Annexes to COM(2013)934 - Application of net financial corrections on Member States for Agriculture and Cohesion Policy - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2013)934 - Application of net financial corrections on Member States for Agriculture and Cohesion Policy. |
|---|---|
| document | COM(2013)934  |
| date | December 13, 2013 |
Both the Financial Regulation and the new CAP Horizontal Regulation provide for a ranking of types of financial corrections where flat-rate corrections may only be used if calculated or extrapolated corrections cannot be established with proportionate efforts flat-rate
Calculated and extrapolated corrections are currently based on DG AGRI auditors' findings and information provided by Member States during the contradictory procedure. In the future, DG AGRI will have more information to feed into the process from the yearly opinions to be delivered as from claim year 2014 by the certifying bodies carrying out the new task assigned to them examining representative samples of transactions.
3.1.2.3. Shorter conformity procedure
Carrying out a contradictory procedure is legally indispensable before making financial corrections. Prior to implementing any net financial correction, the Commission must therefore offer the Member States the opportunity to provide evidence and arguments that may contradict its initial findings. Indeed the current CAP financing regulation[5] and the new CAP Horizontal Regulation provide that "Member States shall be given the opportunity to demonstrate that the actual extent of the non-compliance is less than the Commission's assessment". The principle of a contradictory process between the auditor and the auditee is also an essential element of audit quality standards.
In addition to the contradictory procedure, Art 52(3) of the CAP Horizontal Regulation provides for a "procedure aimed at reconciling each party's position" if an agreement is not reached at the end of the contradictory procedure. The duration of the conciliation as such is limited to 4 months. But the whole process from the request of the Member State concerned to the final result of the analysis by the Commission of the recommendations of the conciliation body takes at least 6 months[6].
The Commission has engaged in and will continue actions aiming at streamlining the whole procedure. Firstly, the new CAP Horizontal Regulation describes precisely the nature, scope and sequence of the successive steps, as well as the different types of financial corrections. Secondly, provisions in the delegated act (method and criteria for calculating the financial correction) and implementing acts (details of the conformity procedure, with mandatory deadlines) are intended to further streamline the legal framework and limit the risk of unnecessary delays. Thirdly, on that stronger basis, DG AGRI will intensify its monitoring of the progress of the conformity procedures to ensure a strict respect of the deadlines.
Details concerning the envisaged procedure for applying net financial corrections for Common Agricultural Policy are provided in Annex 1.
The following diagram describes the successive steps of a conformity clearance procedure leading to a net financial correction carried out under the new CAP Horizontal Regulation. As indicated in the Commission's answer to paragraph 4.31[7] of the ECA's 2012 Annual report on the excessive length of the conformity procedure, there is scope for significantly speeding up the conformity procedure so that in standard cases the financial corrections can be decided two years after the initial audit took place.
3.1.3. Interruption and suspension for CAP will be aligned with Cohesion Policy Funds
Following the adoption of the new CAP Horizontal Regulation by the legislator, a new legal framework for interruptions and suspension of CAP funds will enter into force in 2014 which will strengthen the Commission’s powers to suspend EU financing in cases where risks of irregular payments have been identified.
Accordingly the Commission may reduce or suspend monthly (EAGF) or interim payments (EAFRD) on the following conditions:
where "one or more of the key components of the national control system in question do not exist or are not effective due the gravity or persistence of the deficiencies found" (or there are similar serious deficiencies in the system for the recovery of irregular payments) and:
- either the deficiencies are of a continuous nature and have already been the reasons for at least two financial correction decisions,
or
- the Commission concludes that the Member State concerned is not in a position to implement the necessary remedial measures in the immediate future, in accordance with an action plan with clear progress indicators to be established in consultation with the Commission.
The first indent corresponds to the present situation under Regulation (EC) No 1290/2005; the second indent is new. It is in essence the legislative response to the recommendation by the European Parliament in its 2011 discharge resolution according to which the suspension rules for the CAP should be aligned with those of the Cohesion Funds.
