EU funds lack proper regulation and oversight

4. 2. 2014

The Shadow Report

A new independent study by Czech, Polish and Slovakian watchdogs identifies major gaps both in the national and EU legal framework that fundamentally increase the risk of political corruption and allow misuse of EU funds. The comparative analysis complements the long-delayed first EU Anti-corruption report released today. It concludes, among else, that European Commission and the three studied member states have not been effective in regulating anonymous and offshore recipients of funds and allowed management and oversight of the programs riddled with political conflicts of interest in the Czech Republic, Slovakia and Poland.

The “shadow report” on political corruption and misuse of public funds results from a year-long research by local teams of lawyers, economists and political analysts, and is independent of the Commission's findings as well as the governments' views. Analyzing major risks of political corruption in the management of public funds, the study sheds light on why millions of euros continue to be misused and why implementation of EU funds regularly ends up in criminal prosecution in all three studied countries. Up to a third of the EU resources allocated to the countries is not reimbursed by the EU programs and—as the authors of the study believe—this is largely due to the effects of political corruption and lack of rules and transparency. Because of six months delay in publishing its first Anti-corruption report, European Commission did not translate these and other similar findings into the 2014–2020 funding conditions.

“It is not surprising that EU funds are linked with chronic political corruption in the three studied states since not even the basic rules against conflicts of interest are in effect. EU hasn't been successful in convincing the governments to do so,” comments Martin Fadrný, coordinator of the research team.

Key issues identified in the three member states are:

There is no regulation of anonymous ownership—despite the fact that considerable amount of money from EU funds ends up in companies with anonymous owners and/or firms based in tax havens (see below for data), and that there are no effective means of preventing potential conflicts of interest. Anonymous companies are allowed to be beneficiaries of EU funds and there is almost nothing preventing politicians from owning such companies. The data shows importance of the currently discussed anti-money laundering directive and the G8’s agreement to fight tax avoidance through offshores. An efficient EU legal regulation which would disclose recipients’ ownership structure to the level of natural persons is practically absent.
Public administration is heavily politicized—which leads, among else, to frequent fluctuation of officials responsible for implementation and control of EU funds. Case studies show that absence of clear separation between political and professional officers together with insufficient protection of officials against illegal orders led to misuse of public money from EU funds in the monitored countries. Yet, the Czech Republic, for example, has not passed Civil Service Act promised to the Commission in 2002 that would prevent public administration from being politically influenced.
External control is insufficient—even when supreme audit institutions identify problems in EU funds’ management, their conclusions and recommendations are not implemented. Authors of the study believe that this fact, once again, indicates high risks of political corruption and politicized public administration.

Examples from the report:

Data shows that among companies winning public contracts in the Czech Republic (including EU-funded) 10% had ownership structure with unidentifiable owners and 15% owners form tax havens. A recently published study by Transparency International Czech Republic and Bisnode indicates that during 2008–2013 in the Czech Republic, anonymous companies won public contracts worth CZK 8.7 billion (EUR 300 million) from EU funds. In the same period, companies with owners from tax havens won contracts of more than CZK 6 billion (EUR 218 million) from the EU funds.
An analysis of post-election changes in the structure of the government offices that implement EU funds in the Czech Republic and Slovakia shows that majority of key experienced officials frequently change due to political pressures. For example, Director of the Bureau of the Regional Council of the Czech Regional Operational Programme North-West has been changed eight times in the last 7 years. Three of those former directors are now facing criminal prosecution for the misuse of EU funds.
Approx. CZK 14 billion (EUR 500 million) from EU-funded Czech Operational Program Transport went to the construction company Viamont while its former owner held the position of minister of transport and could easily influence officials managing the EU money.

Read full report – Public Money and Corruption Risks.

Contact for media

Martin Fadrný: martin.fadrny@frankbold.org, +420 775 154 079

Authors of the study

Frank Bold – a legal watchdog with offices in Prague, Brussels and Krakow.
Naši politici – gather and publish information about activities of Czech public service and its elected representatives with the emphasis on potential conflict of interest.
Center of Applied Economics – a semi-academic NGO engaged in data-driven research on public sector.
KohoVolit.eu – a non-governmental organization and an eponymous website aimed at promoting democracy by encouraging political awareness of citizens and public control of elected representatives.
Centrum Cyfrowe Projekt – Polska works towards social change and enhancing citizens’ participation through the use of digital technologies and open, cooperative models based on sharing knowledge and other resources.
Slovak Governance Institute – an independent civic association bringing and supporting solutions to increase quality of the process of public funds allocation.

The project was supported by a grant from the Open Society Foundations.

With the financial support of the Prevention of and Fight against Crime Programme
European Commission - Directorate-General Home Affairs

The project has been funded with support from the European Commission. This communication reflects the views only of the author, and the European Commission cannot be held responsible for any use which may be made of the information contained therein.