Practice category: Red flags
Contact: Ministry of Regional Development and EU Funds
Fraud risk(s) countered
- Conflict of interest
- Avoidance or manipulation of public procurement procedures
- Double funding
- Manipulation of project costs
Context and objective(s)
The Croatian Ministry of Regional Development and EU Funds and the Ministry of Labour and Pension System have set the requirement for Managing Authorities (MAs) for Operational Programme (OP) Competitiveness and Cohesion and OP Efficient Human Resources and their Intermediary Bodies (IBs) to use red flags for carrying out their management verification procedures. More specifically, the EC’s Information Note of Fraud Indicators for ERDF, ESF, and CF (COCOF 09/0003/00-EN) has been transposed into the Common National Rules (CNR) for Management and control system of MAs for OP Competitiveness and Cohesion.
The MA for OP Competitiveness and Cohesion uses ARACHNE but does not have other additional sophisticated IT tools for the identification of red flags. Instead, at the national level, the Managing Authority for OP Competitiveness and Cohesion developed the Common National Rules summarising anti-fraud and anti-corruption measures taken by MAs and IBs.
The MA for OP Competitiveness and Cohesion set up the CNR in order to address several goals:
- To ensure efficient procedures are in place at the OP Competitiveness and Cohesion level, as the MAs have a shared responsibility at the EU level for managing EU funds
- To have a proper safeguard to limit the risks of fraud and corruption at the MA and national level
- To prevent potential fraudulent and corrupt activities involving EU Funds
- To raise awareness among practitioners involved in managing and implementing Operational Programmes (OPs).
Annexes 8 and 9 to the CNR No.10. (Risk management) detail the use of EC-recommended red flags and tailored red flags for management verifications. The Annexes were set up to comply with the Key Requirements 4 and 7 on the specific anti-fraud measures (red flags, fraud risk self-assessment) to be put in place by the Managing Authority. These annexes are available for consultation and use by employees of the MA and IBs. The MA also sees the Annexes 8 and 9 as awareness-raising and capacity-building instruments for IBs of the first and second levels involved in management verifications. Both MAs and IBs are using the red flags list as an up-to-date comprehensive list of risk indicators in anti-fraud work.
Description of the practice
The Common National Rules (CNR) were developed by the MA with technical assistance. The rules were based on a similar set of regulations for the EU Structural funds developed by the MA for the 2007-2013 programming period. With the transition to the structural funds in the new programming period (2014-2020) the MA needs to ensure that all the IBs are following the same rules and procedures from the CPR and EU regulation. CNR is a tool to ensure standardisation and consistent application of rules and procedures regarding management of EU funds and anti-fraud activities.
The framework of anti-fraud work is distributed over two layers of procedures: CNR and organisations’ manual of procedures (MoP). CNR includes procedures on horizontal topics (e.g. risk assessment), as well as prevention and detection of fraud and reporting of irregularities. Currently, the MA has 15 different CNR covering different aspects of the management and control system set up and implementation. Apart from the CNR, each authority and IB in the system have their own MoP, that details the procedures and rules from CNR related functions to daily tasks of these authorities. Internal MoPs detail specific tasks, responsibilities and deadlines for activities for each organisation and team member.
CNR, regarding red flags, is applied using EC-recommended fraud risk indicators, tailored fraud risk indicators or by using ARACHNE IT tool.
The MA uses the EC-recommended list of red flags, which is taken from the EC guidelines on fraud risk assessment . In short, Annex 8 of the CNR on risk management mirrors the template from the EC Guidelines on fraud risk assessment. Annex 9 to the CNR on specific risk indicators was developed in 2017. Based on the analysis performed (with technical assistance), as well as on the feedback received from the IBs and results of the MA checks performed during the verification of delegated functions, the MA found a set of additional fraud risk indicators that were specific to the context of Croatia and were not included in the EC template nor in Annex 8 of the CNR. With the help of colleagues from Latvia, who provided technical assistance, the MA developed a set of tailored risk indicators in additional to EC-recommended indicators.
