hungary's measures:
The Hungarian Government undertook to adopt, by 31 March 2023, a comprehensive action plan
aiming at improving the level of competition in public procurement with clear and ambitious
deadlines for implementing each of the actions set in the action plan. The action plan should take
into account, inter alia, the first results of the
performance measurement framework, to be operational by 31 December 2022.
=========
The remedial measures are the following:
i. Reinforcing prevention, detection and correction of illegalities and irregularities concerning the
implementation of Union funds through a newly established Integrity Authority;
ii. Anti-Corruption Task Force;
iii. Strengthening the Anti-Corruption Framework;
iv. Ensuring the transparency of the use of Union support by public interest asset management
foundations;
v. Introduction of a specific procedure in the case of special crimes related to the exercise of pa
or the management of public property;
vi. Strengthening audit and control mechanisms to guarantee the sound use of EU support;
vii. Reducing the share of tender procedures with single bids financed from Union funds;
viii. Reducing the share of tender procedures with single bids financed from the national budget;
ix. Development of a single-bid reporting tool to monitor and report on public procurements closed
with single-bids;
x. Development of the Electronic Public Procurement System (EPS) to increase transparency;
The Commission’s super milestones
https://commission.europa.eu/documents_en
Among the requisite milestones, improved competition in public procurement features prominently as an indispensable measure to prevent irregularities, including fraud, corruption, or conflict of interest for the functioning of an internal control system (point 59 Commission Decision). The measures the Commission demands is a comprehensive set of actions that should increase competition and improve transparency in public procurement. These include the development of a monitoring tool assessing the share of public procurement procedures resulting in single bids, the development and putting in place of a performance measurement framework to regularly assess the efficiency and cost effectiveness of public procurements, a support scheme to facilitate the participation of micro-, small- and medium-sized enterprises in public procurement procedures and an electronic public procurement system that should facilitate the independent oversight and analysis of competition in public procurement. Besides these actions, the reasons for limited competition in the sectors with the lowest levels of competition must be detected. The overall goal of these measures is to reduce the share of procurement procedures with a single bid and to facilitate the public oversight of the public procurement system. These measures translate into five milestones that should be effectively implemented before the submission of the first payment request.
These measures and the overall conditionality-based approach of the Commission are steps in the right direction.
The measures address longstanding criticism concerning the lack of competition in Hungary’s public procurement system, which has been regularly pointed out by both the Council and the Commission since 2014 , most recently in its 2022 country-specific recommendations.
The Commission’s milestones are also an illustration of the premise that competitive markets contribute to democratic societies by enabling multiple possibilities for meaningful economic participation by offering firms unrestricted access to markets and a plurality of options for citizens while safeguarding their autonomy to choose. This conceptualization rests on the idea that the economic order is a crucial counterpart to the democratic order where the former guarantees consumer sovereignty and the latter participatory rights of citizens.
Milestones sidestepping the real risks in the Hungarian legal infrastructure
The setting up of new monitoring and reporting tools, new measurement frameworks and the adoption and implementation of a comprehensive action plan implies the adoption of special regulation and frameworks that are needed to create and ‘grow’ competition, which is indeed generally seen as the role of regulation which prescribes the desired outcome for the market.
However, the Commission’s approach demands the creation of another layer of regulation and monitoring system from a Member State who has been a champion of instrumentalizing law and law making for the constitutional re-engineering of its economic governance. What has been coined by Bátory as Hungary’s “creative compliance” with EU obligations, by seemingly following and complying with EU norms while in fact not giving up its original political objectives has largely been overlooked by the Commisison. Moreover, the old lessons of EU conditionality mechanisms during the enlargement rounds of 2004 and 2007 should caution the Commission of Hungary’s path dependency of relying on noticeable and direct statutory enactments of substantive law creating “the world of dead letters” that are characterized by politicized transposition processes and systematic enforcement problems coupled with weak civil society. In fact, the Commission’s approach sidesteps two crucial questions: first, how effective and credible control of competition in public procurement should be guaranteed in Hungary, and second, how government-created distortions of competition and regulatory barriers to access public procurement markets should be addressed.
Effective and credible control of competition in public procurement
Safeguarding and maintaining competition in markets is not the role of regulation and specific regulators, but should be left to competition laws and competition authorities. Competition law is the legal instrument to ensure that the valuable process of the market mechanism is protected by removing unnecessary restrictions on competition and by preventing significant reduction of competition.
In an earlier blog, I have argued that proper and active enforcement of competition rules is a key component of respecting the rule of law and protecting the sound financial management of EU funds. Safeguarding competition and effectively enforcing competition rules must be complementary to fighting corruption since both areas of the law aim to correct dysfunctions in market mechanisms. For this reason, I argued that the Commission should have addressed the lack of effective competition (cartel) law enforcement in public tender procedures in Hungary under the Conditionality Regulation. This argument holds for the Commission’s decision taken now on the RRF. Various reports in the past noted that the Hungarian Competition Authority (HCA) does not make active use of the competition rules and it is not sufficiently active in sectors with high risk of collusion. In the period of 2002 to 2010, the HCA started 18 cartel investigations in public procurement procedures, with a yearly average of 2.25 cases. In the period of 2010 to2022 the HCA started only 17 investigations with a yearly average of 1.4 cases. Since 2018, just one investigation has been started. This is a significant fall in the number of investigations since 2010 and an incomprehensible gap between the high number of irregularities in public procurement cases and the low number of investigations in public procurement procedures. On the basis of the empirical data demonstrating high number of irregularities in public tender procedures the number of investigations of the HCA should have at least remained the same as in the period of 2002-2010 (2.25 yearly average) or even increased. The HCA’s failure to act directly affects public spending and thus the management of EU budget by tolerating collusion among undertakings which creates one of the main threats for the integrity of public procurement processes.
Instrumentalizing the law to reduce competition
The Commission leaves the Hungarian government’s longstanding and successful strategy of instrumentalizing the law and regulatory measures to intervene in markets, including public procurement, and distort competition unaddressed. If the Commission aims at creating more competitive public procurement markets, it must clearly and explicitly address those law-created distortions of competition that so far remained under the radar of any EU assessment.
Over the past years, the Hungarian government has systematically used the path of law-making to restructure sectors of the economy and to override market mechanisms while often providing artificial advantages to crony firms. Reducing competition in this way leads to higher prices and in these cases forming cartels (collusion) is easier or is more profitable when the market concentration is higher. This is, to my understanding, exactly the risk the Commission wants to be eliminated. However, in Hungarian markets relatively unknown firms can become within the course of just one year one of the largest operators through acquiring this position by continuously escaping competition law assessment due to, for example, the exception laid down in Article 24 of the Hungarian Competition Act, that enables the Hungarian government to declare mergers to be in the “national strategic interest”.
The frequent application of such wide and ex ante public interest exceptions in Hungarian merger control has created highly concentrated markets in various sectors and has the particular risk of isolating the Hungarian markets from the rest of the internal market one step at a time. The exclusion of competition law assessment by the HCA has already taken place in 36 cases since 2013, which is a high number in a relatively short period of time in comparison with other countries. Mergers in the area of energy, financial, telecommunications, IT and transport sectors were approved by the Hungarian government, without having the HCA authorize them on the basis of their impact on competition.
The risk of such exceptions is especially tangible concerning the rule of law in media mergers as well as telecommunications cases that are closely related to and where the economic activities in these sectors are all interconnected in a complex supply chain.
The missed opportunity to reclaim the importance of competition law in the Rechtsstaat
These two concerning issues boils down to the argument that the Commission should have demanded a full and effective role of the Hungarian Competition Authority in protecting the EU budget. This is even more so considering the fact that competition authorities have ‘court-like’ functions as they protect the legal position of undertakings as well as citizens’ rights to economic activity and free choice in markets. It could have straightforwardly required a milestone on monitoring the priority setting practices of the HCA in public procurement cases and a critical assessment of laws, regulations and government decrees that are capable of distorting competition.
The Commission seems to remember how to make markets work for people when it addresses the contribution of competition policy to a fair, green and digital Europe, but it seems to turn a blind eye when rule of law values are at stake. In doing so, the Commission overlooks the constitutional value of competition and competition law tools that can define the boundaries of public power and by dispersing economic power ensures the integrity and impartiality of institutions. The democratic value of competition is beyond its expected positive economic effects – it is competition as a process that satisfies aggregate preferences in society and promotes citizens’ welfare. Competition rules and principles will not solve the rule of law problem in Hungary, but neglecting their salience in combatting corruption, the accumulation of economic power and in this indirect way their contribution to democratic is another missed opportunity from the ec.
After (potential) threats to the rl = rule of law [estado de derecho], EC has developed 2 toolkits, to protect rl
(as rl is one of the common values of Art. 2 TEU)
1st toolkit = “prevention & promotion”:
-European Rule of Law Mechanism,
-EU Justice Scoreboard,
-European Semester;
-Cooperation and Verification Mechanism,
-support for civil society <> COCOO WILL ORDER FUNDING,
-networks and projects,
-structural reforms.
2ND TOOLKIT:
(i) the Rule of Law Framework (dialogue),
(ii) the art. 7 TEU procedure (political sanctions),
(iii) infringements pursuant to art. 258 TFEU (judicial determination and enforcement)
(iv) a regime of conditionality to protect the EU budget (administrative enforcement)
Following the blueprint of the International Monetary Fund’s (IMF)
and the WB World Bank’s policies, the EU has applied conditionality since the 1980s.
Human rights clauses have been inserted to international agreements in the form of ex-ante or ex-post
(ie conditionality is applied before or after the disbursement of funds) and positive or negative
(ie granting a (non-)pecuniary benefit, withdrawing resources or imposing a sanction) conditionality.
<> cocoo: what conditional hr clauses are in the intl.agreements between eu/imp/wb and spain ?
In the 1990s, the EU’s accession policy has been made conditional on the compliance with the Copenhagen
Criteria.
<> cocoo : spain no longers meet the copenh.criteria, and should be expelled from eu.
-In the aftermath of the 2008/9 financial crisis, macroeconomic conditionality, has been applied vis-à-vis
EU MS when granting financial assistance under international law (European Stability Mechanism), and
EU law (Twopack)
<> cocoo v spain [wrt failure to meet conditions, on international law (European Stability Mechanism), and EU law (Twopack)
-conditionality has also been introduced to the EU’s budgetary policy in the form of
ex-ante conditionalities as requirements for the disbursement of resources under the regime of the
European Structural and Investment Funds
<> cocoo v spain [wrt failure to meet conditions, on European Structural and Investment Funds
On 2021, Hungary brought said action for annulment before the ecj, and sought to
either annul the entire Regulation or arts 4(1), 4(2)(h), 5(2) 5(3) penultimate sentence, 5(3) final
sentence, and 6(3) and (8) thereof. Poland followed. The European Parliament in
June brought an action for failure to act, against the Ec, under art. 265 TFEU,
accusing the Commission of inaction, as it had decided to await ecj’s findings, before implementing
the Regulation
[The rule of law Conditionality Mechanism = RLCM = CM ] <> [‘RLCM Regulation’ = CR = condit.reg]
EC will initiate the procedure set out in Article 6 of the Conditionality Regulation, where
the conditions in Article 4 are met
rlcm is a new instrument that entered into force in January 2021. allows the EU to take measures in
cases of breaches of the RL [rule of law] principles that affect/seriously risk affecting,
the sound financial management of the EU budget, or the EU’s financial interests
in a sufficiently direct way
As the RLCM Reg was only adopted recently, some questions are left open on its
potential scope of application. The European Commission has published guidelines, but without
sufficient jurisprudence to go on they leave some room for interpretation. The fact that the Regulation
has so far only been applied once
Rather than being a one-off procedure, the RLCM is a continuous exercise through
which all 27 Member States are constantly monitored and assessed by the Commission services. The
Commission’s Directorate-General for Budget , ecDGB, is at the centre of the process, coordinating input from
other Directorates-General and institutions and requesting further information where necessary. The
European Anti-Fraud Office (OLAF) and European Public Prosecutors’ Office (EPPO) also play an
important role, as both can bring any irregularities or other relevant issues to the attention of the
Commission during the procedure.
The CJEU: for mechs. to be compatible with the Treaties, they:
1/must be established by secondary legislation, and
2/ must not have in common, with art 7 teu:
(i) the same subject matter,
(ii) pursue the same objective and
(iii) allowing the adoption of identical measures as art. 7 TEU,
After ecj’s findings in the cases by Hungary and Poland, the Commission now has to enforce the Regulation, also in order to avert the European Parliament’s action for failure to act.
Guidelines on Regulation (EU, EURATOM) 2020/2092 on conditionality for the protection of the Union budget
Respect for the rule of law : Article 2 of the Treaty on European Union (TEU) and in the preambles to the TEU and to the Charter of Fundamental Rights of the European Union.
The Union budget expresses the principle of solidarity (Article 2 TEU), based on the mutual trust between the Member States to responsibly use common resources from the Union budget.
However, that mutual trust is conditional to the commitment of every Member State to:
-comply with the obligations under Eu law
– to respect the values in Article 2 TEU, which include the RL
CR (condit. Reg) : protecting the Union budget against breaches of the principles of the rule of law that affect or seriously risk affecting its sound financial management or the protection of the financial interests of the Union in a sufficiently direct way.
CR has 5 steps:
(i) the conditions for the adoption of measures
ii) the relation between the Conditionality Regulation and other instruments;
(iii) the proportionality of the measures to be proposed to the Council;
(iv) the procedure and assessment process; and
(v) the protection of the rights of final recipients or beneficiaries
(i) CONDITIONS FOR THE ADOPTION OF MEASURES
Article 4(1) of the Conditionality Regulation, ‘[a]ppropriate measures shall be taken where Article 6 breaches of the principles of the rule of law in a Member State, affect or seriously risk affect, the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way’.
ecj: Article 4(2): such breaches fall within the CR scope [so ec must trigger the mech/procedure set out in Article 6 of the CR], only if ec finds that there are reasonable grounds that:
(i) at least one of the rule of law principles referred to in Article 2(a) of the Conditionality Regulation has been breached in a Member State
(ii) the said breach concerns at least one of the situations attributable to an authority of a Member State, or at least one instance of conduct of such authorities referred to in Article 4(2) of that Regulation, if relevant to the sound financial management of the Union budget or for the protection of the Union’s financial interests
(iii) the said breach affects or risks seriously affecting that sound financial management or those financial interests, in a sufficiently direct way, with a genuine or real link between those breaches and that effect or serious risk of effect
…. unless it considers that other procedures set out in Union legislation would allow it to protect the Union budget more effectively.
2.1. Relevant breaches of the principles of the rule of law
ecj: Article 2(a) of the CR: the rl is a non-exaustive list, and must be interpreted in line with the other Union values and principles enshrined in Article 2 TEU’ = horizontal conditionality mechanism
As regards fundamental rights, the Court has clarified that the reference to them ‘is made only by way of illustration of the requirements of the
the rl <> fundamental rights: principle of effective judicial protection, the principle of non-discrimination: a Member State whose society is characterised by discrimination cannot be regarded as ensuring respect for the rule of law
Recital 15 of the Conditionality Regulation refers to ‘individual breaches’ and to ‘breaches that are widespread or due to recurrent practices or omissions by public authorities, or to general measures adopted by such authorities.’
The Conditionality Regulation covers both individual and systemic breaches, which are covered in so far as they are relevant for the sound financial management of the Union budget or for the protection of the Union’s financial interests.’ Thus, the Commission can assess both actions or failures to act by the public authorities.
Article 3 of the Conditionality Regulation is intended to facilitate the application of the Conditionality Regulation by providing a list of situations that may be indicative of breaches of the principles of the rule of law14 . As this list is merely indicative, other actions, practices or omissions of public authorities or other legal situations covered by Article 4(1) of the Regulation may be relevant under the Conditionality Regulation.
The Court has held that ‘there is a clear relationship between, on the one hand, respect for the value of the rule of law and, on the other hand, the efficient implementation of the Union budget, in accordance with the principles of sound financial management, and the protection of the financial interests of the Union’ . The Court has added that ‘sound financial management and those financial interests are liable to be seriously compromised by breaches of the principles of the rule of law committed in a Member State, since those breaches may result, inter alia, in there being no guarantee that expenditure covered by the Union budget satisfies all the financing conditions laid down by EU law […]’
The Court has held that compliance with those financing conditions and objectives pursued by the Union when it finances expenditure ‘cannot be fully guaranteed in the absence of effective judicial review designed to ensure compliance with EU law; the existence of such review, both in the Member States and at EU level, by independent courts and tribunals, is of the essence of the rule of law’ . This is without prejudice to the requirement of a sufficiently direct link to the Union budget.
Breaches of the principles of the rule of law shall concern one or more of the situations or conducts of relevant public authorities or attributable to such authorities, insofar as they are relevant for the sound financial management of the Union budget or for the protection of the financial interests of the Union18 . 18. The Court has held that such relevance can be presumed as regards the activities of the authorities referred to in points (a) and (b) of Article 4(2) of the CR, namely the authorities implementing the Union budget and carrying out financial control, monitoring and audit
Regarding investigation and public prosecution services, the proper functioning of those services is caught, under point (c) of that provision, only in so far as it relates to breaches of EU law concerning the implementation of the Union budget or the protection of the financial interests of the Union. The same applies to the prevention and sanctioning, by national courts or administrative authorities, of the breaches of EU law mentioned in point (e). As regards the judicial review referred to in point (d), it is caught only in so far as it concerns the conduct of the authorities referred to in points (a) to (c).
The recovery of funds unduly paid, provided for in point (f), covers only funds from the Union budget, which is also the case for cooperation with OLAF and the EPPO, mentioned in point (g). Lastly, point (h) expressly refers to any other situations or conduct of authorities that are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union.20 . 20. The consequence of this understanding is that, as regards national authorities whose activities are general and not confined to the implementation or protection of the Union budget, their conduct or situations that constitute a breach of the principles of the rule of law will only fall within the scope of the Regulation insofar as it is relevant for the sound financial management of the Union budget or for the protection of the Union’s financial interests.
The Commission notes that, among these specific situations or conduct of public authorities, non-effective or untimely cooperation with the EPPO and OLAF constitutes a ground for action under the Conditionality Regulation . As regards the EPPO22, the scope of this cooperation includes the obligation for the competent national authorities of the Member States participating in the EPPO to actively assist and support the criminal investigations and prosecutions of the EPPO23 . As regards OLAF, the scope of this cooperation includes the right for OLAF24 to carry out on-the-spot checks and inspections, with the assistance needed to carry them out effectively , and to have access to the relevant information, data and documents either to decide whether or not to open an investigation or to carry out investigations effectively and without undue delay. It also includes the related obligations for the Member State concerned
This is without prejudice to the obligations of non-participating Member States to cooperate with the EPPO, under applicable Union rules, when it exercises its competences in participating Member States and requires such cooperation. 24 In line with the provisions of Regulation (EU, Euratom) No 883/2013, cited above. 6 including25 to:
(i) inform OLAF26 ,
(ii) provide OLAF with the assistance needed in order to carry out its tasks effectively in the conduct of such investigation27 , (iii) take appropriate precautionary measures, in particular measures to safeguard relevant evidence28 ,
(iv) take appropriate action on the basis of information provided by OLAF, before OLAF takes a decision whether or not to open an investigation29 , and
(v) ensure appropriate and timely follow-up to OLAF reports and recommendations upon completion of its investigations, reporting back to OLAF on the action taken30
Compliance by the Member State concerned with these obligations is indeed essential to ensure an effective protection of the financial interests of the Union. The Commission will therefore monitor the effective and timely cooperation with OLAF, in view of the principles established in Article 3 of the Conditionality Regulation. This is particularly important for Member States that do not participate in the enhanced cooperation regarding the EPPO, as in those Member States, OLAF is competent to investigate allegations of fraud, corruption or any other illegal activity affecting the financial interests of the Union. Moreover, a systematic lack of follow-up of OLAF recommendations may amount to conduct of public authorities that could be concerned by a breach of the principles of the rule of law under the Conditionality Regulation.
