Annexes to COM(2013)682 - Protection of the EU budget to end 2012 - Main contents

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dossier	COM(2013)682 - Protection of the EU budget to end 2012.
document	COM(2013)682
date	September 26, 2013

agreement with the Commission.

¹³ For example, for the implementation mechanism of financial corrections for cohesion policy see explanations provided in the accompanying SWD, section 4.2.1.

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6.2. Impact on national budgets

6.2.1 Introduction

Under shared management, all financial corrections and recoveries have an impact on national budgets regardless of their method of implementation. It has to be underlined that even if no reimbursement to the EU budget is made, the impact of financial corrections is always negative at Member State’s level. In order not to lose EU funding, the Member State must replace ineligible expenditure by eligible operations. That means that the Member State bears with own resources (from the national budget) the financial consequences of the loss of EU co-financing of the expenditure considered ineligible, unless it recovers the amounts from individual beneficiaries. This is not always possible, for example in the case of flat rate corrections at programme level (due to deficiencies in the national administration managing the programme) which are not linked to individual irregularities at project level. However, those flat rate corrections do protect adequately the EU Budget.

The impact of these financial corrections both for the current year (2012) and cumulatively (per Member State for Agriculture (EAGF) and for the programming period 2000-2006 for ERDF & ESF) is shown below.

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6.2.2 Financial corrections implemented per Member State in 2012

A breakdown of the financial corrections implemented per Member State for the different shared management areas is shown in the table below:

Table 6.2.2: Shared management financial corrections implemented per Member State in 2012

EUR millions

	Payments	*Financial corrections*
							% as	% as
	received								compared	compared
Member State	from the EU budget	EAGF	Rural Develop ment	ERDF	Cohesion Fund	ESF	Other	Total 2012	to payments received from the EU budget	to the total amount of financial corrections
Belgium	1 114	0	3	0	-	11	0	14	1.3%	0.4%
Bulgaria	1 590	15	7	0	6	1	-	30	1.9%	0.8%
Czech Republic	4 433	0	-	116	8	-	0	125	2.8%	3.3%
Denmark	1 101	22	-	0	-	-	-	22	2.0%	0.6%
Germany	10 358	(16)	3	23	-	0	0	10	0.1%	0.3%
Estonia	915	0	1	0	0	0	-	1	0.1%	0.0%
Ireland	1 750	(1)	10	-	-	-	-	9	0.5%	0.2%
Greece	6 022	85	5	0	13	159	0	262	4.4%	7.0%
Spain	12 967	47	2	1 952	81	84	7	2 172	16.8%	58.0%
France	10 868	64	1	20	-	37	2	123	1.1%	3.3%
Italy	8 835	209	0	57	-	3	7	275	3.1%	7.3%
Cyprus	111	8	0	-	-	-	0	8	7.2%	0.2%
Latvia	1 128	-	-	1	1	9	0	12	1.1%	0.3%
Lithuania	1 644	3	4	3	1	0	0	10	0.6%	0.3%
Luxembourg	52	0	-	0	-	-	-	0	0.0%	0.0%
Hungary	3 973	6	0	0	-	-	0	6	0.2%	0.2%
Malta	101	0	-	-	-	-	-	0	0.0%	0.0%
Netherlands	1 247	17	2	0	-	-	0	20	1.6%	0.5%
Austria	1 513	1	-	-	-	-	0	1	0.1%	0.0%
Poland	15 417	12	2	45	79	23	0	162	1.1%	4.3%
Portugal	6 526	15	1	117	0	-	0	134	2.1%	3.6%
Romania	3 290	24	12	22	-	81	-	139	4.2%	3.7%
Slovenia	836	0	0	-	-	-	0	0	0.0%	0.0%
Slovakia	2 190	0	-	29	17	11	-	57	2.6%	1.5%
Finland	1 107	1	0	0	-	-	0	1	0.1%	0.0%
Sweden	1 166	72	2	0	-	0	-	74	6.3%	2.0%
United Kingdom	5 384	27	4	4	-	12	2	50	0.9%	1.3%
Non-split	1 140	-	-	24	-	-	-	24	-
TOTAL	106 777	610	59	2 416	207	430	19	3 742	*3.5%*	*100%*

The graph below takes into account both the absolute “contribution” of each Member State to the total financial corrections and the relative weight of the financial corrections for each Member State compared to the payments received from the EU budget.

