FAILURE OF THE EUROPEAN COMMISSION’S CONTROL SYSTEM OF PROVIDING SUBSIDIES IN THE CZECH REPUBLIC
REPORT OF THE SHORTCOMINGS OF THE CZECH AUDIT BODY IN AUDITING THE STORK NEST PROJECT RESULTING FROM ITS CONFLICT OF INTEREST AND THE CONSEQUENCES OF THE FAILURE TO ACT ON THE PART OF THE EUROPEAN COMMISSION.
This reports follows-up and complements the original analysis „Quality review of the audit engagement of the project Stork Nest farm carried out by the Audit Authority“ published in English on 30 May 2017 as regards some other deficiencies of the Audit Body in the Audit Report and the demonstration of how the Audit Report should have been done and how should it look like in this respect. This report further analysis wider circumstances concerning the subject and assignment of the Audit Report, in particular the role of the relevant departments of the European Commission (DG REGIO) and their joint liability for the low quality of the Audit Report and serious shortcomings of the proper functioning of the management and control system of the operational programmes in a situation where the Audit Body is afflicted by the conflict-of-interest – as it was the case in the operation audit in question – which the relevant departments of the European Commission were aware of or must have been aware of.
A situation, where neither the Czech Audit Authority within the time period of three months nor the officials of the European Commission within the time period of about 18 months (as to the date of this analysis) are able to answer a relatively simple question whether the Applicant was a small or medium enterprise or not because the bodies responsible for granting subsidies from EU funds cannot obtain the relevant evidencing documents from public sources nor are they able to obtain such documents from the Applicant, is a decisive proof of the fact that the management and control system of operational programmes in the Czech Republic is severely dysfunctional, i.e. it does not function effectively as required by Regulation (EU) no. 1083/2006 and Regulation (EU) no. 1303/2013.
Such a state of affairs cannot be tolerated either by the Czech Audit Authority or the European Commission, since otherwise a failure to act could be reproached to them, in particular if, as it results of the facts of the HaTeFo case (C-110/13) dealt with by the Court of Justice of the European Union, the German management and control system of operational programmes relating to small and medium enterprises is able to perform check of SME status of applicants even before disbursement of the public subsidy, and is, thus, able to check even before granting of the subsidy destined for SMEs, whether the applicant is indeed and SME or not, and hence, prevent disbursement of a public subsidy if it proves that the declaration of the applicant that it is an SME proves to be inaccurate.
(Czech) Audit Authority should have and could have established in the Audit Report:
- the relevant provision of EU and Czech legal instruments according to which it should have assessed the question whether or not the Applicant was an SME;
- whether the Applicant was in good faith both at the moment when it submitted the application for the SME subsidy and in the period relevant for drawing down the granted subsidy;
- that the transfers of share interest in the Applicant are fictitious only;
- should have made relevant conclusions about a joint acting of the Applicant, the Agrofert Group and the ultimate beneficial owner, Mr Andrej Babiš, and his close relatives;
- that there are reasoned suspicions about the commitment of the criminal act of violation of financial interests of the European Union.
The reason giving rise to the failures of the Audit Authority in the Audit Report is the fact that the Audit Authority was in conflict of interest in the case in question.
The European Commission contributed to the failures of the Audit Authority by giving it the assignment of to perform an audit, despite the fact that it had known that the Audit authority is in the given case in a conflict of interest. In addition, by imposing a too short time-limit it got the Audit Authority under a time pressure so that the Audit Authority could or have performed the audit in question accurately.
The consequences of the described shortcomings of the Audit Authority are:
- an audit report of a very low quality violating international audit standards, and thus, Article 127 (3) of Regulation 1303/2013,
- breach of trust in the independence and impartiality of the Audit Authority as far as the audit report in question is concerned,
- breach of trust in the effective functioning of the management and control system of operational programmes in situations where the Audit Authority is in a conflict of interest, in particular in those operation programmes under which companies of the Agrofert Group are beneficiaries.
The consequences of the failures attributable to the European Commission and its joint liability consist in the knowledge of its departments, in particular DG REGIO, about:
- the state of conflict of interest of the Audit Authority in relation to the audited person (the Applicant),
- the lack of functioning of the management and control system of operational programmes in the Czech Republic with respect to (i) the small and medium enterprises as far as the subsidies destined for SMEs are concerned, and (ii) beneficiaries of EU funds subsidies of the Agrofert Group.
Note: An approximate amount of EU funding granted to the Agrofert Group in the programming period 2007-2013, including agricultural funds, was CZK 4,9 billion (approx. EUR 181 million).