Furthermore, Article 4(2)(h) covers any other situations or conduct of authorities that are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union. The Court has held that Article 4(2)(h) has to be interpreted in conjunction with Article 4(1), which is the ‘the very core of the horizontal conditionality mechanism established by that regulation’ 31
The Court has also held that Article 4(2) of the Conditionality Regulation, ‘in particular point (h) thereof, is neither such as to render non-exhaustive the situations covered by the conditionality mechanism established by the contested regulation nor insufficiently precise to form part of it’. 32 24. To give one possible example, a situation or conduct of (or omissions by) authorities within the meaning of Article 4(2)(h) of the Conditionality Regulation may cover the proper functioning of the authorities in charge of land registries and of related controls 25 These obligations are foreseen in Regulation (EU, Euratom) No 883/2013.
The list provided in these Guidelines is not exhaustive.
It is worth recalling that the Conditionality Regulation applies to all EU funds. In this respect, the co-legislators have also clarified that the Conditionality Regulation may be triggered where the proper functioning of the authorities implementing their Recovery and Resilience Plans is not ensured, in line with Article 8 of (‘RRF Regulation’) . The Court of Justice also clarified that the Conditionality Regulation can also relate to breaches of the principles of the rule of law affecting the collection of the Union’s own resources
2.2. Effects on the sound financial management of the Union budget or the protection of the financial interests of the Union
According to Article 4(1) of the Conditionality Regulation, for a given conduct or situation to fall within the scope of the Conditionality Regulation, the Commission needs to identify a breach of the principles of the rule of law and to assess whether such a breach (i) affects, or seriously risks affecting, the sound financial management of the Union budget or the protection of the financial interests of the Union, (ii) in a sufficiently direct way. This assessment should be made on a case-by-case basis.
The first condition in paragraph 24 above (see point (i): ‘affects’), requires that the identified breach of the principles of the rule of law has an effect on the sound financial management of the Union budget or on the financial interests of the Union. 28. That effect may consist, first, in implementing the Union budget in a way that is not compliant with the principles of sound financial management as enshrined in Article 317 TFEU and in the rules adopted for the implementation of the Union budget. In particular, Article 2(59) of the Financial Regulation defines ‘sound financial management’ as ‘implementation of the budget in accordance with the principles of economy, efficiency and effectiveness’. Articles 33 to 36 of the Financial Regulation set out in more detail the meaning, scope and consequences of those principles.
Second, that effect may also be established in relation to breaches of the principles of the rule of law that are detrimental to the protection of the financial interests of the Union, eshrined in Article 325 TFEU and in the relevant secondary legislation. In particular, according to Article 63(2) of the Financial Regulation, this covers all legislative, regulatory and administrative measures designed, inter alia, to prevent, detect and correct irregularities and fraud in the implementation of the budget.
ecj: the concept of ‘financial interests of the Union’, within the meaning of Article 325(1) TFEU, encompasses both revenue made available to the Union budget but also expenditure covered by that budget35 . 30. Furthermore, when determining the extent of the effect on the Union budget or the financial interests of the Union, the Commission will duly take into account criteria such as the nature, duration, seriousness and scope of the identified breaches of the principles of the rule of law, which may vary depending on the characteristics of those breaches.
In addition, the intention of the relevant Member State to put an end to the breach of the principles of the rule of law, including the degree of its cooperation with the Commission under the Conditionality Regulation may be relevant, among others, for the purpose of measuring the impact, duration and scope of the relevant breach on the sound financial management of the Union budget or the financial interests of the Union
As regards the situation where breaches of the principles of the rule of law entail a ‘serious risk’ affecting the sound financial management of the Union budget or the protection of the financial interests of the Union, the Court has found that ‘it would be incompatible with the requirements of sound financial management of the Union budget and the protection of the financial interests of the Union to limit the adoption of appropriate measures to cases of proven effects on that sound financial management or those financial interests Such limitation would be liable to compromise the purpose of the … Regulation.’
The prevention of the effects referred to in Article 4(1) of the Regulation is ‘a permanent and horizontal requirement of EU financial legislation’. A “serious risk” may be established in cases where the effects of the relevant breach of the principles of the rule of law, although not yet proven, can nevertheless be reasonably foreseen, since there is a high probability that they will occur40 . It must therefore be demonstrated that the risk has a high probability of occurring, in relation to the situations or to the forms of conduct of the authorities referred to in Article 4(2) of the Conditionality Regulation.
For instance, if certain acts of national authorities implementing Union funds through public procurement, or collecting the Union’s own resources, or carrying out financial control, monitoring and audit of Union funds, or investigating allegations of fraud, corruption or other breaches of Union law in the implementation of Union funds or revenue, cannot be effectively reviewed by fully independent courts, this may entail a serious risk insofar as the Union funds and the financial interests of the Union are concerned. 32. Finally, it is not sufficient that a breach of the principles of the rule of law affects or seriously risks affecting the sound financial management of the Union budget or the protection of the financial interests of the Union.
According to Article 4(1) of the Conditionality Regulation, the breach of the principles of the rule of law should do that ‘in a sufficiently direct way’ (second condition in paragraph 24 above (see point (ii)).
Pursuant to this requirement, it should be established that there is a sufficiently direct relation between the breach of the principles of the rule of law and its effects, or serious risks thereof, on the sound financial management of the Union budget or on the protection of the financial interests of the Union. The Court of Justice has considered that the terms ‘in a sufficiently direct way’ require that the link between the breach of the principles of the rule of law and the impact or risks for the Union budget should be ‘genuine’ or ‘real’. 41 This means that the procedure of the Regulation should not be triggered with regard to situations in which the connection is merely hypothetical, too uncertain or too vague.
3. THE RELATION BETWEEN THE CONDITIONALITY REGULATION AND OTHER PROCEDURES SET OUT IN UNION LEGISLATION
Where the Commission finds that it has reasonable grounds to consider that the conditions for the adoption of measures under the Conditionality Regulation are fulfilled, before starting the procedure it will consider whether appropriate measures are necessary, i.e. whether other procedures set out in Union legislation for the protection of the Union budget would not allow it to protect the Union budget more effectively, as established by Article 6(1) of the Conditionality Regulation.
40 See judgement of 16 February 2022, Hungary v. Parliament and Council
the Union financial legislation and the applicable sector-specific rules already provide for other procedures to protect the Union budget. 36. For instance, the Financial Regulation provides for an early-detection and exclusion system (‘EDES’) , allowing the Commission to detect persons or entities representing risks threatening the protection of the financial interests of the Union early, and to exclude them from receiving funds from the Union budget, if certain conditions are met.
Moreover, the Commission may impose interruption or suspension of payments, and shall impose financial corrections on the Member States 43 if they do not comply with applicable law and do not protect the financial interests of the Union when they implement the Union budget under shared management. Under the RRF Regulation and the financing and loan agreements signed pursuant to it, the Commission has the right to reduce proportionately the support and recover any amount due to the Union budget in cases of fraud, corruption, conflict of interests affecting the interests of the Union that have not been corrected by the Member States.
In addition, a number of recovery and resilience plans include measures directly linked to rule of law issues, whose satisfactory fulfillment is necessary for the release of payments under the RRF. 39. Nevertheless, it might not always be possible to trigger those procedures in relation to situations of breaches of the principles of the rule of law, such as those listed in Articles 3 and 4(2) of the Conditionality Regulation. There may also be situations where the measures under the Conditionality Regualtion can be more effective in protecting the Union budget than procedures of CPR or Regulation (EU) 2021/2116,
Payments may be interrupted if:
(a) there is evidence to suggest a serious deficiency for which corrective measures have not been taken;
(b)the Commission has to carry out additional verifications only relate to expenditure already declared by the Member State to the Commission. For instance, the effective application and implementation of the EU Charter of Fundamental Rights is a horizontal enabling condition in the meaning of Article 15 CPR.
This enabling condition is a prerequisite condition for the effective and efficient implementation of the specific objectives of a programme. Under the CPR, if a Member State does not fulfil an enabling condition, the Commission shall not reimburse the expenditure related to operations linked to the concerned specific objective(s), with the exception of those expenditures that contribute to the fulfilment of the corresponding enabling condition.
This measure applies only after the relevant programme or its amendment has been approved by the Commission. In cases of breaches of the principles of the rule of law in relation to the EU Charter of Fundamental Rights that affect the implementation of a Union programme, the Conditionality Regulation may be more effective insofar as it also provides for the possibility to suspend the approval or amendment of a programme and, as a consequence, further strengthen the protection of the Union budget thanks to its preventive effect.
In considering whether the procedure established by the Conditionality Regulation protects the Union budget more effectively than other procedures, the Commission, building on the enforcement of sector-specific legislation and without prejudice to its powers and obligations set therein, will take into account an open set of criteria, to be applied in light of the specific circumstances of each situation. In some situations, the Commission could apply the Conditionality Regulation alongside or following the adoption of sector-specific or financial measures that it may be bound to take, when the Conditionality Regulation would more effectively protect the Union budget and the financial interests of the Union, thereby demonstrating its added value. Otherwise, the added value and effectiveness of the Regulation, as a general and horizontal instrument aimed at protecting the Union budget and the financial interests of the Union, would be deprived of its useful effect.
The Commission considers that the following indicative criteria may be used to determine the effectiveness of the protection provided by the Conditionality Regulation as compared to other existing instruments to protect the Union’s financial interests. following receipt of information that expenditure in a payment application may be linked to an irregularity. Payments may be suspended, if: (a) the Member State has failed to take the necessary action to remedy the situation giving rise to an interruption under Article 96 CPR; (b) there is a serious deficiency;
(c) the expenditure in payment applications is linked to an irregularity that has not been corrected; (d) there is a reasoned opinion by the Commission in respect of an infringement procedure under Article 258 TFEU on a matter that puts at risk the legality and regularity of expenditure. Financial corrections shall be made, if:
(a) there is a serious deficiency which has put at risk the support from the Funds already paid to the programme;
(b) expenditure contained in accepted accounts is irregular and was not detected and reported by the Member State;
(c) the Member State has not complied with its obligations under Article 97 prior to the opening of the financial correction procedure by the Commission.
One first criterion relates to the scope of the effect on the Union budget and/or the extent of risk the breach of the principles of the rule of law may entail for the efficiency of its sound financial management or the protection of the financial interests of the Union. In particular, procedures under other Union financial rules may only apply to specific spending programmes and could therefore be insufficient, in some cases, for breaches of the principles of the rule of law that are ‘widespread or due to recurrent practices or omissions by public authorities, or to general measures adopted by such authorities’.
This may also happen where breaches of the principles of the rule of law carry a serious risk of affecting the sound financial management of the Union budget or the protection of the financial interests of the Union, whereas other Union financial rules could instead relate to already materialised effects on the Union budget. For instance, where national laws limit criminal liability for fraud or corruption, or weaken the anti-fraud and anti-corruption legal framework or the prevention of conflicts of interest, cases of fraud, corruption or conflict of interest cases might not be effectively investigated and prosecuted, and this could give rise to serious risks for the sound financial management of the Union budget or for the protection of the financial interests of the Union. In the same line of reasoning, general laws precluding an effective judicial review by independent courts of decisions of national authorities managing in whole or in part Union funds may also entail serious risks for the sound financial management of the Union budget. In such situations, the Commission may conclude that the use of the Conditionality Regulation might be more effective than other Union instruments. Another relevant criterion relates to the types of remedies available and their suitability to different situations.
The Conditionality Regulation provides a large variety of possibilities to address the specificities of the relevant breach of the principles of the rule of law that may be applied cumulatively. Should the remedies available pursuant to other Union legislation be less appropriate to address the relevant breach of the principles of the rule of law, the Conditionality Regulation could be considered more effective. Such situations could occur where the Union budget is or risks being affected in a wide manner, due for instance to national law precluding effective judicial review of administrative decisions to implement the Union budget or obstructing referrals of relevant cases to the Court of Justice of the European Union, or due to lack of independence of national courts.
In such cases, suspensive or prohibitive measures under the Conditionality Regulation imposed cumulatively until the relevant breach of the principles of the rule of law is brought to an end, might protect the Union budget more effectively as they could prevent adverse effects on the sound financial management of the Union budget and on the financial interests of the Union. This could 46 See recital 15 of the Conditionality Regulation.
4. MEASURES THAT COULD BE PROPOSED BY THE COMMISSION – PROPORTIONALITY
In line with article 5(3) of the Conditionality Regulation, once the Commission has established that the conditions to trigger the application of the Conditionality Regulation are fulfilled, it will propose to the Council measures that are proportionate48 , which means that they must be suitable and necessary to address the issues found and protect the Union budget or the financial interests of the Union, without going beyond what is required to achieve their aim.
The Court of Justice has held that pursuant to Article 5(3) of the Regulation the measures should be strictly proportionate, i.e ‘limited to what is strictly necessary in the light of the actual or potential impact of breaches of the principles of the rule of law on the financial management of the Union budget or the financial interests of the Union’
In this context, the Commission will duly take into account the nature, duration, seriousness and scope of the breaches of the principles of the rule of law at stake . As these criteria help to determine the extent of the impact, which may vary depending on the characteristics of the breaches of the principles of the rule of law found, their consideration influences the assessment of the proportionality of the measures. While it is not possible to define and weigh all the possible types of breaches of the principles of the rule of law beforehand, as well as their exact impact on the Union budget or the financial interests of the Union, at this stage and in the absence of experience in the application of the Conditionality Regulation, the Commission will examine the elements below in relation to each of these characteristics.
As regards the nature of a breach, all breaches of the principles of the rule of law are relevant for the application of the Conditionality Regulation to the extent that they affect or seriously risk affecting the sound financial management of the Union budget or the financial interests of the Union. However, the situations mentioned in Article 3 of the Conditionality Regulation have a particular importance, as they are expressly mentioned therein. This, however, does not mean that other breaches of the principles of the rule of law of a similar nature will be considered less important.
In its assessment, the Commission will also take due account of other features of the breach of the principles of the rule of law, such as whether it is intrinsically or closely linked with the process under which Union funds are used by the Member State concerned (for instance in cases of improper functioning of the public authorities deciding on the award of grants or contracts financed through the Union budget), in which case the impact on the Union budget or the financial interests of the Union may be particularly significant. 48. As regards the duration, it is likely that the longer a breach of the principles of the rule of law lasts, or the more recurrent it is, the more it will generally adversely affect or seriously risk affecting the sound financial management of the Union budget or the financial interests of the Union.
Thus, this conclusion will also have a bearing on the Commission’s assessment on the proportionality of the measures it may propose. As regards the gravity of a breach of the principles of the rule of law , the Commission considers that, when one or several breaches of the principles of the rule of law concern important parts of the public sector of a Member State, such as the legislative branch and/or the judiciary which may have potential negative impact on the management of the Union budget by national authorities, or where the breach(es) of the principles of the rule of law are systemic or widespread, these factors should be taken into account as regards the proportionality of the measures. Concerning the scope of the breach of the principles of the rule of law, the Commission considers that, when a breach of the principles of the rule of law affects or risks affecting multiple programmes or funds of the Union, its impact on the Union budget or the financial interests of the Union can be expected to be substantial.
In general, the gravity of the breach of the principles of the rule of law under the Conditionality Regulation will tend to be reflected in the gravity of its actual or potential impact on the sound financial management of the Union budget or the financial interests of the Union. 50. The Commission considers that the cumulative presence or absence of the abovementioned elements considered in light of the actual or potential impact of the relevant breach of the principles of the rule of law on the Union budget or on the protection of the financial interests of the Union may guide the proportionality assessment of measures to be proposed under the Regulation.
Therefore, a systemic breach of the principles of the rule of law affecting in a cumulative manner and/or for a significant period of time the sound financial management of the Union budget or the financial interests of the Union may justify proposing measures entailing a significant financial impact for the Member State concerned.
In addition to these elements, the Commission may also consider other factors, in particular, the intention of the Member State to put an end to the breach of the 15 principles of the rule of law, the degree of cooperation of the Member State concerned52 , or its refusal to cooperate sincerely with the Commission in the context of the procedures pursuant to the Conditionality Regulation, or a possible persistence or repetition of similar breaches of the principles of the rule of law, despite earlier recommendations or proposals of measures made by the Commission.
The intention and the degree of cooperation of the Member State are also relevant for the purpose of determining the duration and scope of a breach of the principles of the rule of law.The Commission will ensure an objective and impartial assessment when considering these factors.. The Conditionality Regulation requires the measures to target, insofar as possible, the ‘Union actions affected by the breaches’.
In its proposal, the Commission will indicate specific programmes or funds affected by the breaches of the principles of the rule of law or those that risk being affected and propose, insofar as possible, measures targeting those programmes or funds. However, in cases where this is not possible, including in cases where the breach of the principles of the rule of law has an impact on the collection of the Union’s own resources, the Conditionality Regulation permits the adoption of measures relating to Union actions other than those affected by the breach of the principles of the rule of law. The Court of Justice has held that this could relate to situations where the latter actions cannot55 or can no longer be targeted, or can be targeted only inadequately, in order to achieve the objective of the Conditionality Regulation, which consists in ensuring the protection of the Union budget as a whole, with the result that those measures are necessary in order to achieve that objective56 . Otherwise, the Conditionality Regulation would not be able to attain its objective.
Moreover, in cases where the Conditionality Regulation is applied additionally or subsequently to other Union legislation, the Commission will take into account the overall impact of the measures to ensure respect for the principle of proportionality. 53. For its assessment on the proportionality of the proposed measures, the Commission, pursuant to Article 6(8) of the Conditionality Regulation, must also take into account the same sources used to identify breaches of the principles of the rule of law, as cited in section 5.2 of these guidelines
5. PROCEDURE AND METHODOLOGY OF THE ASSESSMENT PROCESS
5.1. Commission’s preliminary assessment
To identify and assess breaches of the principles of the rule of law under the Conditionality Regulation, the Commission will carry out a thorough qualitative assessment on a case-by-case basis, taking due account of the specific circumstances and contexts, which will lie on the principles and features of the methodology set out in the following paragraphs of these Guidelines. 55. The Commission will carry out its assessment in an objective, impartial and fair manner.
Objectivity requires the assessment to be based on actual facts or evidence that the Commission has at its disposal. In addition to the various contacts between the Commission, other bodies and the Member States, Article 6(4) of the Conditionality Regulation also makes clear that the Commission can request supplementary information necessary to carry out its assessment and it will do so when it considers this appropriate. For example, it may request additional information aimed at confirming the fulfillment of the conditions for the application of the Conditionality Regulation, assessing the extent of the impact on the Union’s budget or on the protection of the financial interests of the Union (or risk thereof), or assessing more in detail any remedial measures that the Member State has put in place or is planning to put in place.
Given that one of the key aims of the Conditionality Regulation is to be used as a preventive tool to protect the Union budget and the financial interests of the Union, the Commission endeavours to ensure a sincere dialogue and cooperation with the Member State concerned, while keeping the procedure at the right pace.
Impartiality in the assessment of cases under the Conditionality Regulation implies equal treatment among the Member States. Article 4(2) TEU also requires the Union to respect the equality of Member States before the Treaties. In line with the consistent case law of the Court of Justice of the European Union, this means first and foremost that comparable situations must not be treated differently and that different situations must not be treated alike, unless such treatment is objectively justified on the basis of the specific circumstances characterising each concrete situation. While the Commission must make its assessments taking into account the particular features of the legal system of the Member State in question and the discretion it enjoys in implementing the principles of the rule of law, this does not mean that the obligations as to the result to be achieved stemming from them may vary from one Member State to another.
