Subsidy fraud: who will monitor the monitors?

It is worth asking to what extent irregularities in projects using public funds detected by various control bodies are the result of fraud and to what extent the result of the complexity of regulations and their unclear interpretation. Spending public funds is not simple and the problem with project implementation is exacerbated by the fact that most of the rules according to which these projects are to be carried out are not only of a general nature, but are defined not in the law, but in regulations, instructions or guidelines. For example, the procurement process in EU projects implemented by entrepreneurs has been regulated in the Guidelines on the eligibility of expenditure under the European Regional Development Fund, the European Social Fund and the Cohesion Fund for 2014-2020 , while previously it was regulated by very general provisions in the grant agreement, requiring the entrepreneur to select contractors in a transparent and fair procedure, respecting the principle of impartiality. Such general clauses are not always sufficient to precisely define the obligations of entrepreneurs. Also the officials or those conducting the proceedings themselves have problems with their interpretation, usually, for reasons of public finance discipline, adopting the one most unfavourable to the beneficiaries. Therefore, undoubtedly, the norms regulating the disbursement of EU funds require, on the one hand, clarification, particularly in such areas as the implementation of contracts, the manner of establishing links between enterprises, the achievement of project indicators and the manner of communicating with institutions and approving changes, and, on the other hand, these rules should be defined in universally binding provisions, which remains consistent with the position of the Constitutional Tribunal expressed in its judgment P 1/11 of 12 December 2011.

Similarly, the provisions of the anti-crisis shield and the PFR Financial Shield are a significant problem for entrepreneurs. I have written more extensively about this in previous posts e.g. Definition of SMEs in the Financial Shield and Beneficiaries of the Financial Shield – „becoming” an SME and benefiting „more”?

Risks associated with the implementation of projects from EU funds include not only the loss of assets as a result of possible irregularities, but also potentially criminal liability for those beneficiaries or their representatives who have crossed the thin red line between ignorance and unawareness and knowledge and awareness of the actions committed.
Although EU funds have been used in Poland for 15 years now, the dark side of subsidies is still surrounded by a certain nimbus of secrecy, and the increasing number of proceedings that are taking place either due to their complexity last for years, or concern very simple and obvious issues. Grant fraud is a complex subject, but it is worth starting with Article 297 of the Criminal Code, which criminalises this type of fraud.

It follows from the above provision that such behaviour of the beneficiary or the person assisting him or her which is of a deliberate, conscious nature is criminalised. The offence of grant fraud indicated in this provision also consists in the submission of a document or statement which contains such false or unreliable information.

The system of applying for public funds is a complex one, requiring above-standard knowledge of many areas of law, and some matters turn out to be too complicated even for lawyers or specialists from units handling grants. This is perfectly illustrated by the issue of establishing connections for the purposes of determining the status of enterprises, which I have described several times. In this context, for example, allegations of deliberate submission of documents that turn out to be false or defective should be treated with particular caution by prosecutors and investigators, as should allegations of links with the contractor of a particular service or of incorrect determination of the content of an application.

Making allegations of intentional actions on the part of beneficiaries on this ground should be done with particular caution and should be supported by genuinely comprehensive evidence. It should be remembered that possible links between entrepreneurs on the grounds of regulations on state aid are far more complex than, for example, links defined on the grounds of other acts, e.g. the Code of Commercial Companies. Suffice it to say that to date, officials granting subsidies themselves have significant problems with recognising when normal economic cooperation takes place between entrepreneurs and when it turns into something that can be called a relationship. In this situation, accusing beneficiaries of acting consciously without reliable evidence of such awareness just because „someone heard about something” or „guessed something” can be considered too far-reaching.

However, this does not mean that there are no pathological cases in the practice of trading. Grant fraud is an increasingly 'popular’ phenomenon, which is directly correlated with the popularity of the grant instruments themselves. It is an open secret that almost every measure and programme has had its 'special’ beneficiaries, who, as part of an organised procedure, have run and obtained EU grants not with the aim of implementing projects and thus contributing to public objectives, but solely with the intention of making easy money. Mechanisms of extorting grants vary – from starting in many areas (in the case of area-based competitions) and eliminating competition, through such „organisation” of contracts in the project that they are carried out by entities related to the beneficiary, to e.g. fraud in the absence of public aid or misrepresentation of the status of an enterprise (instead of e.g. a micro-enterprise, the grant is taken by an entity that has set up a company as a so-called „shell company”). Providing false information in the application documentation, e.g. regarding the potential or experience, or concealing information on the exclusion of a given entity from the possibility of applying for a grant in the knowledge that no one will verify this information, is also commonplace.

In each of these cases, however, when determining the level of awareness of the perpetrators, the prosecutors should always follow the old cui bono principle, i.e. investigate first and foremost who benefited from the fraud. This is because the money trail can, in the simplest way, either answer who benefited or rule out that there is a crime.

In the meantime, as the cases we are dealing with show, investigations are often conducted by investigators without in-depth knowledge of the regulations and the specifics of the projects carried out.

Tackling the pathological set-ups that have and will continue to take place in the spending of public funds should be done head-on and with reason. Certainly, the way to remove pathologies is not to „tighten up the system” for spending and selecting funds. Such action, at best, leads to making the lives of beneficiaries and officials themselves more difficult, and at worst may lead to the frustration of public objectives, i.e. building innovative knowledge-based enterprises, development of cooperation between business and science, etc. Unfortunately, experience shows that this is one of the most frequently used paths in the fight against fraud in the future.

The number of proceedings currently carried out by law enforcement authorities in relation to alleged or actual fraud of public funds also raises the question about the sense and quality of controls carried out by other institutions, including the one providing funding. Very often in the course of such investigations, the investigators ask the controllers „Would you have known that” and here the circumstances established in the course of preparatory proceedings are stated, to which the controller replies . This shows that either project auditors simply cannot cope with detecting irregularities or do not have the instruments to detect them effectively.

Unfortunately, the typical reaction of the system to these pathologies is, for example, to tighten up competition criteria or terminate contracts without a thorough explanation of the case. These types of instruments are not effective in the fight against pathologies, especially since the entities responsible for fraud have long ceased to exist or are so-called 'shell companies’. Therefore, it is worthwhile, in my opinion, for each institution to have a special team composed of both experienced inspectors and lawyers, which could monitor such irregularities, react to such pathologies on an ongoing basis and report effective solutions.