For EAGF, according to the new rules, monthly payments to Member States may continue until the conditions for a suspension decision are met, the rhythm of the monthly payments would not allow using an interruption procedure. However, for EAFRD, the new Common Provisions Regulation (CPR) will provide in addition for the interruption of interim payments by the Authorizing Officer by Delegation (i.e. the Director-General) as an additional, quick and reactive tool in case of concerns on the legality and regularity of payments.
The combination of both preventive actions (interruption for EAFRD, suspension for both Funds) and net financial corrections will allow the Commission to act promptly and effectively and protect the EU budget: no new payments will be made or they will be reduced up to the level of the estimated risk during the suspension; irregular payments already made will be fully covered via the financial corrections.
3.2. Cohesion Policy Funds 3.2.1. New legal provision for the Commission to impose net financial corrections on a Member State
A significant change is introduced for the 2014-2020 programming period. Under certain conditions laid down in Article 145(6) of the Common Provisions Regulation (CPR), the Commission must adopt a decision applying a net financial correction. In such cases the current possibility for the Member State to accept the correction and to re-use the amount of EU funds thus made available is removed.
Within the new financial management cycle, 15 February following each accounting year[8] is the cut-off date for the application of the new provision on net financial corrections in relation to expenditure of the preceding accounting year. By that date, Member States must submit to the Commission the programme’s accounts, management declaration, audit opinion and corresponding reports. This means that all national control and verification work has to be finalised so that the Member State can certify the legality and regularity of expenditure included in the annual accounts.
3.2.2. Financial corrections for irregularities / deficiencies identified before 15 February each year
The rules of the 2014-2020 programming period concerning financial corrections for irregularities identified before 15 February each year are similar to those of the current programming period which were of general application regardless of the date of detection. The objective is to maintain incentives for Member States to detect and correct irregularities and to exclude the amounts from the expenditure declared to the Commission and thus avoid a loss of EU funds (see 3.2.5).
Irregular expenditure detected through national verifications or audits has to be deducted from the accounts to be submitted to the Commission by 15 February each year. Having done so, the Member State will be able to re-use the amounts thus corrected for new eligible operations under the programme, as in the current programming period.
In the case of EU audits which are carried out on expenditure before certified accounts are submitted to the Commission and which detect irregularities requiring financial corrections, two scenarios are possible, as in the current period. If the Member State agrees on the financial correction to be made and takes action, it will be able to re-use the corrected amounts for new eligible operations (Article 145(4) CPR). If the Member State does not agree, the Commission will adopt a financial correction decision, following the contradictory procedure provided for in Article 145 CPR. This financial correction will always be net and the programme and Member State allocation will be reduced proportionally. The Member State will not be able to re-use this amount.
3.2.3. Commission assessment of legality and regularity on the basis of the accounts, audit opinion and accompanying documents submitted by 15 February each year
The introduction of the new provision on annual reporting by the Member State and on net financial corrections implies changes in the way the Commission will carry out its responsibilities. The Commission will assess and review the audit opinions (elements relating to the functioning of systems and legality and regularity) and annual control reports, including the reported error rates, as well as the management declarations and annual summaries, within three months of reception of these documents provided by 15 February. The Commission will on this basis make its risk-assessment and establish its audit plan determining the required risk-based audits targeted to the selected programmes.
The Commission will carry out its risk-based audits by the end of the calendar year in which the Member State submitted the audit opinions, management declarations and related documents. It will examine, through desk and on-the-spot audit work and re-performance of samples of national audits, whether reported information is reliable and therefore constitutes an adequate basis for assurance on legality and regularity. Priority will be given to auditing programmes that have a material impact on the Commission payments for the corresponding Fund in the accounting year. The past performance of Member States authorities will also be taken into account in the risk-based definition of audit priorities.
