EU Court Finds Fraud Warning System Illegal

(CN) - European regulators lacked authority to implement an internal early-warning system to detect potential fraud by government contractors, the EU's lower court ruled Wednesday.

The European Commission put its early-warning system, or EWS, into place in 2008 as a means to detect potential fraud by government contractors and recipients of EU aid. The system assigned different warning levels based on risk uncovered through investigations and circulated the information throughout the commission's agencies.

Meanwhile, Planet AE Anonymi Etairia Parochis Simvouleftikon Ipiresion - a Greek holding that provides advisory services in the business administration field - had been working on three commission-funded projects in Syria. But in 2007, the EU's anti-fraud office asked the commission to list Planet on the EWS based on its investigation into irregularities on the Syrian projects.

But just before listing Planet, the commission had awarded the company another $3.5 million grant. In light of the potential risks uncovered by the anti-fraud office, the commission conditioned the grant on Planet opening a restricted bank account - which the company did, and received the grant.

Planet sued to have its name removed from the EWS. And in a ruling issued Wednesday, the European General Court not only removed Planet from the system but ordered the entire scheme dismantled since the commission lacked the power to create the EWS in the first place.

"European law does indeed provide that the commission is to implement the budget. It provides for recourse to the ordinary legislative procedure. However, the financial regulation does not make reference to a system such as the EWS. That regulation solely provides the institution of a central database relating to mandatory exclusions," the Luxembourg-based court wrote.

The court continued: "It must be noted that EU law does not make it possible to conclude as to the existence of an implicit power. It is clear from the case-law that the existence of an implicit power, which constitutes a derogation from the principle of allocation of powers must be appraised strictly. It is only exceptionally that such implicit powers are recognized by case-law and in order to be so recognized they must be necessary to ensure the practical effect of the provisions of the EU Constitution or the basic regulation at issue."

While perhaps useful, the EWS does not meet the conditions required to be chalked up as one of the commission's implicit powers, the court said.

Furthermore, its use against Planet - without giving the company the presumption of innocence or the chance to defend itself before being listed - disregards the EU's fundamental principles, the court added.

"It cannot be disputed that the low-level warnings concern a situation where the investigations are still ongoing and thus in which no judge has yet established such guilt," the 9-page opinion stated. "Accordingly, if the commission considers it necessary to take preventive measures at an early stage it needs, all the more so for that reason, a legal basis permitting the creation of such a warning system and the taking of the relevant measures, a system which respects the rights of the defense, the principle of proportionality and the principle of legal certainty, the latter meaning that the rules of law must be clear and precise and predictable in their effect, in particular where they can have adverse consequences for individuals and undertakings."

Because EWS by its purpose violates those key rights, Planet must be removed even if the court had found the system legal, the court concluded.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit