Nice Bad Beginnings

“The Lord wants to see sense, and he commits the greatest senselessness. It can truly make one despair.” (Franz Kafka, The Trial).

This quote seems to accurately reflect the frequent reality of many recipients of grants from public funds. A reality that starts with the doorbell – usually a few minutes after 6am.

In practice, there are cases straight out of Franz Kafka’s “The Trial”. It seems that the beneficiary has done nothing wrong, but he or she is detained and then often arrested for a few good months.

Let’s examine the reason for this surprise of many beneficiaries. Well, once an innovative idea is born, entrepreneurs often look for an appropriate expert on EU funds. These are people who specialise in preparing an application and grant procedure. When the application is ready it is submitted to a specific competition. The authority assesses to whom and how much to give. The beneficiary wins – euphoria. Now it’s just the signing of the contract, the three sevens and other documents related to financing and securing it. Everything accepted by the institution, fantastic, we expand the activities of the company. The project is implemented and public funds are disbursed.

In the course of project realisation it is known – here the authority will ask about the expense, why so much, there it will ask about the place of project realisation. Therefore, sometimes an authority will calculate a correction of granted public funds, although it happens that in total it will “wave its hand” in the face of the position submitted by the beneficiary. In a word, everything is fine, we continue the project.

This is where we come to the climax – one of two scenarios can happen after a while. The benign one – a summons from an authority again, but this time a law enforcement authority. The second, traumatic – a 6am wake-up call, detention and convoy to the prosecutor’s disposal. This is where the two cases coincide – charges, preventive measures and, in an extreme but not so rare case, a request for temporary arrest. And here is the biggest surprise when talking to the prosecutor – after all, I am implementing/completing the project, so what is the problem?

The crime of grant fraud has more than one name

Grant fraud is one form of crime under Article 297 of the Penal Code, generally referred to as financial fraud. Focusing on the issue of EU funds that interests us, this provision distinguishes two forms of such fraud:

• 1 relates to unreliable (forged, falsified, etc.) documentation or statement submitted to an institution disposing of EU funds.

• It does not refer to any documents, but only to those necessary to receive a grant.

• 2 relates to a breach of the duty to provide information to the funding body.

• Again, this is relevant information – had the authority known about it, it could have considered withholding or limiting the amount of financial support provided.

In order to fully understand the problem of why, despite the execution of a grant agreement, the beneficiary can ‘get charged‘, it is necessary to explain the nature of Article 297 of the Criminal Code. The crime of grant fraud does not require causing damage to the body disposing of public funds.

Regulations, applications, agreements – a fund minefield

This brings us to the heart of the problem of many beneficiaries of EU funds, who catch their heads when they hear what they have been charged with by the public prosecutor.

– Should you inform the authority?

-I don’t know, there are so many of these grant papers. It’s easy to get lost, but I’m doing a project after all.

-If the authority knew about this circumstance, would it impose a correction?

-Maybe.

In simple terms, the above set-up already allows for a grant fraud investigation. Liability may be based on the hypothetical assumption that, had the intermediary institution been aware of a certain event, it would have withdrawn all or part of the funding.

The fundamental question arises, how does one know what issues are relevant to the intermediate body? One has to refer to the grant documentation in this respect. Ideally, there should be a clear indication of what the authority should be informed about and by when.

Unfortunately, it is the case in practice that regulations, grant agreements, general conditions for project implementation and other grant documents introduce a number of requirements that burden the beneficiary. What is worse, often their content is based on vague, undefined terms, which raise doubts as to how to understand a given provision.

What are the practical reasons why beneficiaries of EU funds end up under the magnifying glass of public prosecutors?

Example 1.The beneficiary implemented a project concerning IT training for people in a difficult position on the labour market. The idea was to increase the competences of people living in rural areas, aged 50+, or long-term unemployed. The applicant fulfilled the objectives set for it – it conducted a series of training courses for people excluded from the labour market, provided training materials to participants, and participants took the certification exam.

