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Crimes against the Budget

Officially, the 2016 budget for the European Union is approximately 155bn (EUR). The fraud risk was estimated and quantified at 3bn (p. 4), which would be approximately 2% of the 2016 annual budget. Other estimates have been made, including the Member States’ at 500m (EUR), which would be approximately .3% of the 2016 budget – a comparatively insignificant proportion even considering differences in periods of measurement and differences in annual EU budgetary expenditures. As the method(s) of estimation is not clear, approximations may be used for this article.

The criminal conduct risk, which would be inclusive of the fraud risk, was assumed to range between 2 and 20% (p. 90) of annual budgetary expenditures. These financial crimes risk estimates are admittedly not reliable (see also p. 90), but they are officially used. Why aren’t the true measures known? Why is the range so large?

Fraud and other criminal conduct acts are not generally transparent. Moreover, quantifying fraud and corruption risk is especially difficult on occasion. For example, where the public agency buyer is bribed to the extent of 2% of the contract value, is the amount at risk due to illicit conduct 2% or up to 100% of the contract value? Is quantification of fraud the amount overpaid as determined by the amount of the kickback or bribe and thus a calculation of comparative value received against a fair market value benchmark (i.e., what would the buyer have paid absent fraud?); or is the fraud risk measured as the entire contract value, as if all of the value received were tainted by the fraudulent conduct initiating and/or causing the transaction to be created by the parties?

Conceivably, if the criminal conduct risk arising from the EU budget were at 20%, the highest level of the range, a compelling argument could be made (in concert with other arguments well publicized in the lead up to the UK and Greece polls to vote on whether to continue participation in the EU) that there really is no need to support an organization’s expenditures where such a significant proportion is wrongfully diverted. Is the inspection and oversight so deficient that no one in authority knows the extent of the ripoffs?

Estimates of fraud in the U.S. are also uninspiring for the purpose of gaining an understanding of the extent of the problem of financial crimes risk, including theft by deception (e.g., here and here). Clearly, the treatment of whistle-blowers does not provide an inviting environment for those contemplating such treachery / honesty, with the result that public reporting of fraud is highly discouraged, understating the extent of the problem.

The questions of why and how financial crimes risk persists are less mysterious: Per Martin Wheatley on 01/07/2013:

“The fundamental nature of financial crime may not have changed over the years.¬† The characters who engage today in money laundering; boiler room scams; insider trading; and corruption are essentially modern day Victor Lustigs. No different from the con-artists, patent mongers and fraudsters of economic history.

“But the impact of their work is now far more quickly mutualised than ever before. ¬†Money laundering and corruption on one side of the planet can fuel crime on the other in a finger snap. Pension pots can fall and mortgages rise in seconds on the manipulation of benchmarks like LIBOR. Increasingly high-tech Ponzi schemes now cross borders and time zones, collecting millions of victims along the way.”

Though opportunity allows some individuals to exploit the vulnerabilities of high tech marketplaces and corporate control systems, financial crime is not equally available to all: Position counts. Fraud and other financial crimes are wider and faster than ever, casting shadows actually immeasurable and contingent on the mind’s light of the interpreter. How much financial crimes risk can you see? Where is it concentrated? Why is it that your neighbor / colleague cannot see it?