In 2012, 11 Member States present overall percentages below 1% and a further 11 Member States between 1% and the average of 3.5% - in total these 22 contribute to 29% of the total corrections. Finally, 5 Member States present percentages higher than the average, over 4.2% in all cases, and contribute to 71% of the amount of

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financial corrections implemented in 2012. Spain with a percentage of 16.8% is clearly the most significant due to specific and complex corrections that were implemented in 2012 in the context of the closure of 2000-2006 programming period.

Graph 6.2.2: Share of Member States’ financial corrections implemented as compared to payments received from the EU budget in 2012*

* The size of the "bubble" is proportionate to the EU Funds received.

Attention is drawn to the fact that the above data relates to one year only, 2012. The level of both the global corrections amount and the split by Member State can change significantly depending on the year. Therefore, a meaningful assessment of the corrective capacity of supervisory and control systems has to be based on a multi-annual perspective (see also section 5 above). For this reason, information on the cumulative financial corrections per Member State is presented below for Agriculture (since the first clearance of accounts decision in 1999) and for the ERDF and ESF 2000-2006 programmes, which are in the closure phase.

6.2.3 Agriculture (EAGF): financial corrections under clearance of accounts

Concerning Agriculture (EAGF), the amount of financial corrections imposed by the Commission since the first clearance of accounts decision in 1999, totals EUR 8 286 million. Once decided by the Commission, the amounts are automatically applied. It is to be noted that in a few cases the date of implementation was deferred by 18 months, and some decisions are also reimbursed in 3 deferred annual instalments. This is notably the case for Member States subject to financial assistance in accordance with the European Financial Stability Framework Agreement signed on 7 June 2010.

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The table below gives a breakdown of the financial corrections that are reimbursed by the Member States concerned to the EU budget. Year on year, the total amounts of financial corrections remain relatively stable and even show a positive trend over the period, in absolute amounts and also in terms of percentage of expenditure.

Table 6.2.3 Cumulative financial corrections decided under of accounts from the first decision in 1999 to end 2012: Member State

EAGF clearance Breakdown by

EUR millions

	Payments received from EU budget	Cumulated	% as compared	% as compared
Member State	financial corrections at	to payments received from EU	to total amount of financial
	end 2012	budget	corrections
Belgium	11 018	34	0.3%	0.4%
Bulgaria	1 441	37	2.6%	0.4%
Czech Republic	3 904	1	0.0%	0.0%
Denmark	15 414	173	1.1%	2.1%
Germany	76 997	178	0.2%	2.1%
Estonia	428	0	0.0%	0.0%
Ireland	18 225	42	0.2%	0.5%
Greece	35 793	2 102	5.9%	25.4%
Spain	79 733	1 366	1.7%	16.5%
France	124 663	1 115	0.9%	13.5%
Italy	64 791	1 672	2.6%	20.2%
Cyprus	287	10	3.5%	0.1%
Latvia	601	0	0.0%	0.0%
Lithuania	1 732	7	0.4%	0.1%
Luxembourg	399	5	1.3%	0.1%
Hungary	6 007	31	0.5%	0.4%
Malta	22	0	0.0%	0.0%
Netherlands	15 549	179	1.2%	2.2%
Austria	9 731	9	0.1%	0.1%
Poland	13 569	67	0.5%	0.8%
Portugal	9 511	193	2.0%	2.3%
Romania	3 573	97	2.7%	1.2%
Slovenia	568	5	0.9%	0.1%
Slovakia	1 714	0	0.0%	0.0%
Finland	7 376	21	0.3%	0.3%
Sweden	9 847	116	1.2%	1.4%
United Kingdom	51 953	826	1.6%	10.0%
Total	564 847	8 286	*1.5%*	*100%*