The Court of Justice has held that respect for the rule of law should be assessed on the basis of uniform criteria, and that the content of the principles of the rule of law is clear, establishes clear and precise binding obligations of result, and are well-known to the Member States.59 The Court of Justice held that Member States are in a position to determine with sufficient precision the essential content and the requirements flowing from each of the principles listed in Article 2(a) of the Regulation60
As regards the fairness of the assessment under the Conditionality Regulation, the Commission considers that it implies taking a comprehensive view on all the circumstances under consideration to identify breaches of the principles of the rule of law that are relevant under the Conditionality Regulation.
The Commission services will first check whether the relevant sources refer to a breach of the principles of the rule of law that has already been identified, or, if not previously identified, whether there are reasonable grounds to consider that such a breach of the principles of the rule of law has taken place. For that purpose, the Commission considers that final rulings of the Court of Justice of the European Union are conclusive. It will then check whether that breach of the principles of the rule of law concerns a situation or conduct of authorities that are relevant for the sound financial management of the Union budget or for the protection of the Union’s financial interests, as provided for in Article 4(1) and (2) of the Regulation. 60.
Secondly, as the mere finding that a breach of the principles of the rule of law exists does not suffice to trigger the Conditionality Regulation, the Commission services will assess whether the breach of the principles of rule of the law affects or seriously risks affecting the sound financial management of the Union budget or the financial interests of the Union, considering the criteria analysed in section 2.2 of these Guidelines.
The Commission will give particular importance to corrective measures or other remedies it has already taken in similar cases under the procedures referred to in section 3 above or other procedures of Union law, provided those had a link with situations that are indicative of breaches of the principles of the rule of law pursuant to the Conditionality Regulation.
The Commission services will finally assess whether the identified breach of the principles of the rule of law has a sufficiently direct link with the effects on the sound financial management of the Union budget or the financial interests of the Union. For this purpose, the Commission considers that final rulings of the Court of Justice of the European Union and previous corrective measures or other remedies it has already taken in similar cases under the procedures referred to in section 3 above as particularly relevant.
5.2. Sources of information
The Commission endeavours to assess issues relevant for the application of the Conditionality Regulation in a diligent and thorough manner, based on a wide range of evidence, insofar as that is relevant to fulfil the conditions for the application of the Conditionality Regulation. The range and scope of evidence will be considered based on the merits of each case, taking into account all the relevant circumstances. The Commission will ensure that the information it uses is relevant and that the sources of that information are reliable. 5.2.1. General sources of information
The Commission will strive to use several sources to identify, crosscheck and assess relevant breaches of the principles of the rule of law in order to reach its own conclusions on whether the conditions of the Regulation are met. The Conditionality Regulation, in its recital 16, cites specific sources such as ‘judgments of the Court of Justice of the European Union, reports of the Court of Auditors, the Commission’s annual Rule of Law Report and EU Justice Scoreboard, reports of the OLAF and the EPPO and information provided by them, as relevant, and conclusions and recommendations of any relevant international organisations and networks, including Council of Europe bodies such as the Council of Europe Group of States against Corruption (GRECO) and the Venice Commission, in particular its rule-of-law checklist, and the European networks of supreme courts and councils for the judiciary.’
In addition to those sources, which do not have a specific or absolute probative value, the Commission will also take into account other relevant information, where appropriate. That may include, for instance, the annual Commission reports on the “Protection of the European Union’s financial interests — Fight against fraud” (“PIF reports”) and the related annual resolutions of the European Parliament, the information on which Commission, OLAF and EPPO relevant reports were based, information contained in Commission services’ audit reports, as well as information received from national authorities and stakeholders, and other information in the public domain, such as judgments of national courts or decisions of national authorities.
The Commission also has the possibility to directly contact other bodies and recognised institutions, such as the national anti-fraud coordination service (‘AFCOS’). While recital 16 of the Conditionality Regulation states that the Commission ‘could consult the European Union Agency for Fundamental Rights and the Venice Commission if necessary for the purpose of preparing a thorough qualitative assessment’, the possibility of such consultations is not limited to these two bodies and the Commission will contact any institution or body it considers necessary in view of identifying breaches of the principles of the rule of law and enhancing the assessment of cases under the Conditionality Regulation
5.2.2. Complaints
Another valuable source of information is the submission of substantiated complaints by any third party that may be aware of relevant information and evidence about breaches of the principles of the rule of law that may affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way.
As a budgetary tool, the Conditionality Regulation does not afford remedies or rights of redress that a complainant may seek 61 . Complainants seeking remedial measures addressed to them, including damages, cannot obtain them from the Commission but may consider filing complaints with national authorities or lodge actions before national courts. The European Union offers means to submit complaints at EU level. In particular, for the case of a Member State that does not comply with Union law, any citizen, business or other stakeholder can report an infringement to the Commission
After receiving a complaint relating to the Conditionality Regulation, the Commission services will assess whether it contains substantiated information and evidence that the Commission may use for its assessment under the Conditionality Regulation. In this respect, it has to be noted that complaints that refer to breaches of the principles of the rule of law without any indication as to the effect they may have or the risks they may present on the sound financial management of the Union budget or on the protection of the financial interests of the Union will not be sufficient to consider that the conditions under the Regulation are fulfilled, unless the Commission establishes this effect or these risks on additional grounds. Depending on the circumstances of each case, the Commission services may invite the complainant to provide additional information to substantiate the complaint within a specific time limit.
If no additional information is provided within the set time limit, the Commission will keep record of the information submitted but may not follow up on the complaint. 69. Where the information submitted is sufficiently substantiated and relevant for the purposes of the Commission’s assessment, the Commission services may request further information or evidence if needed. If considered appropriate, the Commission services may also meet the complainant or their representatives to clarify the allegations made and discuss specific issues related to the complaint. The Commission services may also contact other bodies or institutions in relation to the information submitted by the complainant to corroborate or complement the information and evidence provided by the complainant, in line with Article 6(4) of the Conditionality Regulation.
Should the Commission decide to initiate the procedure established by Article 6 of the Conditionality Regulation and propose appropriate measures to the Council, it will in principle inform the complainant (1) after sending the notification letter to the Member State and (2) after sending its proposal to the Council.
To facilitate the submission of complaints under the Conditionality Regulation, the Commission has setup within its Central Financial Service of its Directorate General for Budget the dedicated mailbox
BUDG-CONDITIONALITY-REGIMECOMPLAINTS@ec.europa.eu
through which a third party may bring to the Commission’s attention alleged breaches of the principles of the rule of law relevant to the Conditionality Regulation.
Annex II to the Guidelines provides the information that may be included when contacting the Commission, as well as a recommended form that may be used to submit such complaints. Unless agreed otherwise, the identity of the complainant will be kept strictly confidential and the Commission will ensure that the rules set out in Directive (EU) 2019/193763 are be complied with.
5.2.3. Preliminary contacts with the Member State concerned
The Commission may contact the Member State concerned before sending the written notification pursuant to Article 6(1) of the Conditionality Regulation, if this is necessary for its preliminary assessment. Thus, if, following a complaint or on the basis of any other information gathered, the Commission is not yet in a position to determine whether it has reasonable grounds to consider that the conditions set out in Article 4 of the Regulation are fulfilled, it should be able to contact the Member State concerned to gather the information or explanations it may need within a reasonable and appropriate ltime limit. Within the same time limit, the Member State may use the opportunity to remedy the situation.
In such cases, the Commission will endeavour to have an open dialogue with the Member State concerned, with a view to enabling enhanced cooperation and possibly addressing concerns at an early stage. This approach also reflects the principle of sincere cooperation, as enshrined in Article 4(3) TEU, as well as that one of the key aims of the Conditionality Regulation is prevention. Where the Commission requests initial written clarifications from a Member State, it will set deadlines reflecting the breadth and complexity of the clarifications requested. 63 Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of Union law
If the Member State concerned does not react or cooperate within the timeframe set by the Commission, the Commission will finalise its preliminary assessment on the basis of the information it has at its disposal, without delay. The Commission will apply the same principles of objectivity, impartiality and fairness for all Member States during any preliminary contacts with the Member States, in cases where such preliminary contacts have been considered necessary, as it will do throughout the procedure and its assessment. 5.3. Formal procedure pursuant to Article 6 of the Conditionality Regulation. Where the Commission finds that it has reasonable grounds to consider that the conditions for the adoption of measures under the Conditionality Regulation are fulfilled and that other procedures set out in Union legislation would not allow it to protect the Union budget more effectively, it will send a written notification to the Member State concerned, setting out the factual elements and specific grounds on which it has based its findings, and initiate the procedure pursuant to Article 6 of the Conditionality Regulation (the ‘procedure’).
The Member State concerned should provide the required information and may propose or adopt remedial measures to address the Commission’s findings set out in the written notification or the request for observations in line with article 6(7) of the Conditionality Regulation, within a time limit specified by the Commission, which shall be at least one month and not more than three months from the date of the notification or the request for observations.
Following the exchanges provided by Article 6, paragraphs 1 to 7, of the Conditionality Regulation, if the Commission finds that the conditions for the application of the Conditionality Regulation are fulfilled and considers that the remedial measures that may have been offered are not adequate, it will propose the adoption of measures to the Council to protect the Union budget or the Union’s financial interests.
When deciding whether to propose measures, the Commission will duly assess the information received and any observations made by the Member State concerned throughout the procedure, as well as the adequacy of any remedial measures proposed in the course of the procedure. To conduct its assessment on the measures that may be proposed, the Commission will also rely on all the information gathered in the context of any possible preliminary contacts with the Member State concerned, including before initiating the procedure, where relevant, as well as any relevant information from available sources, including decisions, conclusions and recommendations of Union institutions and bodies, other relevant international organisations and other recognised institutions. 64 See Article 6(5) of the Conditionality Regulation. 65 See Article 6(7) of the Conditionality Regulation.
In addition to guaranteeing the procedural rights of the Member State concerned, the procedure will also be conducted in accordance with the principles of objectivity, non-discrimination and equal treatment of the Member State concerned, and will be conducted according to a non-partisan and evidence-based approach . In accordance with recital 23 of the Conditionality Regulation, the Commission is committed to make the most appropriate use of its rights under Article 237 TFEU and the Council’s Rules of Procedure67 with a view to ensuring that the Council takes a timely decision on the proposal for measures
5.4. Procedure for lifting measures
After the adoption of the measures by the Council, the Commission will regularly monitor the situation in the Member State concerned. According to Article 7(2) of the Conditionality Regulation, at the request of the Member State concerned, or on its own initiative and at the latest one year after the adoption of measures by the Council, the Commission shall reassess the situation in the Member State concerned, taking into account the evidence submitted by it, as well as the adequacy of any remedial measures adopted by the Member State concerned.
The Member State concerned may, at any time, adopt new remedial measures and submit to the Commission a written notification including evidence to show that the conditions for the adoption of the measures are no longer fulfilled.
When assessing the written notification submitted by the Member State concerned or any other information the Commission gathered after the adoption of the measures by the Council, the Commission will proceed in line with the methodology and principles of objectivity, impartiality and fairness detailed in section 5.1 of these Guidelines. To conduct its assessment, the Commission will rely on all sources of information mentioned in section 5.2 of these Guidelines , gathered after the adoption of the measures by the Council. 83. If, following the assessment of the written notification submitted by the Member State or the assessment of any other information the Commission gathered after the adoption of the measures by the Council, the Commission cannot reasonably determine that the situation leading to the adoption of measures has been remedied, it may request additional information from the Member State concerned or any third party that may dispose relevant information, before concluding its assessment, in line with Articles 7(2) last paragraph and 6(4) of the Conditionality Regulation.
The Member State concerned should provide the required information and may propose or adapt the initially proposed remedial measures to address the Commission’s concerns, within a time limit specified by the Commission, which shall be at least one month and not more than three months from the date of the notification or the request for observations.
Following these exchanges and the Commission’s final assessment, if the Commission considers that the situation leading to the adoption of the measures has been remedied, it will submit to the Council a proposal for an implementing decision lifting the adopted measures, in line with Article 7(2) of the Conditionality Regulation. Where the Commission finds that the situation leading to the adoption of the measures has been remedied in part, it will submit to the Council a proposal for an implementing decision adapting the adopted measures. 85. Measures may be lifted or adapted where the breaches of the principles of the rule of law, despite persisting, no longer have an impact on the Union budget or the protection of the financial interests of the Union
Where the Commission finds that the situation leading to the adoption of the measures has not been remedied, it shall address to the Member State concerned a reasoned decision and inform the Council thereof. In addition to guaranteeing the procedural rights of the Member State concerned, the procedure will also be conducted in accordance with the principles of objectivity, non-discrimination and equal treatment of the Member State concerned, and will be conducted according to an impartial and evidence-based approach72 . In accordance with recital 23 of the Conditionality Regulation, the Commission is committed to make the most appropriate use of its rights under Article 237 TFEU and the Council’s Rules of Procedure with a view to ensuring that the Council takes a timely decision on the proposal for lifting or adapting the measures
6. PROTECTION OF THE LEGITIMATE RIGHTS OF FINAL RECIPIENTS AND BENEFICIARIES OF UNION FUNDING UNDER THE CONDITIONALITY REGULATION
Measures adopted under the Conditionality Regulation will have a financial or economic impact. However, such impact should be limited to the Member State concerned or in specific cases to certain national entities managing the funds. Unless 70 See Article last sentence of Article 7(2) in combination with Article 6(5) of the Conditionality Regulation.
the decision adopting the measures provides otherwise on the basis of duly justified grounds in line with applicable Union rules, the imposition of those measures should not affect the pre-existing obligations of government entities or of Member States to make payments to the final recipients or beneficiaries who are entitled to such payments under the corresponding Union programme or Fund. 88. The measures may concern Union funds or Union programmes under all management modes of the Union budget, i.e. implemented directly (managed by the Commission departments, or through executive agencies, indirectly (by one of the entities provided in Article 62(1)(c) of the Financial Regulation) or jointly with Member States (shared management
The imposition of measures does not alter the pre-existing obligations of government entities or Member States to implement the programme or fund under any management mode, in particular their legal obligations to make payments towards final recipients or beneficiaries, as provided for by the applicable Union instruments and the specific legal acts that created such obligations, unless the decision imposing the measures provides otherwise.
In other words, the government entities or Member States cannot use the appropriate measures adopted by the Council as a justification to release themselves from their pre-existing obligations towards the final recipients or beneficiaries, relating to payments under the relevant applicable rules. Article 5(2) of the Conditionality Regulation states that the obligations of government entities or Member States to implement the programme or fund shall not be affected by the imposition of appropriate measures, and in particular the obligations they have towards final recipients or beneficiaries, unless the decision adopting the measures provides otherwise. The Commission considers that the conclusion on whether the rights of beneficiaries or final recipients may be legitimately affected by the appropriate measures, requires a case-by-case analysis, and the Commission will assess any relevant information in this respect.
At this stage, it considers that, in principle, when the beneficiary or final recipient has been involved in by the breach of the principles of the rule of law, such as in cases of corruption, systemic fraud and conflicts of interest, the measures to be adopted under the Conditionality Regulation may also have an impact on that beneficiary or recipient. Should the Commission be aware of such cases, the Commission will include in its proposal to the Council
(i) its conclusion on whether particular final beneficiaries or recipients should be affected by the proposed measures,
(ii) the reasons justifying this conclusion and
(iii) its specific proposal as regards those beneficiaries or recipients.
webpage https://ec.europa.eu/info/strategy/eu-budget/protection-eubudget/rule-law-conditionality-regulation_en where citizens
to submit information to ec on an application of the CR, fill and submit the complaint form available at that webpage, to this email:
BUDG-CONDITIONALITY-REGIMECOMPLAINTS@ec.europa.eu
. The Commission will publish in its webpage information on the measures imposed to each Member State. If, following the imposition of appropriate measures by the Council under the Conditionality Regulation, the Member State concerned refuses to honour its payments to beneficiaries or final recipients of Union programmes or funds concerned by the measures, the beneficiaries or final recipients concerned should first refer the matter to the competent national authorities by availing themselves of all actions at their disposal under the applicable national rules, including complaints to the relevant authority of the Member State concerned. In case any such action is not available or not effective, the beneficiaries should inform the Commission and, when possible, provide relevant evidence in this respect. Member States should ensure that legal actions receive adequate follow-up, in compliance with the applicable legal framework.
Beneficiaries or final recipients could inform the Commission about potential breaches of Article 5(2) of the Conditionality Regulation, in case they are directly concerned. In their submissions, beneficiaries or final recipients should clearly state
(i) the legal basis of their right to receive payment from the Member State,
(ii) the failure of the Member State to comply with its obligation to pay under the rules of the relevant Union programme or fund,
(iii) the legal actions already undertaken and the related outcome, if any, and provide all necessary evidence and supporting documentation to show the launching of the relevant legal actions, as well as the failure by the Member State to comply with its obligations under Article 5 of the Conditionality Regulation (if available).
The submissions should contain all the information requested in Annex III to these Guidelines.
Under Article 339 TFEU and Article 17 of the Staff Regulations, the officials and other staff of the European Union must not disclose information covered by the obligation of. For instance, in cases where the national authorities unreasonably delay their reply/decision to the beneficiary’s actions.
professional secrecy. The Commission will also ensure that the rules set out in Directive (EU) 2019/1937 will be complied with78 . 96. When implementing Union funds under shared management, Member States concerned by measures adopted pursuant to the Conditionality Regulation are under the obligation to report to the Commission on the concrete steps they have taken to comply with their obligations to pay final recipients or beneficiaries under the Union fund or programme affected. Such reporting should include information and evidence of that compliance (e.g. relevant accounting records and supporting documents) and should take place every three months from the adoption of the measures
On the basis of the reporting provided in Article 5(2) of the Conditionality Regulation and any other proof provided by the Member State concerned or other information gathered, including through the information received from final recipients or beneficiaries, the Commission will verify whether the payment obligations towards final recipients or beneficiaries set under the Conditionality Regulation and other applicable Union law with respect to implementing funding under shared management, have been complied with. Where necessary, it will do its utmost to ensure that any amount due from government entities or Member States is effectively paid to final recipients or beneficiaries in accordance with the relevant sector specific rules. This may entail, for instance, the application of financial corrections in line with applicable Union law .
The Commission may also decide to open infringement proceedings against the Member State concerned to ensure compliance with the Member State’s obligation enshrined in Article 5(2) of the Regulation. Before taking any measure to ensure compliance of Member States with their obligation to pay the final recipients or beneficiaries, the Commission will ensure that the procedural rights of the Member State concerned are respected.
7. REVIEW OF THESE GUIDELINES
More information about how the Commission handles complaints can be found on:
https://ec.europa.eu/info/about-european-commission/contact/problems-and-complaints/complaintsabout-breaches-eu-law/how-make-complaint-eu-level_en
ANNEX I
Breaches of the principles of rule of law Examples indicative of breaches of the principles of the rule of law (Article 3 of the Conditionality Regulation)
(a) endangering the independence of the judiciary.
On this matter, recital 10 of the Conditionality Regulation states that ‘the independence of the judiciary presupposes, in particular, that the judicial body concerned is able to exercise, both under the relevant rules and in practice, its judicial functions wholly autonomously, without being subject to any hierarchical constraint or subordinated to any other body, and without taking orders or instructions from any source whatsoever, thus being protected against external interventions or pressure liable to impair the independent judgment of its members and to influence their decisions.
