Tackling Fraud and Corruption Risks in the Slovak Republic

1. European Structural and Investment Funds in the Slovak Republic: An overview of the fraud and corruption risks

European Structural and Investment (ESI) Funds comprise the European Regional Development Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development, the European Social Fund, and the European Maritime and Fisheries Fund. ESI Funds can support development and enhance the quality of life of citizens in the European Union – through investment in infrastructure, research and development, employment and training, agriculture, forestry and fisheries. With a budget of EUR 454 billion for the current programming period 2014-20, ESI Funds are the main investment policy tool of the EU (European Commission, 2015[1]).

Despite the significant benefits that these funds can bring, some countries have had to deal with cases of systemic corruption and fraud in their disbursement. Over the past four years, the European Anti-Fraud Office (OLAF) has investigated more instances of fraud and corruption involving structural funds than in any other area of the EU budget (Teffer, 2018[2]). According to the European Commission (EC), fraud against the financial interests of the EU amounts to about EUR 3 billion per year, roughly 2% of its annual budget (European Commission, 2018[3]). The European Regional Development Fund and Cohesion Fund are the funds most affected by fraudulent behaviour. Alongside direct financial losses, misuse of funds and fraudulent activity prevent operational programmes (OP) from reaching their objectives, and can create a culture of public distrust of institutions at both the national and EU level.

Fraud and corruption involving ESI funding have a direct negative impact on citizens across the EU. Funds can be recovered as a result of OLAF investigations, which means that projects linked to OPs may be suspended – or in some cases may never have a chance to be implemented, as indeed has occurred in the Slovak Republic. In 2016, OLAF recommended an amount of EUR 631 million (and in 2015, EUR 888 million) to be recovered (European Court of Auditors, 2019[4]). In these cases, citizens lose out on the benefits of projects that aim to improve socio-economic development across the EU, and countries may not be given future funding opportunities. Furthermore, fraud and corruption are perceived by many EU citizens as significant problems in relation to EU spending. In a recent Eurobarometer survey, 68% of the EU citizens responding think that corruption is widespread in their country (European Commission, 2017[5]). In relation to ESI Funds in particular, recent scandals in a number of Member States have drawn further attention to issues of fraud and corruption linked to the funds, causing public outrage throughout the EU. In 2017, Member States reported a total of EUR 320 million in fraudulent irregularities in the Cohesion Fund and European Maritime and Fisheries Fund alone (European Commission, 2018[3]). The size of the problem is further reflected in the investigative activities of OLAF: by the end of 2018, 73 of 362 ongoing investigations related specifically to ESI Funds (Teffer, 2018[2]).

The ESI Funds project cycle and past challenges in the Slovak Republic

ESI Funds provide support in delivering the Europe 2020 strategy of the EU, which centres on smart, sustainable and inclusive growth as a way to overcome structural weaknesses in Europe's economy. The funds should improve Europe’s competitiveness and productivity, and underpin a sustainable social market economy (European Commission, n.d.[6]). As such, OPs in EU Member States are designed in line with the thematic objectives of the ESI Funds and the Europe 2020 strategy. The funds present opportunities for all Member States, but in Central and Eastern European countries in particular, the structural funds represent a significant incentive for public funding.

Once the budget, common rules, principles and priorities for each of the ESI Funds have been determined, the EC consults with Member States to produce a draft partnership agreement, while Member States also present draft OPs. The programmes are implemented by the Member States, which involves selecting, monitoring and evaluating hundreds of thousands of projects. This work is organised by managing authorities in each country and/or region: an MA may be a national ministry, a regional authority, a local council, or another public body that has been nominated and approved by the Member State in question. The EC pays the certified expenditure to each country and monitors each programme alongside the country concerned (Figure ‎1.1).

Figure ‎1.1. ESI Funds management

Source: Open Knowledge (2015), “Where does Europe’s money go? A guide to EU budget data sources”, https://community.openspending.org/resources/eu/pdf/WhereDoesEuropesMoneyGo.pdf (accessed 20 August 2019).

Grants from the funds are put towards specific projects or organisations in line with EU policies in different areas, such as agriculture, youth, and social inclusion, among others. To benefit from these grants, applicants must answer a call for proposal initiated by an MA. Once applicants respond to a call and submit an application, MAs undertake an initial assessment followed by a more comprehensive appraisal of the full application. If the application is successful at both stages, a funding agreement is drawn up specifying the terms of the funding. The successful applicant then becomes the grant beneficiary during the contract management stage of the project cycle. Here, the beneficiary implements project activity in line with ESI Fund requirements, which are monitored by the MA. This includes checking claims and conducting on-the-spot monitoring visits to ensure that all the expenditure is within the stated rules. When the activity is completed, the MA conducts checks that the activity has closed and all the records are accurate and in place, as audits can continue to take place for years following completion of a project (Department for Communities and Local Government, 2015[7]).

