10 pieces of the puzzle how to reach an EU subsidy by circumventing European law
What is the Stork Nest affair about?
The political explosiveness of the answer to the question whether Stork Nest Farm company was a dissimulated subsidiary of the Agrofert Group, the biggest agricultural and food producing conglomerate in the Czech Republic, or a true SME, results from the fact that the Agrofert Group owned and controlled by Mr. Andrej Babiš, the current finance minister of the Czech Republic. If OLAF rules that the almost EUR 2 million subsidy was corrupt, it may well be the end of the rocketing political career of the Czech finance minister which was built just on the fight against corruption.
The Stork Nest affair is a case of a possible misuse of EU subsidies for small and medium enterprises by an alleged SME, the Stork Nest Farm company. This company was allegedly owned and controlled at the time of applying for a SME subsidy by a large enterprise – the Agrofert Group. The Agrofert Group was and still is under the control of the current minister of finance, Mr. Andrej Babiš, who is at the same time the supervisor of the accuracy of disbursement of EU subsidies in the Czech Republic. The case is prosecuted by the Czech police, EU audit bodies and OLAF. At least, all the key pieces of information of the Stork Nest puzzle have already came to surface so it is possible to go through them one after another.
Piece no. 1: The subsidy was not given to a disadvantaged enterprise.
The Recommendation of the European Commission relating to granting of subsidies to small and medium enterprises (SMEs) as well as the decisions of the Court of Justice of the European Union clearly state that a subsidy can be granted to a SME if the SME is disadvantaged (1). The Stork Nest Farm company did not need the subsidy. If it was able to receive a bank loan in the amount of CZK 350 million (approximately EUR 13 million) guaranteed by the Agrofert Group, it could have received a higher bank loan exceeding by CZK 50 million (the amount of the EU subsidy in question) the original loan. The guarantee of Agrofert Group could have – due to its size – easily covered this additional 50 million bank loan.
Piece no. 2: The enterprise had a strategic partner.
The aforementioned Recommendation of the European Commission also expressly indicates that an enterprise which is affiliated to a partner enterprise is no longer at disadvantage, and hence, shall not be eligible for SME funding. The Stork Nest Farm company, as it can be elicited from publicly available information as well as from the declarations of Andrej Babiš himself, was affiliated to such a strategic partner – Agrofert Group (2). Exactly this arrangement is banned by the EU SME rules on subsidies for such enterprises.
Piece no. 3: The enterprise was not an SME.
From the information on corporate ownership structure, management bodies of the company and other circumstantial evidencing pointing to the links between the Stork Nest Farm company and the Agrofert Group it is clear that this company was so interlocked to the Agrofert Group that it could not have been a self-standing independent SME, but an enterprise linked to the Agrofert Group (premise renting, guarantees from the group, provision of accounting services, car leases, investments etc). If the Stork Nest Farm company was not autonomous, if it was dependent on another enterpries with which it acted jointly, it was not in reality an SME. Even according to the formal rules it was not eligible for drawing the EU subsidy funds which are destined for truly independent small and medium companies.
Piece no. 4: Formal ownership structure of the SME is irrelevant.
Whether or not a company is an independent and self-standing SME is not determined only on the basis of the declaration of the alleged SME or its formal ownership structure which – at the moment of lodging the application for the subsidy – was unknown. The Court of Justice of the European Union stated unambiguously in two decisions relating to granting subsidies to small and medium enterprises that the SME definition cannot be circumvented on formal grounds or by improper legal arrangements (3).
Piece no. 5: Anonymity of owners of a company receiving public money signals a problem.
