3 main Breaches of Rule of Law, in Hungary, Put the EU Budget & Financial Interests at Risk=> Payment of EU Funds must be Suspended

A) The Lack of Transparent Management of EU Funds

B) The Lack of an E ective National Prosecution Service to Investigate
and Prosecute Fraud

C) The Lack of Guarantee of Independent Courts to Ensure that EU Law is Reliably Enforced

Written Notifcation to Hungary under REGULATION (EU, Euratom) 2020/2092, on a general regime of conditionality for the protection of the Union budget: 

In its resolution of 25 March 2021, the Parliament gave the Commission a deadline of 1st June 2021 to respond to our call for immediate application of the Regulation, which entered into force on 1 January 2021. We maintain that no guidelines are necessary for application of the Regulation because the Regulation itself does not require any. We also maintain that the Commission need not wait for the Court of Justice to rule on the actions for annulment lodged by Hungary and Poland challenging the legality of the Conditionality Regulation. An EU regulation does not cease to be applicable simply because it is subject to a pending annulment action; it ceases to be applicable only if and when the Court of Justice declares the nullity of the contested act. We now call upon the Commission to fulfil its duty as the Guardian of the Treaties and to apply the regulation against Hungary immediately.

To facilitate this process, we have done the Commission’s work for it. We have prepared a model of the written notification under the Conditionality Regulation that the Commission should send to the Hungarian government immediately, documenting

A) the lack of trans- parent management of EU funds,

B) the lack of an effective national prosecution service to investigate and prosecute fraud, and

C) the lack of guarantee of independent courts to ensure that EU law is reliably enforced, including measures a ecting the Union’s budget and nancial interest.

We have also performed an analysis of the various EU legal instruments designed to ensure the proper spending of EU funds and have determined that the problem- atic stewardship of EU funds in Hungary is best addressed through the immediate application of the Conditionality Regulation.

Because the Rule of Law Conditionality Regulation applies only to EU funds awarded after 1 January 2021, some observers have assumed that it cannot be triggered until and unless specific instances of fraud against these new EU funds are detected. is is plainly incorrect. Rather, the Regulation explicitly demands the Commission take a proactive, risk-based approach to protect the EU budget. is does not re- quire the Commission to wait until speci c instances of fraud or abuse of EU funds under the new budget can be documented, but instead requires the Commission to act to address serious risk of such fraud or abuse created by existing breaches of rule of law principles enumerated in the Regulation.

The model notification we are publishing today demonstrates that this serious risk already exists in Hungary because Hungary has already engaged in grave breaches of the rule of law as per the Regulation, which requires that Member States ensure:

… a transparent, accountable, democratic and pluralistic law-making pro- cess; legal certainty; prohibition of arbitrariness of the executive powers; e ective judicial protection, including access to justice, by independent and impartial courts, also as regards fundamental rights; separation of powers; and non-discrimination and equality before the law. The rule of law shall be understood having regard to the other Union values and principles enshrined in Article 2 TEU.2

Risks generated by a failure to honour the rule of law constitute a threat to the sound nancial management of the Union budget, and these are risks that the Commission must confront and insist on being remedied by Hungary before it can responsibly release funds to it. Indeed: remedy first, release later.

While some of the rule of law breaches we identify in the model notification are of recent origin, many of them are long-standing violations that have not been addressed, despite repeated criticisms from many European Union institutions, international organisations, as well as civil society actors. e fact that some breaches are longstanding and persistent does not make them any less threatening to the responsible management of EU funds. Indeed, they may be even more threatening because they are more entrenched.

New streams of EU funds will soon be released to Member States under the Multi-Annual Financial Framework (MFF) and through the Recovery Fund, based on plans currently being submitted to the Commission. Now is the time for the Conditionality Regulation to be activated to ensure that proper accountability mechanisms are in place before funds allocated to Hungary are authorized and committed.

The Model Notification we are publishing today, sets out in strictly legal terms the systemic rule of law breaches that justify the Commission’s immediate application of the Rule of Law Regulation. 

The Lack of Transparent Management of EU Funds:

Hungary’s problems with the proper stewardship of EU funds are not new. In the last MFF from 2014–2020, Hungary was at the top of list of countries for which the EU’s anti-fraud agency OLAF made nancial recommendations to recover EU funds.

In 2019, the Commission imposed about €1 billion in nancial corrections after having found “systemic irregularities, in particular related to discriminatory or restric- tive exclusion, selection or award criteria, and unequal treat-

is correction was the highest in the EU in the 2014– 2020 period. e Group of States against Corruption, GRECO (a monitoring body based at the Council of Europe), has subjected Hungary to its special “non-com- pliance procedure” since 2017 because the Hungarian government has repeatedly failed to take the steps GRECO has recommended in order to prevent corruption. In its most recent report in November 2020, GRECO labelled the Hungarian gov- ernment’s compliance with its recommendations as “globally unsatisfactory.”

In its 2020 country-specific recommendations as part of the European Semester, the Council pointed to serious problems with Hungary’s procurement system, in particular a lack of competition in tenders. Nearly half of all public tenders generat- ed only a single bid. In 2019, the European Semester country-specific recommendations had agged the same problems, indicating “systemic irregularities in the tendering processes.”

Going into the 2021–2027 funding cycle, Hungary’s management of EU funds has not improved, and in fact the European Parliament’s ink Tank noted changes in the wrong direction as “an amendment to the Public Procure- ment Act adopted in 2019 abolished a type of procedure used in the national regime for ten- ders below EU thresholds, which the Commis- sion considered to be non-transparent and a barrier to competition.”

Some specific cases illustrate the problems that the Commission has already identified. During the last MFF, a program for modernizing science education, the Öveges program, was adopted under the European Social Fund, providing new laboratory classrooms in each of 43 Hungarian high schools at the cost of €1 million euros per classroom. e audit reports soon showed “the existence of signi cant de ciencies in the management and control system … concerning procedures for selecting op- erations, the rst level of management veri cations and the audit trail.”9 e Com- mission’s investigation found, for one example among many, that each classroom was charged separately and additionally for the development of textbooks even though the textbook for each of the classrooms was the same.

The Commission concluded that the managing authority was not uncovering fraud e ectively, not least because the audit trail was found to be defective. Despite much dialogue with the Hungarian government over the matter, the Commission ultimately found that the Hungarian authorities did not correct the irregularities. Funding to this project was therefore suspended and a nancial correction applied. e following year, the Hungarian government corrected the de ciencies su ciently on this particular project for the Commission to lift the suspension.

Though OLAF les remain secret, the Hungarian investigative reporting outlet Atlatszo.hu was able to use the Hungarian freedom of information act to uncover the correspondence between OLAF and a number of these municipalities in early 2018 to show precisely how:

Investigative reporting has shown that the public contracts have massively benefited PM Viktor Orbán’s family and friends. An investigation by the Financial Times documented the rise of a new set of Hungarian oligarchs close to PM Orbán who have made most of their money through state contracts.15 An analysis by Reuters of Hungarian public procurement data showed that just ten businessmen—including both PM Orbán’s close childhood friend and his son-in-law—together won nearly €6.5 billion between 2010 and 2018 from state contracts.16 Development projects at Lake Balaton have proceeded with a budget of about €2.5 billion, 40% of which was earmarked to come from EU funds for underdeveloped regions. But just six men close to PM Orbán won tenders worth more than 25% of the funds committed to the project.

An analysis by the Corruption Research Center Budapest of nearly 250,000 public contracts issued from 2005 to 2020 showed that, though the intensity of competi- tion (as measured by number of bids) increased after OLAF’s investigations into Hungarian procurement started in 2016, the share of public procurements won by crony companies nonetheless increased nearly every year since 2011.

