When the state deceives itself: Billions for nothing – How systematic control gaps turn subsidies into plunder

Phantom cafes and fake coaching sessions: Why billions in taxpayer money simply disappear

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It begins with a phantom café in Hanover and culminates in a nationwide, multi-billion-euro problem: Germany's subsidy system loses vast sums of taxpayer money every year due to systematic loopholes, perverse incentives, and institutionalized naiveté. The case of the integration association "Integrationsarbeit Kronsberg" and organized coaching fraudsters exemplifies a profound failure of the state. Millions are poured into projects that never materialize – while authorities merely file paperwork instead of verifying actual results. Close ties between politics and associations further exacerbate the situation. This is an in-depth analysis of how the system opens the floodgates to subsidy fraud, who profits from it, and why a radical reform of Germany's subsidy and funding culture is long overdue.

Advance payments without checks: Why the German subsidy system is a paradise for fraudsters

The case of the Hanover-based integration association "Integrationsarbeit Kronsberg" sparked a long overdue debate in the spring of 2026. Over €1.1 million from public funds flowed to an association whose actual services remain unclear to this day. The Federal Office for Migration and Refugees (BAMF) has since reclaimed €739,583, and the state of Lower Saxony has retroactively revoked all funding approvals and is itself demanding the return of nearly €400,000. The Hanover public prosecutor's office is investigating on suspicion of subsidy fraud and breach of trust. What at first glance appears to be a regional scandal is, upon closer inspection, a symptom of a deeply rooted structural problem: The German state distributes billions of euros annually to private organizations without adequate control mechanisms, without consistent performance measurement, and with a political culture of institutionalized naiveté.

A club, a café, and millions that vanished

The core project of the association "Integrationsarbeit Kronsberg" (Integration Work Kronsberg) was the so-called "Respekt Café Kronsberg" in Hanover – a meeting place that was supposed to be funded by the European Union's Asylum, Migration and Integration Fund (AMIF). The funding was earmarked at a total of €924,479.88, with total expenditures of €1,027,199.88, representing a funding rate of approximately 90 percent. According to the German Federal Government, €739,583.90 had actually been disbursed by June 30, 2025. The problem: The café still doesn't exist. A meeting place that was supposed to be doing integration work on paper remained a phantom.

The chairwoman of the association, former SPD local politician Hülya Iri, founded and led the organization for many years. Until recently, she served on the city council of Hanover, the capital of Lower Saxony. Investigators' suspicions are serious: association funds may have been misappropriated to purchase real estate. One of the nine criminal complaints filed with the public prosecutor's office contains this allegation in great detail. The Hanover District Court has now officially opened insolvency proceedings, and the appointed insolvency administrator, Joachim Heitsch, reports "clear indications of liability claims" against the association after an initial review of the account transactions.

The question of the auditing process is particularly explosive. In response to a parliamentary inquiry, the Federal Ministry of the Interior stated that the association had submitted three expenditure reports and that "no irregularities were found." This statement stands in stark contrast to the reality of a never-built café and an ongoing investigation by the public prosecutor's office. It demonstrates that the audit was apparently purely formal – documents were filed, reports received, but no one inquired whether the paperwork reflected any actual work performed.

The structural problem: Advance payment without responsibility

A key economic problem in the German public funding system is the practice of large advance payments. In the case of the Kronsberg Association, 80 percent of the investment costs were paid out in advance – before the café had even been built. CDU integration expert Christina Stumpp has therefore called in the Bundestag for an urgent review of whether such large advance payments are still compatible with the due diligence obligations of public funds. The economic logic behind this criticism is strikingly clear: Anyone who receives 80 percent of a sum before even beginning to deliver has, according to rational calculation, the strongest incentive to keep the service as minimal as possible or to forgo it altogether.

This is no coincidence, but a systemic problem of perverse incentives. In principal-agent theory, a fundamental concept in economics, the situation is described as follows: The principal (here, the state) delegates a task to the agent (here, the funding body) but cannot fully monitor the agent's actions. If the incentive structures are flawed, the agent will act opportunistically. This is precisely what is structurally inherent in the German subsidy system: Funds are disbursed before the service is provided, oversight is weak, and sanctions—if they are applied at all—only take effect long after the money has been spent.

The AMIF funding regulations theoretically stipulate proof of expenditure and on-site inspections. The managing authority is authorized to conduct operational and financial audits on a risk-based random sampling basis. But this is precisely where the problem lies: In practice, "risk-based" often means that closer scrutiny only occurs when there is already suspicion. Small, politically well-connected associations with plausible-sounding project descriptions slip through the cracks – until it's too late.

The continuing education industry: A multi-billion dollar market with structural perverse incentives

While the Kronsberg case falls under the umbrella of integration work, the same structural pattern is also evident in the significantly larger market of state-funded continuing education. The Federal Employment Agency alone has allocated approximately €4.1 billion in its 2026 budget for the promotion of vocational training – an increase of around €690 million compared to the previous year, partly due to the transfer of training funding from job centers. This is a gigantic market that attracts private training providers like moths to a flame.

