An irregularity and financial fraud are two different legal classifications, even though in project control practice the distinction between them may sometimes begin to blur. For the funding recipient, the distinction is fundamental. An irregularity primarily gives rise to financial consequences relating to the funding received, whereas suspected fraud may also trigger action by law enforcement authorities.
Definition of an irregularity under EU law
The Common Provisions Regulation defines an irregularity as any breach of applicable law resulting from an act or omission by an economic operator which has, or would have, the effect of prejudicing the EU budget by charging an unjustified item of expenditure to it.
A key feature of this definition is that an irregularity does not require intent. An irregularity may also result from acts or omissions committed in good faith, including breaches in procurement procedures, incorrect classification of costs, procedural failures or inaccurate statements made in project documentation.
The Polish implementation legislation uses the concept of an individual irregularity, referring directly to the EU-law concept of an irregularity. As a result, the scope of the two concepts is essentially the same.
How does financial fraud differ from an irregularity?
The offence of financial fraud can be committed only intentionally. In the context of public funding, this means deliberately seeking to obtain support unlawfully or to retain that support despite circumstances that should result in its suspension or reduction.
Under Polish criminal law, the principal point of reference is Article 297 of the Criminal Code. That provision covers situations in which, for the purpose of obtaining support from public funds, a person submits a forged or altered document, a document containing false certification, an unreliable document, or an unreliable written statement concerning circumstances of material importance for obtaining that support (Article 297 § 1 of the Criminal Code).
“Submitting” covers any act by which a document or written statement is made available, including in particular filing it, presenting it for assessment or providing a copy. It is not necessary, however, for the offender to act with the intention of failing to comply with the obligations associated with obtaining the support, for example with the intention of using the funding for purposes inconsistent with its intended use. It is sufficient that the person acts for the purpose of obtaining support by using documents or statements that satisfy the statutory elements of the offence.
A separate offence consists in failing to notify the competent body or institution of a situation that may affect the suspension or limitation of support, where the person concerned is under a duty to provide such notification (Article 297 § 2 of the Criminal Code). The provision also provides for non-punishment where, before criminal proceedings are initiated, the person voluntarily prevents the support from being used or satisfies the injured party’s claim (Article 297 § 3 of the Criminal Code).
Can every project irregularity be treated as financial fraud?
No. In project control practice, however, the two concepts may sometimes be brought dangerously close together, particularly where the institution concludes that the project documentation does not reflect the actual course of events. From the perspective of criminal liability, however, the mere finding of an irregularity is not sufficient.
A funding recipient may incorrectly classify expenditure, breach a procurement procedure, fail to comply with a condition of the grant agreement, or provide the funding institution with information that later proves inconsistent with the facts. Each of these situations may have serious consequences for the eligibility of expenditure or the recipient’s entitlement to funding. None of them, however, in itself establishes that a criminal offence has been committed.
When assessing criminal liability, it is necessary to determine whether the conduct of a particular person satisfies the statutory elements of a specific criminal offence. In the case of Article 297 of the Criminal Code, relevant factors include, among other things, the nature of the document or statement submitted, the circumstances to which it related, their significance for obtaining the support, and the purpose for which the person acted. This analysis cannot be replaced by the conclusion that, because a document was unreliable or the project was implemented contrary to the grant agreement, financial fraud must have occurred.
This distinction is particularly important in projects implemented over several years. Documentation is created at different stages and by different people, while particular information may result from an incorrect interpretation, an inaccuracy or incomplete knowledge on the part of the person providing the explanation. For the purposes of criminal-law assessment, it is necessary to establish what actually happened and with what degree of awareness the particular person acted.
When can project control findings lead to a report to law enforcement authorities?
The risk goes beyond an ordinary financial correction where the material gathered during a project control begins to indicate that the funding institution may have been deliberately presented with a false picture of the project or of circumstances relevant to the award, payment or retention of support.
In practice, particular attention should be paid to situations in which the auditors question the authenticity or reliability of documents, identify significant discrepancies between the documentation and the actual course of project implementation, or find that statements submitted to the funding institution do not correspond to the facts established. Repetition of similar discrepancies may also be relevant. A single mistake will be assessed differently from several documents prepared according to the same pattern where each of them presents the situation more favourably from the perspective of entitlement to funding.
Not every such finding will justify attributing criminal liability. From the perspective of the authority conducting the project control, however, it may be sufficient to give rise to a suspicion requiring the matter to be referred to the competent authorities. The institution conducting the control does not determine the guilt of any particular person. Its findings may, however, become the material on the basis of which a separate investigation begins.
A concerning signal may therefore be a change in the language used during the project control. If the questions cease to concern only the eligibility of expenditure or compliance of the project with the grant agreement and begin to focus on who prepared a particular document, who had particular knowledge, when a specific person became aware of a discrepancy, or why a particular statement was submitted despite that person’s knowledge, the scope of the institution’s interest is clearly expanding.
What should be done when a project control suggests possible financial fraud?
The worst time for spontaneous explanations is when the control findings begin to concern possible deliberate conduct by persons representing the funding recipient. At that stage, each further response should be preceded by establishing the facts on the basis of documents rather than relying on the recollections of people involved in the project.
The first step should be to reconstruct the chronology of events. It is important to establish what information was available at the relevant time, who had that information, which documents existed when a particular statement was made, and what had previously been communicated to the funding institution. An assessment made several years later, when the entire course of the project is already known, may differ substantially from the perspective of the person who made a decision at a particular stage of project implementation.
It is also necessary to separate two issues that often begin to merge in the institution’s correspondence. The first is whether the project conditions were breached. The second is whether a particular person knowingly provided false information or an unreliable document in circumstances satisfying the statutory elements of a criminal offence. Establishing the first does not automatically establish the second.
Before providing further explanations, the control findings should therefore be compared with the funding application, the grant agreement, the project documentation and the earlier correspondence. It is particularly important to check whether the case file already contains responses that could be interpreted as admissions of particular facts. A subsequent letter should not attempt to “correct” earlier wording by presenting a new version of events without explaining the reason for the difference.
At this stage, precision is more important than speed of response. If a particular circumstance cannot be established from the available documentation, it should not be filled in by assumption or speculation. If, on the other hand, the institution’s position combines a project implementation error, unreliability of the documentation and the alleged intent of a particular person into a single allegation, each of those elements should be analysed separately.
Why does this distinction matter?
An irregularity generally gives rise to financial consequences, such as a financial correction, a reduction in funding or an obligation to repay funds. Financial fraud, by contrast, involves the risk of criminal liability for persons acting on behalf of the funding recipient. If the project control findings indicate circumstances suggesting financial fraud, the funding institution may, alongside repayment proceedings, submit a report of a suspected criminal offence.
In project control practice, funding institutions focus primarily on the financial impact on the budget rather than on assessing the funding recipient’s intent. Increasingly, however, where irregularities are particularly serious or appear to be systemic in nature, the institution may decide to report the matter to law enforcement authorities.
Practical conclusion
Project control findings concerning irregularities should be treated as matters of significant legal importance requiring early and thorough analysis. It is essential to establish the facts accurately, properly classify the breaches identified and carefully review the content of explanations submitted to the institution. This can help limit the risk of the matter escalating from a financial correction or repayment claim to potential criminal liability.
Has a project control identified irregularities, or is the funding institution challenging the funding recipient’s explanations or documentation?
See how the Law Firm supports funding recipients in analysing project control findings, preparing their position and handling matters concerning repayment of funding.