Member State	ERDF+ESF contribution amount	Financial corrections decided/ confirmed	Financial corrections in progress (closure letters sent)	Total financial corrections imposed for 2000-2006	Percentage of financial corrections in relation to the ERDF+ESF contributions	Share of financial corrections imposed compared to total financial corrections
Belgium Czech Republic Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Slovenia Slovakia Finland Sweden United Kingdom Interreg	1 945 1 456 570 26 960 305 3 067 20 211 40 686 14 825 27 501 53 518 773 71 1 695 57 2 702 1 647 7 032 18 178 215 1 245 1 789 1 634 16 129 5 645	12 5 0 36 1 21 1 154 2 921 309 1 011 0 4 3 2 12 0 0 180 181 2 43 0 12 293 25	2 10 88 160 81 368 33 740 3 0 40 202	14 15 0 124 1 181 1 235 3 289 342 1 751 4 3 2 12 0 0 180 184 2 43 0 12 333 227	0.7% 1.0% 0.1% 0.5% 0.4% 5.9% 6.1% 8.1% 2.3% 6.4% 0.0% 0.8% 0.3% 2.6% 0.7% 0.0% 0.0% 0.0% 2.6% 1.0% 0.9% 3.4% 0.0% 0.7% 2.1% 4.0%	0.2% 0.2% 0.0% 1.6% 0.0% 2.3% 15.5% 41.3% 4.3% 22.0% 0.0% 0.1% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 2.3% 2.3% 0.0% 0.5% 0.0% 0.1% 4.2% 2.9%
Total	196 911	6 229	1 726	7 955	4.0%	100%

The following graph takes into account both the absolute “contribution” of each Member State to the total financial corrections and the relative weight of the financial corrections for each Member State compared to the payments received from the EU budget.

15 Member States present overall rates of correction equal to or below 1% -corrections for these 15 Member States contribute to just 2% of the total corrections. A further 5 Member States, plus INTERREG, present rates between 1% and the average rate of 4% and represent 14% of the total corrections. Finally, 5 Member States present a rate of correction above the average of 4% and contribute to 84% of the total amount of corrections.

¹⁶ A prudent estimate of the Commission services of additional corrections carried out by Member States themselves and reported to the Commission until March 2010 is EUR 0.96 billion for the ERDF and 0.32 billion for the ESF, representing at least 0.7% and 0.5% of allocations respectively. This means that by end 2012 the overall rate of correction for the 2000-2006 period is at least 5.6% for the ERDF decided allocations and 2.9% for the ESF (for details, see Report on Financial corrections carried out for ERDF and ESF on 2000-2006 programmes sent to EP CONT Commitment on 12/04/2013 ARES(2013)689652 pages 12 to 18).

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Graph 6.2.4 Share of Member States' cumulative financial corrections decided/confirmed and in progress (at 31/12/2012) for ERDF & ESF programming period 2000-2006*

* The size of the "bubble" is proportionate to the EU Funds received.

6.3. Further consequences of financial corrections

It is underlined that the reported amounts in the sections above do not reflect the totality of the amount of financial corrections accepted by Member States as a result of the supervisory role of the Commission. Remedial action plans may have a preventive impact on expenditure already incurred by beneficiaries and registered at national level in the certifying authority's accounts but not yet declared to the Commission. For such expenditure, the certifying authority (under Cohesion policy) applies the financial correction requested by the Commission prior to declaring expenditure. Particularly in the case of extrapolated or flat rate corrections, where there are weaknesses in management and control systems covering a large population of projects, the amounts concerned can be significant.

Preventive effect of financial corrections under Cohesion policy

As a result of the Commission action plan and interruptions, at the end of 2012, the Czech Republic accepted a Commission request for a correction of about EUR 450 million covering two ERDF programmes. The Commission could formally report only EUR 108 million as withdrawals from previously certified expenditure; the remaining corrections do not appear in the official Commission reporting, as an amount of EUR 151.4 million was not included in the certification of October 2012 and a further amount of approximately EUR 189 million will be deducted by the certifying authority before certifying future claims to the Commission in 2013. A similar preventive effect, not reflected in the official reporting of financial corrections, concerns an ERDF/CF Slovak programme where a 7.3% deduction of all expenditure certified and to be certified in the future for hundreds of contracts was deemed necessary by the Commission in order to adequately protect the EU budget and it is now implemented by the Member State.

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Another case concerns an ESF flat-rate correction for Romania: The Commission identified serious problems in a Romanian operational programme during 2012. The Commission and Romanian authorities agreed on a 25% flat-rate correction covering all expenditure incurred as at end 2012, plus further claims affected by the same irregularities identified by the Commission. As a result, Romania made a further declaration of expenditure (exceeding 25 % of all expenditure declared previously), on the basis of which the Commission paid a very small amount to Romania in December 2012 after offsetting the agreed financial correction. The impact of the financial correction is that expenditure incurred, which was in breach of law, is excluded from Union expenditure.