Despite the abolition of anonymous bearer shares as of 2014 it still possible to hide the true beneficial owner(s) of Czech companies. Either via trust funds ownership with anonymous beneficiaries or by issuing of paper certificates representing interest held in limited liability companies or registered paper shares in joint-stock companies. Although a clandestine transfer of ownership in companies via interest certificates or registered share requires an extra step compared to the bearer shares – next to the hand-over it is necessary to write the name of the new owner on the certificate – it is possible to substitute owners in this way indefinitely: none of the transfers or owners has to be registered anywhere. Despite the commentaries that the sum at stake in the Stork Nest affair of CZK 50 million (approx. EUR 1,8 million) represents no money, it is a prima facie case of a doubtful (mis)use of the anonymous owner by a company which illicitly benefits from public money, irrespective of whether they come from the EU budget or the budget of the Czech state or municipalities (4).
Piece no. 6: The identity of anonymous owners cannot be anyhow proven.
The identity of anonymous owners cannot be evidenced by any documents. The evidentiary value of the statement who was the owner of the anonymous bearer shares of the Stork Net Farm company is close to zero, especially in situation when the contents of this statement changed several times over a short period of time. To earmark close relatives as the alleged anonymous owners is from the evidentiary perspective the least the least credible information. Moreover, the anonymous bearer shares could have passed from one person to another practically every day from the moment of lodging the application until the expiry of the sustainability period, that is the period in which the beneficiary had to observe the conditions under which he received the subsidy (5).
Piece no. 7: If different enterprises are owned by one family, they have a joint control.
In 2014 the Court of Justice of the European Union dealt with a case very similar to the Stork Nest Farm which happened in Germany. Three family members of a German family owned and controlled a small company producing plastic products which applied for a SME subsidy. Two of these three persons were at the same time in the bodies of another company which was owned by a parent of one of these three persons. The German administration, however, refused to grant the SME subsidy to this allegedly small enterprise. It considered that both companies are linked through the family members, and thus that both firms together no longer represent a SME, but a large enterprise. According to the European Court of Justice the interconnection of family members allows them to jointly, that is „to exercise an influence over the commercial decisions of the enterprises concerned which precludes those enterprises from being regarded as economically independent of each other“ which excludes such company from eligibility for a SME subsidy (6). This judgement describes in which way previously adopted EU rules on SMEs should have been applied also in relation to the Stork Nest Farm case which happened in 2008.
Piece no. 8: Audited financial accounts of the company Stork Nest Farm are either incomplete or false
According to the accounting regulations which were in force between 2008 – 2013 each Czech company was obliged to indicate in the annex to the published financial accounts its direct shareholders with interest of 20 % or more (7). If each of the descendants of Mr. Andrej Babiš had an interest in the Stork Nest Farm in the amount of at least 20 % and the brother of his partner in the amount of 60 %, at least one and/or all these persons should have been indicated in the Annex to the financial accounts as shareholders. In none of the published financial accounts of the Stork Nest Farm company any shareholder or shareholders owning interest of 20 % or more in this company are mentioned. Nevertheless, all these financial accounts are audited by the auditor without any qualification. The auditor thus confirmed, amongst others, that the financial accounts, including its annexes contains all information which it should have contained under the regulations in force. However, the obligatory information about direct shareholders with interest of 20 % or more is missing. Was it a negligence on the part of the auditor? An intention? Or a repeated coincidence? Moreover, the financial accounts for the most important year 2008 was not filed to the corporate registry. Another coincidence?
Piece no. 9: The application for subsidy had to contain at least a declaration that the Stork Nest Farm company is a SME.
As we learned from the public meeting of the Lower Chamber of the Czech Parliament in relation to the Stork Nest affair, the application for subsidy must have included a declaration of honour that the applicant Stork Nest Farm company is a SME. This declaration must have been signed by a person which signed on behalf of the Stork Nest Company the application for SME subsidy. And, by the way, what does it mean if someone creates, uses or submits false, inaccurate or incomplete documents or if he in such documents indicates false or grossly misleading information relating to the revenues or expenditures of the budget of the Euroepan Union or budgets administered by the European Union or on its behalf or he conceals such documents or information, and thus allows for an incorrect use or containment of financial means of such budget or reduction of sources of such a budget?