The guarantees of independence and impartiality require rules, particularly as regards the composition of the body and the appointment, length of service and the grounds for rejection and dismissal of its members, in order to dismiss any reasonable doubt in the minds of individuals as to the imperviousness of that body to external factors and its neutrality with respect to the interests before it.’ According to ECJ case law “the concept of independence presupposes, in particular, that the body concerned exercises its judicial functions wholly autonomously, without being subject to any hierarchical constraint or subordinated to any other body and without taking orders or instructions from any source whatsoever, and that it is thus protected against external interventions or pressure liable to impair the independent judgment of its members and to influence their decisions”
(b) failing to prevent, correct or sanction arbitrary or unlawful decisions by public authorities, including by – law-enforcement authorities, – withholding financial and human resources affecting their proper functioning, – failing to ensure the absence of conflicts of interest. According to the case law of the Court of Justice of the European Union, these ‘situations may lead to a failure to observe the principle prohibiting the arbitrary exercise of power by the executive or the principle of effective judicial protection’ 82 . (c) limiting the availability and effectiveness of legal remedies, including through – restrictive procedural rules, – lack of implementation of judgments, – limiting the effective investigation, prosecution or sanctioning of breaches of law. In relation to the above, recitals 8 and 9 of the Conditionality Regulation state that:
‘Sound financial management can only be ensured by Member States if public authorities act in accordance with the law, if cases of fraud, including tax fraud, tax evasion, corruption, conflict of interest or other breaches of the law are effectively pursued by investigative and prosecution services, and if arbitrary or unlawful decisions of public authorities, including law-enforcement authorities, can be subject to effective judicial review by independent courts and by the Court of Justice of the European Union.’
The independence and impartiality of the judiciary should always be guaranteed, and investigation and prosecution services should be able to properly execute their functions. (…) The judiciary, and investigation and prosecution services should be endowed with sufficient financial and human resources and procedures to act effectively and in a manner that fully respects the right to a fair trial, including respect for the rights of defence. Final judgments should be implemented effectively. Those conditions are required as a minimum guarantee against unlawful and arbitrary decisions of public authorities that could harm the financial interests of the Union.’ Examples of specific situations or conduct of authorities83 that may be concerned by breaches of the principles of the rule of law (Article 4(2) of the Conditionality Regulation)
(a) the proper functioning of the authorities implementing the Union budget, including loans and other instruments guaranteed by the Union budget, in particular in the context of public procurement or grant procedures.
(b) the proper functioning of the authorities carrying out financial control, monitoring and audit, and of effective and transparent financial management and accountability systems – on this point, the Court of Justice clarified that ‘the expression “effective and transparent financial management and accountability systems” […] refers to the concept of “financial management”, which falls within the concept of “sound financial management” found in the Treaties themselves, in particular in Article 310(5) and the first paragraph of Article 317 TFEU, and defined in Article 2(59) of the Financial Regulation as the implementation of the budget in accordance with the principles of economy, efficiency and effectiveness….The expression “financial accountability”, for its part, reflects in particular the financial control, monitoring and audit obligations mentioned in […] Article 4(2)(b) [of the Conditionality Regulation], while the expression “effective and transparent … systems” implies the establishment of an ordered set of rules which ensure in an effective and transparent manner the said financial management and accountability’84 . The Court of Justice also clarified that the expression ‘financial accountability’ reflects in particular the financial control, monitoring and audit obligations mentioned in the said Article 4(2)(b), while the ‘effective and transparent … systems’ imply the establishment of an ordered set of rules which ensure in an effective and transparent manner the said financial management and accountability.’
(c) the proper functioning of investigation and public prosecution services in relation to the investigation and prosecution of: – fraud, including tax fraud, especially where such fraud may result in failure to collect taxes such as VAT and custom duties directly affecting the resources necessary for the Union to attain its objectives and carry out its policies, – corruption or other breaches of Union law relating to the implementation of the Union budget or to the protection of the financial interests of the Union; (d) the effective judicial review by independent courts of actions or omissions by the authorities referred to in points (a),b) and (c) of Article 4(2) of the Conditionality Regulation. In particular, recital 9 of the Conditionality Regulation states that ‘the judiciary, and investigation and prosecution services should be endowed with sufficient financial and human resources and procedures to act effectively and in a manner that fully respects the right to a fair trial, including respect for the rights of defence. Final judgments should be implemented effectively.
(e) the prevention and sanctioning of fraud, including tax fraud, corruption or other breaches of Union law relating to the implementation of the Union budget or to the protection of the financial interests of the Union, and the imposition of effective and dissuasive penalties on recipients by national courts or by administrative authorities;
(f) the recovery of funds unduly paid;
(g) effective and timely cooperation with the European Anti-Fraud Office (‘OLAF’) and, subject to the participation of the Member State concerned, with the European Public Prosecutor’s Office (‘EPPO’) in their investigations or prosecutions pursuant to the applicable Union acts in accordance with the principle of sincere cooperation;
ANNEX II
Elements that should be included in the complaint about alleged breaches of the principles of the rule of law under the Conditionality Regulation Complainants should include the following details when contacting the Commission about alleged breaches of the principles of the rule of law under the Conditionality Regulation:
Identity and contact details; Information about how the rule of law has been allegedly infringed (including which acts or omissions by public authorities are allegedly in breach of the principles of the rule of law) and relevant evidence; Information on how the alleged breach is relevant for the Conditionality Regulation (description of how it affects or seriously risk affecting the Union budget or the financial interests of the Union in a sufficiently direct way) and relevant evidence; List of supporting documents which could – if requested – be sent to the Commission.
To facilitate the submission of information relevant for the application of the Conditionality Regulation and ensure that the Commission receives relevant and structured information, the below template, as available on the webpage:
https://ec.europa.eu/info/strategy/eubudget/protection-eu-budget/rule-law-conditionality-regulation_en
Disclosure of complainants’ identities and information submitted by them to the Member State concerned is subject to their prior agreement and must comply, inter alia, with European Parliament and Council Regulation (EU) 2018/1725 of 23 October 2018 on the protection of natural persons with regard to the processing of personal data by the Union institutions, bodies, offices and agencies and on the free movement of such data, and repealing Regulation (EC) No 45/2001 and Decision No 1247/2002/EC.
EUROPEAN COMMISSION Complaint
Breach of the principles of the rule of law affecting the Union budget or financial interests Regulation 2020/2092 on a general regime of conditionality for the protection of the Union budget (“CR”)
This complaint form serves to notify the European Commission of breaches of the principles of the rule of law in a Member State that specifically affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way. To notify the European Commission of any other complaint related to the rule of law, please use instead the complaint form available at
https://ec.europa.eu/assets/sg/report-abreach/complaints_en
Other ‘layers of protection’ of the EU budget :
[ec may only trigger the rlcm as a last resort [if these other proceduresn would not allow to better protect the Union budget].
<> cocoo v ec, [for the excessive level , and lack of proper audit/control , of funding
given to spain] + v gobs/mins...
1/-ARLR:
The rlcp runs in parallel to the annual Rule of Law Reports, arlr, led by the
DG for Justice. arlr and rlcm inform each other.
arlr is different than rlcm, in that involves general assessments and protects
media pluralism and freedom, and the system of checks and balances, whereas the
rlcm protects against breaches of the principles of rule of law that affect the
sound financial management of the EU budget, in a customised case-by-case appraisal
2/-EDES (the Early Detection and Exclusion System) protect the EU budget from risks of
insolvency, negligence, fraud or irregularity committed by private actors
(potential beneficiaries of EU funds).
3/- protection mechs for EU funds managed by national authorities [below], against
deficiencies affecting national authorities DIRECTLY in charge of managing/controlling
SPECIFIC EU programmes:
- mechs to protect cohesion funds,
- mechs to protect‘Home Funds’,
- mechs to protect CAPF [Common Agricultural Policy funds],
-mechs to protect Recovery and Resilience Facility (RRF))
-mechs to protect the EU budget from PAs actions or omissions that may [partly] overlap
with the RLCM
-mechs to protect the eu budget from changes in national laws or nationwide
administrative decisions indicative of breaches of the rule of law.:
-eg. the HEC [the horizontal enabling condition], which ensures respect for
the EUCFR [eu Charter of Fundamental Rights] wrt to Cohesion Funds and ‘Home Funds’
The HEC partially overlaps with the RLCR, even if it only allows to suspend payments or the approval of
programmes, while the RLCR offers a greater number of protecting measures .
-eg. the RRF milestones related to rule of law. the EU can encourage
national governments to adopt reforms for judicial independence, the fight against
corruption or anti-money laundering
The ‘complementarity test’ – when is the RLCM most effective?:
The rlcm may be used only as last resort, as an alternative to the other layers of protection, when
there is a risk to the EU budget not (or insufficiently) covered by the other protections.
The rlcm can also be deployed alongside or after the adoption of other provisions,
if ec concludes that cumulative application will protect the EU budget more effectively.
the rlccm offers several advantages compared with other instruments:
1/It is the only procedure protecting the EU’s financial interests from the malfunctioning
of public prosecution and judicial authorities
<> cocoo v tc [if approves ley de amnistia]
2/ It can also be used preventively [= without having to prove that
the risks have materialised]
As long as it complies with the principle of proportionality.
eg. risks stemming from changes in national laws, or from nationwide administrative decisions
that breach the rule of law principles
<> cocoo identifies JR res iudicatas [v ap decisions that breach rl] >> cocoo FOC v ap...
eg gob's ley de aministia , secession, etc
but ec will not trigger the rlcm, if:
- there is a need for a quick response, or
- there are no clear remedial and monitorable actions that can be imposed on the Member State to address the situation.
The thorny issue of the ‘sufficiently direct link’:
To trigger a rlcm procedure, a breach of the rule of law must affect [or
seriously risk affecting], the EU budget, in a sufficiently direct way.
<>ecj caselaw: this condition requires a ‘genuine’ link between the
breach of rule of law, and the EU budget...but no caselaw has explained what is meant by 'genuine'.
Thus, cocoo is free to play with possible interpretations of what would constitute a link
that would allow rlcm to be triggered.
for instance, when the breach results from a pa in charge of managing and controlling the use of
EU funds, the link is obviously genuine....but where the breach stems from a pa not directly involved in the management/control of EU funds,
the method of establishing this link is still open to interpretation:
eg.some may say that the direct link must be demonstrated by hard evidence, such as
proof that certain judges were barred from working on cases directly related to the use
of EU funds.
eg. it could be interpreted that, where there is strong evidence of total
absence of independence in the judiciary, there is a serious risk that
cases of fraud and corruption in the use of EU funds will not be properly investigated
and condemned
<> cocoo v gob sanchez
hypothetical situations within the rlcm Regulation:
caselaw and ec guidelines, as well as the other layers of protection, allow cocoo to identify
hypothetical situations, where PAs actions or omissions may be breaches of
rule of law [wrt the EU budget or the EU’s financial interests]
but cocoo/ec may only trigger them, if can prove the existence of a
‘sufficiently direct link’ and of a ‘serious risk’ to the EU budget
cocoo's analysis should not be limited to cases of systemic and recurrent breaches of rule of law, but
can also be used to protect against specific and/or occasional breaches,
Also, the use of the rlcm does not necessarily require proof of
pas’ clear and explicit intention to breach the rule of law principles.
Some case studies show situations in which the breach does not come from a single,
intentional decision taken at the central level – such as the
adoption of a new law endangering the independence of the judiciary – but rather from a systemic
failure by the central level, to prevent or sanction arbitrary or unlawful decisions made by lower-level
administrative bodies..... THEREFORE : Conclusions:
The rlcm is NOT a means of last resort, only in cases of major and systemic threats
to the rule of law..if cocoo only uses the rlcm like that, it would have it difficult to use it
because it would have a very high threshold of application and considerable political costs attached.
Instead, rlcm is just another instrument to protect the EU’s financial interests.
The mechanism works alongside other ones, and may be used to support the
Commission’s continuous monitoring of the rule of law situation in all 27 Member States.
The protection of the Eu’s financial interests is the shared responsibility of the EU and its
Member States
In recent years, the introduction of new flexibilities and new
instruments, to address COVID, then the effects of Russia’s invasion of Ukraine, have
increased the risks of EU fraud and corruption. In particular:
-the introduction of the (RRF) has resulted in a significant increase in
the amount of EU funds to be spent at the national level in the coming years,
adding pressure on national management and national control systems
-the recent creation of the European Public Prosecutor’s Office (EPPO):
investigating/prosecuting crimes against EU financial interests
- the new rlcm, with the arlr at its centre. Its aim is to develop a stronger awareness
of rule of law developments in all Member States, and prevent rl breaches.
It entered into force in January 2021, and allows the EU to take measures in case of breaches of
rule of law principles that affect, or seriously risk affecting, the sound financial management of the EU
budget and the financial interests of the EU in a sufficiently direct way.
ec has published guidelines explaining how it intends
to apply the RLCM Regulation, but they leave room for interpretation
Moreover, the fact that the Regulation has so far only been applied once brings legal
uncertainty...that cocoo will take advantage.
The rlcm can only be used if other procedures set out in EU legislation do not allow the
Union budget to be protected more effectively...But, as noted in the ec guidelines,
it can be used either as an alternative to, or in combination with, these other mechanisms.
The rlcm, unlike the other mechs, addresses the effects, or risk of effects, on the EU budget
of breaches of the rule of law principles. Thus, rlcm requires a case-by-case appraisal
and tailored approach, to reflect country and case-specific dimensions.
Rather than being a one-off procedure, the Mechanism functions as a continuous exercise,
whereby all 27 Member States are constantly monitored and assessed by ec/cocoo
ec's dg for Budget implements rlcm, coordinating input from other
dgs and institutions such as the European Court of Auditors
Also, The European Anti-Fraud Office (OLAF) and European
Public Prosecutor’s Office (EPPO) can bring irregularities or other relevant systemic issues
to the attention of the ec, during the rlcm procedure.
It was not until the Multi-Financial Framework (MFF) 2021-2027 that the EU budget became a
powerful instrument to enforce the values enshrined in Article 2 TFEU
So it was in this context that the rlcm Regulation was adopted in 2020
rlcr is only triggered in violations of the rule of law that ‘affect or seriously risk
affecting’ the EU budget, or the Union’s financial interests, ‘in a sufficiently direct way’
in 2021, Hungary and Poland submitted two actions for rlcm reg annulment [under Article 263 TFEU]
But (ecj =CJEU) dismissed both actions
the rlcm reg art.5: leaves discretion to ec:
-on the procedure and methodology for the assessment, and
-on the criteria to determine the type of response proposed (interruption or suspension of payments
;the reduction of commitments; or a prohibition to enter into new agreements)
2.2 The institutional rlcm setup: who does what?
rlcm is triggered when ec/cocoo identify reasonable grounds of breach of the principles
of the rule of law, that ‘affect or seriously risk the sound financial management of the
Union budget or the protection of the financial interests of the Union, in a sufficiently
direct way’
STEPS [ that ec/cocoo must follow to decide whether or not to trigger rlcm]:
1/consider ecj caselaw, reports of the Court of Auditors, ec's arlr, or reports of the European
Anti-Fraud Office (OLAF) and the European Public Prosecutor’s Office (EPPO)
; inputs from the Member State concerned [although not mandatory].
2/if ec chooses to trigger rlcm, [and unless it considers that other procedures that best
protect the EU budget], ec sends a written notification to the Member State
starting the procedure and explaining factual elements and grounds on which it
has based its findings....ec/cocoo may propose or adopt remedial (interim) measures
3/If ec still finds the conditions[in the rlcm reg] are met, and the proposed remedial measures are not
adequate to solve the issue, it can propose the adoption of measures to the Council.
4/ Once measures are adopted by the Council, ec regularly monitors the developments in
the country
5/ If, at any stage, ec considers that the situation has been remedied, it submits a new
proposal to the Council to lift measures.
6/If there are further remedial measures adopted after the
Council implementing decision, which only partially address the issue, the Commission can also
propose to partially lift or adapt the measures.
**it is possible that measures may be lifted or
adapted as soon as the Union budget is no longer affected, even when breaches of the principles of
the rule of law persist.
1/ the ‘preliminary’ phase [before launching a rlcm against a Member State]
= a screening of issues and any action possibly taken before sending a written notification
under Article 6(1).
2/ rlcm starts with the written notification and ec prepars a proposal for a Council decision.
- in steps 1/ and 2/, information exchanges take place on the nature of the breach of the principles
of rule of law, to find if rlcm applies, and/or other (more proportionate) remedy exist
The assessment requires a caseby-case appraisal to reflect country and case specificities
- rlcm is a continuous exercise where all 27 Member States are constantly monitored and
assessed by Commission services...ec pays particular attention to countries like hungary,
poland or spain, where persistent shortcomings have been identified in the Rule of Law Reports
that may help trigger the rlcm Regulation.
The ec dg for Budget (DG BUDG) is at the centre of the of implemention of the rlcm
It conducts the continuous monitoring of Members' possible breaches of the rl affecting the EU budget
It coordinates input between other DGs and institutions and requests further information where necessary
This information exchange is between DG BUDG and the EC service in
charge of the policy or fund investigated. Therefore, while the Secretariat-General and
DG JUST – both in charge of the arlrs – are important contact points, other DGs
may also play. For instance,
DG GROW is consulted on public procurement
DG HOME provides data linked to anticorruption
DGs in charge of implementing funds are consulted on instrument-specific issues.
Institutions outside the Ec may also be consulted, but these
exchanges are, so far, less frequent. Nonetheless, reports and studies published by, for instance, the
European Court of Auditors, form part of the Ec’s data collection activities used for
the monitoring, and evidence
eg: some of the DGs implementing funds are REGIO/ EMPL (ESIF), AGRI (CAP) and ECFIN (RRF) and SG RECOVER.
The role of OLAF and EPPO
The rlcm Reg targets Members States failing to ensure ‘effective and timely cooperation’
with the European Anti-fraud Office (OLAF) and the European
Public Prosecutor’s Office (EPPO), subject to the participation of the Member State
-The EPPO is an independent public prosecution office responsible for investigating and
prosecuting crimes against the EU financial interests in the participating Member States
-The OLAF does independent investigations on fraud affecting the financial interests of the
Union. OLAF is integrated within EC, but enjoys independence. The outcomes of its investigations
result in recommendations to both EU and national public authorities.
Along with other Commission DGs, it participates in the preparation of the arlr,
Similarly, it forms part of the ongoing rlcm process through the
identification of fraud/irregularities, which brings to DG BUDG’s attention.
Operational as of June 2021, the EPPO complements OLAF’s mandate
for criminal law-based investigation and prosecution of crimes affecting the financial interest of the Union
Unlike OLAF, the EPPO is an independent public prosecution office, embedded in the national judicial systems
of the 22 participating Member States, through the presence of European Delegated Prosecutors,
having the same powers as national prosecutors
While not all Member States participate in the EPPO, in accordance with Article 325 TFEU, the
protection of the Union budget is an obligation for all Member States. Therefore, non-participating
Member States must cooperate with the EPPO based on the principle of sincere cooperation.
the cooperation between EC and the EPPO is not internal [as in the case of OLAF]
Therefore, the arrangement between the EPPO and the EC, says how the cooperation
established in the rlcm Reg should take place:
‘EPPO may send to the EC, via the contact points specified in Annex I, relevant information on
individual or systemic issues’. EPPO should inform DG BUDG and copy DG JUST and OLAF.
Art. 86 of the TFEUCR 2017/1939 implementing enhanced cooperation on the establishment of
the European Public Prosecutor’s Office (‘the EPPO’)
The following are EPPO’s participating EU Member States: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czechia, Estonia, Finland, France,
Germany, Greece, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Romania, Slovakia, Slovenia, and Spain. Hungary has
a working arrangement on cooperation with EPPO. However, negotiations with Poland for a similar arrangement were unsuccessful.
3. THE TWO COURT RULINGS AND THE COMMISSION GUIDELINES
The two CJEU rulings on the actions for annulment brought by Poland and Hungary against
the rlcm reg... The Court
dismissed both actions in their entirety and gave some guidance on how to interpret the
articles, and the criteria to det. the impact of breaches, and when defining the type
and nature of measures to be imposed.
The EC guidelines :
1) the conditions for adopting measures;
2) the ‘complementarity test’, i.e. assessing whether the Regulation would be more effective than other procedures
in protecting the EU budget;
3) the measures to be adopted (and their proportionality);
4)the procedure and methodology for the assessment process; and 5) the protection of the
rights of the final recipients.