In 2019, companies close to the government won 21% of the value of all public tenders, and in the early months of the pandemic in 2020, closely connected companies won fully 27% of the value of all public tenders.

particular municipalities were able to channel the contracts to the son-in-law of the Prime Minister, who in fact won the tenders for all twenty-eight of the municipalities.

The auditor on the project was a company owned by a friend of the Prime Minister’s son-in-law. ough Hungarian authorities launched an investigation into Elios after OLAF had businessmen together won nearly €6.5 billion between 2010 and 2018 from state contracts

The purpose of these foundations became clear through the transfer of massive amounts of public property into these public interest foundations in April 202123, effectively insulating all management and disposition of this property from public view. Many of these foundations will be recipients of EU funds but once public contracts are awarded to them, public management and accountability ceases. In particular, most of Hungary’s universities, along with a number of other cultural institutions, have now been converted from public institutions into private foundations. Of the thirty-one public interest foundations currently regulated by this law, fully twen- ty-one are universities that have now been transferred—most within the last month— into this new legal form whose assets can no longer be publicly scrutinized. New public interest foundations may be added to this list with the government’s reliable two-thirds majority in the Parliament.

The EU’s goals in the next funding cycle rely heavily on supporting innovation and technology. Hungary has been persistently criticized by the European Commission in its European Semester reports for having a lower-than-average percentage of university graduates in the population and for falling behind in ensuring that its population has skills for the new economy. The combination of policy areas that the Commission has set out for funding, combined with the European Semester recommendations for Hungary will practically necessitate putting a great deal of EU money into the higher education sector. In its initial public plan for spending the Recovery Fund, the Hungarian government indicated that it would spend fully 20% of the Recovery Funds through universities.

While the Commission seems to have rejected this plan and Prime Minister Orbán has responded by saying that Hungary will take only the grant part of the Recovery Fund and not the loans, Hungary’s new plan of action will still require much of the in ux of EU funds to go through universities.

Let us consider concretely what that would mean: Contracts to increase the num- ber of university graduates, or to encourage basic university research to be brought to market, or to develop new green technologies will be bid on by universities. But twenty-one of Hungary’s universities are now governed by boards whose members have been named precisely for their connection to the governing party. Once pub- lic money—including EU money—is awarded to the public interest foundations, it leaves the realm of the state audit and public management.

Any public funds distributed to these twenty-one universities disappear into pockets that cannot be probed by EU auditors because they will not be able to get the relevant data from Hungarian auditors to see what happened to the money.

Even if universities produce competitive bids, these bids will be like tines of a fork—appearing separate at the end, but linked by a common handle behind them. Universities may be incorporated and managed separately, but the members of the governing boards are linked through their association with the governing par- ty. Bids generated by di erent universities managed by the same circle of political friends may look competitive, but they will not necessarily be so.

Given abundant evidence of corruption in the use of EU funds in Hungary, the risks to the EU budget clearly have increased in recent months, even above and beyond the initially very high background risk. e Conditionality Regulation should be triggered where rule of law breaches a ect, or risk a ecting the authorities imple- menting the EU budget and the functioning of those who control, monitor and audit EU funds. The Hungarian track record and new developments provide ample evi- dence that EU funds are not well managed, monitored or controlled.

-The Lack of an Effective National Prosecution Service to Investigate and Prosecute Fraud:

The corruption and cronyism we have sketched above presents a stark contrast with the desert of high-level public prosecutions for fraud. In its 2019 country-specific recommendations as part of the European Semester, the Council expressed continuing concern about weaknesses in the Hungarian prose- cution service in which there were “still no signs of determined action to prosecute corruption involving high-level o cials or their immediate circle when serious alle- gations arise.”

The 2020 European Semester country-specific recommendations noted even more bluntly that “[d]eter- mined systematic action to prosecute high-level corruption is lacking.”

The European Parliament Think Tank report assessing progress in compliance with European Semester recommendations concluded there was:

No Progress. There is no determined systematic action to prosecute high-level corruption. According to the Prosecutor General’s O ce, most corruption-related cases involve public o cials, typical cases involving tax and customs o cials. While some high-level cases have been pros- ecuted, there is a general perception of impunity among the business community. Hungary reports relatively few cases, while OLAF nds much more in Hungary than in other countries. Restrictions on access to in- formation hinder corruption prevention and the application of fees for accessing public information has a deterrent e ect on citizens and NGOs exercising their constitutional right. While the Freedom of Information Act has not been touched, piecemeal changes to other sectoral laws have continued, corroding the overall transparency and access to information framework.

The Prosecutor General in Hungary is Péter Polt, a long-time ally of the Prime Min- ister and a founding Fidesz member who ran for a parliamentary seat on the Fidesz list in 1994. He was elected Prosecutor General during the rst Orbán government in 2000 and was returned to that o ce by the second Orbán government in 2010. Despite the fact that his tenure has been repeatedly criticized by European institu- tions for failing to come to grips with corruption, Polt was re-elected by the Fidesz two-thirds majority in Parliament in 2019 for another nine-year term. We cannot realistically expect the Hungarian strategy for public prosecutions to change with- out a change of leadership in that o ce.

Although the hierarchical arrangement of the prosecution service created through a pair of laws in 2011 has been criticized since the Venice Commission report of 201231, the public prosecutor’s o ce still retains a rigid structure in which each prosecutor can be disciplined by those higher up in the o ce rather than by an independent authority. At the top of this pyramid, the Public Prosecutor has been granted by law the same immunity as members of Parliament, a general immunity that applies to all of his actions and can only be lifted by a two-thirds vote of the Parliament. e structure of the prosecution service in Hungary thus lends itself to tight control from the top without any accountability at the top.

Under EU law, national governments are responsible for taking action and conducting their own investigations of corruption. If national governments fail to investigate and prosecute the misuse of EU funds, EPPO should….However, Hungary remains one of only ve EU Member State that has not joined the EPPO.

The lack of determination of the prosecution services in Hungary to effectively investigate and prosecute high-level fraud in the use of EU funds provides another reason for triggering the Conditionality

-The Lack of Guarantee of Inde- pendent Courts to Ensure that EU Law is Reliably Enforced:

Enforcing procurement rules, ensuring prosecution of fraud, adjudicating challenges to tender procedures and being able to make references to the European Court of Justice, among other actions related to the EU budget, demand indepen- dent courts. While many judges in the ordinary courts in Hungary remain indepen- dent, they have been increasingly subjected over the last ten years to growing polit- ical pressures, as evidenced by the fact that

Hungary now has the low- est score in the World Justice Project’s Rule of Law Index of any EU Member State33 and was the rst EU Member State to be categorized as an autocratic regime by the Varieties of Democracy (V-Dem) Institute34 and by Freedom House.35 Attacks on judicial independence have been central to all of these indicators.

The Hungarian government’s strategy for compromising the independence of courts has not in general involved wholesale ring of judges (at least not since about 15% of Hungarian judges were removed by suddenly lowering the judicial retirement age in 2012)

Instead, the appointment of judges has been politicized and dominated exclusively by the ruling party, and court procedures have been adjusted so that judges aligned with the ruling party have been steadily ap- pointed to the bench and so that speci c cases can always be assigned to these friendly judges.

The power to appoint judges was strongly centralized after 2012 in the hands of a politically elected former judge, Tünde Handó, who had been a friend since col- lege days with Prime Minister Orbán. Handó was elected by a two-thirds vote of the Fidesz Parliament into the newly created position of president of the National Judicial O ce (NJO) in 2012 with the power to hire, re, reassign, promote, demote and discipline all judges in the ordinary Hungarian judiciary without any substantial checks on her power.