Piece no. 10: Neither the fulfilment of the SME requirement nor the necessity of the subsidy has been verified
Once again on the basis of information voiced in the Lower Chamber it is apparent that no one verified the accuracy of the declaration that the Stork Nest Farm is a SME. Another condition for attribution of the subsidy – the necessity – was, as it appears, ignored completely both by the authorities competent for granting the subsidy and later by auditing bodies. The fact that the basic requirements conditioning granting of the subsidy were not checked by the authorities – and God knows whether they are checked now – shows a possible serious systemic shortcoming in the way in which EU subsidies are disbursed in the Czech Republic. At the same time, it becomes more and more evident why we spent so much money from EU funds on building on useless golf playgrounds, wellness centres and congress palaces which were doubtlessly erected by independent and self-standing SMEs.
Having put all the pieces of the jigsaw together, the resulting picture stands out clearly. The German authorities in 2012 were able to reveal improper arrangements with the definition of a SME even before they granted the subsidy. Even Italian authorities in 1999 before they disbursed a public subsidy to an allegedly small producer of solar panels owned by a large holding company, were kind enough to ask the European Commission whether the aid they were about to grant was in accordance with the EU rules. Both the European Commission and the European Court of Justice confirmed to the Italian authorities that it is illegal to grant a SME subsidy to a company which is not a self-standing and independent SME at disadvantage which for this reason needs the subsidy.
I am really curious whether the competent authories will put the jigsaw pieces together in the same way as I did. It is indeed not a very difficult task. Apart from the political implications, the whole Stork Nest affair raises difficult questions about the credibility of supervisory system over the way in which EU funds are disbursed in the Czech Republic.
References to the documents mentioned in the text:
(1) Points 9 and 12 of the Recommendation of the European Commission relating to the definition of microenterprises and small and medium enterprises; para. 39 of the judgement of the European Court of Justice C-91/01 of 29 April 2004 Italy v. European Commission
(2) Art. 3 (1) – (3) of the Recommendation of the Commission of 6 May 2003 relating to the definition of microenterprises and small and medium enterprises
(3) Para. 50 of the judgement of the European Court of Justice C-91/01 of 29 April 2004 Italy v. European Commission; para. 39of the judgement of the Court of Justice of the European Union C-110/13 of 27 February 2014 HaTeFo GmbH v. Finanzamt Haldensleben
(4) There are hundreds of anonymous recipient of subsidies similar to the Stork Farm (Anonymních příjemců dotací jako Čapí hnízdo jsou stovky), Jiří Skuhrovec, blog Aktuálně.cz, 23 March 2016
(5) The Anticorruption Endowment (Nadační fond proti korupci) indicates in this respect an interesting fact. The lawyer Mr. Václav Knotek and the notary Svatopluk Procházka, are in their position of obliged persons under the anti-money laundering regulations, obliged to keep the documents and identification of persons on whose behalf Mr. Václav Knotek acted in the shareholder meetings of the Stork Nest Farm company held on 5 January 2009 and 31 August 2010. The copies of identification documents of descendants of Mr. Andrej Babiš and brother of his partner should be kept for the period of 10 years (more information at http://www.nfpk.cz/glosy/janusz-konieczny/4363).
(6) Para 39 of the judgement of the Court of Justice of the European Union C-110/13 of 27 February 2014 HaTeFo GmbH v. Finanzamt Haldensleben (a note for lawyers: the Court of Justice of the European Union according to Art. 267 of the Treaty on Functioning of the European Union interprets and applies the Union law, it does not create it as such; as a result, even the judgment of 27 February 2014 is relevant in relation to facts which happened before this date since the court only explained what was the intepretation of the European Commission regarding the SME definition as to the date of its adoption on 6 May 2003 – with effects for the Czech Republic as of 1 May 2004 when it became a Member State of the European Union).
(7) Section 39 (1) of the Czech regulation no. 500/2002 Coll. as applicable between 2008 – 2013