This preventive effect of the Commission supervisory role is not reflected in the official reporting even though it leads to an increased protection of the EU budget. For example, warning letters sent out by the Directorates-General when system deficiencies are identified before a payment claim is submitted to the Commission may have the same preventive effect on the protection of the EU budget, but in this case no financial correction is reported by the European Commission/ Member States either.

Recoveries from beneficiaries may also result from audits and financial corrections by the Commission services. When the Member State recovers irregular amounts from farmers before the financial correction is decided by the Commission, these amounts are reimbursed to the EU budget and are deducted from the financial correction. Amounts recovered from beneficiaries after the execution of the financial correction shall not be reimbursed to the EU budget. This system encourages Member State in their efforts to actually recover irregular payments.

Recoveries linked to financial corrections under Agriculture

In Italy for the financial year 2008, the calculated risk for the EU budget of weaknesses in the Land Parcel Identification System (LPIS) was EUR 29.6 million. Due to amounts recovered by the Italian authorities following an update of their LPIS (EUR 23 million), the financial correction finally amounted to EUR 6.6 million.

In Ireland for claim years 2005 to 2007, the calculated risk due to weaknesses in the LPIS was EUR 5 Million. However taking into account amounts recovered from the farmers, the financial correction eventually amounted to EUR 0.02 million.

A comparable situation appeared in Austria, where for claim years 2006, 2007 and 2008 the total calculated risk represented EUR 6.9 million. Also in this case, further to an update of their LPIS and subsequent retroactive cross-checks, the Austrian authorities recovered EUR 3.3 million from the farmers. The final financial correction amounted to EUR 3.6 million.

In addition, where the Commission considers that the time taken for a Member State to recover amounts from a final beneficiary is too long, it can and does launch infringement procedures against the Member State involved. This of course is in addition to the fact that the EU Budget may already be protected via the original financial correction. In the field of the CAP, a specific mechanism also exists under which 50% of undue payments which the Member States have not recovered from the beneficiaries within 4 years (or 8 years in case of judicial proceedings), are automatically charged to their national budgets. This gives a strong incentive to the national authorities to complete the recovery procedures in a timely manner. In addition, the Commission may also charge the entire amount still to be recovered (and not only 50%) if it considers that the Member States' authorities have been negligent in the management of the recovery procedure for specific individual cases.

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Infringement procedure following financial corrections

In 2013, the European Commission, via a letter of formal notice, called on Italy to take action to address deficiencies in the implementation of EU legislation concerning imposition of surplus levy on milk and other milk products among milk producers who have contributed to the overruns of the national quotas, and specifically to effectively recover levy due from such liable producers.

The failure to ensure the effective recovery undermines the possibility for that system to achieve its objectives of stabilisation of the market and also creates distortions of competition with other European and Italian producers having abided to the system of production limitation or having regularly paid the surplus levies due in case of overrun. The total of levy still not recovered amounts to at least EUR 1.4 billion and it is due to the Italian budget.

The Commission has already imposed financial corrections amounting to EUR 750 million linked to this problem. Furthermore, it raised the issue of Italy's inability to comply with the obligation of taking all measures necessary to ensure the timely payment of surplus levy by the concerned producers in its numerous correspondences with the Italian authorities. Italy manifestly did not take the appropriate measures to effectively recover the levy due from such liable producers, despite the repeated requests coming from the Commission. The Commission has accordingly decided to initiate the infringement procedure under Article 258 of the TFEU.

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7. ROLE OF FINANCIAL CORRECTIONS AND RECOVERIES IF ERROR RATES ARE PERSISTENTLY HIGH

The European Parliament resolution on the integrated internal control framework adopted on 3^rd July 2013¹⁷ requested a strict application of the Article 32 (5) of the Financial Regulation which states:

5. If, during implementation, the level of error is persistently high, the Commission shall identify the weaknesses in the control systems, analyse the costs and benefits of possible corrective measures and take or propose appropriate action, such as simplification of the applicable provisions, improvement of the control systems and re-design of the programme or delivery system.

The Commission is required to implement this provision of the Financial Regulation in the most economical way, taking into account the resources available, in particular during a period of staff reduction.