International criticism of this arrangement eventually forced the Hungarian gov- ernment to compromise by giving a minor role in the selection process to the Na- tional Judicial Council (NJC), a body of judges elected by the judiciary itself. e NJC was given the power to rank the candidates for a judgeship and, if the president of the NJO disagreed with the ranking, she could fail to choose the rst person on the list, as long as she provided reasons for her choice and didn’t stray in her selec- tion too far down the list that the NJC had ranked.

The end result is that the Hungarian judiciary is lled with judges appointed over the last eleven years in an openly political process controlled exclusively by the ruling Fidesz party that was only slightly tamed by the interventions of judges. As a result, there are government-friendly judges on every court in the country and all of the court presidents have been appointed through this process.

In addition to control of judges through the appointment process, there is also con- trol of judges through the disciplinary process. One of the judges on the NJC who had voted to impeach Handó was then threatened with a disciplinary procedure himself. He took a criminal case before him involving a non-Hungarian EU na- tional and referred it to the Court of Justice asking, among other things, whether the pressure brought to bear on him a ected his independence. e Prosecutor Gen- eral appealed the case to the Supreme Court, which ruled that the reference to the Court of Justice was unlawful because the questions it raised were unrelated to the case before the referring judge.40 e interim president of the referring judge’s court (who had been appointed by Handó over the objection of the NJC after the search for the permanent president was cancelled) then initiated disciplinary proceedings against the referring judge, proceedings that were eventually dropped but that sure- ly had a chilling e ect on other judges thinking of referring issues related to the independence of the Hungarian judiciary to the ECJ. As the Commission noted in its 2020 Rule of Law report:

The fact that the Kúria can, in the context of an extraordinary judicial rem- edy, review the necessity of preliminary references could interfere with the possibility of national courts to refer questions of interpretation of Union law to the Court of Justice and that disciplinary proceedings could be initiated, could discourage individual judges from making requests for a preliminary ruling.

This episode illustrates that judges who try to enforce EU law in cases where the government objects can be subject to politically motivated disciplinary procedures. The mere exis- tence of this situation will have a chilling e ect, discourag- ing judges from ruling against the government or powerful actors connected to the government in any case, including those involving the EU budget and the nancial interests of the Union.

In Hungary, court presidents have the power to determine how cases are assigned to judges—and how judges are assigned to panels to decide these cases. e Om- nibus Act of 201942 has made it much easier for court presidents to direct cases to speci c judges. Prior to this law, the process of assigning cases to judges in Hungary was not automated or strictly rule-governed; instead, court presidents designated a general assignment system once each year to send cases to speci c judges or pan- els of judges. Under the new law, however, the remaining legal constraints the pre- vented court presidents from simply assigning particular cases to particular judges as the cases came along have been lifted. Now, a court president can decide that for case A, judges 1, 2, and 7 should decide the case, but for case B, judge 7 should be replaced with judge 

This has given rise to the concern that cases a ecting the government’s interests can always be channelled to friendly judges by court presidents, all of whom have now been appointed through a politicized process.

Two other new features of the Omnibus Act of 201943 intensify concern about the independence of the judiciary: a) a new form of appeal to the Constitutional Court and b) new powers of constitutional judges. e Omnibus Act has also provided an opportunity for the government to capture the presidency of Supreme Court.

Should any public authority object to a decision of any court, the Omnibus Act permits a novel form of appeal directly to the Constitutional Court, bypassing the normal appeals process through the ordinary courts. So, for example, if the government loses an administrative law case in the central court in Budapest, the Budapest Metropolitan Court, it can either appeal through the normal judicial channels up to the Supreme Court or it can now appeal directly to the Constitu- tional Court.

Since 2013, the Constitutional Court has been sta ed with a majority of judges elected by the Fidesz super- majority in the Parliament; at present, almost every member of the Court has been elected by the Fidesz supermajority. It virtually always rules in favour of the government’s posi- tion on any contested matter.

For any public authority to have the possibility of a quick appeal directly to the Constitutional Court practically ensures favourable decisions in cases of high salience to the government. If the audit office, prosecutor’s office or any ministry loses a case in the ordinary courts, this new ap- peals procedure gives that body a friendly forum to review the case. is includes, of course, cases that involve the expenditure of EU funds.

The government’s ability to always nd a friend- ly judge can and, in a society as full of corruption and crony- ism as Hungary, surely will compromise the independence of the judiciary and will almost surely include cases where public contracts and the distribution of EU funds will be at issue.

The systematic availability of channels for politically sensitive cases to always reach friendly judges provides another reason why the Conditionality Regulation should be triggered.

These three areas taken together—the lack of trans- parent management of EU funds, the lack of an e ec- tive national prosecution service and the lack of guar- antees of judicial independence—show that Hungary has already egregiously violated basic rule of law prin- ciples as laid out in the Conditionality Regulation. The government of Hungary cannot be a reliable steward of EU funds until these problems are corrected. The Commission should therefore immediately trigger the Conditionality Regulation with regard to Hungary.

-Article 6(1) of REGULATION (EU, Euratom) 2020/2092 on a general regime of conditionality for the protection of the Union budget (hereafter “the Conditionality Regulation”) establishes that:

Where the Commission nds that it has reasonable grounds to consider that the conditions set out in Article 4 are ful lled, it shall, unless it considers that other procedures set out in Union legis- lation would allow it to protect the Union budget more e ectively, send a written noti cation to the Member State concerned, setting out the factual elements and speci c grounds on which it based its ndings. The Commission shall inform the European Parliament and the Council with- out delay of such noti cation and its contents.

Recital 14 clarifies that the Regulation complements a variety of instruments and processes that promote the rule of law and its application, including infringement proceedings (Article 258 TFEU), the procedure provided for in Article 7 TEU, financial support for civil society organisations, the European Rule of Law Mechanism, and the EU Justice Scoreboard. Recital 17, first sentence, adds that measures under this Regulation are necessary in particular where other procedures set out in Union legislation would not allow the Union budget to be protected more e ectively. Recital 17, second sentence, clari es in this regard that Union financial legislation and applicable sector-speci c and nancial rules provide for various possibilities to protect the Union budget, including inter- ruptions, suspensions or nancial corrections linked to irregularities or serious de ciencies in management and control systems. ese other procedures include, inter alia, checks and monitoring of Member States’ budgetary management and control systems and individual bene ciaries, including through the Early Detection and Ex- clusion System, under the Financial Regulation1 (recital 90, Article 63(2) and Articles 135-144), the enabling con- dition that refers to the need to design and implement in line with the Charter of Fundamental Rights the funds covered by the Common Provisions Regulation2 and the European Social Fund Plus Regulation3 as well as the possibility to act on the notion of ‘systemic irregularities’ in spending by economic operators under the Common Provision Regulation (Articles 2(36), 2(38) and 7). ese tools also include more detailed Commission policy guid- ance to implement European Structural and Investment funds in line with the Charter of Fundamental Rights.4 e Commission points out that, in its assessment in the current case, the Regulation provides more e ective protection than these other procedures for di erent reasons. Firstly, the main origin and cause of problems with sound nancial management in Hungary are breaches of the principles of the rule of law. Problems are best con- fronted by directly addressing their source. Moreover, the Regulation authorises a pro-active risk-based assess- ment that is generalised rather than one that is tailored to speci c EU funds or targeted at speci c nal bene cia- ries. A comprehensive approach based on a single legal instrument facilitates coordinated targeting of the issues at hand. Finally, the Regulation provides for a clear and transparent procedure with short deadlines for triggering Regulation 2018/1046 of 18 July 2018 on the financial rules applicable to the general budget of the Union :

Regulation (EU) 303/2013 of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricul­ tural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (consolidated version November 2020). The latest version is available as Council document 6180/21, Common Provisions Regulation –Analysis of the nal compromise text with a view to agreement, 25 February 2021.