The fraud risk indicators (red flags) in the Annex 9 are merged into three groups depending on the area of fraud risks:
- Public procurement
- Forgery of documents
- Labour costs and consulting services
Each group of fraud risks contains specific fraud risk indicators and practical examples on how such fraud indicators would look in practice. For instance, the corruption risk indicators include 12 practical examples of corrupt behaviour. It makes it much easier to understand the specific fraud indicator and to detect such fraudulent behaviour. In addition to this, the main terms as fraud, corruption etc. are also defined and standardised to avoid misinterpretation and misunderstanding among IBs.
The type, degree and frequency of the verifications using these red flags depend on the assessed level of risk for the project. Hence, the higher the perception of fraud risks for a specific project, the stricter the verifications are. For instance, a project assessed with a high degree of riskiness could be subject to more frequent on-the-spot checks, involving more targeted verifications. In this way, Annexes 8 and 9 are used by practitioners as an additional tool during the check-ups to detect suspicious behaviour, documents or patterns.
Following the new EC guidelines establishing bid rigging as a type of irregularity to be corrected, the MA has organised a network meeting for all IBs to raise awareness on bid rigging as a fraud risk and how to detect such a risk. Following an interest from the IBs, the MA has included bid rigging in the risk of fraud risk indicators.
To follow up on the implementation and monitoring of fraud risks, the MA has designated risk coordinators in charge of coordinating with project managers of IBs on the use of red flags in their management verifications. Each authority (MA, IB) has a designated risk coordinator that is responsible for anti-fraud work. Risk coordinators are forming a network of experts that meet at least two times per year to exchange good and bad practices, sharing knowledge and fraud risks. In addition, risk coordinators are involved in three operational networks, discussing issues around state aid, public procurement and irregularities. Following the meetings, risk coordinators distribute relevant information throughout their organisations.
Outcomes and results
Requirement of integration of red flags into the management and control system in Croatia ensured a high standard for risk control and verification for ESI Funds operation. Implementation of the CNR has reinforced the use of red flags and identification of fraud risks for OPs under ESI Funds.
The MA generally recognises the improved efficiency and consistency in anti-fraud prevention and detection as a result of developing CNR and its Annexes 8 and 9. The risk indicators are also included in the MA’s checklist on public procurement, therefore it is difficult to measure the impact of introduction of Annexes 8 and 9 separately. The MA has seen positive outcomes as a result of the implementation of CNR and the fraud risk indicator based on the statistics of reported irregularities and suspected fraud by the IBs. The latest statistics on reported irregularities indicate a better response to risk, but also better awareness and capacity of IBs to detect fraud risks. Annex 9 has proved to be an excellent prevention tool that increases the alert of IBs for potentially fraudulent activities. The reported irregularities and suspected fraud, however, relate mostly to conflict of interest and fraud in general.
Key success factors
- The development of the Common National Rules should be a common task between MAs, IBs and consultants. MAs have extensive knowledge of the system and internal processes that should be considered, once IBs help tailor the procedures to better fit into the existing environments.
- Involvement of the IBs in the development of the CNR ensured the consistency of CNR with the individual manual of procedures of each IB.
Challenges encountered & lessons learned
- When implementing all the requirements from the regulation into a local or national system, the MA should aim to put all information together in a practical and simple way. Heavy and complex procedures lead to low uptake by the IBs and a high number of errors.
- EC’s self-assessment tool was useful for the MA to ensure that all necessary procedures are foreseen in the CNR and IBs’ manuals of procedures.
- CNR are constantly evolving, and updates reflect the changes in the EU and national regulation, fraud risk trends (taking into account the feedback from IBs as well as the recommendations of audits and controls of delegated functions performed by MAs).
- The MA views personal visits to the IBs and running self-assessments to be a key to understanding the knowledge gaps of the IBs, to better assessing the local environment and fraud risks and to tailoring the CNR to the needs of IBs.