However, difficulties have arisen in the legislative procedure for the period 2014-2020 which could affect the proposed simplification. The remaining risks caused by overly complex rules complicate the prevention of errors and therefore lead to a high cost of control. This is why the Commission considers that, especially in the area of shared management, the implementation of this new requirement foreseen in Article 32(5) cannot be limited to actions which only focus on identifying and correcting errors at the level of final recipients.

Financial corrections and recoveries at the level of the Member States, which are implemented during the lifetime of multi-annual programmes, will always be an important factor to be taken into consideration, as well as the continued efforts to simplify rules, redesign and strengthen systems.

Ref. P7_TA(2013)0319

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Article 32 – Internal control on budget implementation

8. CORRECTIVE ACTIONS MADE BY MEMBER STATES UNDER COHESION POLICY ON THEIR OWN INITITATIVE

Under shared management, Member States have the primary obligation to prevent and detect irregularities, and thus to make financial corrections and recover undue amounts from beneficiaries. Thus, they perform management verifications, controls and audits in the first instance, these being in addition to those of the Commission detailed above. Under the regulations for the current programming period, Member States have to report annually the corrections stemming from all controls performed. Such a requirement was only introduced for 2007-2013 and the Commission is performing risk-based audits to test the reliability of these figures for the purpose of its assurance process.

The cumulative corrections implemented to end 2012, following the controls made by the Member States for Cohesion Policy programming period 2007-2013, are given below. These amounts are in addition to, and after deduction of, the corrections reported cumulatively by the Commission above.

Table 8: Cumulative corrections at end 2012 reported by Member States for Cohesion Policy period 2007-2013

EUR millions

Member State	ERDF/CF	ESF	EFF	Total 2012
Belgium	3	11	-	14
Bulgaria	13	2	0	15
Czech Republic	191	37	-	228
Denmark	0	0	0	0
Germany	290	49	1	340
Estonia	4	0	0	4
Ireland	0	5	0	5
Greece	63	-	0	63
Spain	204	39	9	252
France	42	37	0	79
Italy	141	27	0	168
Cyprus	0	0	0	1
Latvia	10	-	0	10
Lithuania	6	0	0	6
Luxembourg	-	0	-	0
Hungary	26	-	0	26
Malta	1	0	-	1
Netherlands	1	2	0	3
Austria	4	1	0	5
Poland	204	-	0	204
Portugal	46	28	1	75
Romania	43	-	0	43
Slovenia	5	5	-	10
Slovakia	33	4	0	37
Finland	1	0	0	1
Sweden	2	1	1	4
United Kingdom	38	13	1	52
Cross-border	8	-	-	8
TOTAL IMPLEMENTED	1 377	261	14	1 652

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9. OTHER RECOVERIES

9.1. Recovery of pre-financing amounts

Another important control of the Commission, which is not covered by any of the above mechanisms, is the recovery of unused (i.e. unspent) pre-financing amounts. When a beneficiary has not used (spent) the advances received from the EU on eligible expenditure, the Commission issues a recovery order to return the monies to the EU budget. This procedure represents an important step in the control system of the EU to ensure that no excess money is kept by the beneficiary without proper expense justification, thus contributing to the protection of the EU budget. The amounts are the result of the issuance of a recovery order by the Commission, and are recorded in the accounting system as such. The above recovery of unused prefinancing amounts should not be confused with irregular expenditure recovered. Where Commission services identify and recover such expenditure in relation to prefinancing amounts paid out, these are included in the normal financial correction or recovery processes described above.

Table 9.1: Recovery of pre-financing amounts

EUR millions
	2012
Agriculture:
EAGF	0
Rural Development	0
Cohesion Policy:
ERDF	38
Cohesion Fund	5
ESF	214
FIFG/EFF	0
EAGGF Guidance	5
Internal policy areas	207
External policy areas	104
Administration	2
Total recovered Pre-Financing	575

9.2. Recoveries relating to own resource revenues

So as to provide a complete picture of all the tools used by the Commission to protect the EU budget, it is also necessary to consider the recoveries made in the area of own resource revenue. Own resource revenue is the primary element of the EU’s operating revenue and therefore the bulk of expenditure is financed by it. The Commission makes on-the-spot inspections so as to verify that the correct amounts are being supplied to the EU budget. Amounts can also be audited as part of the ECA’s annual audit process. In 2012, the amounts recovered were as follows:

Table 9.2: Recoveries relating to own resource revenues

EUR millions

	2012
Amounts recovered: - Principal - Interest	133 160
Total recovered	293