Council document 6182/21, European Social Fund Plus (ESF+) Regulation – Analysis of the nal com­ promise text with a view to agreement, 25 February 2021.

Commission notice, Guidance on ensuring the respect for the Charter of Fundamental Rights of the European Union when implementing the (‘ESI Funds’)

Pursuant to Article 6(1), we therefore hereby notify the government of Hungary that there are reasonable grounds to consider that the conditions set out in Article 4 of the Conditionality Regulation are ful lled in the case of Hungary and that other available procedures would not allow the Commission to protect the Union budget more effectively than would the triggering of the Conditionality Regulation. In assessing whether the conditions set out in Article 4 are fulfilled, the Commission followed the procedure set out in Article 6 of Regulation 2020/2092, taking into account relevant information from available sources including decisions, conclusions and recommendations of Union institutions, other relevant international organisations and other recognised institutions. Moreover, we will demonstrate that due to the systematic and severe character of the relevant breaches of rule of law in Hungary, no other procedures set out in Union legislation would allow it to protect the Union budget more e ectively.

We have identified a series of interconnected breaches of the principles of the rule of law in Hungary. Some of these are long-standing breaches that have not been remedied while others are only recently enacted. Alone and taken together, these breaches seriously risk a ecting the sound nancial management of the Union or the protec- tion of the nancial interests of the Union as of 1 January 2021 in a su ciently direct way. e relevant breaches of the principles of the rule of law the Commission has identi ed concern multiple issues enumerated in Article 4(2) (a-h). ough the breaches of the rule of law in Hungary are interconnected and must be understood in a holistic manner, we can divide them into three broad headings:

1. Transparent Financial Management: Breaches of principles of the rule of law that seriously risk a ecting the proper functioning of the authorities implementing the Union budget, in partic- ular in the context of public procurement or grant procedures, as well as the proper functioning of the authorities carrying out nancial control, monitoring and audits and e ective and trans- parent nancial management (Articles (4(2)(a) and 4(2)(b) Regulation 2020/2092).

2. Investigation and Prosecution of Fraud: Breaches of principles of the rule of law that seri- ously risk a ecting the proper functioning of investigation and public prosecution services in relation to the investigation and prosecution of fraud, including tax fraud, corruption or other breaches of Union law, as well as the prevention and sanctioning of fraud, including tax fraud, corruption and other breaches of Union law relating to the implementation of the Union budget or to the protection of the nancial interests of the Union, and the imposition of e ective and dissuasive penalties on recipients by national courts of by administrative authorities (Articles 4(2)(c) and 4(2)(e)) Regulation 2020/2092).

 factual elements and grounds on which the Commission based its findings, as required under Article 6(1)

Pursuant to Article 6(5), the government of Hungary may make observations on the ndings set out in this noti cation and may propose the adoption of remedial measures to address the ndings set out herein. If the government of Hungary chooses to make such observations, it shall provide them to the Com- mission within one month of the date of this notification.

1. Serious breaches of rule of law a ecting transparent nancial management (Article 4(2)(a), Article 4(2)(b) and Article 4(2)(g))

Background: A number of breaches of principles of the rule of law in Hungary – involving issues ranging from the operation of so-called “public interest asset management foundations”6 (hereinafter, “public interest founda- tions”) to frequent derogation from public procurement rules – seriously risk a ecting the transparency of nan- cial management and directly put at risk the protection of the nancial interests of the Union. e Commission has recently opted to act with regard to one such instance regarding alleged irregularity with public procurement in Hungary.7 ese breaches interact with and amplify one another such that their cumulative, systemic e ect creates even greater risks for the Union budget and the nancial interests of the Union. Despite being called on to address these issues by the Council in the context of the European Semester process8, by the European Par- liament in the context of the Sargentini Report9 and the Article 7 process, by respected watchdog organisations

Public interest asset management foundations (közérdekű vagyonkezelő alapítványok) are private law institutions operating with a public purpose, regulated under the Hungarian Civil Code (Act V of 2013) as modi ed by the Act on Public Trust Funds (Act XIII of 2019). Under a December 2020 constitutional amendment adding Art 38(6) to the Fundamental Law, the statute regula­ ting these foundations can now only be changed by a two­thirds vote of the Parliament. These foundations are governed by boards of trustees initially appointed by the government. Once a board is constituted, all subsequent appointments to the board are made by the board itself. The funds of public interest foundations are audited by a supervisory board or property administrator appointed by the board. Under Fundamental Law Art. 39(3) (also added to the Constitution in December 2020), public funds are de ned narrowly to include only “revenu­ es, expenditures and receivables” of the State.” Public funds awarded to the public interest foundations will now lose their public character because the foundations are regulated under private law. Such funds therefore leave the jurisdiction of the State Audit Office.

Hungary has in fact been subject to GRECO’s special “non-compliance procedure” since 2017 due to its failure to take su cient measures to prevent corruption.12 is was con rmed again in November 2020 in GRECO’s Second Interim Compliance Report, when GRECO concluded that Hungary’s overall low level of compliance with its recommendations remained “globally unsatisfactory.”13 As discussed below, in recent years Hungary continues to have the highest percentage of nancial recommendations from OLAF of any member state. In the 2014-2020 EU budget cycle, after a Commission audit identi ed serious de ciencies in the functioning of the management and control system in relation to public procurement procedures, Hungary was made to apply a 10% at rate nancial correction on all contracts awarded under the de cient system.14 e fact that Hungary has chosen not to participate in the European Public Prosecutors O ce raises additional concerns given that, according to Transparency International, Hungary is tied for having the highest level of corruption of any member state of the EU.15 Against this background, the Hungarian government’s failure to comply with recommendations from the Commission and external watchdogs provides a particular reason for concern about the transparent and accountable management of EU funds:

1.1. Breaches of rule of law concerning public procurement (Article 4(2)(a)):

Many indicators suggest that the public procurement process in Hungary is highly prone to irregularities and cor- ruption.16 As the Commission noted in a 2019 country report on Hungary in the context of the European Semester process, despite some improvements in aspects of the public procurement process, serious rule of law breaches persist. e Commission explained, “Available indicators point to notable corruption risks. Determined action to prosecute corruption in high-level cases is missing. Weak accountability and obstacles in access to public information hinder the anti-corruption framework. The effectiveness of the justice system increasingly raises concerns, in particular as regards judicial independence. Corruption risks and favouritism distort the allocation of resources.”

The impact of systemic breaches of rule of law principles regarding public procure- ment in Hungary are evidenced in the high level of nancial irregularities involving European Structural and Investment Funds detected in Hungary. OLAF’s 2019 report showed that Hungary had by far the highest percent of its payments impacted by OLAF nancial recommendations concerning nancial irregularities. Hungary had such nancial recommendations concerning 3.93% of its payments, more than ten times the EU average.

Pre- vious OLAF investigations have detected, “very serious irregularities as well as possible fraud and corruption” in projects in Hungary involving EU funds,20 and “Commission audits on public procurement related to projects co-funded by the Union and carried out in recent years identi ed systemic de ciencies and showed weaknesses in the public procurement control system.”21 European Semester Reports show that the share of single bid public tenders “remained stably high over the last years and increased in 2018 to 39% for tenders above the EU thresh- old”.22

1.2. Measures that provide for discretionary suspension of public procurement rules (Article 4(2)(a)).

The financial interests of the Union are further put at risk by the Hungarian government’s longstanding and ongo- ing invocation of emergency measures that allow for the suspension of public procurement rules that are designed to ensure the proper functioning of authorities involved in public procurement – inter alia those involved in im- plementing the Union budget. In its December 2020 package of infringements, the Commission sent a letter of for- mal notice to Hungary stemming from its 2015 suspension of procurement rules in the continually renewed state of migration emergency that continues to the present day.23 e new state of medical emergency in force since June 2020 and renewed in February 2021, however, contains a similar suspension of normal procurement proce- dures at the discretion of the Prime Minister or his designate.24 Under the state of medical emergency, the Prime Minister has the discretion to exempt procurement processes from following the normal rules, including inviting contractors to submit bids directly without competition. e new statutory provision also permits the Prime Minister to delegate this discretionary competence to any member of government. While the ability of the Prime Minister to suspend procurement rules during the state of medical emergency nominally excludes “EU development funds” (Európai uniós fejlesztési források), risks to the nancial interest of the Union remain.