The basic structure of this market is as follows: Job seekers receive a training voucher from the employment agency, which they can use to complete further training at approved providers. The providers bill the agency directly for the courses. This sounds like an efficient voucher system – and it can be. However, without consistent monitoring of success at the end of the chain, it becomes a gateway for abuse. The case of a Berlin coaching gang illustrates this dramatically.

In September 2025, the Berlin State Criminal Police Office conducted a large-scale raid with 23 search warrants at 25 locations in Berlin, Brandenburg, and Saxony-Anhalt. Fifteen individuals were investigated for commercial and organized fraud in 140 cases. The suspects allegedly billed job centers and employment agencies for individual coaching sessions from May 2021 until at least July 2023, sessions they had either not provided at all or only partially. The total damage amounted to €890,974.40. A suspected ringleader, a 42-year-old man, was arrested. The system exploited by the gang was remarkably simple: unemployed individuals signed documents without having received any actual coaching services, the reports were falsified, and the invoices were accepted.

The industrial nature of subsidy fraud

The Berlin coaching case is not an isolated incident. Industry insiders report that around 20 percent of providers in the continuing education market operate illegally and siphon off large sums of public funding. This figure is not officially verified, but it aligns with observations that investigative journalists and researchers have been documenting for years. The online portal FragDenStaat (AskTheState) has determined in extensive research that around 350 million euros of taxpayer money flowed to training providers without any services being provided. Furthermore, a large proportion of the programs actually conducted are considered worthless because participants do not subsequently improve their job prospects.

The Federal Employment Agency relies on the AZAV certification system (Accreditation and Approval Regulation for Employment Promotion), which examines providers and programs before approval. The problem with AZAV is well-known and well-documented: the process is bureaucratic, expensive, and primarily assesses formal criteria – quality management systems, organizational structures, and curricula on paper. Whether a program actually helps people find employment, whether the instructors are competent, and whether the lessons are effectively designed – all of this remains largely unchecked. Critics have been complaining for years that AZAV prioritizes formal requirements over substantive quality.

The fundamental problem is economic: job centers fill pre-purchased training slots, even if the programs are hardly suitable for the participants. Anyone who has issued a training voucher must also process it – regardless of whether the program is worthwhile or whether the provider operates reliably. This bureaucratic pressure to conform means that the actual goal of getting people into sustainable employment gets lost behind administrative completeness. Participants in further training programs are not formally considered unemployed during their participation, which adjusts the statistics – but of course, doesn't solve the underlying problem.

Political entanglements and the erosion of the control function

In the case of the Kronsberg Association, another structural problem arises: the political dimension. Hülya Iri was not only the association's founder and chairwoman, but also a local SPD politician. Whether this political affiliation contributed to the association receiving generous funding for years without sufficient oversight is a question explicitly raised by the CDU in the Lower Saxony state parliament. FDP leader Wolfgang Kubicki puts it succinctly: precisely where substantial funding is used to mask political failure, the susceptibility to corruption and abuse is particularly high.

The entanglement of government funding and political networks is a systematic phenomenon in German associations. Associations with strong political connections often have easier access to funding – not because their work is better, but because they know the right contacts and fill out the right forms. An investigation into federal NGO funding practices shows that numerous organizations receive funding from multiple federal programs simultaneously and do not operate in a politically neutral manner. Legal scholars like Professor Hubertus Gersdorf have pointed out that the current practice, lacking a clear legal basis, is constitutionally problematic because the state can exert undue influence on public opinion through the indirect funding of politically active organizations.

The state failure identified by Reiner Holznagel, president of the Federation of Taxpayers, therefore has a twofold dimension: firstly, it is a failure of the administrative control systems, and secondly, a failure of political neutrality. When more than a million euros are transferred and it remains unclear where the money went, then there is not only a suspicion of criminal activity, but also a fundamental failure of the political oversight system.

The limits of formal testing: How paper can handle anything

The Federal Ministry of the Interior had stated that the Kronsberg Association had properly submitted proof of expenditure and that no irregularities had been found. This statement is perhaps the most revealing of the entire scandal. It exposes a control philosophy that relies on document review rather than impact assessment. As we all know, paperwork can conceal anything.

While EU regulations for the AMIF fund stipulate extensive reporting requirements—twice-yearly indicator reports, interim and final statements of expenditure, and theoretically, on-site inspections—these audits are conducted on a risk-based sampling basis. Experience shows that small associations with comparatively low funding volumes are not typically targeted for intensive scrutiny. Those who submit the correct forms completely and on time, and who have no political enemies, can remain under the radar of the authorities for years.

This problem is not new. The Federal Court of Auditors has pointed out structural gaps in the German subsidy control system in various reports. Wasted subsidies, inadequate audits, and outdated IT systems result in the state losing tens of billions of euros in revenue and funds annually. This was particularly evident in the area of ​​COVID-19 emergency aid: The Federal Ministry for Economic Affairs and Energy itself admitted that the proper use of federal funds estimated at more than 4 billion euros could not be unequivocally verified. The losses due to fraudulently obtained COVID-19 aid amounted to 151.3 million euros in 2020 alone, accompanied by a sharp increase in subsidy fraud cases to 7,585 – compared to just 318 in the previous year.