The guidelines give the criteria to be used when carrying out the lrcm test.
However, they leave room for interpretation....THAT COCOO WILL USE
3.1 The Court judgements
On 2022, the ECJ confirmed the legality of Regulation 2020/2092
and dismissed the actions for annulment by Hungary and Poland in the two cases of Hungary v
Parliament and Council (C-156/21) and Poland v Parliament and Council (C-157/21).
Table 1: Summary of the CJEU rulings
Pleas in law
Argument of the applicants
Court finding: Lack of a legal basis
Art.322(1)(a) TFEU inappropriate. Instead, Art.311(3) or 312(2) TFEU would be appropriate.
Horizontal RLCM, which subjects a Member State’s receipt of EU funding, to adherence to the rule of law,
can fall within the powers conferred by the Treaties on the Union, to
establish financial rules relating to the implementation of the Union budget
Circumvention of Article 7 TEU
Art. 7 procedure is exclusive for the protection of values in Art. 2 TEU
RLCM Regulation does not circumvent the procedure of article 7 TEU, as it has a different aim: rather than allowing for the
penalization of serious and persistent breaches of the EU’s
common values as under article 7 TEU, the objective of the
LRCM, is to protect the budget and only applies where a rule of law breach affects or seriously risks
affecting the Union budget
Breach of Protocol No 2
The Regulation is only about the protection of EU budget/finints.
Both eu and members are bound by the Regulation.
The Subsidiarity principle, and the Regulation do not
apply, because this case about EU functioning, and not about EU budget/finints
Thus, the proposal should have been sent to national parliaments
Infringement of Article 296 TFEU
The reasons for adopting the Regulation are not apparent from the statement of
reasons set out in the proposal
The plea’s line of reasoning is ineffective, since the action seeks
to annul the Regulation, and not the proposal
Infringement of the principle of conferral
The Regulation touches upon areas where competence is exclusively national and the
‘spillover effect’ logic used to adopt the Regulation, does not hold
Breach of the principle of equality
References to the Venice Commission’s recommendations are discriminatory since they
distinguish between ‘old’ and ‘new’ democracies
Under Art.6(1) to (9) of the Regulation, Commission is mandated
to follow an evidence-based approach and to respect the
principles of objectivity, non-discrimination and equal treatment
of Member States before the Treaties when conducting proceedings
Breach of the principle of legal certainty
Regulation grants too much discretion to the EC and Council on account of the lack
of precision of:
1) the concept of the rule of law in Art. 2 of the Regulation
2) criteria in Art. 3 and 4(2);
3) source of information on which EC formulates its assessment
The fact that a law confers implementatory discretion on the authorities
responsible for implementing it, is not inconsistent with the requirement of foreseeability.
The Court also argued that the principles of rule of law set out in the Regulation had been
sufficiently developed in its case law and are also rooted in the
constitutional traditions of the Member States, which is why
their content and requirements can be determined with precision
Breach of the principle of proportionality
There are other provisions of EU law intended to protect the EU budget
No evidence was brought to annul the Regulation on the basis of this plea
3.1.1.1 Lack of competence:
Both Poland and Hungary claimed that the Eu lacked the competence to adopt the rlcm reg.
, on the basis that:
- article 322(1)(a) TFEU does not constitute an appropriate legal basis;
- that the Regulation exceeds the competences set out in Article 322(1)(a) TFEU);
- and that it constitutes a circumvention of Article 7 TEU.
the applicants argued that :
-Article 322(1)(a)TFEU does not allow the EU to create a mechanism
through secondary law, which would deprive the European Council of its exclusive power
to determine a breach of rl under Article 7 TEU, and
-the Regulation undermines the institutional balance as established in Article 7 TEU, Article 13(2)
TEU and Article 269 TFEU, by granting new powers to the Council, the Commission and the Court.
The Court rejected the pleas, because the objective of the Regulation is not to sanction Member
States for rl breaches, as asserted by Poland and Hungary, but to protect the Union budget
from adverse effects stemming from such breaches.
This objective is in line with the EU financial rules under Articles 310 and 315 to 317 TFEU,
which are intended to ensure sound financial management of the Union budget, including
by Member States, and falls within the scope of Article 322(1)(a) TFEU.
held: rlcm is not a circumvention of Article 7 TEU, because the EU institutions may establish
additional procedures relating to EU values, as long as those procedures are different,
both in terms of their aims and their subject matters, from the procedure laid down in
Article 7 TEU.
held: because the Regulation does not confer any powers on the European Council, and because
the conferral on the Council of a power to adopt measures is duly justified,
the Regulation does not undermine the institutional balance
3.1.1.2 Infringement of Protocol No° 2
Poland and Hungary claimed that the adoption of the RLCM Regulation infringed the
obligation to consult national parliaments under Protocol No° 2 on the application of the principles of
subsidiarity and proportionality. They argued that the protection of the Union budget is not an
exclusive competence of the European Union and hence falls under the principle of subsidiarity.
The Court rejected the plea. It found the Regulation to fall within the exclusive competence of the EU,
to which the principle of subsidiarity does not apply.
3.1.1.3 Infringement of duty to state reasons
Poland and Hungary claimed that the Regulation infringed the duty to state reasons for its adoption
under Article 296 TFEU as the statement of reasons, as set out in the proposal, was insufficiently clear
as to why it was necessary to adopt the Regulation.
The Court rejected the plea as ineffective on the ground that the claim was made in relation to the
proposal rather than the contested Regulation itself. In any event, even if it had related to the
Regulation, it would have had to be rejected, as the Court considers the duty to state reasons fulfilled
by the Regulation.
3.1.1.4 Infringement of the principle of conferral and infringement of the duty to respect
Member States' essential functions
Poland and Hungary argued that the Regulation touches upon areas where competence is exclusively
national and the ‘spillover effect’ logic used to adopt the Regulation infringed the principle of conferral
under articles 4(1) and 5(2) TEU as well as the duty to respect the Member States’ essential functions
provided for in the second sentence of Article 4(2).
The Court rejected the plea on the ground that the Regulation allows only for the assessment of
situations and conduct of authorities relating to the implementation of the Union budget or the
protection of the Union’s financial interests. Moreover, the Court recalled that Member States must
comply with EU law even when exercising their competences in their reserved areas.
3.1.1.5 Breach of the principle of equality of Member States and non-respect for their national
identities:
Poland, supported by Hungary, claimed that the application of the RLCM Regulation would
breach the principle of equality between Member States and their national identities for three reasons:
the Commission’s taking into account opinions from the Venice Commission; the lack of precision in
the criteria for initiating the procedure and for determining the measures to be adopted; the voting
rule governing the Council’s decisions under Article 6(11) of the Regulation. The arguments presented
in this section partially overlap with those in the next.
The Court dismissed the plea as unfounded. It argued that it is for the Commission to ensure that the
information it uses for its assessment is reliable and that, in any event, Member States retain the
possibility to challenge the merits of the Commission’s assessments in the context of an action brought
against a Council decision adopted under that Regulation. The Court equally rejected the argument of
lack of precision of the criteria laid down in the Regulation as firstly, the principles of the rule of law
referred to in Article 2(a) of the regulation are recognised in the legal order of the EU.
Secondly, the situations and conduct laid down in Article 4(2) are sufficiently precise and, in any event, the
Commission is obliged to follow an evidence-based approach and to respect the principles of
objectivity, non-discrimination and equal treatment of Member States before the Treaties when
conducting proceedings. It also confirms that the qualified majority voting procedure under Article
6(11) of the Regulation does not violate the principle of equality between Member States and is in line
with the value of democracy enshrined in the Treaties.
3.1.1.6 Breach of the principle of legal certainty
Poland and Hungary claimed that the Regulation does not meet the requirements of legal certainty
and legislative clarity because the concept of ‘rule of law’ cannot be precisely defined but is rather in
constant evolution. Secondly, they claimed a lack of a precise definition of the criteria in Articles 3 and
4(2), which result in too wide discretion for the Commission and the Council in applying the Regulation.
Thirdly, they claimed that the relationship between Articles 2(a), 3 and 4(2) of the Regulation cannot
be clearly determined and that their joint application could not rule out measures even in situations
not related to the sound financial management of the EU budget.
The Court rejected the pleas as unfounded. It stated that Article 2(a) of the Regulation is not intended
to give an exhaustive definition of the rule of law but merely sets out the most relevant principles
related to the protection of the Union budget and, in doing so, does not exceed the limits of the rule
of law concept itself. Neither does the Commission’s discretion in applying the Regulation breach the
principle of legal certainty as it is, in its assessment, bound by a number of procedural requirements
under Articles 6(1) to (9) of the Regulation, including a duty to carry out a diligent qualitative
assessment, which is objective, impartial and fair, should respect the principles of objectivity, nondiscrimination and equality of Member States before the Treaties and should be conducted according
to a non-partisan and evidence-based approach. It also finds that there is sufficiently precise links
between Articles 2(a), 3 and 4(2) of the Regulation.
3.1.1.7 Breach of the principle of proportionality
Poland and Hungary claimed that the Regulation breaches the principle of proportionality, which
requires that acts of the EU institutions do not go beyond what is necessary to achieve its objectives,
as it does not explain the need for its adoption.
The Court rejected the claim as no evidence was put forward that could demonstrate that the EU
legislature exceeded its broad discretion when considering the Regulation necessary to alleviate
adverse effects on the Union budget resulting from rule of law breaches.
Overview of arguments linked to the scope of application of the Regulation
In this part, the Court’s findings relating to the scope of application of the Regulation will be analysed.
The most relevant articles in this regard are Articles 2, 3 and 4 of the CR. They
build upon one another in a three-step test:
•Article 2 first gives broad definitions, particularly on the concept of the rule of law for the
purpose of the CR.
•Article 3 then refers to situations that may be indicative of breaches of the principles of the rule
of law, to facilitate the application of the Regulation.
•Article 4 lays out when the conditions to adopt measures are fulfilled (Art. 4(1)) as well as the
situations or conduct of authorities that must be concerned by the breaches (Art. 4(2)).
Once it is established that a situation falls within the scope of application of the Regulation the question
of the scope of measures imposed arises, which is dealt with in Article 5 of the Regulation. Regarding
the relationship between these articles, the Court states that Articles 2(a), 3, 4(2) and 5(1) of the
Regulation together are constituent elements of the mechanism in Article 4(1) by laying down the
definitions necessary for its implementation, specifying its scope and prescribing the measures to
which it may lead
In general, the Court stresses at several points in the judgments that the objective of the Conditionality
Regulation is not to penalise breaches of the rule of law by the Member States but to protect the EU
budget against such breaches. It thereby delineates the outer boundaries of the scope of application
of the Regulation in general
3.1.2.1 Definition of (rl) and ‘government entities’ (ge), under Article 2
Article 2 of the Regulation defines ‘the rl’ by referring to the Union values enshrined in
Article 2 TEU. It includes the principles of legality implying a transparent, accountable, democratic and
pluralistic law-making process; legal certainty; prohibition of arbitrariness of the executive powers;
effective 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 Court rejects the applicants’ argument that the concept of the rule of law can, as a rule, not be
given a universal definition.
It states that Article 2(a) of the Regulation is not intended to define the
concept exhaustively but rather to set out the most relevant principles which it covers for the sole
purpose of the Regulation. This can include principles that are mentioned separately from the rule of
law in Article 2 TEU – such as protection of fundamental rights or principles of non-discrimination and
equality – as they form part of the concept as developed in the Court’s own case law based on common
values of the Member States.
‘Government entity’(ge) is defined by the Regulation as a pa at any level of
government, including national, regional and local authorities, as well as Member State organisations
within the meaning of the EU Financial Regulation.
3.1.2.2 Situations indicative of breaches of the rule of law under Article 3
Once a situation falls within the concept of the rule of law under Article 2, then Article 3 of the
Regulation gives a list of situations, which may be indicative of breaches of the principles of the rule of
law. This includes endangering the independence of the judiciary; failing to prevent, correct or sanction
arbitrary or unlawful decisions by public authorities as well as withholding financial and human
resources affecting their proper functioning or failing to ensure the absence of conflicts of interest; and
limiting the availability and effectiveness of legal remedies or the effective investigation, prosecution
or sanctioning of breaches of the law.
The Court makes clear that the purpose of this article is to facilitate the application of the Regulation.
To do so, it merely lays out possible breaches of the rule of law but does not set out specific obligations
for the Member States. It does not provide an exhaustive list of situations that constitute breaches.
Such a list, according to the Court, may not be needed as requirements to access EU funds are defined
in other legislation. There is no need for a specific definition of the concept of ‘breach’ for the purpose
of the Regulation in the Court’s view, so it also does not further define the scope of application in this
regard.
What should be also noted is that the Court does not explicitly mention the need for ‘intention’ when
breaching the rule of law principles. Article 5(3) in conjunction with Recital 18 specify that, in
determining measures to be adopted, the principle of proportionality should apply and the intention
of the Member State concerned in putting an end to the breach of the principles of the rule of law is
one of the elements to take into consideration when assessing the proportionality of the measures (see
section d). However, the Court clarifies in its judgment that the reference to the ‘intention... of the
Member State concerned’ is to the intention to ‘[put] an end to the breaches’ found, not to the intention
to breach the rule of law principle.
3.1.2.3 Conditions for the adoption of measures in cases of breaches of the rule of law under
Article 4
Following Article 4 of the Regulation, breaches of the rule of law fall within the scope of the
CM when two conditions are met. Firstly, they should affect or seriously risk
affecting the sound financial management of the Union budget or the protection of the financial
interests of the EU in a sufficiently direct way. Secondly, they must concern at least one of the specific
situations or instances of conduct referred to in Article 4(2) of the Regulation. When these two
conditions are met, the Commission may trigger the conditionality procedure if the so-called
‘complementarity test’ is passed, that is, if it concludes that other procedures set out in Union
legislation for the protection of the Union budget would not allow it to protect the Union budget more
effectively, as established by Article 6(1) of the CR.
As regards the first condition set out in Article 4, it is interesting to note that, in contrast to Article 7
TEU, no serious or persistent breaches of the rule of law are required under the Mechanism; a simple
isolated breach suffices as was also highlighted by the Court. The Court also reiterates that any adverse
effects or risk of adverse effect on the EU budget must be linked in a sufficiently direct way to the rule
of law breaches to trigger the Mechanism and that this link should be ‘genuine’ but it does not go into
further detail when such a link is genuine. Poland and Hungary had claimed in their actions that the
general wording of Articles 3 and 4(2) of the Regulation results in such discretionary assessment by the
Commission and Council when deciding on measures that the decision whether such a link exists
would become a matter of political discretion. The Court dismisses these claims by simply stating that
such a link could not be determined automatically anyway and refers to the Commission’s obligation
to use an evidence-based approach and to respect the principles of objectivity, non-discrimination and
equality of the Member States when examining possible measures.
The Court also briefly sheds light on the notion of ‘risk’ in this context and whether its inclusion in
Article 4(1) of the Regulation might allow for arbitrary penalties to be imposed in uncertain or unproven
situations. While it does not give examples of what might be considered a legitimate risk to trigger the
application of the mechanism, it does emphasize that there must be a ‘serious’ risk of an adverse effect
on the budget. This in turn requires a demonstration that the risk has a high probability of occurring in
relation to the situations referred to in Article 4(2) but does not limit the adoption of measures to cases
of proven effects of breaches on the Union budget as this would be incompatible with the
requirements of sound financial management and protection of the Union budget. Overall, however,
and considering the importance of the question of when a genuine link between the breach of rule of
law and the Union budget exists, the Court remains remarkably vague on it.
As regards the second condition from Article 4, the Court explains that under Article 4(2) the breaches
of the rule of law must concern the situations or conduct of the listed authorities in so far as they are
relevant to the sound financial management of the Union budget or the protection of the financial
interests of the Union. It does not go into detail about all situations mentioned in the article but deals
with those terms contested by Poland and Hungary, who claimed a lack of precision in the Regulation.
3.1.2.4 Scope of the measures imposed
Under Article 5(3) of the Regulation, measures taken under the mechanism must be strictly
proportionate and reflect the actual or potential impact of the rule of law breaches on the Union
budget. This means that the Commission, in proposing the measures, must consider the nature,
duration, gravity and scope of the breaches of the principles of the rule of law and carry out a diligent
assessment of the facts. The Court interprets this to mean that the proportionality of the measures is,
in the first instance, determined by the impact of the rule of law breaches on the Union budget. The
other criteria are, in turn, used to determine the extent of the impact.
The Court finds that the use of
the expression ‘insofar as possible’ in the fourth sentence of Article 5(3) of the Regulation does not
sever the link between the breach and the measure, thereby affecting the proportionality of the latter.
It also makes possible, by way of derogation, to apply measures to protect the EU budget to actions
other than those affected by the breach of the principle of the rule of law, where the protection of the
budget cannot otherwise be achieved.
3.2 Guidelines on application: theory and practice
Following the two Court rulings, the European Commission issued its own Guidelines 27 on 2 March 2022
to clarify five aspects of the CR. Concerning the development of the Guidelines,
the Commission indicated that they 'have been prepared through a comprehensive process, including
consultations with the European Parliament and EU Member States’ 28. The Guidelines were used to
inform the preparation and activation of the procedure against Hungary. However, without further
practice to rely on in their development, an important caveat for their interpretation is that they are, in
fact, considered to be work in progress rather than a finalised set of instructions (different to other
guidelines, which are often developed based on decades of practice).
3.2.1 Scope of application
The first chapter of the Guidelines describes the conditions for initiating the procedure set out in
Article 4. While many of these were clarified by the Court´s rulings, this section brings together all these
elements into a coherent understanding that relies on the Commission’s interpretation of the
Regulation and the Court rulings.
Following the Court´s rulings, the Commission clarifies that only breaches of rule of law principles
that concern at least one of the situations or conduct of public authorities referred to in Article
4(2) fall under the scope of the CM, and only insofar as those situations or
conducts are relevant to the sound financial management of the Union budget or for the protection of
the Union’s financial interests.
This relevance is presumed for actions or omissions of public authorities
in charge of implementing, monitoring and auditing the use of EU funds - referred to in points:
(a) and (b) of Article 4(2) - but not for actions or omissions by the public authorities cited in Article 4(2), which
have a general mandate such as investigation and prosecution services, judicial authorities or
administrative authorities in charge of investigating and sanctioning fraud and corruption. Relevance
is not presumed either for other actions or conducts mentioned in Article 4(2), such as the ‘recovery of
funds unduly paid’ 29 or the ’effective and timely cooperation with OLAF and EPPO’ 30 : breaches of rule
of law principles concerning these conducts are relevant only if they affect the management of Union
funds or the protection of EU financial interests 31.
The Commission also recalls that point (h) of Article 4(2) of the Regulation 32 leaves the door open to
other situations. It illustrates this with an example of a case which could possibly fall within this
residual category: a malfunctioning of the authorities in charge of land registries and of related controls
on leasing and/or ownership of agricultural land, whose actions indirectly affect the eligibility of CAP
For instance, if public authorities in charge of the recovery of funds unduly paid infringe a rule of law principle, this action will fall within
the scope of the Regulation only if it relates to the recovery of EU funds and not of national funds. Likewise, problems of cooperation with
OLAF will only be relevant if they concern the investigation of fraud and corruption involving EU funds (OLAF fulfils other objectives, such
as for instance the investigation of serious misconduct by EU staff and EU institutions).
‘Other situations or conduct of authorities that are relevant to the sound financial management of the Union budget or the protection of
the financial interests of the Union.’
Following the Court´s judgments, the Commission also clarifies that a ‘serious risk‘ (which
has to be established in cases in which the effects of the breach of the rule of law principle on the Union
budget have not materialised or cannot be proved) is a risk which has a high probability of
occurring 34. Finally, the Commission discusses the notion of a ’sufficiently direct link’. It recalls that
the Court requires this link to be ‘genuine or real’ 35. For the Commission, this requisite ’genuine’ or ’real’
characteristic means that the link should not be ‘mere hypothetical, too uncertain or too vague’ 36.
