12 January 2023

Subsidy Fraud, Relevant Markets and Presidential Elections

Former prime minister and now a member of the Czech parliament Andrej Babiš scored a victory only a few days before the upcoming Czech presidential elections. On 9 January 2023, the Municipal Court in Prague finally issued a verdict in a criminal case involving him and his colleague Ms Nagyová on charges of grant fraud and damaging the financial interests of the European Union. The court concluded that the acts of Mr Babiš and Ms Nagyová, as framed by the prosecution, did not constitute a felony. Hence, to the surprise of many, including Mr Babiš’ attorney, the court acquitted both defendants.

The importance of the case can hardly be understated. Criminal prosecution of an important political person is always bound to attract public attention, but this case hits even closer for the Czechs as Mr Babiš, among his other political activities, is currently running for the Czech presidency. Hence it comes to little surprise that his prosecution has been a major talking point in the Czech public debate. In the following text, I will try to explain this admittedly rather complicated case and outline its political implications.

Agrofert’s Stork Nest

A short recap of the story is in order. In 2007, a firm that belonged to the Agrofert business group, an agricultural giant owned by Mr Babiš, issued anonymous shares, obscuring its ownership structure. In the following year, the firm was renamed Farma Čapí hnízdo (“Stork Nest”) and a construction of a modern recreational and conference centre some 50 kilometres from Prague begun. With anonymous shares being obtained by various, albeit at the time undisclosed, natural persons, the firm seemingly severed its ties with Agrofert, with the exception of its corporate organs in which people close to either Agrofert or Mr Babiš’ family suddenly started to appear. Most importantly, however, Stork Nest then applied for a subsidy of around 2 million Euros from an EU funds programme aimed at small and medium enterprises, which it received.

Around 2012, suspicions started to arise about the circumstances in which Stork Nest received the subsidy and around Mr Babiš’ role as the press discovered that Stork Nest is built on an estate owned by Imoba, another firm that was part of the Agrofert group. A connection to Agrofert was confirmed in 2015 when, only a few weeks after the end of a five-year period, in which the enterprise receiving the subsidy is required to still satisfy the conditions prescribed by the subsidy, Stork Nest re-joined the Agrofert group.

The investigation and prosecution

What followed was a lengthy police investigation, repeated lifting of parliamentary immunity for Mr Babiš and another investigated person who were both MPs at the time, the involvement of OLAF and even Czech administrative authorities requiring Imoba to refund the subsidy after the Commission made a plea to have Stork Nest excluded from EU subsidies.

Ending the investigation, the police concluded that by purposefully dissociating Stork Nest from Agrofert, Mr Babiš and other accused persons had conspired to create conditions in which Agrofert, an economic giant, would effectively receive a subsidy aimed at SMEs. Upon receiving the case, the prosecution initially stopped the proceedings against all persons charged as it concluded that it was not proven that Stork Nest was not an SME. Later, an intervention of the Prosecutor General forced the prosecution to reopen the case, albeit now only in regards to Mr Babiš, as the person holding an effective control over Stork Nest, and Ms Nagyová, an expert on grant applications who filed the application and likely thought up the scheme. When the case finally reached the courts, the prosecution placed its focus slightly differently than the police. According to the prosecution, it was primarily the wilful concealment of personal connections between Stork Nest and Agrofert in the subsidy application, and hence filing for a grant for SMEs in full knowledge that Stork Nest is not one, that constituted the crime. From a fraudulent scheme, the focus and evidence-presenting efforts thus shifted to whether the accused knew at the time that the firm was ineligible to receive the grant.

The verdict

The Municipal Court in Prague, however, disagreed with both points.

As for the purposeful disassociation of Stork Nest from Agrofert to receive the subsidy, the court found that the disassociation was not motivated by securing the grant but likely by other objectives. Rather, the idea of applying for the grant came only later, after it was decided that despite its financial losses, Stork Nest would continue its operation so as to allow Mr Babiš’ family members to pursue business activities for the sake of their interest in the project. Hence, the disassociation was not a fraudulent scheme. Somewhat ironically, the court based these findings on a testimony of a key witness whose credibility was being vigorously attacked by the defence throughout the proceedings.

Secondly, as the prosecution focused on wilful withholding of information about personal interconnections, as well as the Stork Nest’s ineligibility to receive an SME grant being know to the accused, the case came down to a technical question concerning relevant markets. In order for Stork Nest to be considered a linked enterprise in relation to Agrofert due to both being connected by the person of Mr Babiš, it would have to, pursuant to Article 3(3) d) of the Commission Recommendation of 6 May 2003 2003/361/EC concerning the definition of micro, small and medium-sized enterprises, read in light of paragraph 12 of its preamble, operate on the same or adjacent markets as other businesses belonging to Agrofert. Yet, this has not been proven by the prosecution. Without establishing the operation on the same or adjacent markets, the SME eligibility of Stork Nest then needed to be examined without an account being taken of its relation with Agrofert and in such a situation, Stork Nest indeed satisfied the conditions to be considered an SME. With the company thus likely being eligible to receive a grant, no felony was committed through an application lodged to receive one.