Through nine national and regional programmes, the Slovak Republic has been allocated EUR 15.32 billion from ESI Funds for 2014-20. With a national contribution of EUR 4.72 billion, the Slovak Republic has a total budget of EUR 20.04 billion to be invested in different areas, from job creation and growth to supporting sustainable transport, as well as protecting the environment and investing in research and innovation. While all funds are designed to support the socio-economic development of the Slovak Republic, the following targets have been set for the current programming period:

• Employment – Support for 250 000 jobless people, particularly low-skilled workers and the long-term unemployed

• Education – Improvement of education and training through initiatives for over 100 000 pupils and students

• Transport and infrastructure – Reconstruction or renovation of 111 km of railways and 17 070 km of newly built roads, as well as the building or renovation of 157 310 square metres of public or commercial buildings

• Social inclusion – Support for 150 municipalities with the most deprived Roma communities

• Firms – Approximately 15 000 firms and 5 200 start-ups supported, with more than 6 000 new jobs created

• Environment and energy – Recycled waste increased by 197 466 tonnes a year and flood-protection measures benefiting 13 000 people

• ICT infrastructure – Broadband coverage and next-generation networks spread to 100% of 30 Mbit/s coverage

• Research and innovation – More than 1 000 new full-time researchers employed and 4 580 enterprises supported in order to introduce new products to the market

• Public administration – Up to 20 ministries to introduce quality management systems and develop training for civil servants to modernise public procurement.

• Agriculture and rural development – Modernisation of nearly 1 250 small and medium-sized farms to improve economic performance; financing of start-up costs for approximately 600 young farmers; more than 2 000 jobs created in rural areas; and designating 21% of total agricultural land to support biodiversity and/or landscapes (European Commission, 2014[8]).

In the Slovak Republic, ESI Funds have been a useful instrument for modernising infrastructure in, for example, the areas of education, social services, and civil structures and facilities in towns and municipalities. They have also enabled implementation of a number of major projects that could not have been possible without EU funding (KPMG, 2016[9]). As well as providing opportunities for Member States, implementing large amounts of EU funding can be a complex task that presents a number of different risks. The programming period 2007-2013 was affected by delays in setting up management and control mechanisms for OPs in the Slovak Republic, which resulted in a low rate of contracting that continued into the beginning of the current programming period. The government of the Slovak Republic has since taken steps to ensure greater transparency around management of funds, as well as simplified procedures.

However, the government faces persistent challenges in its management of fraud and corruption risks and prevention irregularities in implementing ESI Funds. Irregularities are not always fraudulent; they can indicate waste, mismanagement, or systemic problems in the Management and Control System (MCS)1. Fraudulent irregularities, on the other hand, are those that are committed deliberately. During the programming period 2007‑13, the following irregularities were reported most frequently and produced the most significant financial impact in the Slovak Republic:

• lack of transparency in the selection and evaluation of projects to be carried out within OPs

• infringement of procurement rules and procedures

• declaration of expenditure not in line with the actual works performed

• failure to ensure fair competition (Höslová, 2015[10]); (Government of the Slovak Republic, 2014[11]).

In particular, the Slovak Republic has experienced repeated deficiencies in relation to public procurement at the level of beneficiaries and insufficient verification by managing authorities. As discussed in the next section, fraud and corruption risks can manifest at each stage of the project cycle. In particular, the Slovak Republic and numerous other Member States have experienced challenges in mitigating risks in the project selection and implementation stages.

Fraud and corruption risks and schemes

Fraud affecting EU financial interests is defined in Article 3 of Directive (EU) 2017/1371 dealing with the fight against fraud by means of criminal law: it is characterised as a deliberate act of deception intended for personal gain or to cause a loss to another party (European Parliament, 2017[12]). A definition of corruption used by the EC is the abuse of public position for private gain. Types of fraudulent irregularities that are found in the implementation of OPs include, inter alia: falsified accounts/falsified supporting documents; missing or incomplete documents; infringement of public procurement rules; and unjustified expenditure. Both the EC and Member States must put in place measures to protect EU financial interests against fraud and corruption under Article 325 of the Treaty on the Functioning of the EU (TFEU) (European Union, 2016[13]).

In the course of the current programming period, the EC placed a stronger focus on fraud prevention in implementing ESI Funds in response to systemic challenges highlighted in previous programming periods. Specifically, many Member States have experienced cases of fraud and corruption in the project selection and implementation stages of the ESI-funded project cycle, potentially due to the number of actors involved in the management and delivery of OPs. Perpetrators have found ways to adapt their ploys not only to the ESI Fund context generally, but also to specific funds and OPs. Based on an OECD survey of over 80 practitioners from programme authorities in Member States, as well as interviews with experts, the main risks at each stage include the following:

• In the initial stage of the project cycle, potential fraud and corruption risks lie in both the application and project selection processes. For example, in an attempt to win projects and funds, an applicant may submit a false declaration to strengthen their application. In reality, the applicant may not possess the expertise or have the capacity to carry out the project properly. When it comes to project selection, an applicant may seek to influence members of the evaluation committee/board to ensure their project is selected. In some cases, applicants may even bribe officials. Alternatively, members of the evaluation committee/board may have a connection to and in some cases collude with the applicant to help them win the project. Fraud or corruption at this stage can have an impact throughout the project cycle, with perpetrators employing nefarious tactics in the later stages to conceal the original scheme.