First, the language of this provision leaves it unclear whether the exclusion of the suspension of public procurement rules would apply to all EU funds or only a subset of those funds. Second, even if all EU funds must be allocated under normal procurement rules under this particular state of medical emergency, the regularity with which states of emergency are accompanied by suspensions of public procurement rules in Hungary, and recent amend- ments to the procedures governing the declaration of emergencies that make it easier for such suspensions to be declared pose grave risks to the nancial interests of the Union. e Ninth Amendment to the Fundamental Law adoped in December 2020, comprehensively rewrote Articles 48-54 regulating states of emergency. Previously government decrees issued in a state of emergency required parliamentary rati cation if they were to remain in force for longer than 15 days.26 However, under the December 2020 amendments to the Fundamental Law, once Parliament declares an emergency, government decrees may override any existing law – including laws on Public Procurement – without any parliamentary approval and they may remain in force until the emergency ends.

1.3. Measures that impede scrutiny of spending of Union funds (Article 4(2)(b)):

e Ninth Amendment to the Fundamental Law of Hungary, adopted in December 2020, introduced measures that will have the e ect of further impeding scrutiny of public funds, including EU funds. An amendment to Arti- cle 39(3) of the Fundamental Law entrenches a new, narrower de nition of public funds as, “the revenues, expen- ditures and receivables of the State.” According to this new de nition, public funds (including funds originating from the EU budget) would lose their ‘public’ character and no longer be subject to various disclosure and trans- parency requirements, such as freedom of information act requests and monitoring by the state audit o ce, once they are transferred into the hands of a legal form known as “public interest asset management foundations”28 (hereinafter, “public interest foundations”). In recent years, the government of Hungary has been transferring state assets, including nearly all state universities, into the hands of such public interest foundations. Of the thirty- one institutions presently listed in the statute as public interest foundations, twenty-one are universities, most transformed into this status within the last six months.29 Given that Hungarian universities are regularly recipi- ents of EU funds, EU funds going to them will be shielded from public scrutiny under this new legal status. More- over, the Ninth Amendment to the Fundamental Law passed in December 2020 also provided (in amendments to Fundamental Law Article 38) that henceforth the establishment and control of such public interest foundations would be regulated by a so-called ‘cardinal law’ that can be passed only with a two-thirds majority of MPs in the Hungarian Parliament. As a result, these public interest foundations – and the funds that they receive, in- cluding funds originating from the EU budget – would be further insulated from scrutiny and control by future governments. e December 2020 amendments to the Fundamental Law thus create new barriers to the public scrutiny of spending of Union funds that are awarded to such entities, because public audits and freedom of infor- mation requirements no longer apply to these entities. Finally, it must be emphasised that neither the rede nition of public funds nor the private-law character of public interest foundations under Hungarian law can have any

1.4. Measures that permit discretionary changes in the management and prioritization of particular public projects (Article 4(2)(b)).

Act LIII of 200630 provides for the expedited completion of publicly funded projects, including those with EU

funding, and Section 12(5) authorises the government to declare by means of a decree that a particular project has “national economic signi cance.” Under a 2012 amendment to this law, this designation permits the government to appoint a special commissioner (“kormánymegbízott”) to manage the project in detail and allows the projects

so designated to be granted exemptions from otherwise compulsory requirements (e.g. obtaining certain permits, meeting environmental standards, bypassing local municipality regulations). Given that a discretionary govern- ment decree issued after a project has been approved can change the authorities responsible for managing the grant and/or can waive otherwise compulsory rules involving EU funds, the proper functioning of e ective and transparent nancial management and accountability systems is put at risk. us, declaring particular projects to be of “national economic signi cance” can be used in an e ort to circumvent EU rules concerning the manage- ment of those projects.

2. Serious breaches of rule of law a ecting investigation and prosecution of fraud (Article 4(2)(c) and 4(2)(e))

Background: Limiting the e ective investigation and prosecution of fraud is indicative of a breach of rule of law principles under the Conditionality Regulation. Today, the investigation and prosecution of fraud, including investigation and prosecution of fraud against the EU budget committed by high level o cials in Hungary and/or contractors closely associated with them, is almost non-existent. is is true even in instances where OLAF has identi ed such fraud against the EU budget and recommended that the Prosecutor General of Hungary act on the matters.31 As the 2020 Rule of Law Report on Hungary states, “When serious allegations arise, there is a system- atic lack of determined action to investigate and prosecute corruption cases involving high-level o cials or their immediate circle,” and, “there has been no prosecution of high-level government o cials in recent years” [on cor- ruption related charges].32 Likewise, a 2021 European Parliament Study on country speci c recommendations in the context of the European Semester process found that in Hungary, “ ere is no determined systematic action to prosecute high-level corruption,” and that no progress had been made on the issue in the past two years.33 e very low level of investigation and prosecution of fraud by high level o cials or those closely connected to them is all the more striking given that evidence from organisations such as Transparency International suggests that Hungary is among the most corrupt member states in the European Union, and that some of the largest

bene ciaries of public contracts are closely connected to high level o cials.34 e lack of investigation and pros- ecution of fraud is clearly systemic, in that it is rooted in organisational de ciencies in the Hungarian prosecution service, which the Hungarian government has refused to address despite calls to do so from the Council of Europe and the European Council.

2.1. Organisation of the Prosecution Service (Article 4(2)(c).

Key aspects of the organisation of the Prosecution Service raise doubts about the political independence of this o ce. e Council of Europe’s GRECO (Group of States Against Corruption) made a series of recommendations to the Hungarian government to address this concern, recommendations that the Hungarian government has not fully acted upon. In particular, GRECO recommended that the possibility of reelecting the Prosecutor General be reconsidered to improve the independence of the o ce35 but the public prosecutor who has systematical- ly failed to bring actions involving corruption against senior o cials of the current government was re-elected in November 2019 by the Parliament for another nine-year term. In addition, GRECO recommended that disci- plinary procedures against prosecutors be handled by an independent body and not by the immediate superior of the prosecutor in question. While the Hungarian government added a separate “disciplinary commissioner”36 to the disciplinary process, the ultimate decisions about disciplining prosecutors still rests with the directly sup- erior prosecutor which, in GRECO’s assessment, limits the transparency and accountability of the procedure.37 GRECO recommended that “the removal of cases from subordinate prosecutors be guided by strict criteria and … justi ed in writing” but GRECO concluded that this recommendation had not been followed.

GRECO also recommended that “the immunity of public prosecutors be limited to activities relating to their participation in the administration of justice.”39 But this recommendation was also not acted upon. e failure of the government of Hungary to act fully on the recommendations regarding the organisation of the prosecution services indicates the persistence of breaches of rule of law principles that undermine the proper functioning of investigation and public prosecution services in Hungary – including in relation to the potential investigation and prosecution of fraud or other breaches of Union law relating to the implementation of the Union budget or to the protection of the nancial interests of the Union. In short, the organisation of the prosecution services continues to breach rule of law principles by undermining the independence of line prosecutors who are subject to hierarchically organized disciplinary procedures within the prosecution service under a chief public prosecutor who himself has general immunity that can only be lifted by a two-thirds vote of the Parliament, and this creates an ongoing situation in which there is a serious risk that fraud against the EU budget perpetrated by high ranking government o cials or private actors closely connected to them will not be prosecuted.