Yet, not all was rosy for Mr Babiš. While the court struck down the prosecution, Mr Babiš received his fair share of criticism as well, mainly as regards inconsistencies of his own testimonies. With two witnesses of the defence – a financial director of Agrofert and a member of board of directors of Imoba – the court even went as far as to suggest that the police should start perjury investigations. Lastly, the court found it sufficiently proven that someone, with Mr Babiš’ full awareness, forged a signature of Mr Babiš’ son to transfer shares onto the son without his consent.

The prosecution stated that it will consider whether to appeal the decision, but the decision is an important victory for Mr Babiš in any case. Exact intricacies of the court’s reasoning are unknown at the moment as the full written verdict is expected to be published in 3 months, but the court went above and beyond of what is usual in Czechia in explaining its line of thinking. After a more than 3 hours-long reading of the verdict, the court organised a conference session with the press, in which the judge answered questions about the case. That is interesting in and of itself – it is not very common for judges of lower instance courts to communicate openly with the media. The interview (in Czech) is available here.

The verdict’s reception

The verdict has been received, rather unsurprisingly, with mixed reactions. The stakes were high, especially with the ongoing presidential elections, and the public expected an indictment rather than an acquittal. In the press, however, the judicial proceedings, while disappointing for many in their outcome, have been described as meticulous, correct and as a sign of an impartial and fair administration of justice. The few raised notions of mismanagement of the case were not aimed at the court but rather at the public prosecution.

For Mr Babiš, the verdict could not have been timed better as it came only 5 days before the first round of presidential elections and, thus, allows him to bank on his success and give credibility to a mantra about the corrupt establishment attempting to unjustly oust him from politics. What this really means for Mr Babiš’ actual chances in the elections is, however, a difficult question. On the one hand, the notion of him running for president to gain immunity that comes with the office is no longer on the table. On the other hand, Mr Babiš’ case has been in the focus of the public eye for more than 5 years now and the notion of a criminally prosecuted prime minister and even a presidential candidate is hardly anything new for the Czechs. As such, while it may help some to decide, there won’t be many who base their support or opposition to Mr Babiš on the outcome of these criminal proceedings. With the trenches already dug and the criminal prosecution hardly being the only line of attack for Mr Babiš’ political opponents, the acquittal will most likely not in itself guarantee him the presidential office.

According to latest pre-election surveys preceding the acquittal, Mr Babiš is more or less tied with another candidate, former Chief of Staff and Chair of the NATO Military Committee Petr Pavel as regards the first round of the elections. Exact voter shift caused by the acquittal will not be known until the votes are counted as the Czech Statute on Presidential Elections forbids publishing pre-election surveys in the three days preceding the voting and, hence, surveys reflecting the acquittal will not be available. But while the verdict boosts Mr Babiš’ chances to emerge victorious in the first round, his biggest challenge will be the second round as it is expected that the majority of votes going to other unsuccessful candidates present in the first round will be secured by Mr Pavel in the second round, whereas Mr Babiš can expect only modest gains. At the moment, bookmakers predict a 58 percent chance of a victory for Mr Pavel and 29 percent chance for Mr Babiš. In third place is former rector of Mendel University Danuše Nerudová who until recently tied with both Pavel and Babiš but recently saw significant losses in surveys.

Conclusion

Is the message of the acquittal strong enough to overcome Pavel’s lead? The last weekend of January will tell. However, it is reasonable to assume that if Mr Babiš emerges victorious, the reasons go beyond the verdict. As surveys over the last few years and indeed Mr Babiš’ political successes of the past show, the fact that criminal proceedings are underway against a politician does not carry much weight in Czechia.

No matter the outcome of the presidential elections and despite the possibility of the appeal by the prosecution, the most notorious criminal case in recent Czech history has been resolved. The verdict surprised many, probably including Mr Babiš himself. Elaborate legal analyses will surely follow once the full reasoning is out and maybe one will learn a thing or two about assessing relevant markets. Will we say in the future that designating a geographical relevant market for conference hosting in criminal proceedings has decided who the Czech president is? Probably not.


SUGGESTED CITATION  Burda, Jan: Subsidy Fraud, Relevant Markets and Presidential Elections, VerfBlog, 2023/1/12, https://verfassungsblog.de/subsidy-fraud-relevant-markets-and-presidential-elections/, DOI: 10.17176/20230112-121613-0.

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