• The fraud and corruption risks that arise during the project implementation stage are potentially due to the number of actors that can be involved. In addition, a number of procurement-specific risks are likely to arise at the implementation stage. For example, members of an MA or beneficiary may tailor tender specifications or leak sensitive bid information to favour one particular company or individual. Companies or contractors may also take part in collusive bidding in order to win tenders.

• Although the project closure and evaluation stages of a project carry fewer fraud or corruption risks, perpetrators may submit forged or falsified documentation to hide fraudulent or corrupt activity that took place earlier on in the project, ultimately allowing the activity to go undetected. In some cases, perpetrators may bribe or collude with auditors or evaluators to ensure that their reports and findings conceal the original fraudulent scheme.

Despite the focus of the EC and Member States on implementing anti-fraud measures during the current programming period as well as the subsequent one from 2021 to 2027, challenges remain with regard to fraud and corruption risk management. In an audit published in 2019 on tackling fraud in cohesion spending, the European Court of Auditors found improved fraud prevention measures in sampled MAs, but highlighted the need for further improvements to proactive fraud detection. Furthermore, the findings indicated that the MAs had not developed procedures for monitoring or evaluating the impact of their anti-fraud measures. Lastly, the audit found that the fraud detection rates published by the EC did not necessarily reflect the effectiveness of the detection mechanisms of Member States, or indicate how much fraud is actually detected. Instead, the rates showed how many cases Member States decided to report to the EC (European Court of Auditors, 2019[4]).

The OECD partnership with the Central Co-ordination Body and the government of the Slovak Republic

The Central Co-ordination Body (CCB), which sits in the Slovak Republic Deputy Prime Minister's Office for Investments and Informatisation (DPMO-II), plays a critical role in ensuring the principles of integrity, accountability and transparency in ESI-funded programmes. Established in June 2016, the CCB manages and co-ordinates the implementation of OPs among Slovak authorities. The CCB requested support from the OECD in improving the resilience of the ESI Funds environment and its ability to safeguard the funds from fraud and corruption. The CCB proposed four managing authorities to participate in the project that reflected a range of maturity and capacity for managing these risks. The four participating MAs are responsible for the following OPs: Quality of Environment; Human Resources; Integrated Infrastructure, and Research and Innovation. The policies, practices and insights from these MAs provided the basis for the analysis and actions in the strategy outlined here.

In addition to the aforementioned MAs, the CCB and the OECD engaged a number of other authorities in the Slovak Republic to ensure that the strategy takes into account the different responsibilities and experiences in managing fraud and corruption risks in OPs. Slovak authorities that participated in OECD missions and workshops, as well as providing documentation and inputs for the strategy, include: the Public Procurement Office (PPO), General Prosecutor’s Office (GPO), Anti-Monopoly Office (AMO), Procurement Unit of the Deputy Prime Minister’s Office, Anti-Corruption Unit of the Government Office, Ministry of Finance (certifying authority, audit authority), and central contact point (CCP) OLAF.

The OECD assessed relevant legislation, policies, practices and tools for managing risks, and organised five fact-finding missions, workshops and consultations with project participants. During the missions, experts and practitioners from Estonia, Ireland, Latvia, the Netherlands, Spain and the United Kingdom shared their experiences via practical case studies from their respective countries. For the fourth mission, the OECD team engaged an experienced representative from the European Commission to provide participants with a holistic view of the main challenges and opportunities for Member States regarding fraud and corruption risk mitigation in structural funding. In addition, the OECD conducted a survey of approximately 80 practitioners from programme authorities in other Member States to gain insights into the most prevalent fraud and corruption risks and schemes that other countries encounter throughout the ESI Funds project cycle. During Integrity Week 2019, the OECD organised a seminar with experts from Member States and EU-level institutions to gain their perspectives on different thematic areas that are integral to this strategy. Last, the OECD team researched fraud and corruption schemes involving ESI Funds.

Reflecting the analysis and inputs from these efforts, the strategy is organised into two main thematic areas. The first is fraud and corruption risk assessments, with the focus on making better use of data. The second is fraud and corruption risk governance, including active co-operation among programme authorities, training and capacity building, co-ordination efforts, and finally, monitoring and evaluation (M&E) of fraud and corruption risk management practices. The proposed actions and priorities related to these areas build on the existing practices and capacity of the MAs and other project partners in the Slovak Republic.

Note

← 1.  Managing Authorities are required to set up a Management and Control System for their Operational Programme to ensure that projects are implemented with sound financial control. These systems aim to prevent, detect and correct any irregularities, and ensure the full legality and regularity of expenditure.