Interview of Penkov, Markov & Partners’ Managing Partner Vladimir Penkov for the Newspaper Dnevnik, March 2009

More than Ten Bulgarian Acts of Parliament Contain a Conflict of Interests Definition

Penkov, Markov & Partners, Attorneys at Law, acted as subcontractors to the German company Noerr Stiefenhofer Lutz which last summer was commissioned by State Fund Agriculture and the SAPARD Agency to draw up the concrete projects analysis, develop evasion and fraud indicators and identify the bottlenecks of the European projects control mechanism. The analysis was part of the implementation of the government’s Action Plan adopted in response to the EC letters on the EU funds freezing. Perhaps these efforts have also been of help to the Agency administrators in convincing Brussels to extend the operation of SAPARD by one year.

What did the analysis cover and how did your findings pan out?

Based on the legal frameworks of the EU and Bulgaria the concrete projects analysis provides concrete indicators for potential scenarios for law evasion and fraud, a check list of questions facilitating fraud detection via formal document lay-out, questions for fraudulent behaviour detection in connection to the documents’ contents, questions used for the detection of relatedness between persons, as well as legal amendments recommendations. The analysis was fully in compliance with the government’s Action Plan’s aims to eliminate the existing or potential conflict of interest networks in the funds management as a whole, to strengthen the legality and eligibility check on expenses via real and regular on-the-spot checks and audits, as well as to enable the taking of quick preventive, corrective or disciplinary measures. All of the above targeted the resumption of regular payments and positive assessments of the other Operational Programmes.

What were the indicators you listed?
Several dozens of indicators were developed. They are to serve as red flags in cases of project irregularities and to be used by the control bodies in future EU project reviews. Unfortunately I cannot divulge detailed information on the indicators because of a confidentiality clause in the contract. What I can say, however, is that using them, we went through 56 projects, each of which contained from 2 to 10 big paper binders. Thus, in less than a month we studied over 250 huge binders, which entailed a maximum findings’ reliability under the terms of the assignment.

Would it be possible to claim that you have developed overly restrictive assessment rules and thus the SAPARD project assessment could be blocked?
No, not at all. No, because we gave a high assessment of the existing legal framework and the truth of the matter is that Bulgaria was the only one among the “new democracies” whose rules were accredited by the EC - these assessment rules are not bad at all, but they were insufficient to guarantee their own proper implementation. In our work we were highly motivated to assist the administration so that the bulk of the funds under the already approved projects would be disbursed. The use of the indicators would facilitate the administrators to easily spot the good projects and would eliminate to a large extent the formal and superficial approach to assessment. It should be noted that during the assessment and checks one should not only mark the existence of one of the required documents, but its contents should be examined by the respective expert.
We aimed at developing a mechanism for future projects approval and at preventing irregularities in the EU funds absorption in the future. We introduced new elements and questions during the projects’ evaluation, facilitating the work of the administrators at the SAPARD Agency and the State Fund Agriculture. By which I do not mean to say that these administrators were not working in good faith or that they were professionally wanting when discharging their duties. For the purposes of work facilitation we drew up a check list with questions to the candidates for grants. The questionnaire was designed in such a way that should all questions receive a NO answer, it would signal to an official that the project is impeccable. And this check list is completely separate from the process of project assessment.

How did you select the project sample?
A statistics professor (an authority in his area whom I would like to keep anonymous) analyzed all of the approved over 3600 projects and came up with a model based on a random selection criterion for selecting completed projects (both disbursed and non-disbursed), which had up until then not been the subject of discussion. We wanted to avoid any and all subjectivism and hence selected a risk-based method by assuming that in general risk increases with the increase of the grant amount. That is why the purely statistical principle was combined with the grouping of projects, according to the potential risk they contain.

That is, you provided officials with a precisely calibrated methodology for future use?
That is correct. The study and the analysis did not aim at exercising control over the officials’ decisions or over the legality of the provided funding. They were entirely focused on the work of the officials during the application stage, the project approval stage and the disbursement stage. Attention was devoted to the processing of the applications and their completeness, as well as to the accuracy of the checks and controls. The aim was to flag up the procedural and structural weaknesses in the administrative practice, as well as the points of susceptibility to fraud. The methodology complies fully with EC requirements. We strived to provide the broadest possible scope of recommendations so as to minimize irregularities. If the government decides that our proposals are suitable, it is up to them to select all or just some of the recommendations. Furthermore, we analyzed the legal framework in the country in order to check in which Acts of Parliament there is a definition of relatedness, which has come to be widely known as conflict of interests. We went through all laws, decrees and other acts which contain these terms. And we discovered that despite all claims that in Bulgaria there are no legal acts containing a definition of related persons, there actually are more than 10 such. The latter include the Commerce Act, the Tax-Insurance Procedural Code, the Civil Servant Act, the Public Procurement Act to mention but a few. We have drawn ideas not only from Bulgarian but from European laws as well. As a result we proposed amendments to the Agricultural Producers’ Subsidies Act as that was the only place lacking such definition.

What is the definition of conflict of interests?
At its most general this definition is provided by the Tax-Insurance Procedural Code. According to it, related persons shall be spouses, descending and ascending relatives as well as relatives of blood to the third degree, employer and employee, partners, persons one of which is part of the management of the other or its branch, persons in whose management or control bodies takes part one and the same legal or natural person, company or person owning more than 5% of the shares or equity, persons one of which exercises control over the other, persons one of which has made a donation to the other, persons directly or indirectly participating in the management, control or capital of the other person, etc. You can see the broad spectrum of relations provided for and that is in Bulgarian legislation, not the European one. The Bulgarian definitions are even broader than the ones in German legislation, which I claim to be well acquainted with. There, no one would allow themselves to participate with another company if there is a physical personal relation with its management bodies; no one would fail to report such relation to the competent authorities when applying for a grant.

It turns out the excuse, that there is no definition of relatedness, is actually a flagrant attempt to avoid liability?
I would not put it that way. Our task was to analyze the Bulgarian and European legal framework, to draw up proposals and leave things at the discretion of the administrators. Still, I was really surprised at the number of legal acts defining relatedness in Bulgaria. My personal opinion is that whenever public money is disbursed and doubtful objectiveness is assumed, by analogy we could have used some of the definitions in the existing legislation. Of course, Bulgarian specificities like restitution and the fact that the current owners do not cultivate the land have to be born in mind. And of course, the definition in the Tax-Insurance Code is much too broad, but it probably could be applied also in the areas under EC control and where European money is disbursed. Apart from relatives and equity, in many legal acts relatedness includes the direct or indirect participation in management, the ability to exert influence, etc. The administration should not bury its head in the sand like an ostrich but call a spade a spade.

You have performed an enormous amount of work in order to provide guidelines for EU programme project assessment. What part of these guidelines has been used already?
I do not know what part of the report has been used, as we were not invited to the meeting with EC experts despite the contractual option to do so. We could not participate in the negotiation strategy development either. After all, this is a prerogative of the government, within the government’s discretion. It is my belief that we have performed our task accurately, i.e. facilitating the work of the administration and facilitating the beneficiaries in the filling out of the documents, project assessment and the exercised control. The application even of only a fraction of the analysis’ results would minimize the opportunities for fraud or irregularities as a result of ignorance. This would convince the European Commission to resume the disbursement of European money under the pre-accession programmes and to trust without misgivings the procedure, created in Bulgaria, as to the payments on all European programmes.