Auditors highlight EU funds’ risk exposure

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European Commission departments should cooperate more closely in spreading funding across a range of financial institutions to reduce the EU executive’s exposure to risk in the event of banking failures, found a report released yesterday (16 June) by the European Court of Auditors.

Taking the 2007 financial year as its reference point, the Court’s 2009 report on the EU executive’s treasury management, presented in Brussels yesterday, found that the Commission had largely complied with EU legislation, but “coordination” of its treasury management activities could be improved. 

European law obliges the EU executive to ensure that it has sufficient funding at its disposal to cover the “cash needs” of implementing the Union’s budget. 

Auditors were satisfied that “the Commission had established internal control systems which ensure sound treasury management,” including “prudent cash management forecast procedures”. 

But the Court criticised the EU executive for a “lack of coordination between Commission [departments] in an area where a common approach to issues such as risk management and control is necessary”. 

“This led to a situation where the accounts’ limits for holding funds with commercial banks were established by the [departments] concerned without considering the Commission’s overall risk exposure with each commercial bank”. 

“In the economic and financial times we are now experiencing, this is risky, and increases the chances of losing taxpayers’ money in the event of a defaulting bank in which the Commission holds accounts with large amounts,” said Court of Auditors member Dr. Igors Ludboržs. 

The Court reprimanded the EU executive for “not sufficiently documenting” its procedures for transferring funds between member states’ own resources accounts, a claim which the Commission denied. 

The report also criticised the Commission’s budget department for failing to adequately document its risk management, with auditors condemning the EU executive’s practice of holding fines in specific bank current accounts, “increasing risk of loss” in the event of bank failure. 

“At the time of our audit, there was no clear policy on the treatment of risks related to these fines,” said Ludboržs. 

The report called on the EU executive to find an “optimum solution” for the treatment of provisionally-collected fines “as a matter of priority”. 

In response, the Commission agreed to produce a “clear and comprehensive” document outlining the risks it is exposed to and the measures it has put in place to minimise them. 

It also pledged to hold “more regular” meetings between the departments concerned. 

"The [European] Commission did not contradict our findings and our conclusions," said European Court of Auditors  member Dr. Igors Ludboržs, presenting the report in Brussels yesterday. "In fact, in several of its replies, the Commission [agreed] to undertake action to improve its procedures and to give a follow-up to most of our recommendations." 

Nevertheless, warning that "the proof of the pudding is in the eating," he said the Court would in future "evaluate the realisations of the Commission's intentions in this respect". 

Explaining why the audit was necessary, Ludboržs said: "The treasury management of Community funds has been subject to wide public interest, increasing so amid the financial crisis. On several occasions, MEPs have asked whether the European Commission's treasury management will be subject to an audit by the Court." 

"In view of the recent financial turmoil, it is rather important for the Commission to put in place procedures to improve the oversight of its treasury management activities and enhance coordination between the DGs concerned, thereby reducing the financial risks for EU funds in case of banking failures," Ludboržs continued. 

Every year, the European Commission makes millions of payments to third parties to implement EU policies. Recipients of such funding include member-state public authorities responsible for fund management, and private companies and individuals benefiting from Community aid. 

Around 1.5 million such transactions took place in 2007 alone, with a total value of 114 billion euros. 

Commission funding derives from contributions from member states and is primarily held in the EU executive's 'own resources' accounts. 

Other monies held in central and commercial banks are primarily used for making payments to third parties, and total around 19 billion euros. 

The Commission's treasury management is performed by two departments: the directorate-general (DG) for economic and financial affairs and DG Budget. 

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