2.2. Functioning of Prosecution Services and Sanctioning of Fraud. (Article 4(2)(c) and 4(2)(e)).

In the context of the “European Semester” national reform programme process, the Council of the European Union has repeatedly noted Hungary’s failure to address concerns over the prevention and prosecution of corrup- tion. For instance, in its 2019 Recommendation on the Convergence Programme of Hungary, the Council noted,

“there are still no signs of determined action to prosecute corruption involving high-level o cials or their imme- diate circle when serious allegations arise. Accountability for decisions to close investigations is a matter of con- cern, as there are no e ective remedies to contest such decisions.”40 As noted above, there have been no cases of prosecution of high-level corruption in recent years, and there have been instances in which OLAF recommended that Hungarian authorities bring prosecutions targeting corruption by involving EU funds by individuals with connections to senior government o cials but in which the authorities declined to bring any legal action.41 Since OLAF itself cannot bring prosecutions, there is no further recourse in such cases where Hungary’s prosecution service refuses to act. e Council reiterated the same concerns in its 2020 Recommendation, further underlining that, “Investigation and prosecution appears less e ective in Hungary than in other Member States,” and noting that, “Restrictions on access to information continue to hinder the ght against corruption.”42 Likewise in its lat- est Country Report on Hungary as part of the European Semester Process, the European Commission noted that “No progress has been made to reinforce the anti-corruption framework,” including by improving prosecutorial e orts and access to public information.”

3. Serious breaches of rule of law affecting effective judicial review by independent courts (Article 4(2)(d) and 4(2)(h)).

Background: Recital 8 of the Regulation reminds us that, “Sound nancial management can only be ensured by Member States if … arbitrary or unlawful decisions of public authorities, including law-enforcement authorities, can be subject to e ective judicial review by independent courts and by the Court of Justice of the European Union.” Indeed, the Court of Justice has made it clear that Article 19(1) second subparagraph TEU requires that national courts be independent when they are called upon to rule on issues linked to the interpretation and ap- plication of EU law.44 is entails, rstly, that the court concerned exercises its functions wholly autonomously, without being subject to any hierarchical constraint or being subordinated to any other body and without taking orders or instructions from any source whatsoever, thus being protected against external interventions or pres- sure liable to impair the independent judgement of its members and to in uence their decisions.45 Second, judi- cial independence requires impartiality which, among other things, requires that an equal distance is maintained by national courts from the parties to the proceedings and their respective interests with regard to the subject matter of those proceedings. ird, judicial independence demands objectivity of judgment and the absence of any interest on the part of the judges in the outcome of the proceedings apart from the strict application of the rule of law.

Judicial independence thus requires autonomy, impartiality and objectivity, but these qualities can no longer be assured in Hungary. Breaches of numerous rule of law principles in Hungary concerning judicial review by independent courts seriously risk a ecting the implementation of the Union budget and the protection of the nancial interests of the Union. e breaches of rule of law principles are systemic in nature and a ect the independence of the judiciary as a whole.

Generally, individual judges in Hungary hearing speci c cases can still reach judgments not subject to direct outside in uence. However, a variety of new structures erected in the past 10 years have subjected the judiciary as a whole to excessive political control by the government – on issues ranging from the appointment and pro- motion of judges to the allocation of cases. Moreover, recent changes to the judiciary make it more likely that the government can nd judges inclined to rule in its favor. As a result, e ective judicial review by independent courts in Hungary, including in cases a ecting the implementation of the Union budget and the nancial interests of the Union, can no longer be guaranteed. Moreover, the absence of this e ective judicial review by independent courts has enabled the government of Hungary to defy CJEU rulings, and to do so in ways that a ect the nancial interests of the Union.

Effective judicial review by independent courts in Hungary has been compromised in several ways, some dating back years and some very recent in origin. As detailed below, Union institutions including the European Parlia- ment, the European Commission, Parliament and Council, and numerous international organisations specializ- ing in rule of law including the Council of Europe’s Venice Commission, the Council of Europe’s GRECO Group, the Council of Europe’s Commissioner for Human Rights, the UN Human Rights Committee, the UN Special Rapporteur on the situation of human rights defenders on his mission to Hungary, the European Association of Judges, the Hungarian Helsinki Committee, and Amnesty International Hungary among others have all have crit- icised the mounting threats to judicial independence in Hungary and called for speci c reforms to address areas of concern. However, rather than undertake such reforms, the government of Hungary has instead put in place additional measures that breach rule of law principles and further endanger the independence of the judiciary. e cumulative e ect of these is evident in the fact that Hungary has the lowest rating of any EU member state in the World Justice Project’s Rule of Law Index47 and was the rst EU member state to be categorised as an autocrat- ic regime by the Varieties of Democracy (V-Dem) Institute48 and by Freedom House.

3.1. Excessive concentration of power in hands of politically appointed President of the National Judicial O ce (NJO) and the sidelining judicial self-governance (Article 4(2)(d)).

As the result of changes introduced already in 2012, institutions of judicial self-governance were sidelined and ex- cessive control of the entire judicial system was concentrated in the hands of a political appointee occupying the newly created position of President of the National Judicial O ce (NJO). By exercising control over appointments to judgeships, to leadership positions in the courts, to the promotion and career advancement of judges, and to disciplinary procedures for judges, the NJO President exercises political control over the judiciary in ways that undermine the guarantee of e ective judicial review by independent courts – including courts like the Budapest Metropolitan Court (Fővárosi Törvényszék) which, due to the concentration of government agencies in the capital, are likely to hear many of the cases involving EU funds. Some of the powers wielded by this political appointee that undermine judicial independence include that:

I. e NJO President can appoint court presidents in Hungary with very little input from the National Judicial Council (which is composed of judges elected by their fellow judges) despite a strong recommendation from the Venice Commission that the position of sitting judges be strengthened in this process.50 In principle, the NJO President should only appoint court Presidents that enjoy the support of a majority of judges on the court in question, and if the NJO President wants to appoint an applicant that does not enjoy such majority support, he must seek the consent of the National Judicial Council. However, the NJO President can circumvent this entire process and prevent judges from participating in the appointment of court Presidents: the NJO President can simply declare the call for applicants unsuccessful and appoint an interim court President without any judicial input. is loophole has been exploited by the NJO President, such that court Presidents have been installed with- out support from judges or the National Judicial Council.51 is is signi cant in particular because these court presidents control the allocation of cases – including cases that could involve EU funds – to speci c judges, which creates the possibility for political considerations to play a role in the selection of judges who will hear a particular case. Court president can also initiate disciplinary procedures against judges on their courts.52

II. e NJO President can invalidate applications for judgeships even when they are approved by National Judicial Council.53 e previous NJO President used this power so frequently that the National Judicial Council called for her impeachment in 2019.54 Above and beyond these speci c instances in which this authority was used, the mere existence of this authority can have a chilling e ect – discouraging quali ed judges from taking the time and e ort to apply for positions that they know the NJO President could in the end simply invalidate their applications.

III. e NJO President can reassign judges to new posts (including demotions and transfers to remote lo- cations) without their consent, which might be experienced by some judges as punishment or a threat of punish- ment for decisions they have made.55 Similarly, the NJO President can transfer any judge outside the judiciary and into an administrative body.56 Judges thus transferred typically receive signi cantly higher remuneration57 and can later be returned to the judiciary as the head of a panel (tanácselnök) without going through the regular application procedure.58 Using these tools, the NJO president can easily reward judges for decisions they have made. e fact that the NJO President – a political appointee – has the authority to reward or punish judges at his or her discretion subjects the judiciary as a whole to an excessive degree of political control.

