Steve Peers

Contrary to popular belief, fraud against the EU budget is not typically committed by corrupt EU officials. As per EU reports, the usual culprits are individuals or companies exploiting EU funds managed by Member States. These violations also extend beyond spending to include EU income reduction, such as evading customs duties on imports.

Establishing and upholding EU-wide regulations for such misconduct has been challenging. However, the Court of Justice (CJEU) significantly strengthened the law in this area with its recent Taricco judgment.

Background

The CJEU, in its 1980s Greek maize judgment, established that Member States must actively combat fraud against the EU budget. This principle, now enshrined in Article 325 TFEU, mandates that Member States implement measures equivalent to those used against fraud affecting their finances.

Criminal law concerning this issue originated from the 1995 ‘PFI Convention’ among Member States. This treaty, effective since 2002, mandates criminal penalties for severe EU budget fraud. Croatia is not yet included, while the UK opted out in 2014.

A 2012 Commission proposal aims to replace the Convention with a Directive, currently under negotiation. One key debate is whether the Directive should encompass VAT fraud, as a small portion of VAT revenue contributes to the EU budget. The Commission and Parliament support inclusion, while the Council disagrees, citing the predominantly national impact of VAT fraud. Other discussion points include standardized penalties and statute of limitations for fraud.

This proposed Directive is linked to the Regulation establishing the European Public Prosecutor’s Office (EPPO), as the EPPO’s jurisdiction will cover only EU fraud, necessitating a clear definition. The EPPO Regulation, in turn, connects to the Regulation restructuring Eurojust, the EU agency coordinating national prosecutions, due to the close collaboration between Eurojust and the EPPO.

Judgment

The CJEU’s Taricco judgment addresses alleged VAT fraud against Italy’s national budget, specifically concerning statute of limitations. Due to Italian regulations regarding pauses in these limitations, many VAT fraud cases are dismissed due to expired time limits. Consequently, an Italian court sought the CJEU’s opinion on whether these national rules violated EU economic law, particularly concerning competition, state aid, economic and monetary union, and the VAT Directive.

The CJEU concluded that the Italian law did not violate EU competition law, as inadequate law enforcement does not inherently encourage cartels. It also found no breach of state aid regulations, as the Italian government was not exempting tax obligations. Lastly, it did not violate monetary union rules, as the link to sound public finances was insufficient.

This left the VAT Directive. As the Directive outlines VAT’s scope but lacks provisions for criminal law, the Court interpreted the case through the broader lens of EU law, particularly Article 325 TFEU and the PFI Convention. Expanding on prior case law like Fransson, the Court determined that combating VAT fraud to protect the EU budget required not only general effective measures but also criminalization, particularly in serious cases. This aligns with the PFI Convention, which the Court confirmed applies to VAT fraud despite the absence of explicit provisions. The alleged fraud in this instance, amounting to millions of euros, was deemed serious.

The Court further ruled that the limitations periods in Italian law violated Article 325 TFEU. While limitation periods are acceptable, the Italian law’s method of calculating pauses effectively prevented prosecutions, thus violating the principle of equality outlined in Article 325.

Consequently, the CJEU decided that the national court must disregard the relevant national law, as Article 325 TFEU mandates unconditional and precise rules for protecting the EU’s financial interests, thereby requiring the primacy of EU law.

Lastly, the CJEU rejected a human rights concern regarding its judgment. While Article 49 of the EU Charter of Fundamental Rights prohibits retroactive application of stricter criminal penalties, the CJEU, aligning with the European Court of Human Rights’ stance on Article 7 ECHR, clarified that a limitation period differs from a substantive criminal offense. As the alleged acts were criminal offenses under national law at the time, the Charter’s prohibition on retroactive criminal law did not apply.

Comments

The CJEU, in this judgment, went beyond its mandate of interpreting EU economic law and instead reinforced the constitutional basis of EU criminal law.

The judgment significantly broadens EU criminal law obligations to include VAT fraud, which the Court deems a pre-existing obligation under both the PFI Convention and the TFEU, requiring a Treaty amendment for any reversal. This obligation extends beyond criminalization to encompass procedural aspects like statutes of limitations. Thus, excluding VAT from the EU fraud Directive would have minimal impact.

The Court’s rulings on criminalization and statute of limitations likely extend to other forms of EU fraud. Including prescription rules in the Directive merely reaffirms existing obligations, although the final Directive is likely to offer greater clarity than the CJEU’s judgment. Furthermore, the Taricco ruling might expedite the PFI Directive negotiations, potentially impacting the EPPO and Eurojust discussions.

Furthermore, the ruling limits the effects of opt-outs. While Ireland and Denmark have opted out of the proposed Directive, they remain bound by the PFI Convention, as interpreted by the Court. The UK, having opted out of both, remains bound by the Court’s interpretation of the Treaty. The practical impact is minimal if national law already aligns with these measures. While the UK is no longer free to decriminalize fraud against the EU budget, it was unlikely to exercise this option, particularly for VAT fraud, which predominantly affects UK revenue.

More fundamentally, the Taricco judgment reinforces the constitutional basis of criminal law obligations within the EU legal framework. Although relevant only to EU fraud cases, a category now broadened to include VAT fraud, national courts are obligated to disregard conflicting national law regarding procedural aspects of criminal proceedings. However, they are not obligated to disregard conflicting substantive national criminal law, as this would violate Article 49 of the Charter.

The ruling, based on the Treaties’ legal effect, establishes a primacy test similar to the direct effect test. It remains unclear how this aligns with the EU’s overall constitutional framework. Nevertheless, the Taricco judgment significantly strengthens the EU’s role in this area. 

Barnard & Peers: chapter 25, chapter 6

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