Fraud in risk capital funds

The fraud indicators and signals that triggered the suspicion were:

1. Possible inflation of project costs and doubtful amounts in particular the quantities and unit price of the construction materials supplied for the work.
2. Delays in project leading to sea water erosion of structure and the project being well over budget

The decision to procure the construction materials from a faraway quarry alluded to possible irregularities.

The irregularities mainly concerned the breach of the selection criteria for the participations of the risk capital fund.  The risk capital fund, which was run by the same management before and after it was privatized, made irregular investments in 44 companies, disregarding the investment criteria. For example, companies which were not small or medium-sized (SME) received funding, as well as enterprises in financial difficulties or companies threatened with insolvency. This contravened the eligibility criteria set for EU funding.

The suspicions of fraud and irregularities were reported by a whistleblower and by the press. The allegations brought forward suggested that the investment team of the risk capital fund had favored companies which were not eligible for an investment under the European Structural Funds rules in the funding period 2000-2006 and 2007-2013.

OLAF examined a third of the total fund portfolio of the investment team of the risk capital fund and concluded that the risk capital fund made irregular investments and disregarded investment criteria. However, the suspicion of fraud could not be confirmed as the case has been dismissed by the  judicial authorities

OLAF carried out its activities independently and cooperated with different national authorities. OLAF’s investigation uncovered irregularities and suspected fraud as well as significant deficiencies in the control obligations of the national authorities, and confirmed serious flaws in the privatization process of the risk capital fund.

The case involved a large number of portfolio companies. OLAF could only carry out a limited number of on-the-spot-checks. Information related to the portfolio companies was only available via the information collected at the risk capital fund. Some of the companies involved had already been dissolved. The authorities were reluctant to provide OLAF relevant information.

Deficiencies in the management and control system were confirmed by OLAF and by the Regional Court of Auditors of the Member State.

The eligibility criteria set for EU funding which should prevent this type of irregularity and fraud are now in place. Furthermore since the 2018 revised Financial Regulation, the definition on conflict of interest is extended to shared management funds and EC guidance  on conflict of interests is available  to MS.