Union institutions including the European Commission59 and Parliament60, as well as international organisa- tions and other recognised institutions such as UN Human Rights Committee,61 UN Special Rapporteur,62 Venice Commission,63 Council of the European Union,64 Commissioner for Human Rights of the Council of Europe,65 Council of Europe’s GRECO group,66 the European Association of Judges,67 the International Bar Association,68 the Hungarian Helsinki Committee and Amnesty International Hungary,69 have all expressed concerns over the NJO, but the government of Hungary has not addressed their central concerns. Along with the concentration of power in the hands of the NJO President, institutions of judicial self-governance in Hungary such as the National Judicial Council (NJC) have been sidelined. e statutes in place since 2011 have allowed the political appointee at the NJO to circumvent the NJC’s recommendations for appointments to judgeships and court leadership posi- tions.70 In 2020, the NJC vigorously opposed the candidate for the new president of the Supreme Court (Kúria) put forward by the President of Hungary. e Parliament nonetheless elected this candidate over the objections of the NJC.

3.2. Avoiding judicial review by independent courts (Article 4(2)(d)).

Act CXXVII of 2019 (the “2019 Omnibus Act”), Article 55 enables public authorities, including the tax authority, state audit o ce, prime minister’s o ce, and public prosecutor’s o ce, each of which is involved in implementing the Union budget, carrying out nancial control, management and audit, and/or investigating fraud, to overrule judicial review by independent courts by asking for a special review of the Constitutional Court in cases public authorities have lost in the ordinary courts. e 2019 Omnibus Act established this new legal action, which en- ables public authorities to bring appeals against unfavourable court decisions in the ordinary courts directly to the Constitutional Court,71 a court that has already been subject to substantial control by the governing party.

While the Constitutional Court has not been active in cases involving the EU budget before this time, the new ap- peals mechanism could put that court in the middle of controversies over the use of EU funds. e Commissioner for Human Rights of the Council of Europe also noted that the Omnibus Act would have negative e ects on fair trial guarantees in Hungary.73 Likewise, analyses from Amnesty International and the Hungarian Helsinki Com- mittee conclude Act CXXVII of 2019 was designed to guarantee judicial decisions favourable to the government in politically sensitive cases.74 Because public authorities can appeal cases involving the expenditure of EU funds and/or the collection of EU revenue in Hungary through this new procedure, this situation seriously risks a ect- ing the e ective judicial review by independent courts of actions or omissions by the authorities dealing with the nancial interests of the Union.

3.3. Political capture of the Kúria (Supreme Court) and its growing control over the ordinary judiciary (Article 4(2)(d)).
ough the Constitutional Court in Hungary has had since 2013 a working majority of judges been elected by the governing party’s two-thirds parliamentary majority and presently features a bench in which every judge has been elected in this way, the Supreme Court (Kúria) has on balance maintained greater independence over the last decade. However, the independence of the Kúria has come under substantial new pressures:

I. As the result of changes introduced in the 2019 Omnibus Act, politically appointed judges to the Con- stitutional Court can now be transferred without an additional appointment procedure to become judges at the Kúria.75 Whereas previously only judges with extensive experience sitting as judges in the Hungarian ordinary court system could qualify for positions on the Kúria,76 the new transfer mechanism introduced in the 2019 Omni- bus Act allows political appointees to the Constitutional Court with no prior experience as judges in the ordinary courts to be installed as Kúria judges. Because the judges at the Constitutional Court are elected by the Parlia- ment without vetting by professional judges in the process, reappointing them to the Kúria without going through the ordinary judicial appointments process thus compromises the independence of the Kúria.77 In January 2021, a new president of the Kúria was installed using this procedure after being transferred from a judgeship at the Constitutional Court without ful lling the normal statutory conditions for holding his present position (namely, at least ve years of prior experience as a judge in an ordinary court). is new President was appointed despite having been rejected by an overwhelming (but non-binding) vote of the National Judicial Council, a vote which – among other things – registered judicial disapproval of having at the top of the system of ordinary courts a judge who had never served on any ordinary court before.

II. is new, politically appointed Kúria President will oversee an extraordinary expansion of the number of judges on the Kúria. In 2020, the number of judgeships on the Kúria was increased by 23% with the addition of 21 new vacant positions.78 e number of judges on the Kúria is not set by statute but determined by the President of the National Judicial O ce.79 Vacancies at the Kúria can be lled by appointment by the President of the Kúria, who has powers identical to those of the President of the National Judicial O ce when it comes to appointing judges on his court. As of 1 January 2021, the President of the Kúria was also given the power to increase the num- ber of judges on each adjudicating panel from three to ve, with his appointments to these panels constituting the expanded group. Leading non-governmental organisations have expressed concern that this extraordinary expansion of judgeships as well as the expansion of judicial panels, which is occurring at the moment when a new Kúria President has been installed over the objections of the National Judicial Council, creates a risk of politically motivated ‘court packing’ that would undermine judicial review by independent courts.

III. e new President of the Kúria – along with the presidents of all other courts – has also been given expanded powers over case allocation in the Omnibus Act of 2019. In general, in the Hungarian courts, cases are allocated by the court president to standing panels of judges on each court. ere is no automatic system of allocation; rather, cases are assigned to panels of known judicial composition under a case allocation scheme designed by the court president. Before the Omnibus Law of 2019, these case allocation schemes could only be revised once per year, which limited the strategic use of case management so that particular cases could not be arbitrarily directed to particular judges. e Omnibus Act of 2019 now lifts this one-year limit so that all court presidents, including the President of the Kúria, may revise the case allocation scheme at will.81 When the pres- ident of a court has the power to ensure that particular cases can be assigned to particular judges, particularly where the president of a court has the power to assign judges to particular panels, essential elements of judicial independence – the requirements of impartiality and objectivity – can be called into question.

IV. e Omnibus Act of 2019 gave new powers to the Kúria to exercise control over the rest of the system of ordinary courts. Under a new review procedure, called a “complaint for the uni cation of jurisprudence,” that went into e ect on 1 July 2020, the Kúria now has the power to issue interpretations of law that are binding on all courts.82 is procedure allows the Kúria to quash any nal and binding court judgment that it deems deviates from prior decisions published by the Kúria and to issue an opinion of general applicability to all future cases on related matters. e panels that issue such binding interpretations are composed solely at the discretion of the President of the Kúria.83 Given the new political pressures being placed on the Kúria and the fact that its new President was elected by the Parliament over the objections of the independent National Council of the Judiciary, the introduction of this procedure seriously risks a ecting the e ective judicial review by independent courts of actions or omissions by the authorities dealing with the nancial interests of the Union.

3.4. Serious breaches of rule of law a ecting the e ectiveness of legal remedies (including through lack of implementation of CJEU judgments) (Article 4(2)(h)).

