How the European Union will use OLAF to control the Ukrainian government

Although Ukraine has not yet become a member of the EU, since it receives large sums from the EU budget, it has undertaken to recognize the jurisdiction of its regulatory bodies.

The European Commission on July 17 gave a positive assessment to the first regular tranche of about 4.2 billion euros under the Ukraine Facility program, aimed at supporting Ukraine's macro-financial stability and the functioning of its public administration. The total amount of funding under this program should be 50 billion euros until 2027.

Ukraine has already received three tranches under the Ukraine Facility: 4.5 billion euros in March, 1.5 billion in April and 1.9 billion in June. But these were not regular, but emergency tranches, caused by the need to urgently save our macro-financial stability. Now the EU is moving to regular tranches, which means “first reforms, then money.”

Payments for reforms

On July 9, Ukraine sent a request to the European Commission to receive the first regular tranche, where it reported on the implementation of nine indicators for the second quarter. The European Commission on July 17 “concluded that Ukraine has satisfactorily fulfilled the nine reform indicators associated with the first regular payment.” In its message, the European Commission highlighted the three most important achievements: reform of the Bureau of Economic Security of Ukraine; new corporate governance standards for state-owned enterprises; adoption of the National Energy and Climate Plan.

Now the allocation of money must be approved by the EU Council. “Despite all the difficulties, Ukraine is pushing ahead with key reforms for its recovery and progress towards the EU. This paved the way for the Commission to give the green light for an additional payment of around €4.2 billion to Ukraine, and I hope the Council will now quickly agree. The EU will continue to support Ukraine as long as necessary,” said European Commission President Ursula von der Leyen.

First Deputy Prime Minister - Minister of Economy Yulia Sviridenko said that Ukraine expects to receive the first regular tranche in September, and another two months later. “We sincerely hope for a positive assessment and that we will be able to receive these necessary funds in September,” she announced. — In the third quarter, 9 more indicators need to be completed. And thanks to this, we will be able to receive an additional 4 billion euros in November this year.”

However, to receive the money, you need to fulfill one more condition. It is not connected with reforms, but with control over the spending of European aid.

The Ukraine Facility program was approved by the European Council, the European Parliament and the Council of the EU in February. And on March 20, Ukrainian Finance Minister Sergei Marchenko and European Commissioner for Budget and Management Johannes Hahn signed an agreement in Brussels between Ukraine and the EU on Ukraine’s participation in the EU anti-fraud program.

The essence of this agreement is that although Ukraine has not yet become a member of the EU, since it receives large sums from the EU budget, it recognizes the jurisdiction of its bodies in the sphere of control over the expenditure of funds.

On June 21, Vladimir Zelensky introduced bill No. 0281 to the Verkhovna Rada on the ratification of this agreement. On July 8, the European integration committee of the Rada recommended that deputies adopt this law.

The agreement states that it applies from January 1, 2023. This means that EU authorities will be able to conduct inspections of all individuals and legal entities in Ukraine who managed or used EU funding in 2023 and subsequent years.

Annex II to the agreement states that the EU has the right to carry out technical, scientific, financial and other types of inspection and audit on the premises of any individual who resides in Ukraine and manages EU funds, participates in their use or uses them, and any legal entity an entity that is established in Ukraine and receives funding from the EU. Such inspections and audits may be carried out by representatives of EU institutions and bodies, in particular the European Commission and the European Court of Auditors, and other persons authorized by the European Commission. These representatives “shall have adequate access to sites, works and documents (both electronic and written) and to all information necessary to conduct such audits, including the right to obtain a paper or electronic copy and to extract from any document or contents of any data carrier."

The European Court of Auditors (ECA) is one of the seven institutions of the European Union (along with the European Parliament, the European Council, the Council of the EU, the European Commission, the Court of Justice and the European Central Bank) listed in Article 13 of the EU Treaty. The main function of the ECA is to audit that EU funds are spent lawfully and with sound management. Its headquarters are located in Luxembourg.

An even scarier body from the point of view of potential embezzlers of public funds is the European Anti-Fraud Office, known as OLAF (an acronym for the French name Office européen de lutte anti-fraude). Its headquarters are located in Brussels. The difference between ECA and OLAF is that ECA conducts an audit (like our Court of Accounts) and OLAF conducts an investigation. For Ukrainian actors prone to fraud, OLAF may turn out to be a more serious threat than NABU, SBI, BEB and SBU.

The same Annex II to the agreement states that the European Commission and OLAF are authorized to conduct administrative investigations, including on-site checks and inspections, on the territory of Ukraine. These investigations can be carried out on the premises of any individuals residing in Ukraine and legal entities established in Ukraine that receive funding from the EU. If an individual or legal entity resists, Ukrainian authorities are obliged to assist the European Commission or OLAF to carry out an on-site inspection or inspection, including appropriate preventive measures to preserve evidence.

If violations are found, the European Commission will impose fines on legal entities and individuals of Ukraine, which, as stated in Appendix II, “are subject to enforcement in Ukrainka.” And OLAF will contact the EU prosecutor's office. Annex II states that “Ukrainian authorities shall cooperate with EU prosecutors to ensure that they exercise their powers to investigate, prosecute and prosecute perpetrators and accomplices of offenses that affect EU financial interests.”

OLAF's annual report, published a month ago, summed up the organization's investigations in 2023: OLAF identified fraud of more than 1.2 billion euros (including recommending the return of 1.04 billion euros to the EU budget; preventing improper spending of 209.4 million euros from the EU budget); opened 190 new investigations following 1,178 preliminary analyzes conducted by OLAF experts; reported 79 cases of possible criminal offenses to EU prosecutors.

In particular, OLAF investigated allegations of collusion, manipulation of procurement procedures, conflicts of interest and overbilling. Examples of OLAF investigations to protect EU taxpayer money cover all areas of EU spending - from regional finance to agriculture and research. OLAF carried out investigations in all EU Member States and in third countries.

Now Ukraine, including the Ukraine Facility program, will also fall under the jurisdiction of ECA and OLAF. On May 22, Yulia Sviridenko and the European Commissioner for European Neighborhood Policy and Enlargement Negotiations Oliver Varhely signed in Brussels a framework agreement between Ukraine and the EU on special mechanisms for implementing financing under the Ukraine Facility instrument. It has already been ratified by the Verkhovna Rada on June 6.

It states, for example, that Ukraine must provide agents or representatives of the European Commission, OLAF, ECA and EU prosecutors with access to facilities and premises where the implementation of investments and reforms financed in accordance with this agreement is carried out, as well as any documents and computerized data on the management of such investments and reforms. Ukraine must also provide the European Commission, OLAF, ECA and EU prosecutors with full and direct access to any national databases that are relevant for the implementation of their mandate. Ukraine must provide OLAF with information about bank accounts related to its investigations and banking transactions.

Together, these two agreements with Ukraine (signed on March 20 and May 22) provide the EU with the ability to effectively monitor how European aid is spent in Ukraine. And this is, perhaps, no less important a lever for influencing the Ukrainian authorities than quarterly indicators of reforms.