Transnational fraud and off shore companies

The fraud indicators and signals that triggered the suspicion.

- A Bulgarian legal entity (Company X) won the public procurement contract in Romania, despite not having any previous experience in this sector

- “Company X” stopped delivering food to Romania’s most vulnerable during the initial stages of the project.

- When the economic operator breached the contract, the bank, who issued the bank guarantee, refused to cover the costs.

- The funds had already been paid to Company X but no one was implementing the contract.

The Romanian Agency for Payments and Intervention in Agriculture (APIA) initiated a public procurement procedure in 2012 for delivery of food under the Fund for European Aid to the Most Deprived (FEAD), a fund that complements the actions of the European Social fund. A Bulgarian Legal entity “Company X” won the public procurement for over 32 million euro. After the first deliveries of flour and oil were made, APIA made an advance payment of around €18 million to “Company X”.

The public procurement procedure required from the winning company to provide a bank guarantee which would serve as an insurance that if the winning company does not deliver the results under the public procurement, then the bank would cover these costs.

However, after the Bulgarian Company had received the money and minimal deliveries had been made, the deliveries stopped and the funds disappeared. APIA requested the funds back from the Bulgarian Bank who had issued the bank guarantee, but the bank refused to pay.

An investigation started on both an EU level, headed by OLAF, and on a national level in Romania. On the spot checks were performed in different Member-States, including Bulgaria.

Fraud was suspected after the Bulgarian “Company X” did not deliver the food for the most deprived in Romania. This was confirmed by the competent authorities in Romania.

This case study is based on the official public information on the case, given by OLAF and the competent authorities in Romania and Bulgaria . It aims to demonstrate the actions of the Bulgarian authorities to amend national legislation in order to assist the investigations of the European Anti-Fraud Office (OLAF) during a large scale international legislation.

OLAF's assistance to the Romanian Anti-Corruption Directorate (DNA) and the Romanian Anti-Fraud Department - DLAF, has included the conducting of on-the-spot checks in Romania and Bulgaria as well as making enquiries with the judicial authorities in Cyprus, receiving the investigative assistance of the Carabinieri in Italy and also the receipt of detailed information from the administrative authorities in Sweden and Germany.

In Bulgaria, the competent authorities provided OLAF with the relevant information for their investigation into the tax and insurance data of “Company X”. However, under article 74 of the Tax-insurance procedure code (DOPK), such information can only bе issued by the National Revenue Agency (NRA) to specific entities, provided for by law, such as the President of Bulgaria, the Customs authorities, Minister of Finance and others.

In this case, the Bulgarian Anti-Fraud Coordination Service (AFCOS Bulgaria within Ministry of Interior) was obligated to assist the investigators of the European Anti-Fraud Office in accessing the  investigative information.

However, neither OLAF, nor AFCOS had the right to access to such information, according to Bulgarian legislation. From legal point of view, the obtaining of tax and insurance information for the Bulgarian “Company X” was possible through two ways:

1. If either AFCOS or OLAF are provided for by the law as being entitled to receive such sensitive information from NRA (which they were not);

2. To request the voluntary consent of the perpetrator/fraudster.

In this case, the Bulgarian authorities did the following to obtain the necessary information:

1. They secured the voluntary consent (through a consent declaration) from the owner of the Bulgarian “Company X”, to assist with the AFCOS investigation,

2. The National Revenue Agency then provided further information to AFCOS and to OLAF.

3. AFCOS and NRA initiated amendments in the Tax-Insurance Procedure Code (DOPK).

With the amendments of 2015, 2016 and 2017 the Tax-Insurance Procedure Code (DOPK) stipulates that:

Art. 74, par. 1 Access to tax and insurance information can only be given to:

par. 4 to the Director General of the European Anti-Fraud office or to a designated person by him, as well as to the Director of the Bulgarian Anti-Fraud Coordination Service (Directorate “Protection of the Financial Interests of the European Union within the Ministry of Interior”) for the purposes of an open investigation.

Romanian anti-corruption prosecutors conducted searches in various locations throughout Romania and Company X was prosecuted by the Romanian authorities. In Bulgaria, APIA brought a case before the Supreme Court of Cassation, which concluded that the Bulgarian Bank has to pay the Bank Guarantee. A judicial enforcer seized the accounts of the Bank to use the bank guarantee to repay APIA. However, the EU funds have still not been recovered. An irregularity report was sent by the Romanian authorities, through IMS, to OLAF.

For the Bulgarian side this case demonstrated the willingness of the authorities to render the necessary cooperation during an investigation of fraud by OLAF, including by promptly amending the national legislation.

The following difficulties were encountered in this specific transnational case:

• The public agency brought a case before the Supreme Court of Cassation, which concluded that the Bank has to pay the Bank Guarantee. A judicial enforcer seized the accounts of the Bank to use the bank guarantee to repay the agency. However, the EU funds have still not been recovered
• the participation of offshore companies which further complicated investigations;
• Failure of the bank of to pay the bank guarantee.

Some weaknesses in the joint efforts of the Member States involved can be identified, such as:

- the internal rules of APIA allowed for such large sums of money to be paid out prior to the implementation of a more significant part of the contract (although the funds were guaranteed);

- the public procurement criteria that allowed an unexperienced and dubious company to apply for and win the tender;

- the participation of offshore companies which further complicated investigations;

- Failure of the bank of to pay the bank guarantee.

- the need for a EU institution that can investigate and prosecute at EU Level, such as the EPPO.