EU politicians accused of fraud on 'a massive scale'.

The European Union's anti-fraud agency is to investigate whether parliamentarians have been pocketing staff allowances after a damning internal audit. Olaf, the anti-fraud office, said yesterday it had asked for a copy of the confidential report, which exposes misuse of the Euros 140m annual staff budget. "It is potentially of interest to us," Olaf said. The report reveals cases of people claiming for staff they do not employ and routing payments through fake agencies.

Shocked MEPs who read the report called in the financial watchdog. Its contents were "dynamite", said Chris Davies, a British Liberal. "These allegations . . . should lead to the imprisonment of a number of MEPs," he said. "It is fraud and embezzlement on a massive scale." Only members of the budgetary control committee such as Mr Davies can enter the locked room to read the report. They cannot take notes and must sign a confidentiality agreement. An internal parliament auditor examined 167 payments to MEPs' assistants in 2004 and 2005. He did not name the deputies.

The parliament said yesterday the report did not reveal cases of fraud but exposed weaknesses in the system. "It is too complicated and not what MEPs are elected to do," it said. There are three systems and different social security requirements in each of the 27 member states. Many MEPs use "service providers", usually a bookkeeper, to process payments and ensure that social security arrangements are met. Reforms that are to be proposed by the parliament's secretary-general shortly would give all 785 MEPs the same rules, with assistants possibly employed under Belgian law.

Paul van Buitenen, whose allegations brought down the European Commission in 1999 and who is now an MEP, read the report. Failure to address the problem would swell the eurosceptic vote in elections next year, he said. The budgetary control committee will debate the report next Tuesday. MEPs have agreed to reform their pay and expenses. Salaries will be equalised and MEPs will have to provide receipts for most spending.

Parliamentarians receive more than Euros 15,000 (Dollars 22,200, Pounds 11,300) a month for staff and Euros 4,000 for a constituency office. They also receive Euros 287 a day living expenses when attending sessions, a travel allowance and Euros 4,000 a year for trips outside the EU.

By ANDREW BOUNDS / 22 February 2008 / Financial Times