In the procedure against Hungary, the Commission justifies the activation of the Regulation mainly
with the existence of breaches of the rule of law falling within points (a) and (b) of Article 4(2), namely
malfunctioning of authorities implementing the Union budget and malfunctioning of the authorities
controlling the use of EU funds. In particular, it considers that systemic and recurrent deficiencies in the
application of public procurement rules and the prevention and detection of conflicts of interest
constitute breaches of the principles of legal certainty and prohibition of arbitrariness of the executive
powers, and raise concerns about the separation of powers.
As the identified breaches are intrinsically
linked to the procedures for the implementation and control of EU funds, the Commission does not
need to prove the existence of a ’sufficiently direct link’. The Commission also considers that the
malfunctioning of public procurement procedures partly stems from ‘the constant failure to ensure
that the regulatory framework and practice in public procurement avoid risks of corruption and other
irregularities’. Since this is an omission by the legislative or the government rather than the authority
in charge of implementing EU funds, it includes in its reasoning a breach of a rule of law principle falling
within point (h) of Article 4(2), ‘other situations (…) relevant to the sound financial management of the
Union budget’. Finally, the Commission also finds deficiencies in the prevention and investigation of
fraud and corruption, which falls within point (e) of Article 4(2) 37.
An element that is not mentioned in the Commission’s Guidelines or the Commission’s assessment of
the Hungarian case is the Member State´s intentionality to breach the rule of law principles. As in the
Court’s ruling, the Guidelines do not explicitly require intentionality in infringing the principles. Hence,
one may deduce that this intentionality is not required. Another argument in favour of this
interpretation is that some of the indicative breaches of rule of law principles listed in Article 3 do not
necessarily require an element of intentionality (for instance, Article 3(b), ‘failing to prevent, correct or
sanction arbitrary or unlawful decisions by public authorities, including by law-enforcement authorities
EC has a complaint form, to allow for receiving information
from any third party that may be aware of relevant information
and evidence. The usefulness (and quality) of submissions received and data obtained through this
form remains to be seen.
3.2.6 Protecting the rights of final recipients and beneficiaries
The Guidelines also make specific reference to the intention to limit the effect of the Regulation on final
recipients and beneficiaries of EU funding. They clarify that the imposition of measures under the
Regulation does not affect the obligation of government entities or the Member States to implement
the programme or fund concerned. 59 This is true in particular for their responsibilities towards final
recipients and beneficiaries, unless the Council implementing decision specifies otherwise. This could
be the case, for instance, when a specific beneficiary was involved in a breach of the principles of the
rule of law.
For funds implemented under shared management, Member States concerned by measures adopted in the context of the Conditionality
Regulation will have to report to the Commission every three months, which will verify their compliance with the obligations towards
final recipients or beneficiaries (Article 5(2) CR)
4 OTHER LAYERS OF PROTECTION OF THE EU BUDGET
Various procedures exist to protect the EU budget from different types of risks. Some of
these seek to protect the EU budget from risks caused by private actors (potential
beneficiaries of EU funds). The most relevant ones for the purpose of this study, however,
are those protecting the EU budget from actions or omissions made by national public
authorities, as they may overlap with the CR.
This chapter analyses the main procedures set out in the Common Provisions Regulation,
CAP legislation, RRF Regulation and the Financial Regulation. Most of them are designed to
deal with deficiencies affecting national authorities in charge of managing and controlling
a specific EU programme and are thus ill-equipped to deal with systemic deficiencies. They
are also ineffective in protecting the EU´s financial interests from the malfunctioning of
public authorities not directly involved in the management or control of EU funds,
including public prosecution or judicial authorities. Furthermore, in many cases, the
Commission first needs to prove that a risk to the EU budget has materialised before
applying the procedure.
Some procedures, however, are applied in a forward-looking way and can be used in
response to breaches of the rule of law principles. This is the case for the horizontal enabling
condition, which ensures respect for the EU Charter of Fundamental Rights in the
implementation of cohesion and “Home Funds”. This enabling condition is very powerful
and partially overlaps with the CR, even if it has a narrower scope of
application and only allows the suspension of payments or approval of programmes, while
the CR offers a greater number of measures.
Finally, through the establishment of RRF milestones related to rule of law issues, the EU
can, in a one-off manner, prompt national governments to adopt reforms in the area of
judicial independence, the fight against corruption or anti-money laundering. The real
effectiveness of this instrument has not yet been tested at the moment of writing this study.
Home Funds refer to AMIF, ISF and BMVI. CAP funds refer to European Agriculture Guarantee Fund
(EAGF) and European Agriculture Fund for Rural Development (EAFRD).
As explained in the previous chapter, Article 6(1) of the CR stipulates that the
Commission can only trigger the RLCM if it considers that other
procedures set out in EU legislation would not allow it to protect the Union budget more effectively.
This chapter explores which are these other ‘layers of protection’ of the EU budget – that is, other
mechanisms in the hands of the Commission to protect the EU budget. It describes their scope of
application and functioning, assesses their effectiveness and explores the potential complementarity
between these tools and the CM, while keeping in mind that, according to the
Commission´s Guidelines, the CM can be used as an alternative but also
alongside or after the application of these other mechanisms if considered ineffective to tackle the
problem alone.
Before jumping into the analysis, it is worth clarifying what is covered in this chapter. We focus on
procedures set out in the EU’s Financial Regulation (FR) 60 or in sector-specific rules and endowing the
Commission with powers to protect the Union’s financial interests. This excludes infringement
procedures, which are based on primary law (Art. 258 TFEU) and thus do not fit the definition in Article
6(1) of ‘procedures set out in Union legislation’
As the RLCM aims to protect the EU budget from actions or omissions by national
public authorities, we pay specific attention to those ‘layers of protection’ covering areas of the EU
budget in which public authorities of the Member States play a relevant role. This includes, first and
foremost, EU funds under shared management (Cohesion policy funds, part of ‘Home Funds” and CAP
funds). In areas under shared management, it is mostly Member States´ programme managing
authorities which prepare EU tenders, select projects, verify payments and perform audit operations.
They are also responsible for preventing and detecting fraud and corruption, as well as recovering
fraudulently obtained amounts and imposing effective and dissuasive penalties (Art. 63(2) FR). In these
areas, EU-level mechanisms act as an additional ‘layer of protection’, allowing the Commission to react
in case of malfunctioning of the management and control systems in the Member States.
Member States´ programme managing authorities also play a major role in the implementation of RRF
funds. They are in charge of implementing, monitoring and auditing the national recovery and
resilience plans (NRRPs) as well as preventing and detecting fraud and corruption by final beneficiaries.
As in programmes under shared management, the RRF Regulation includes EU-level procedures to
ensure that national control systems provide sufficient assurance and allow the Commission to step in,
in case RRF national authorities malfunction or misbehave.
In the rest of the EU spending programmes, the role of national public authorities is more marginal.
Some public bodies are recipients of directly managed EU funds, such as local authorities participating
in EU-funded town twinning initiatives or public universities benefiting from Horizon Europe grants.
National public organisations can also manage EU funds or budgetary guarantees on behalf of the
Commission (‘indirect management’). This is the case of national promotional banks under the InvestEU
fund and of Erasmus+ national agencies. If they commit fraud or corruption and this is detected, or if
they do not manage the EU funds according to pre-established principles and rules, the Commission
has procedures to suspend the payments and terminate or reduce the grant agreement or the contract.
Under certain circumstances, they can be blacklisted and excluded from future EU tenders. On top of
that, all entities acting as implementing partners on behalf of the Commission are subject to a strict exante assessment
(referred to as ‘Pillar assessment’) to guarantee that they have appropriate internal control structures and procedures.
Member States can also receive financial assistance in the form of loans guaranteed by the EU budget.
The Commission can request the early repayment of the loans if the beneficiary country commits fraud
or corruption or any other illegal activity detrimental to the financial interests of the Union when using
the proceeds from EU loans.
National public authorities are also responsible to collect, calculate and make available Own Resources
to the EU Commission. The management and control procedures vary depending on each Own
Resource but the Commission has procedures at its disposal to react in case national authorities do not
properly fulfil their obligations.
Finally, it is worth mentioning the OLAF’s investigative role in fraud and corruption and the EPPO’s
investigative role in crimes against the EU´s financial interests. Rather than being ‘layers of protection’
on their own, the findings from OLAF and EPPO can feed into the other mechanisms thus reinforcing
their effectiveness. For instance, OLAF's ‘financial recommendations’ can provide evidence to apply
financial corrections, recoveries, and suspensions, while ‘administrative recommendations’ may serve
to highlight systematic issues in national management and control systems.
The table below lists the main ‘layers of protection’ of the EU budget. Annex 3 describes each layer. In
the remainder of this chapter, we will discuss their scope and effectiveness separately. In Chapter 5 we
will look at their potential overlap and complementarity with the rlcm
Table 5: Main layers of protection of the EU budget (excluding CR)
Description
Legal basis...Scope of application
Suspensions and financial corrections in case of serious deficiencies in Member States’ Cohesion policy management and
control systems
Art 97 and 104 CPR 61
Non-reimbursement of expenditures in case of non-compliance with horizontal enabling conditions
Art 15 and Annex III CPR
Suspension of the approval of a programme or an amendment of
a programme in case of non-compliance with the EU Charter of Fundamental Rights
Art 23 and 24 CPR
Suspension of payments in case of an infringement procedure on
a matter putting at risk the legality and regularity of expenditure
Art 97(1)(d) CPR
Suspensions and net financial corrections in case of serious deficiencies in national CAP governance systems
Art 42 and Art 55 CAP Horizontal Financial Regulation 62
Suspension of the approval of a CAP strategic plan or an
amendment of a CAP strategic plan in case of non-compliance
with the EU Charter of Fundamental Rights
Art9and118(4)Regulation on CAP strategic plans
RRF reduction and recovery procedure
Art 22(5) RRF Regulation+ Art 19 and 20 RRFfinancing agreements
EU Cohesion policy funds(ERDF, ESF+, CF, JTF,EMFAF) and measuresfinanced under shared
management by ‘Home’funds (AMIF, ISF and BMVI)
European AgricultureGuarantee Fund (EAGF)and European AgricultureFundforRuralDevelopment (EAFRD)
Recovery and Resilience Facility (RRF)
Audit and control and rule of law-related RRF milestones and targets
Art 24 RRF Regulation 64 + Art 6(5) of RRF financing agreements
Suspension, reduction or termination of award procedures or
agreements
Art131 Regulation
EU funds under direct and indirect management
Early Detection and Exclusion System (EDES)
Art135 Regulation
EU funds under direct and
indirect management
Art154Regulation
EU funds under indirect
management
Early repayment of loans (Macroeconomic Financial Assistance)
Art 220(6)Regulation
Financial assistance (EU loans to Member States)
Recoveries under own resources
Art96(2)Regulation
4.1 Procedures set out in the Common Provisions Regulation
The Common Provisions Regulation (CPR) lays down common financial rules for all EU cohesion policy
funds - the Regional Development Fund (ERDF), the European Social Fund Plus (ESF+), the Cohesion
Fund (CF), the Just Transition Fund (JTF) and the European Maritime, Fisheries and Aquaculture Fund
(EMFAF)– and for measures financed under shared management by the so-called ‘Home’ funds - the
Asylum, Migration and Integration Fund (AMIF), the Internal Security Fund (ISF) and the Instrument for
Financial Support for Border Management and Visa Policy (BMVI). The Regulation applies to all
expenditures incurred during the 2021-2027 programming period and replaces the pre-existing 2013
CPR, which covered the period 2014-2020 65.
Under the CPR, the Commission has various mechanisms to protect the EU’s financial interests.
4.1.1 Interruptions, suspensions and financial corrections in case of major deficiencies in the
national management and control system
The most well-known procedure is the possibility to interrupt payment deadlines, suspend interim
payments or apply financial corrections in case of serious deficiencies in the national management and
control systems (Art. 97 and 104 CPR). The first two measures (interruptions and suspensions) are used
any time the Commission has evidence of deficiencies at any level of the control systems in the Member
State. They have a preventive aim: by temporarily stopping the payments, they aim to force the
Member State to correct these deficiencies to prevent them from generating future irregular payments.
Interruptions can last up to 6 months (9 months at the request of the concerned Member State). If, after
this lapse of time, the Member State has not corrected the problem, the Commission may suspend the
payments until the deficiency is corrected.
Financial corrections, on the contrary, have a corrective goal. They serve to exclude irregular
expenditure approved by the Member State from the amounts being reimbursed by the Commission.
Financial corrections are primarily implemented by national authorities themselves if they find
evidence of irregular payments done to final beneficiaries. In this case, they withdraw the irregular
amounts from the programme accounts. They must be also implemented by the national authorities
at the request of the Commission if the latter finds evidence of irregularities through its own audits. In
this case, national authorities can reuse the money excluded from the accounts to finance other
operations within the same programme.
However, if the Commission finds evidence of irregularities
after the accounts are submitted (at year n+1), these irregularities have not been identified, reported
and corrected by the Member State authorities and they result from serious deficiencies in national
management and control systems, the Commission shall open a procedure to apply net financial
corrections. In this case, the amounts subject to financial correction are deducted as net corrections –
i.e. the Member State cannot reuse the money cancelled (Art. 104 CPR).
A delegated regulation establishes detailed rules to determine what is a ‘serious deficiency’ based on
a list of key requirements that all cohesion policy managing and control systems must fulfil as well as
rules to calculate the level of financial corrections (from 5% to 100%) according to the relative
importance of the deficiency, the frequency and the degree of risk of loss for the EU budget 66. It should
be noted that the effective recovery of undue payments from the beneficiary is not among the list of
key requirements from management and control imposed on national authorities implementing
cohesion policy. The latter have to keep an ’appropriate and complete account of amounts recoverable,
It should be noticed that the CPR for 2014-2020 had a slightly different scope of application, as it did not cover the ‘Home’ funds but
included the European Fund for Rural Development (EFRD), one of the two CAP funds.
Commission Delegated Regulation 480/2014 of 3 March 2014 supplementing Regulation (EU) No 1303/2013
recovered and withdrawn’ but there is no obligation of result. The ’effective implementation of
proportionate anti-fraud measures’ is a key requirement but the non-fulfilment of this criterion cannot
trigger by itself a procedure of corrections.
The Commission makes extensive use of the preventive procedures (interruptions and suspensions)
and particularly of warning letters preceding interruptions, suspensions and corrections 67. In 2021 and
early 2022 DG REGIO sent a total of 60 warning letters alerting of possible corrections, interruptions or
suspensions of payments (Table 6) whereas only one suspension decision was adopted, linked to a
payment claim of less than EUR 30,000. According to the Commission these preventive measures,
together with the threat of net financial corrections, work as a strong incentive for the Member States
to improve their management and control systems and correct all detected irregularities and possible
deficiencies. In effect, since the beginning of the 2014-2020 period, Member States have deducted
cumulatively EUR 12.2 billion from the ESIF accounts through financial corrections applied by
themselves (Table 7).
At the same time, however, the possibility to apply net financial corrections may not be a fully effective
tool to deal with systemic or recurrent deficiencies extending beyond individual programmes. EU
officials note that the procedure is subject to such strict cumulative conditions that it is practically
impossible to trigger it. In particular, net corrections can be applied only if the Member State has not
reported and remedied the irregularity, but the Commission should always inform the Member State
of the opening of a procedure and allow the Member State to apply itself the financial correction. Since
the Member State can avoid a net cut by correcting the irregularity, it has a strong incentive to do so
by itself and re-use the money, without necessarily remedying the systemic deficiency (see Box 1). Since
the start of the 2014-2020 programming period, the Commission has never applied a net financial
correction as the conditions have never been met
Table 6: Preventive measures adopted in 2021 and Q12022 by DG REGIO
Warning letters of corrective measures
Warning letters of possible interruptions
Interruptions of payment
Pre-suspension letters
Suspension decisions
Table 7:
Financial corrections: cumulative amounts deducted from ESIF accounts since the
start of the 2014-2020 period and up to end of 2021 (in EUR million)
Financial corrections applied by Member States at their own initiative
Financial corrections requested by the Commission after the submission of annual
accounts and implemented by Member States
The sending of warning letters is an informal procedure not included in the regulation.
Box 1: Case study 1 – Application of financial corrections for deficiencies in the public
procurement system
In 2017, the Commission identified serious deficiencies in a national public authority responsible for
controls on public procurement contracts. Following the procedure, the Commission asked the
Member State to apply a net correction (a 10% flat rate cut) on all contracts awarded under this
authority. This represented a huge sum, of approximately EUR 1.6 billion. Even if this was presented
by the media as a 'big penalty' from the EU Commission for mismanagement of EU funds, in practice
it consisted of a financial correction applied by the Member State at the request of the Commission.
This allowed the government to re-use the EU funds allocated to finance other projects not affected
by the irregularity. Despite the application of this correction, the government did not correct the
systemic deficiency in the public procurement system.
4.1.2 Non-reimbursement of costs in case of non-compliance with horizontal enabling
conditions
Another mechanism at the hands of the Commission is the possibility to exclude costs from the
reimbursement if a Member State does not comply with one of the enabling conditions set out in
Annex III of the CPR (Art. 15 CPR). If a Member State does not fulfil a thematic enabling condition the
Commission shall not reimburse the expenditure related to operations linked to the concerned specific
objective(s). In the case of ‘horizontal’ enabling conditions, applicable to all specific objectives, non –
fulfilment implies a non-reimbursement of any costs except for those related to actions contributing
to the fulfilment of these conditions.
There are four horizontal enabling conditions, two of them impose basic requirements on public
procurement and state aid arrangements whereas the other two require compliance with the EU
Charter of Fundamental Rights and with the UN Convention on rights of persons with disabilities.
The procedure in case of non-compliance with enabling conditions has been improved in comparison
to the 2014-2020 rules on ex-ante conditionalities. In the previous programming period, the
Commission had the power to suspend interim payments in case of non-compliance with ex-ante
conditions but could only do so if the Member State failed to adopt some agreed remedial actions
within a given calendar. In practice, the Commission did not suspend any payments due to nonfulfilment of ex-ante conditions even if many Member States failed to complete the remedial actions
in due time (ECA 2017) 68.
Under the new Article 15 CPR, the suspension is automatic: if the condition is not fulfilled, the
programme will be adopted and the Member State will receive the pre-financing but further costs will
not be reimbursed until the enabling condition is fulfilled 69. Besides, the Commission has the power to
stop payments at any time throughout the whole period of execution if it finds evidence proving that
the enabling condition is no longer fulfilled.
Article 15 CPR is applicable since the beginning of the 2021-2027 programming period. So far there has
not been any case of non-reimbursement of costs due to non-compliance with horizontal enabling
The procedure can be very effective to deal with systemic deficiencies in the public
procurement system. It allows the Commission to stop all cost reimbursements in case of evidence of
deficiencies without having to provide proof of irregular payments. However, some Commission
officials note that the enabling condition on public procurement is defined in a very narrow and rather
restrictive way.
It requires Member States to have ‘effective monitoring mechanisms of the public procurement market’
(Box 2). Compliance with this condition may not be sufficient to ensure a well-functioning public
procurement market with adequate levels of competition and transparency. The same can be said of
the enabling condition on state aid; it guarantees the public authority´s capacity to apply the state aid
rules but does not necessarily prevent an arbitrary application of these rules (Box 2).
