EU lifts the lid on secret £1m slush fund for staff perks

The European Commission last night admitted a catalogue of mismanagement at its statistical agency Eurostat after an inquiry revealed how cash from secret bank accounts funded staff perks including a volleyball team and a riding centre.

Two reports into a £1m scandal at Eurostat paint an alarming picture of the way the Luxembourg-based agency acted as a law unto itself, raising and spending money unknown to EU accountants.

Most of the financial irregularities began before the present European Commission came into office in 1999. But, crucially, dubious contracts then in operation continued until 2002, well into the mandate of the present Commission.

The scandal has prompted calls for a senior head to roll and revived memories of the sleaze row that destroyed the last European Commission, prompting its unprecedented mass resignation, in 1999.

Last night's findings show how Eurostat sold some of its data to the private sector via an incestuous network of firms including Planistat, Eurogramme, Eurocost and CESD. Some of the proceeds were channelled through "phantom" accounts and officials operated a double accounting system.

Some of the cash was used to fund a volleyball team for Commission staff as well as an equestrian centre, the Club Hippique. Dinners and free trips were paid from the non-existent accounts. The documents lift the lid off the way the Commission staff operated in Luxembourg, a grand duchy with a population of just 400 000 people where international banks and EU institutions dominate the local way of life.

A second problem has emerged over the EU's Luxembourg Office of Publications from which €62,000 not so far unaccounted for. The row over that has provoked the most serious scandal to rock the European Commission president Romano Prodi, putting pressure on him to sack a Commissioner. Although the EU's official fraud-buster, Olaf, had been investigating Eurostat for three years, Commissioners were informed of the scandal only when it became public in May this year.

In July, an internal inquiry discovered cash was channelled into unofficial bank accounts outside the scrutiny of auditors. It also found the value of some contracts issued by Eurostat was artificially increased, that others did not exist, and contractors held Eurostat funds.

A central problem for Mr Prodi is the evidence that some of these contracts continued during his term of office when the European Commissioner for Economic and Monetary Affairs, Pedro Solbes, had responsibility for Eurostat. Between 1999 and 2002, no fewer than 28 contracts were signed between Eurostat and one of the companies under investigation, Eurogramme.

After the scandal broke, the three most senior Eurostat officials, Yves Franchet, Daniel Byk and Photius Nanopoulos, were moved to different posts though they deny benefiting personally. M. Franchet, the director general of Eurostat, sat on the board of some of the companies with which Eurostat signed contracts.

Euro-MPs have seen a report which suggested as much as €4m may remain unaccounted for and suggested cases of "nepotism" had been identified. Opinion in the European Parliament is divided over whether to press for the resignation of a Commissioner. Mr Solbes is first in the firing line followed by Neil Kinnock, the Commission vice-president in charge of administrative reform, and Michaele Schreyer, the budget Commissioner.

When Mr Prodi came into office in 1999 he promised "zero tolerance" on fraud and mismanagement.