Czechs take more responsible approach to EU funds

Photo: European Commission

The pairing of fraud and EU funds is not being heard so frequently in the Czech Republic these days with suggestions that the country has learnt some of the lessons from the fraught programme period ending in 2013 where abuse appeared to rife, supervision slack, and the European Commission resorting to the toughest punitive measures out of the tool box to try and remedy the problems.

Photo: European Commission
A training project where almost none of the participants met the basic criteria; where those who had followed advanced computer courses were put in classes for beginners, and where two elementary school directors were on a course to be welders. Or there’s the case where the funds applicant sought cash for the reconstruction of two buildings but the amounts were so inflated that he was able to throw in another building for the same amount. Or the consultancy which dreamed up dozens of jobs that were never created at all and in the process found itself a lucrative flow of funds for years to come administering the ghost project before the paper trail gave it away.

Those are some of the horror stories about Czech use of European Union funds between 2007 and 2013. Maybe in the context of other countries’ performance it was not so bad, but it certainly seemed so at the time. Top EU officials were so angered at the disarray in Czech funding that at various stages they stopped funding worth hundreds of millions of crowns in its tracks.

Even so, the Czech Republic still managed to receive 700 billion crowns during the funding period, that’s more than the total for Hungary and Romania and about twice the level of Slovakia. Indeed, one of the constant questions, often from the media, was whether there was a shortfall in Czech pumping of EU funds, and, if so, who was to blame. Few seemed to question what the money was being used for and whether it was making a real difference on the ground.

Some of that funding history was recently revisited at an international conference in Prague about EU funds fraud where one of the main organisers was the Czech branch of anti-corruption and good government promotor Transparency International. Director David Ondráčka commented on the fraught past funding period:

“The biggest problem was the regional programmes which were controlled by local or regional politicians.”

“The main line of criticism was that the Czech Republic was not fully in line with the implementation and control structures, that the audit institutions were not communicating with each other and that as a result of that some of the programmes were not properly checked. That was the main challenge that needs to be addressed for the following period and which is being addressed at the moment in order to prevent fraud, in order to prevent projects which are clearly false or which are allocated in a way which is not in line with the purpose of EU funds.”

One of the biggest weaknesses of the previous funding period, at least in the Czech context, was the fact that a significant number of projects and programmes, eight in fact, were based at the regional level with not very transparent boards deciding who got funds for what. Mr. Ondráčka says one of the biggest advances in the latest funding period from 2014-2020 - with the cash shrunken to around 600 billion crowns - is that those multiple regional programmes have gone and that there is a lot more openness over the selection and operation of the programme committees that are now in place.

“I guess it’s going in the right direction. There is more openness and clearness about who is a member and who is nominating and about the minutes of those committees. But the key change is that the biggest problem was the regional programmes which were controlled by local or regional politicians who had their own political interests to favour one project over another. And that has changed significantly since they have lost that power over individual projects. That should also limit the conflict of interests that were emerging in previous years. So I hope there is a significant improvement and the committees should not pose such a dramatic challenge in the future.”

David Ondráčka, photo: Czech Television
Instead of the eight regional programmes, there is now just one, and according to Ondráčka that is subject to a lot closer scrutiny and control. He adds that the new set up appears to be working and the Czech Republic is no longer in the spotlight as one of the worst performers.

“I want to be optimistic about it – we are in 2016 – two years into a new financial period and it seems that the communication between those supervisory institutions has improved dramatically. There was a new national audit institution that was introduced into the system that should be more independent programmes or EU funds programmes. And it seems that Brussels is happy with this institutional set up.”

Transparency International has analysed what went wrong with Czech use of EU funds during the previous period. The preliminary results show a complicated picture that began when the programmes were dreamt up in the first place back in Brussels. But on Czech soil, the fraud opportunities blossomed. They tapped into such factors as still weak and inexperienced central and local administrations with frequently changing staff, a willingness to take a lot on trust from funding applicants including heavy reliance on sworn statements without any other factual backup, supervisory structures that did not communicate with each other, failure to use risk assessments to highlight the likelihood of fraud, and an unwillingness to ask too many awkward questions in the often mistaken belief that things would be ironed out in the long run or that the only major issue was pumping as many euros out of Brussels as possible. David Ondráčka again on the lessons that should have been learnt:

“…it seems that the communication between those supervisory institutions has improved dramatically.”

“Of course, we need to detect those risks before they actually happen and to make a make a proper analysis ex ante, however, at the moment it seems that we have all the structures in place. We have a whistle blowing mechanism in place so there is the possibility to report defects in the system, we have all the audit and control mechanisms in place, there is communication established. What it means is that those who are involved in everyday operation of EU funds actually use those mechanisms. But there are always individual and personnel aspects of this whatever institutions are involved. Unless people use them properly then they don’t function. What is very clear is that there is a very clear lesson from the previous period in that if we fail in that then we will not use the whole of the allocated funds. I think that the Czech Republic will benefit from that lesson for the next period.”

In spite of the progress, Ondráčka says there are still some gaps in what Prague could be doing to make sure that funds are being used for the purposes declared and by the people who have ostensibly claimed them. One loophole that could be closed is by making it possible to find out who really is the ultimate beneficiary of the funds:

Illustrative photo: Miroslav Zimmer
“What definitely needs to be addressed is the beneficial ownership of companies that have applied for European funds. What happens at the moment is that there is an individual declaration by the company but public officials basically have no tools to verify that information. The issue of beneficial ownership would be critical but that is related to the whole public sector and not just EU funds. The second thing is that the [prevention of] conflict of interest between committees, applicants, and controllers happens in real life and is not just declared and is paperwork but that it is actually happening. And lastly, I think that we need to look at EU funds as an opportunity and investment which helps the country to strive and modernize its economy and society, not to look at it as free money from Brussels that needs to be spent to the last euro not matter what sort of project is there. So I think the mentality needs to be changed and we need to make good projects.”

One of the speakers at the conference was Tomáš Kafka, a specialist in fraud and its avoidance at the consultancy Ernst & Young. He pointed out that more checks aiming to deter fraud is not the simple answer. |At a certain level more checks can be self defeating in that they create more confusion and more opportunity for fraud.

He did, however, suggest that the public sector could take some lessons from the private and especially insurance companies. While many companies like to brush cases of fraud under the carpet believing that they represent poor publicity and will tarnish the reputation of the company, many major insurance companies, often significant victims of fraud, take the opposite view and are keen to be open about the fraud cases they are able to crack.

“What definitely needs to be addressed is the beneficial ownership of companies that have applied for European funds.”

“It is a cold calculation because they reckon that when they give publicity to the cases of fraud which they uncover then in the process the deter a lot of other fraudsters from trying. But when a lot of supervisory boards are asked to take such a step do many decide to do so. I don’t think so even though it’s a good way of countering fraud. The insurance companies reckon it’s a way of directing the fraudsters to the competition, who perhaps are not so advanced and have not got as developed systems to fight against fraud.”