Impact research as an inconvenient answer

There is a scientifically sound way out of this dilemma – it is just too rarely followed consistently: systematic impact research. The Institute for Employment Research (IAB) has conducted extensive studies on the effectiveness of continuing education programs over the past two decades. The results are more nuanced than the sweeping condemnations from the political debate, but also more sobering than the self-promotion of the training sector.

Studies by the IAB (Institute for Employment Research) generally show that subsidized training increases the employment prospects and income of the unemployed. Short, target-group-specific programs perform better than long, generically designed programs. Retraining programs show positive long-term effects, albeit with a significant lock-in effect at the beginning. However, research also reveals a huge variation in quality. Some programs generate significantly positive labor market effects, while others have no measurable effect. A systematic quality differentiation within the Federal Employment Agency's procurement system—that is, an allocation based on the proven labor market success of previous programs offered by the providers—does not yet exist to a sufficient degree.

The Bertelsmann Foundation has repeatedly pointed out that the German continuing education system is poorly equipped to meet the actual skills needs of the labor market. The need for reform has been recognized, but implementation remains slow. A coalition agreement that announces funding monitoring and aims to strengthen due diligence obligations is a first step, but no substitute for a structurally redesigned allocation and control system.

The damage beyond the numbers

The monetary damage in the Kronsberg case – around €1.1 million – is manageable in absolute terms. However, the overall societal costs of this structural misuse of subsidies are far higher. It's not just about lost taxpayers' money, but about poisoned trust.

When the state spends millions of euros to promote integration, and it turns out that the money may have been used to buy real estate, it not only damages the reputation of the funding system. It also harms the many reputable organizations working to promote integration who are doing valuable work and are now being unfairly suspected. It undermines the societal consensus on the necessity of integration efforts. And it fuels populist narratives that seek to delegitimize all forms of state funding.

The same applies to the continuing education market. When 350 million euros flow to training providers without any measurable benefit, and at the same time the Federal Employment Agency reports a budget deficit of almost 4 billion euros that has to be covered by federal loans, then this is a disastrous combination. Every euro that flows into useless or fraudulent continuing education programs is missing elsewhere – for genuinely effective training opportunities, for counseling services, for the infrastructure of job placement.

What reform would mean

From an economic perspective, the necessary reforms are not rocket science – however, they require political will, which the system has not yet sufficiently demonstrated.

First, funding allocation needs to be consistently results-oriented. Organizations should not be paid solely for carrying out measures, but for achieving measurable results – for example, how many of their participants are in jobs subject to social security contributions after six or twelve months. Blended funding models, which combine a base amount with a performance-based bonus, could provide a solution here.

Secondly, the advance payment rates need to be fundamentally reconsidered. An organization that receives 80 or 90 percent of a grant before even beginning to deliver is under minimal financial pressure to provide the service. A staggered disbursement model closely linked to documented project progress would significantly reduce the incentives for abuse.

Thirdly, genuine on-site inspections are needed, not just document checks. If an association builds a community center, someone must verify that the center actually exists – not after three years and three proofs of use, but at an early stage. This is labor-intensive, but the alternative – paying millions of euros for phantom projects – is more expensive.

Fourth, political neutrality in the awarding of contracts should be institutionally guaranteed through independent awarding bodies. Legal scholars have pointed to constitutional requirements that could necessitate a non-partisan, pluralistically composed decision-making structure for the allocation of funds. Where political networks influence award decisions, the risk of abuse increases.

The uncomfortable conclusion: A system that lies to itself

The scandals surrounding the Kronsberg Association and the Berlin coaching gang are not isolated incidents or random outliers. They are the predictable result of a funding system that, for decades, has relied on granting trust rather than evaluating its impact. The system distributes funds generously, conducts formalistic reviews, and reacts too late.

The figures speak for themselves: €4.1 billion for further training from the Federal Employment Agency's budget alone, several billion more for integration, democracy, and social promotion from federal and state funds, and ultimately a Federal Court of Auditors reporting on squandered subsidies and losses in the tens of billions. The investigating authorities are only seeing the tip of the iceberg – because most cases go undetected due to insufficient oversight.

What keeps this system alive is a political economy of turning a blind eye. Subsidies are a tool for conflict resolution, cultivating clientelism, and symbolic politics. Those who rigorously monitor make enemies. Those who generously fund and discreetly look the other way maintain their networks. This logic is politically rational, but economically destructive. And it costs taxpayers hundreds of millions of euros every year—for cafés that were never built, for coaching sessions that never took place, and for integration services that were never provided.

The Kronsberg case is therefore a litmus test. If the investigations do not lead to fundamental structural consequences – no new procurement law, no stricter control regime, no genuine focus on results – then this report will have to be written again in five years. With new names, new associations, and more millions missing.