3.2.4. Identification by EU audits of irregularities indicating a serious deficiency after 15 February each year
If EU (Commission or European Court of Auditors) audits carried out after 15 February each year detect irregularities demonstrating a serious deficiency affecting the corresponding accounting year the Commission has the obligation to take a formal decision applying a financial correction, if the conditions defined in the regulation are fulfilled. The Commission has no discretionary power in the matter. The resulting financial correction will always be net. This means that the allocation to the programme and the total allocation of the Member State will be automatically reduced by the amount of the correction, even if during the contradictory procedure the Member State accepts the audit results and agrees to the financial correction. As a consequence there is no possibility for the concerned Member State to re-use the amount subject to such a net financial correction in another programme.
The conditions set-out in the regulation obliging the Commission to apply net financial corrections are the following:
- The irregularities detected by EU audits show a serious deficiency affecting an accounting period for which the Member State submitted a management declaration and an audit opinion which did not identify the problem.
- After 15 February and prior to detection by the EU audits, the Member State has not identified the problem in other audit reports submitted to the Commission (with the appropriate measures) or has not taken appropriate remedial measures.
When the conditions for a net financial correction are met, the Member State will have the right to present its observations within two months[9], and any additional audit evidence in a hearing, before the financial correction decision is adopted by the Commission. The timing of this contradictory procedure with the Member State is clearly framed in the regulation. Finally, independently from whether the Member State eventually accepts or not the Commission position as regards the required financial correction, the Commission has to adopt a formal decision within maximum six months of the hearing with the Member State.
Definition of a serious deficiency
To ensure legal security, the notion of “serious deficiency in the effective functioning of a management and control system” is defined in the CPR itself (Article 2). Essentially it means that if the deficiency in one of the key requirements of the system is such as to give rise to a risk of material error, it is serious.
Article 2 (39) CPR:
…
'serious deficiency in the effective functioning of a management and control system' means, for the purposes of implementation of the Funds and the EMFF under Part Four, a deficiency for which substantial improvements in the system are required, which exposes the Funds and the EMFF to a significant risk of irregularities, and the existence of which is incompatible with an unqualified audit opinion on the functioning of the management and control system.
…
Under the CPR, the Commission is empowered to lay down in a delegated act detailed rules concerning the criteria for the assessment of the functioning of management and control systems, including the main types of serious deficiencies, the criteria for establishing the level of financial correction to be applied and the criteria for applying flat-rates or extrapolated financial corrections. The delegated act will be of general application regardless of the timing of the detection of the deficiencies.
The delegated act will be based on the current guidance framework for the assessment of the key requirements of management and control systems and for setting the level of flat-rate corrections. The Commission will therefore have a stronger legal basis compared to the current programming period, and intends to adopt the delegated act in early February 2014. The criteria for the assessment and the levels of flat-rate corrections will therefore be well-known in advance to all programme stakeholders.
The approach foreseen by the Commission is that it will conclude on the existence of a serious deficiency based on its assessment of the system key requirements (see diagram below) when at least one of the main key requirements (in bold in the diagram below) or two of the other key requirements are considered as working partially or not functioning. In such cases it will apply a flat-rate financial correction, unless the Member State can provide within four months a more precise estimate of the risk through the audit of an appropriate and representative sample of the concerned expenditure as a basis for an extrapolated correction.
It is envisaged that current levels for flat-rate correction will be maintained: 5%, 10%, 25% and 100%. This approach for the application of flat-rate corrections has been confirmed by the case law of the Court of Justice.
Nonetheless the decision to apply any level of financial correction must take account of proportionality and of the residual risk to the Union budget, as required in the CPR. Therefore in exceptional cases the Commission may apply an intermediate level of flat-rate correction (e.g. 50% or 20%).
Increased level of correction for repeated deficiencies
When the same deficiencies have been detected by EU audits despite a previous financial correction, the Commission intends to include a provision in the delegated act allowing for a higher rate of correction than in the case of the first correction. This will be a clear message to Member States that they need to ensure a rapid and permanent adjustment of their management and control systems once a serious deficiency has been detected.