However, the law enforcement authorities concluded that there was grant fraud. In a nutshell, according to the prosecution, the participants were simply elderly, which makes them ineligible for the labour market.

Example 2.The applicant obtained a grant for the construction of a machinery centre. The aim of the project was to purchase appropriate design and construction equipment and to employ a certain number of people in the company. The beneficiary purchased machinery, hired staff and started production.

Among the provisions of the regulations, there was a competition bonus for locating the production plant in a specific place. Initially, the beneficiary implemented the project in the bonus area, however, over time it was forced to move the business to another location for a period of time. However, the law enforcement authorities decided that the transfer of the plant to another location was already sufficient to bring charges under Article 297 of the Criminal Code et al. and this despite the fact that the Beneficiary, even without the aforementioned bonus, exceeded the point threshold of the grant and achieved the objectives of the project.

Example 3. The Beneficiary had made an investment co-financed by the grant and was already at the stage of project sustainability[1]. There was an offer to sell the beneficiary’s shareholding, which was taken up. The intermediary institution was not informed of the transaction, as the change is disclosed in the publicly available KRS.

In such a case, it is sometimes judged that there has been a breach of the principle of sustainability. Therefore, the institution was not informed of an event that had a significant impact on the grant, as this was the basis for imposing a financial correction in this example.

Perhaps it is worth returning the grant as a prophylactic measure?

Some beneficiaries return the grant to the institution a short while after being charged. Although, in the light of the evidence gathered, they are unlikely to have committed a crime, the thinking is that voluntarily returning the grant received will protect them from prosecution and generally end their troubles.

However, this is not an accurate observation. Although Article 297 § 3 of the Criminal Code allows for the institution of so-called “active regret”, it is limited in time – the reimbursement of the subsidy must occur even before the initiation of criminal proceedings.

• “Before the initiation of criminal proceedings” – the limit is the formal commencement of the criminal procedure, i.e. the decision to initiate an investigation/investigation.

• It is not the moment when charges are brought, by which time it is too late for an effective active repentance.

• A late active regret may be regarded by law enforcement authorities as an informal admission of the act.

However, an effective active regret is worth considering if the beneficiary has a reasonable suspicion that the grant application process may give rise to an investigation of the applicant. What should be done in such a case?

• Carry out an internal audit to verify the data/documents/statements provided to the institution – e.g. whether our service provider/external expert did not bring documents to the company, which are then submitted to the authority, and whose reliability is questionable
• Legal analysis in terms of a peculiar regulatory trap, i.e. whether an effective active repentance under Article 297 of the CC will not cause the committed act to be qualified under a different basis – e.g. Article 270 § 1 of the CC.

What is actually threatened by Article 297 KK?

Subsidy fraud is punishable by imprisonment from 3 months to 5 years. It is worth emphasising that the aforementioned ranges apply irrespective of the amount of the depleted subsidy.

The upper limit of 5 years’ imprisonment allows the perpetrator to benefit from a number of criminal law institutions allowing to mitigate the consequences of the violation of the law. If the other conditions are met, the perpetrator can count on, for example, conditional discontinuance of the proceedings or imposition of a fine or restriction of liberty instead of solitary confinement in prison.

The impression that there is no very severe punishment for subsidy fraud may prove illusory. A significant change is brought by the situation of being charged with an offence under Article 297 of the CC, which also exhausts the elements of Article 286 of the CC. In such cases, one should expect more severe liability, as in the case of Article 286 of the CC, the legislator has provided for gradation of severity of punishment depending on the amount of the unfavourable disposition of property (Article 294 § 1 of the CC et seq.).

In particular, since 1 October, an amendment to the Penal Code came into force, introducing very severe penalties for leading to an unfavourable disposition of property.

disposition

Author

:

	apl. Michał Busz

[1] Project sustainability period – a period of several years from the final settlement when the project must be “kept alive”, cannot be subject to significant modifications, or the beneficiary cannot abandon the activity.