I. Breaches of rule of law principles in Hungary seriously risk undermining the e ectiveness of legal rem- edies for violations of EU law, including in cases involving the nancial interests of the Union. ese breaches a ect both the functioning of the preliminary reference procedure under Article 267 TFEU and the functioning of the infringement procedure under Article 258 TFEU. With regard to preliminary references, the Hungarian Supreme Court (Kúria) declared that a judge acted illegally by sending a request for a preliminary ruling to the CJEU,84 and as a result disciplinary proceedings were later initiated against that judge.85 e judge in question then added to his reference to the CJEU the question of whether the commencement of disciplinary proceedings against a judge for having requested a preliminary ruling constituted a violation of the principle of judicial inde- pendence.86 e Commission’s 2020 Rule of Law Report on Hungary noted this case with concern:

the fact that the Kúria can, in the context of an extraordinary judicial remedy, review the necessity of preliminary references could interfere with the possibility of national courts to refer questions of interpretation of Union Law to the Court of Justice and that disciplinary proceedings could be initiated, could discourage individual judges from making requests for a preliminary ruling

II. With regard to infringement proceedings, the Hungarian government has failed to implement several recent judgments by the CJEU in Article 258 TFEU cases. Taken together, these cases amount to a pattern of non-implementation that undermines the e ectiveness of legal remedies for violations of Union law, including in cases that risk a ecting the nancial interests of the Union.

Law on NGOs – In its judgment in Case C-78/18, Commission v Hungary (Transparency of Associations), delivered on 18 June 2020, the Court of Justice found that the Hungarian Law on NGOs (“Transpar- ency Act”) was in breach of EU rules on free movement of capital, fundamental rights to protection of personal data and freedom of association as protected by the EU Charter of Fundamental Rights. the Commission determined that the government of Hungary has failed to comply with the judgment, despite repeated calls from the Commission for it to do so. As a result, the Commission has sent Hungary a Letter of Formal Notice under Article 260(2) for its failure to comply with the CJEU ruling in C-78/18. e government of Hungary recently announced that it would repeal the o ending Law on NGOs. However, the draft bill it has proposed to replace the existing Law appears designed to serve as an alternative means for the government to breach fundamental rights to freedom of association by harnessing the State Audit O ce (Állami Számvevőszék) to obstruct the work of independent NGOs.90

Higher Education Law – In its judgment in Case C-66/18 Commission v Hungary (Higher education), delivered on 6 October 2020, the Court of Justice held that aspects of Hungary’s higher education law violated provisions of the Charter of Fundamental Rights of the European Union (‘the Charter’) relating to academic freedom, the freedom to found higher education institutions and the freedom to conduct a business, along with other requirements of EU law and of the General Agreement on Trade in Services. To date, Hungary has failed to comply with the judgment of the Court of Justice.

Pushbacks of Migrants and Asylum Seekers – In its judgment in Case C-808/18, Commission v Hungary (Reception of Applicants for International Protection) delivered on 17 December 2020, the Court of Justice ruled that Hungarian legislation on pushbacks of migrants and asylum seekers breaches EU law. To date, Hungary has failed to comply with the judgment of the Court of Justice, and, accord- ing to the Hungarian police themselves, thousands of pushbacks have taken place at the borders with Croatia and Serbia. As a result of this noncompliance, Frontex – an EU funded agency – has suspended operations in Hungary, thus demonstrating directly the e ect that lack of implementation with CJEU judgments can have on the nancial interests of the Union. Moreover, the government of Hungary itself receives EU funds in connection with its border management activities, and will continue to do so in the context of the new Multi-Annual Financial Framework (2021-2027) through the Integrated Border Management Fund.

Conclusions

Any one of the breaches of rule of law principles detailed above seriously risks a ecting the sound nancial man- agement of the Union budget and/or the protection of the nancial interests of the Union in a su ciently direct way. Taken as a whole, they re ect serious and interconnected breaches of rule of law principles a ecting trans- parent nancial management, the prosecution of fraud and judicial review by independent courts (as enumerated in Article 4(2), under headings a, b, c, d, e, g and h of Regulation 2020/2092). Hungary must adopt remedial mea- sures to stop and reverse these breaches of rule of law principles with immediate e ect so as to restore conditions enabling sound nancial management.

In accordance with Article 6(5) of Regulation 2020/2092, and in light of the gravity and urgency of the situation, the Commission now provides Hungary the opportunity to provide the required information, make any observa- tions and put in place remedial measures to stop and reverse the breaches of rule of law principles a ecting the sound nancial management of the Union budget and/or the protection of the nancial interests of the Union within one month from this written notification.

To the extent that the Commission will not have received appropriate, comprehensive and satisfactory informa- tion and evidence of remedial measures having been put in place by that date it will, in accordance with Article 6(6) of Regulation 2020/2092 formulate a proposal for a Council implementing decision to take appropriate measures for the protection of the Union budget within one month. In accordance with Article 6(7) of Regulation 2020/2092 Hungary would then have a further period of one month to submit its observations on the proposed Council implementing measure, in particular on the proportionality of the envisaged measures.

Three key insights ow from a close reading of the Regulation in the wider context of Union and Hungarian law. ey may facilitate the e ort to promote the Commission’s triggering of the Regulation in combination with the use of other tools to address the rule of law situation in that Member State:

I. In terms of putting the Regulation to swift use, the reasoning to trigger it will hinge on the Article 4(1)-wording “seriously risk a ecting the [EU budget or the Union’s nancial interests] in a su ciently direct way”. is wording implies that past breaches of the principles of the rule of law remain relevant if and when they result in a continuing weakening that a ects the way in which the EU budget can be implemented now. is log- ically requires giving a certain predictive power to well-documented past behaviour. And that, in turn, requires being immediately proactive on assessing new information given that, in practice, no or very little EU monies have been disbursed to any Member States as yet. is approach is simply inherent in the wording, and is also in line with the logic of ex ante risk-based assessment that already existed in the Financial Regulation.

II. e Regulation’s focus is on “government entity” and “Member State organisation” as a recipient of Union monies, on the behaviour of “public” authorities, and on expenditure that is “public”. Recent legislative changes in Hungary appear designed, or at least may be raised, as an argument to side-step the Regulation’s reach. ey create nominally private law governed entities under Hungarian law that can receive or serve as the nal destination of EU-money, but that are in Hungarian law formally private foundations with the primary goal of governing public activities, such as universities. If the civil law nature of the “public interest foundations” or the type of supervision over public tasks they put in place would indeed be put forward in an e ort to sidestep the Regulation, it should however be clear that national Hungarian legislative (re)de nitions are legally irrelevant to how concepts such as “government entity”, “public authority” and “Member State organisation” are understood as a matter of Union law. As Union law terms they need to be interpreted solely as a matter of Union law. A Regula- tion is directly binding in the national legal order, so that any national law needs to be changed or interpreted in such a way so as to give it full e ect. Domestic (re-)de nitional ploys do not a ect the reach of the Regulation, and therefore should in no way delay its application.

III. The (subsidiarity and complementarity) wording and overall logic of the Regulation in its wider context do not exclude its application in parallel to other speci c and general legal procedures. To the contrary, the very reference to the relevance of all these di erent tools in recitals 14 and 17 should be taken as an encouragement to the Commission to start using all available tools. is is particularly so for the Commission’s possibility to conduct ex ante checks to monitor disbursing EU monies as a risk-based approach to Sound Financial Manage- ment.120 In this way, practically, the Commission would give e ect to rule of law considerations before EU funding gets disbursed, which would be fully in line with Council approved European Semester recommendations that need to be leading for disbursement of NGEU funds.

Application of different tools may even happen with regard to the same general subject matter of rule of law issues. For example, from a legal perspective nothing stands in the way of acting both preventively (ex ante checks) and reactively (checks of individual nancial misconduct) un- der the Financial Regulation, structurally under the Common Provisions Regulation and European Social Fund Plus Regulation, and from the angle of rule of law protection under the Conditionality Regulation, in case these angles are simply di erent expressions of the same wider issue of rule of law backsliding. On the other hand, the Regulation’s restriction of considering only those rule of law issues with a su ciently direct link to budgetary mat- ters underlines the signi cant remaining relevance of Treaty based tools such as infringement actions by either the Commission or Member States (Article 258 and 259 TFEU).