Box 2: The horizontal enabling conditions on public procurement and state aid (Annex III
Common Provisions Regulation)
Effective monitoring mechanisms of the public procurement market
Monitoring mechanisms are in place that cover all public contracts and their procurement under the
Funds in line with Union procurement legislation. That requirement includes:
1) Arrangements to ensure compilation of effective and reliable data on public procurement
procedures above the Union thresholds in accordance with reporting obligations under Articles
83 and 84 of Public procurement Directive
2) Arrangements to ensure the data cover at least the following elements:
(a) quality and intensity of competition: names of winning bidder, number of initial
bidders and contractual value;
(b) information on final price after completion and on participation of SMEs as direct
bidders, where national systems provide such information.
3) Arrangements to ensure monitoring and analysis of the data by the competent national
authorities in accordance with public procurement EU directive
4) Arrangements to make the results of the analysis available to the public in accordance with
public procurement directive
5) Arrangements to ensure that all information pointing to suspected bid-rigging situations is
communicated to the competent national bodies
Tools and capacity for effective application of State aid rules
Managing authorities have the tools and capacity to verify compliance with State aid rules:
1) For undertakings in difficulty and undertakings under a recovery requirement
2) Through access to expert advice and guidance on State aid matters, provided by State aid experts
of local or national bodies
Another relevant enabling condition is the one requiring compliance with the EU Charter of
Fundamental Rights. The Charter contains various principles and rights to which all EU citizens are
entitled. Some of them derive from the application of general rule of law principles enshrined in Article
2 TEU, such as the principle of non-discrimination, effective judicial protection or equality before the
law (Box 3)
Box 3: The content of the EU Charter of Fundamental Rights
The Charter contains rights and principles in relation to six themes: Dignity, Freedoms, Equality,
Solidarity, Citizens' Rights, and Justice.
‘Dignity’ (Articles 1-5): human dignity, the right to life, the right to the integrity of the person,
prohibition of torture and inhuman or degrading treatment or punishment, prohibition of slavery
and forced labour;
‘Freedoms’ (Articles 6-19): the right to liberty and security, respect for private and family life,
protection of personal data, the right to marry and found a family, freedom of thought, conscience
and religion, freedom of expression and information, freedom of assembly and association, freedom
of the arts and sciences, the right to education, freedom to choose an occupation and the right to
engage in work, freedom to conduct a business, the right to property, the right to asylum, protection
in the event of removal, expulsion or extradition
‘Equality’ (Articles 20-26): equality before the law, non-discrimination, cultural, religious and
linguistic diversity, equality between men and women, the rights of the child, the rights of the
elderly, integration of persons with disabilities;
‘Solidarity’ (Articles 27-38): workers' right to information and consultation within the undertaking,
the right of collective bargaining and action, the right of access to placement services, protection in
the event of unjustified dismissal, fair and just working conditions, prohibition of child labour and
protection of young people at work, family and professional life, social security and social assistance,
health care, access to services of general economic interest, environmental protection, consumer
protection;
‘Citizens’ rights' (Articles 39-46): the right to vote and stand as a candidate at elections to the
European Parliament and at municipal elections, the right to good administration, the right of access
to documents, the right to refer to the European Ombudsman, the right to petition, freedom of
movement and residence, diplomatic and consular protection;
‘Justice’ (Articles 47-50): the right to an effective remedy and a fair trial, presumption of innocence
and the right of defence, principles of legality and proportionality of criminal offences and penalties,
the right not to be tried or punished twice in criminal proceedings for the same criminal offence
Member States have a general obligation to respect the Charter’s principles and rights when
implementing EU law. The enabling condition requires in particular compliance with the Charter when
implementing the ESIF and ‘Home Funds' as well as the establishment of a compliance procedure to
report non-respect of the Charter to the programme’s monitoring committee 70 (Box 4).
Monitoring committees monitor the implementation of operational programmes under cohesion policy. They oversee implementation
and review issues affecting the progress of the programme towards achieving its objectives.
Box 4: The horizontal enabling condition ‘Effective application and implementation of the
Charter of Fundamental Rights’ ( Annex III Common Provisions Regulation)
Effective mechanisms are in place to ensure compliance with the Charter of Fundamental Rights of
the European Union ('the Charter') which include:
1. Arrangements to ensure compliance of the programmes supported by the Funds and their
implementation with the relevant provisions of the Charter.
2. Reporting arrangements to the monitoring committee regarding cases of non-compliance of
operations supported by the Funds with the Charter and complaints regarding the Charter
submitted in accordance with the arrangements made pursuant to Article 69(7).
Which types of actions or omissions by public authorities can be covered by this provision is not clear.
A restrictive interpretation would be that the provision only covers actions taken by public authorities
in charge of designing and implementing the EU funds, such as the adoption of tender rules or the
selection of operations. This interpretation seems in line with the guidelines published by the
Commission in 2016 on how to assess compliance with the Charter in the implementation of ESIF 71.
However, the Hungarian 2021-2027 Strategic Partnership Agreement 72, adopted in December 2022,
seems to indicate that this legal provision could also allow the Commission to block legislative reforms
in areas such as the judiciary system, the education or the asylum system, insofar as such reforms
infringe the Charter and have a concrete and direct impact on the implementation of ESIFor ’Home
Funds‘ (see Box 5).
Box 5: Hungary's 2021-2027 Strategic Partnership Agreement and the enabling condition on
compliance with the Charter of Fundamental Rights
The Commission adopted the Hungarian Strategic partnership agreement the 22nd of December
2022. The Partnership Agreement has not been posted at the Commission´s website, but the press
release informing about the approval of the agreement explains that, in the case of Hungary, the
horizontal enabling condition on the Charter of Fundamental Rights will be considered fulfilled ‘once
Hungary has taken the measures on the judiciary to which it has committed under the country's
Recovery and Resilience Plan’1. This refers to a series of reforms aimed at the strengthening of judicial
independence which have been included as milestones under the country's Recovery and Resilience
Plan.
In addition to that, the Commission considers that ‘the provisions of Hungary's so-called childprotection law, and serious risks to academic freedom and the right to asylum have a concrete and
direct impact on the compliance with the Charter in the implementation of certain specific
objectives of three cohesion programmes and of the Asylum Migration and Integration Fund
respectively. For these parts of those programmes, ‘Hungary is therefore currently not fulfilling the
horizontal enabling condition on the EU Charter of Fundamental Rights’.
4.1.3 Suspension of the approval of a programme or the amendment of a programme in case
of non-compliance with the EU Charter of Fundamental Rights
EU funds in shared management (ESIF and ‘Home Funds’) are used according to operational
programmes prepared by national authorities and approved by the Commission. Article 23 CPR
stipulates that, at the moment of approving the programmes, the Commission shall assess if the
programme complies with the obligations set out in the CPR, including a series of horizontal principles
set out in Article 9 CPR. One of these principles is the need to ‘ensure respect for fundamental rights
and compliance with the Charter of Fundamental Rights of the European Union in the implementation
of the Funds’ (Art. 9(1) CPR).
If, at the moment of assessing the programme, the Commission considers that the programme is in
breach of an obligation established in the CPR – and, particularly, that structures and procedures
foreseen for the management, monitoring and control of the ESIF and ‘Home Funds’ do not guarantee
compliance with the Charter - it may suspend the adoption of the programme and ask the Member
State to review it. The suspension can last until five months after the first submission of the programme
by the Member State (Art. 23 CPR), or four months in case of an amendment of the programme.
The threat to suspend the approval of a programme or an amendment of a programme has been used
once, and it has proved to be very effective to prevent the introduction of anti-discriminatory measures
in Operational Programmes (see Box 6). However, it is a measure that can be applied only before the
approval of the relevant programme or amendment and does not guarantee compliance with the EU
Charter of Fundamental Rights during the implementation phase. Besides, the Commission can only
suspend the approval of the programme for up to five months. After this period, the Commission shall
decide on whether or not to approve the programme. While theoretically possible, it is hard to imagine
the Commission rejecting the approval of a programme unless a Member State takes a confrontational
stance against the Commission.
Box 6: Case study 2 – Suspension of the approval of the REACT-EU programme in response to
‘anti-LGTBI’ resolutions
During 2019 and 2020, five regional governments of a Member State passed resolutions opposing
'public activities aimed at promoting the ideology of LGTBI movements' and declaring themselves
'LGTBI-ideology free zones'. In response to this, the Commission sent a letter to the ESIF regional
Managing Authorities of these regions in which they informed them that declaring LGTBIfree/unwelcome territories is against the Charter of Fundamental Rights and that, in consequence,
they put on hold the REACT-EU programme amendments in relation to their regions. The threat of
suspension was effective and all six regions ended up withdrawing their anti-LGTBI resolutions.
4.1.4 Suspension of payments in case of an infringement procedure putting at risk the
legality and regularity of expenditure
The CPR (Art. 97(1)(d)) also allows the Commission to suspend interim payments in cases in which there
is an infringement procedure against a Member State on a matter putting at risk the legality and
regularity of EU expenditure. This provision was first introduced in the 2000-2006 financial period. It
was maintained during the 2007-2013 financial period, then removed in the 2014-2020 period and has
been re-instated in the current 2021-2027 period.
This provision has been rarely used. In the 2000-2006 period, it was activated once to deal with a
situation in which a Member State infringed an EU sectoral law, the compliance with which was
deemed necessary for the implementation of ESIF-related actions. This case was brought to the CJEU
by the concerned Member State, and the Court held that the Commission could suspend ESIF
payments as long as it proved the existence of a 'sufficiently direct link' between the ESIF financed
measure and the EU sectoral law (see Box 7)
Box 7: Case study 3 – Suspension of payments due to non-compliance with the EU waste directive:
In 2007, the Commission launched a procedure against a Member State for infringement of the EU
Waste Directive. The Commission claimed in particular that the Member State had not adopted the
necessary measures to ensure that the waste management system of a given region complied with
all the EU health and environmental standards. In parallel to this, the Commission decided to
suspend all ESI payments related to the operations included in the measure 1.7. of the Regional
ERDF operational programme, which regrouped a number of actions to support the regional waste
management and control system. The Member State brought the case to the EU Court of Justice as
it considered that this infringement procedure did not enter into the scope of application of Article
97.(1).(d) of the CPR.
In particular, the government argued that the infringement of the EU Directive
had not put at risk the legality of the specific operations co-financed by the ESIF programme. The
Court rejected the government´s argument, and concluded that it was not necessary for the
Commission to prove a link between the infringement of the EU law and specific ESIF co-financed
projects. To suspend payments, it was 'sufficient for the Commission to establish that the matter
covered by that procedure has a sufficiently direct link with the ‘measure’ governing the
‘operations’ to which the payment applications concerned relate'.
Different interpretations of this ‘sufficiently direct link’ could justify a more extensive or more restrictive
use of the Article 97(1)(d) procedure. For instance, the Commission has launched infringement
procedures against 17 Member States for incorrect transposition of the PIF Directive (the Directive on
the Protection of the EU’s financial interests). This Directive sets common standards on criminal
offences affecting the EU’s financial interests. It is also the legal basis that ensures the good
development and deployment of EPPO because the EPPO’s powers are defined by reference to the PIF
Directive. The PIF Directive also facilitates the recovery of misused EU funds through criminal law. Some
experts interviewed for this study consider that, given all these arguments, an incorrect transposition
of the PIF Directive could justify a suspension of payments under Article 97(1)(d) CPR.
Another element to take into account is that this provision only allows the Commission to suspend
payments, not to apply corrections (e.g., cut) EU funds.
4.2 Procedures set out in the CAP legislation
The EU agricultural policy has been subject to an important reform in its objectives and mode of
delivery. The new CAP became applicable in January 2023. Its legal basis is laid down in three
regulations:
(1) the CAP Strategic Plan Regulation, setting rules on the content, approval and
implementation of the recently created ‘national CAP strategic plans’;
(2) the CAP Horizontal Financial Regulation, setting common financing rules for the two European agricultural funds: the European
Agricultural Guarantee Fund (EAGF), which finances direct payments to farmers and market measures
and the European Agricultural Fund for Rural Development (EAFRD), which finances rural development
measures; and
(3) the Common Market Organization (CMO) Regulation, which regulates the use of
market-support tools, exceptional measures and aid schemes for certain sectors.
Under the new CAP rules, the Commission has two mechanisms to protect the EU’s financial interests.
These two mechanisms only apply to expenditure under the CAP strategic plans; those market-support
measures which are outside the CAP strategic plans are subject to other rules and procedures.
4.2.1 Suspensions and net financial corrections in case of serious deficiencies in national CAP
governance systems
The CAP Horizontal Regulation 73 allows the Commission to apply interruptions, reductions or
suspensions of monthly payments (EAGF) and suspensions of interim payments (EAFRD) when there is
missing information or evidence of irregularities (Art 32(10), Art 39 and Art 40 CAP Horizontal
Regulation). In these cases, the Commission shall offer to the Member State the possibility to provide
the required documents or contest the Commission´s findings, and this may eventually lead to the
lifting of the suspension or a reimbursement (in case of reductions).
The Commission can also suspend payments in case of serious deficiencies in the proper functioning
of the CAP governance systems (Art. 42 CAP Horizontal Regulation). Suspension can be due to
deficiencies in key aspects of the management and control system but also in case of serious
deficiencies in the system for the recovery of irregular payments from the final beneficiary. In case of
identifying such serious deficiencies, the Commission will first ask the Member State to submit an
action plan including the necessary remedial actions and clear progress indicators. Only if the Member
State fails to submit or to implement the action plan, if the action plan is manifestly insufficient or if it
has not been implemented in accordance with the Commission´s request, the Commission can
suspend the payment
The suspension cannot last for more than 24 months. If, after this period, the deficiency has not been
resolved, the Commission will take into account the amounts suspended when adopting financial
corrections under Article 55.
In parallel to asking for an action plan, the Commission can launch a conformity procedure to
determine whether to impose a financial correction on the Member State (Art. 55 CAP Horizontal
Regulation). Unlike under the CPR, financial corrections under CAP are always net, e.g. they result in a
permanent reduction of the Member State’s funds. The conformity procedure is subject to a
contradictory process which gives the concerned Member State wide possibilities to contest the
Commission’s findings. Before implementing any net financial correction, the Commission must offer
the Member States the opportunity to provide evidence and arguments that contradict its findings. If
there is no agreement between the two parts, the Member State may request the opinion of an
independent conciliation body.
The Commission shall take into account this opinion and provide
justification if it decides to depart from it. The final decision shall be taken following the comitology’s
advisory procedure (that is, after having consulted the national representatives sitting at the
Agricultural Funds Committee). The procedure is finalised with the adoption of a Commission
Implementing Decision applying the financial correction (so-called ‘ad hoc decisions’) 74.
Finally, as in cohesion policy, a Commission Delegated Regulation 75 establishes detailed rules on how
to calculate the level of financial corrections. Financial corrections are calculated on the basis of the
Regulation (EU) 2021/2116 of the European Parliament and of the Council of 2 December 2021 on the financing, management and
monitoring of the common agricultural policy
The Ad hoc Decision can be challenged by the interested Member State before the EU General Court
Regulation (EU) 2022/127, wrt loss caused to the EU budget, or on the basis of extrapolation if possible. If it is not possible to
calculate or extrapolate the loss ’with proportionate effort’ the Commission can apply flat-rate
corrections. The level of flat-rate corrections can range from 2% to 25% and only in exceptional cases
go beyond 25%.
The Commission has detailed guidelines to determine and calculate financial
corrections. The guidelines for the current programming period are under preparation. The past
guidelines76, which were built on CJEU case law, stipulated that, to apply flat-rate corrections, the
Commission must prove the existence of a serious deficiency in the national CAP control system
entailing a real risk of financial damage for the EU budget (’real risk’ defined as a situation in which the
Commission has ’reasonable and serious doubts’ that the CAP financed operations have been executed
in accordance with the applicable EU and national law).
The Commission makes regular use of interruptions and suspensions/reductions of CAP payments
when it has inconsistent or unclear information or suspicion of irregularities. In most cases, this
concerns tiny amounts of money, affecting a large majority of Member States (20 countries in 2020)
and part of this money is later returned to the Member States in the form of reimbursements, once they
submit the required information. Both in 2020 and 2021, for instance, amounts reduced from EAGF
monthly payments were lower than reimbursements (Table 8). In contrast, suspensions due to major
deficiencies in the control system are more significant in terms of amounts affected but concern very
few Member States. There were no such suspensions for deficiencies in 2021 and only 2 in 2020,
amounting to EUR 175.4 million and EUR 12.3 million respectively.
Illegal land grabbing refers to the practice of obtaining land through illegal actions and then claiming
CAP support on it. In certain circumstances, illegal land grabbing might be detected by CAP paying
agencies (e.g. if the fraudster uses grossly falsified documents). However, if the fraudster obtains the
land through a crime – e.g., coercion to farmers, extortion or collusion with public officials– but uses a
formally legal document to claim CAP subsidies, the CAP paying agencies will not necessarily detect
the issue (see Case study 4 – Box 8).
Box 8: Case study 4 – Problems of illegal land grabbing affecting CAP payments:
In 2018, a delegation composed of CONT and LIBE Members of the European Parliament went on a
fact-finding mission in a given Member State following numerous accusations of illegal land
grabbing. In this Member State, due to the communist heritage, an important part of the land is
owned by the State and managed by a ‘public land fund’ which can lease it out to farmers or
agricultural companies on time-restricted contracts.
The delegation was faced with evidence of intimidation and physical violence against small farmers
and confronted with accusations of malfunctioning against some public authorities. In particular,
farmers complained that officials from the ‘public land fund’ collected bribes from interested farmers
and agro-companies to secure long-term leases and cancelled contracts with farmers to lease the
land to other interested parties with a remarkable degree of arbitrariness.
In 2020, OLAF concluded a series of investigations into this country and confirmed the existence of
problems of illegal land grabbing. OLAF investigators pointed also to weaknesses in the verification
procedures on land ownership applied by the CAP payment agency and addressed an administrative
recommendation for action to DG AGRI which addressed it through its system audits. However, the
investigation also revealed the malfunctioning of the ‘public land fund’ in the concerned Member
State.
The OLAF report concluded that the fund’s own procedures to provide contract leases ‘should
be improved as regards its transparency and legal certainty’ and raised questions on ‘whether the
process was applied in an efficient and non-discriminatory way’.
The ECA report mentioned above (ECA SR 14/2022) presents this case study as an example of
weaknesses in the CAP management and control system. In its reply to the report, the Commission
argues that the issues described in this case study ‘are not necessarily related to weaknesses in checks
performed by the CAP paying agencies but rather to the shortcomings of how land ownership and
land leases are managed in the specific Member State’. While it stresses the importance of improving
controls applied by CAP paying agencies it concludes that ‘the focus should be the urgent need for
those systems to be improved rather than looking at the side of Paying Agency controls as such’.
4.2.2 Suspension of the approval of a CAP Strategic Plan or an amendment of a plan in case
of non-compliance with the EU Charter of Fundamental Rights
Under the new CAP, the Member States have to design a ‘CAP Strategic Plan’ laying down how they
intend to use the EU funds for CAP income support, rural development and certain market measures.
As ESIF Strategic Plans, these new national CAP Strategic Plans have to be approved by the
Commission.
The CAP Strategic Regulation stipulates that to approve the Plans, the Commission shall check that the
Plan is compatible with the CAP rules and, particularly, with the general principles set in Article 9. One
of these principles is the need to design the interventions in the CAP Plans ‘in accordance with the
Charter of Fundamental Rights of the European Union and the general principles of Union law’. If the
Commission considers that the Plan does not guarantee compliance with the Charter, it may suspend
the adoption of the programme for up to six months and ask the Member State to review the
programme (Art. 118(5) CAP Strategic Regulation), or four months in case of an amendment of the Plan
(Art. 119(6) CAP Strategic Regulation).
Frequency of use and effectiveness:
This procedure is a novelty introduced in the post-2020 CAP. It has not been used so far as the
Commission has approved all 27 national CAP Strategic Plans without any suspension.