Details concerning the envisaged procedure for applying net financial corrections for Cohesion Policy Funds are provided in Annex 2.
3.2.5. Convergence of good practices for the Commission’s supervisory system under shared management
For the 2007-2013 period the main preventive legal instrument putting pressure on Member States to put in place effective management and control systems consists of procedures to interrupt payments or the suspension of payments to (part of) an Operational Programme. The Commission considers that these procedures have been instrumental in improving substantially error rates compared to the 2000-2006 period.
Interruption and suspension procedures 2012-2013 combined
|| ERDF and Cohesion Fund || ESF
Warnings || 175 || 16
Interruptions || 184 || 60
Pre-suspensions || 137 || 34
Suspension decisions || 6 covering 13 programmes || 11 covering 11 programmes
Nevertheless, the progress made in reducing error rates has proved to be insufficient, and for the next programming period the existing preventive instruments will be complemented with stronger corrective ones, extending best practices across shared management policy areas.
The key components of the Commission’s supervisory system for the 2014-2020 programming period are therefore:
- Interruptions and suspensions (respectively Articles 83 and 142 of the CPR), existing for Cohesion policy under the current programming period 2007-2013,
- Compulsory net financial corrections for serious systems deficiencies on the basis of a new provision (Article 145(7)) introduced in the CPR.
The introduction of the legal basis for compulsory net financial corrections under certain conditions in the next programming period addresses a weakness in the current legal framework, reported by the European Parliament and the Council in their discharge recommendations of the last years. The deterrent effect of the new net financial correction provisions, whereby Member States cannot re-use the corrected and recovered amounts and therefore lose the funds, will be significantly higher than in the current period, and will provide strong incentives for effective control arrangements.
This convergence with practices already existing for Common Agricultural Policy will complete the legal arsenal for the Commission to exercise its supervisory role under Cohesion Policy Funds, including on the corrective side, and will further enhance harmonization of the legal framework across EU budget areas under shared management.
[1] The letter also referred to the Communication on the Protection of the EU budget (COM(2013) 682 final/2) which was published on 30 September 2013 as requested by the European Parliament in its resolution on the budgetary discharge for the financial year 2011
[2] For European Agricultural Guarantee Fund (EAGF) the appropriation are assigned to the ''origin of the revenue'' (Art. 174(1) FR) and for financial instruments to the ''same financial instrument'' (Art.140(6) FR).
[3] In 2012, the Commission took three conformity decisions, leading to financial corrections of 651 million euro (503 million euro relating to EAGF and 148 million euro to EAFRD). The average amount of financial corrections in the last five-year period (2008 - 2012) was 30 % higher than in the preceding period (2003 - 2007), taking into account the budget increase between those two periods.
[4] ECA Annual report 2012 paragraph 4.30: ''The use of flat-rate corrections does not sufficiently take into account the nature and gravity of the infringement, as the same flat-rate correction of 5% is applied, regardless of whether weaknesses were found for a single key control or for many such controls.''
[5] This date can be extended to 1st March in exceptional cases at the request of the Member State, cf. Article 59(5) of the Financial Regulation (EU, Euratom) N° 966/2012 of the European Parliament and of the Council.
[6] It can take even longer if the whole case has to be re-examined.
[7] ECA Annual report 2012 paragraph 4.31 Commission reply: "Notably in the framework of the preparation for the implementation of the CAP reform, the Commission will continue in its efforts to improve and speed up the process, bearing in mind the need to maintain quality standards and the Member State's right of reply."
[8] This date can be extended to 1st March in exceptional cases at the request of the Member State, cf. Article 59(5) of the Financial Regulation (EU, Euratom) N° 966/2012 of the European Parliament and of the Council.
[9] With an additional two months allowed in case of proposed extrapolated or flat-rate correction for the Member State to demonstrate that the actual extend of the irregularity is less than that assessed by the Commission.