4.3 Procedures set out in the RRF Regulation:
The Recovery and Resilience Facility (RRF) is a new EU programme financed by Next Generation EU,
which provides grants and access to concessional loans to Member States to finance National Recovery
and Resilience Plans (NRRP).
The RRF is different to all other EU programmes. It is a performance-based instrument implemented
through direct management, where the Member States are the beneficiaries. RRF payments are not
conditioned to the respect of certain eligibility rules and not made on the basis of costs incurred; they
are conditioned to the fulfilment of agreed objectives defined through milestones and targets. This has
important implications from the point of view of the procedures to protect the EU´s financial interests.
Unlike with cohesion or CAP funding, the Commission cannot interrupt or suspend RRF payments any
time it finds evidence of irregular use of RRF funds, i.e. a use not in conformity with the relevant EU and
national laws. It can only do so if this irregularity endangers the satisfactory fulfilment of RRF milestones
and targets. This does not mean that the Commission does not have any powers to protect the EU´s
financial interests under the RRF. As for programmes under shared management, the Commission
checks that the management and control systems put in place by the Member States are appropriate
and can step in, when there are deficiencies at the national level. In addition to that, through the
establishment of milestones linked to reforms, the RRF can induce Member States to adopt and
implement ‘rule of law’ related reforms.
4.3.1 The RRF recovery and reduction procedure
Article 22(5) of the RRF Regulation allows the Commission to reduce, recover or – in case of a loan – ask
for early repayment of RRF funds if it finds evidence of fraud, corruption or conflicts of interests which
have not been corrected by the Member State. These irregularities shall be found among the
operations provided by the Member State as evidence for the fulfilment of the milestone or target as
only in this case do they constitute an attack on the EU’s financial interest, and must therefore be
corrected either by the Member State, or if not, by the Commission.
Article 22(5) also allows the Commission to apply reductions or to ask for recovery of funds in cases of
‘serious breaches of an obligation’ resulting from the RRF grants and loans agreements signed with the
Member State. The RRF Financial Agreements (Art. 3(15)) define ‘serious breach of obligations’ as a
breach by the Member State of the obligations incorporated in the financial agreement concerning
double funding (Art. 4), pre-financing (Art. 5), communication and visibility of Union funding (Art. 10),
protection of EU’s financial interest (Art. 11) and obligation to allow verifications and checks by the
Commission, OLAF, ECA and EPPO (Art. 12), insofar as the breach ‘adversely affects, in a material or
substantial manner, the rights of the Commission or the proper implementation of Union funds’.
When the recovery or the reduction is due to irregularities (fraud, corruption or conflict of interest), the
amount of the reduction will correspond to the amount affected. In case of reductions due to
deficiencies in the Member State’s RRF control systems, the Commission will apply a flat-rate reduction
which can range from 5% to 100% depending on the frequency and extent of the deficiency (Art.
19(2)(b) RRF Financial Agreements). In all other cases of breaches of obligations resulting from the RRF
Agreements, the Commission has wide discretion to set the amounts to be recovered even if it has to
respect the principle of proportionality.
The provisions of Article 22 (5) RRF Regulation have not yet been applied. On paper, they look quite
powerful. Unlike the procedures for financial corrections under the CPR or the CAP Regulations, the
Commission can cut RRF funds in cases there is a serious deficiency in the Member State’s control
system without having to find evidence of irregularities, and even if the milestones and targets have
been fulfilled
The Commission has also wider discretion than under cohesion policy or CAP to calculate the amounts
to be cut or recovered. Article 19 of the RRF Financial Agreement imposes a duty of proportionality and
establishes some guidelines to calculate the percentage to be reduced (from 5% to 100% depending
on the frequency and extent of the deficiency) but the guidelines are less detailed than those imposed
under CAP or Cohesion policy. Finally, a ‘serious breach of obligation’ under RRF rules goes beyond a
serious deficiency in the national management and control system. It can also include a breach of the
Member States’ obligation to allow verifications and checks by the Commission, OLAF, ECA and EPPO
(Art. 12 RRF Bilateral Agreements).
4.3.2 RRF milestones and targets on audit/control and rule of law
The RRF conditions the payments to the fulfilment of certain reforms and actions. Progress in the
achievement of these reforms is monitored through milestones (qualitative objectives) and targets
(quantitative objectives). The commitments taken by Member States in the form of milestones and
targets, as agreed with the Commission and approved by the Council, as well as the Commission´s
capacity to suspend RRF payments in case of non-fulfilment of milestones and targets constitute
another important mechanism at the hands of the Commission to protect the EU´s budget.
There are two relevant types of milestones and targets related to the protection of the EU´s financial
interests. On the one hand, the Commission can require the inclusion of ‘audit and control’ milestones
in NRRPs, that is, actions to remedy detected deficiencies in the RRF management and control systems.
These milestones, also called ‘super milestones’, are imposed as pre-conditions to receive the first RRF
payment (aside from the pre-financing payment). Apart from these ‘super milestones’, NRRPs can
include milestones and targets related to reforms or actions aimed at strengthening compliance with
some rule of law principles, such as reforms to guarantee the independence of the judicial system, to
strengthen the anti-corruption system or improve the anti-money laundering system. The inclusion of
specific rule of law reforms in the NRRPs can be requested from Member States having received
Country-Specific Recommendations (CSRs) on these topics
Progress in the achievement of each reform or action is monitored through the achievement of
intermediate and final milestones and targets. To receive RRF funding, Member States have to submit
payment requests. The calendar for payments and the corresponding milestones or targets to be
The Commission regularly assesses the functioning of national RRF control systems through controls carried out on payment requests
submitted by Member State. In addition to that, the Commission undertakes system audits on the protection of the financial interests of
the European Union to provide assurance that the Member States’ control systems are fully effective regarding the prevention, detection
and correction of fraud, corruption and conflict of interests and are compliant with the financing and loan agreements signed with the
Commission. 19 national systems have already been audited to date, three of which are finalised. The Commission intends to audit all
remaining ones by the end of 2023
In some cases (notably in the Hungarian and Polish NRRPs) some ’rule of law’ milestones considered instrumental to address rule of law
challenges are at the same time deemed necessary to remedy deficiencies in the audit and control system. For instance, in the case of
Poland, the two super milestones on the disciplinary regime for Polish judges are relevant both to ensure compliance with Article 22 of
the RRF Regulation (EU’s financial interests) and to address the CSR on the investment climate and judicial independence.
fulfilled to receive each payment are defined in a Council Implementing Decision (CID). The so-called
‘Operational Arrangements’ (OA) establish in detail the type of documents or data (i.e., the verification
mechanism) required to certify the fulfilment of each milestone or target. The Commission is in charge
of assessing whether the Member State has achieved the required milestones and targets. If the
assessment is negative, it will apply a partial or total suspension of the payment. If, after six months,
the milestone is still unfulfilled the Commission will reduce the amount of RRF funds.
The Commission has made extensive use of the possibility to require control and audit milestones. Out
of the 27 plans adopted so far, 23 Member States have been required to include specific milestones to
remedy certain deficiencies in their management and control systems. The actions required are very
varied but most of them are specific and not necessarily related to potential breaches of rule of law
principles – e.g. requests to set up a repository system able to collect and store RRF data on actions and
final beneficiaries or to strengthen the administrative capacity of the RRF implementing and audit
bodies. Certain Member States, however, are requested to introduce or improve their audit strategy or
anti-fraud measures.
However, given that these ‘super milestones’ are imposed as conditions for the first payments, most of
them consist of rather formal or legal obligations, such as the requirement to set up new laws,
administrative procedures or structures. Fulfilment with these conditions is not sufficient to guarantee
that these new rules, procedures or structures will function correctly throughout the whole period of
the RRF implementation (see Box 9). But they guarantee that these new rules, procedures or structures
should remain in place as their reversal would allow for the Commission to suspend and – where
relevant - recover RRF funding (see Art. 24(3) RRF Regulation).
Box 9: Case study 5 – Fulfilment of an ‘audit and control’ milestone requiring the establishment
of a repository system able to collect and store RRF data:
One Member State had to comply with an 'audit and control' milestone requiring the establishment
of a repository system able to collect and store RRF data. The Council Implementing Decision and
the Operational Agreement stipulated that, for the satisfactory fulfilment of this milestone, the
Member State had to design the new system but not necessarily prove it to be fully functional.
The audit report by the Commission therefore concentrated on the design of the system, and not its
actual operation. The Commission however asked for supplementary information to verify whether
the system was actually able to collect and store data on beneficiaries, contractors, subcontractors,
and beneficial owners. It detected some weaknesses in the functioning of the system. The
Commission discussed these weaknesses with the national authorities, who agreed to resolve them
but alerted that the solutions would take between six and nine months to implement. Despite that,
the Commission considered that the milestone had been satisfactorily fulfilled, made a positive
assessment of the payment request and did not impose any formal action plan to the national
authorities to remedy this deficiency.
As regards the ‘rule of law’ milestones, these are related to three main groups of actions or reforms:
those aimed at strengthening judicial independence, those aimed at strengthening anti-fraud and anticorruption policies and structures and those aimed at improving anti-money laundering procedures
and structures. Unlike the ‘super milestones’, which are imposed as conditions for the first payment,
‘rule of law’ milestones can be imposed in successive payments, as both intermediary and final
milestones to assess the adoption and successful implementation of certain reforms. Having said so,
some milestones related to anti-fraud and anti-corruption have been defined as ‘super milestones’ and,
in two NRRPs (those of Hungary and Poland), some milestones related to the independence of the
judicial system have been also defined as ‘super milestones’ and thus been imposed as pre-conditions
to receive the first payment.
Table 9: Rule of law measures included in NRRPs.
Overall objective: Main actions or reforms required
Member States from which these actions or reforms have been required
Judicial Independence
Reforms aimed at separating prosecution services from the
investigative branch, encouraging the independence of
magistrates, strengthening the legislative framework and
transparency in the area of courts, judges, prosecutors and
bailiffs or strengthening judicial independence and
transparency by making legislative changes
CZ, HU, MT, PL, RO, SK
Anti-fraud and anticorruption
Adoption of national anti-corruption action plans, the
establishment of independent anti-corruption bodies,
strengthening mechanisms for the data collection on fraud
and corruption, new legislation on conflict of interest, new
legislation to protect whistle-blowers, new legislation on
asset declarations, new legislation against tax evasion and
fraud
CY, CZ, HR, HU, IT, LT, MT RO,
SK, ES
Anti-money laundering
Measures to strengthen prevention and detection of money
laundering and terrorist financing, new legislation on
business register, enforcement of investigation and judicial
prosecution of money laundering
EE, FI, IE, LV, LU, SK
It is still too early to judge the effectiveness of these rule of law milestones. The most important ones
are those related to reforms aimed at strengthening judicial independence. At the moment of writing,
among the six Member States whose NRRPs include milestones on judicial independence, three have
already submitted RRF payment requests conditioned to the fulfilment of such milestones. In all cases
(Czechia, Malta and Slovakia) these were reforms enacted before the adoption of the NRRPs and thus
not imposed by the Commission. The big test will be countries having systemic problems of judicial
independence and to which milestones on judicial independence have been imposed, i.e., Poland and
Hungary. At the moment of writing, neither of these two countries has presented an RRF payment
request
It is also important to highlight that, in the case of Hungary, RRF milestones have been used in
coordination with the application of the CM. More specifically, in the rule of law
conditionality procedure, Hungary submitted 17 remedial measures intended to address the
Commission’s findings. To monitor the effective implementation of these measures – which could lead
to a lifting of the measures applied under the CR – the Commission has defined
intermediate and final implementation milestones and has conditioned the disbursement of the RRF
funds to the fulfilment of these milestones.
Leaving aside whether or not these milestones will be effective, some of the limitations in using rule of
law milestones as a way to improve respect for rule of law principles should be noted. The most
important one is that this is a ‘one-shot’ measure: only those countries having received country-specific
recommendations on rule of law issues in 2019 or 2020 - as well as Bulgaria and Romania, which have
received rule of law recommendations in the context of their Cooperation and Verification Mechanisms
- have been requested to include milestones and targets on these issues to get their NRRPs approved.
Except if the Member State requests to amend its plan, these milestones and targets cannot be
modified. Thus, if, in the coming years, a Member State experiences a process of rule of law backsliding,
the Commission cannot use this tool of its own accord to remedy this and impose new ‘rule of law’
milestones to this country. However, the Commission can suspend and – where relevant - recover RRF
funding were the Member State to backtrack on previously met rule of law milestones (see Art. 24(3)
RRF Regulation).
4.4 Procedures set out in the Financial Regulation
The Financial Regulation (FR) includes various procedures and mechanisms to protect the EU´s financial
interests in areas under direct or indirect management as well as in the use of Macro-economic financial
assistance loans.
4.4.1 Suspension, reduction or termination of award procedures or agreements
Article 131 FR allows the Commission to suspend an award procedure if there is suspicion of
irregularities or fraud being committed in the preparation of the procedure. If these suspicions are
confirmed, the Commission will cancel the procedure.
The article also allows the Commission to suspend payments or interrupt the implementation of a grant
agreement or a contract in case of suspected fraud, irregularities or breaches of obligations by the
entity or person signing the agreement or by some final recipients (e.g. in case of a framework financial
partnership agreement). If the presumed fault is confirmed, the Commission can terminate the
agreement as a whole (if the fault is committed by the entity or person signing the agreement) or in
part (if the fault only concerns some final recipients).
Article 131 FR allows the Commission to apply preventive and corrective measures in areas of direct or
indirect management. In 2021, preventive measures (deduction of amounts before payment)
amounted to EUR 298 million whereas the corrections implemented by the Commission after
payment/acceptance amounted to EUR 765 million. These are minor amounts if compared with the
total amount of EUR 4 557 million deducted by Member States in areas of shared management through
preventive and corrective measures
From a rule of law perspective, it should be noted that contracts and grant agreements can be
suspended or cancelled as a result of fraud or corruption but also as a result of a breach of the
obligations included in the agreement. In addition to that, the Commission can cut EU funds to
implementing partners having signed global grant agreements (so-called ‘framework financial
partnership agreements’) if they do not respect these principles of transparency and equal treatment
when distributing the EU funds to the final recipients (Art. 130(4)(d) FR).
4.4.2 The Early Detection and Exclusion System (EDES)
The Early Detection and Exclusion System (EDES) is a system established in 2016 and revised in 2018,
which allows the Commission to blacklist and exclude unreliable economic operators (individuals or
public or private entities) from future EU tenders. The EDES procedure only applies to EU funds under
direct or indirect management. In the context of the upcoming revision of the Financial Regulation, the
Commission proposes to extend the use of EDES to shared management.
The Commission’s authorising officers of the different ‘spending’ DGs are responsible for detecting
unreliable operators and registering them in the EDES database. As a first step, they can blacklist the
operator. This does not prevent operators from applying to tenders and receiving EU funds but serves
as an alert for the other authorising officers. In a second step, if the Commission has conclusive
evidence about the situation rendering the economic operator unreliable, the operator can be
excluded.
Exclusion can be based on different grounds; some of them related to lack of capacity to
execute the projects (e.g. bankruptcy, insolvency, non-payment of taxes or social security
contributions) and others related to issues of integrity (having committed fraud, corruption or other
illegal activities in the past, significant non-compliance with main obligations under EU contracts,
grave professional misconduct). The exclusion procedure depends on the type of exclusion situation.
Authorising officers can directly exclude counterparties for bankruptcy or insolvency as well as for
non-payment of taxes or social security contributions based on final judgements or administrative
decisions. For the other situations, the authorising officer shall send a request for exclusion to an
independent EDES panel composed of an independent chair, two permanent members designated
by DG BUDG and a representative of the DG making the request. In some cases, the exclusion decision
can be accompanied by a financial penalty and the decision to publish the name of the operator on
the Commission´s webpage.
According to a 2022 ECA report on EDES 82, between 2016 and 2020 the EDES database resulted in the
exclusion of 448 economic operators. The overwhelming majority of cases (430, or 98% of cases) were
exclusions due to insolvency and bankruptcy and only 18 cases were exclusions related to other
reasons. Only two cases of exclusion were cases related to fraud and corruption. Nearly half of all cases
registered to EDES were included by the Commission´s departments and agencies responsible for
research and innovation spending (DG RTD and REA).
The ECA report concludes that the system has a broad scope and robust decision-making procedures
but that the Commission services have made little use of it. Whereas EDES has an exclusion rate of 2.5
(number of excluded operators per billion euros), its equivalent US federal exclusion system obtains a
rate of 25. Besides, exclusion has been focused on cases of bankruptcy and insolvency but has not been
much used to deal with problems of fraud or corruption.
In the context of the upcoming revision of the Financial Regulation, the Commission proposes to add
new grounds for exclusion under EDES. On the one hand, two new situations of ‘grave professional
misconduct’ are listed as potentially leading to an exclusion: an entity which attempts to influence the
award of EU funds by taking advantage of a conflict of interest and an entity having engaged in
incitement to discrimination, hatred or violence against a group of persons or a member of a group
where such misconduct negatively affects or concretely risks affecting the performance of the legal
commitment with the Commission. On the other hand, an additional autonomous ground for exclusion
is included: the refusal to cooperate with OLAF, EPPO or the Court of Auditors.
Before signing contribution agreements or guarantee agreements with these entities, the
Commission shall carry out an ex-ante assessment of the systems, rules and procedures of the entities
implementing Union funds. If it concludes that entities´ internal control systems are not sufficiently
robust to prevent and correct fraud, that rules and procedures for providing financing to third parties
do not respect certain principles (such as the principles of transparency and non-discrimination), that
they do not have efficient and effective review procedures or do not have effective rules for recovering
funds unduly paid they will not sign an agreement with these entities (Art. 154 FR).
Indirect management is particularly important in areas of the EU´s external action where implementing
partners are third countries and international organisations. Within the Union, national public
authorities act as implementing partners in some tiny EU programmes, such as Erasmus+ (EUR
2.3 billion in 2021-2027) or the EU solidarity corps (EUR 114.4 million). In addition to that, during the
2021-2027 period, national promotional banks can act as implementing partners of the InvestEU
guarantee, alongside the EIB group and some other international public bank institutions.
According to the DG Education and Culture 2021 annual activity report, implementation through
Erasmus+ national agencies does not raise major concerns. The aggregate 2014-2020 residual error
rate for the implementation through these entities is estimated to be very low (0.83%), with only some
weaknesses having been detected in the national Erasmus national agencies of Bulgaria and North
Macedonia. As regards national promotional banks, their role as implementing partners is a novelty as
the predecessor of the InvestEU guarantee, the EFSI guarantee, was exclusively implemented through
the EIB group.
4.4.4 Early repayment of loans
EU countries can receive financial assistance in form of loans guaranteed by the EU budget. The
Commission releases the loans in instalments conditioned on the fulfilment of pre-defined conditions.
Article 220 FR stipulates that loan agreements must include the obligation of the beneficiary country
to take appropriate measures to prevent irregularities and fraud, and, if necessary, take legal action to
recover any funds misused (Art. 220(5)(a) FR). The agreement shall also entitle the Commission to early
repayment of the loan where it has been established that, in relation to the management of the
financial assistance, the beneficiary country has engaged in any act of fraud or corruption or any other
illegal activity detrimental to the financial interests of the Union ( Art. 220(5)(d) FR).
We have not found any evidence of a situation in which the Commission has made use of Article
220(5)(d) FR and required the early repayment of loans for reasons of fraud, corruption or any other
illegal activity committed by the beneficiary country. On paper, however, the provision looks rather
restrictive. It can only be used when there is established evidence of fraud, corruption or another illegal
activity committed by the Member State and directly related to the management of the EU loan.
4.5 Recoveries under own resources
Member State authorities are responsible for collecting and making the amounts of Traditional Own
Resources (TOR) available in a timely manner to the Commission, whereas the other own resources are
calculated and called from the Member States by the Commission. The methods and procedure to
make available the OR are set out in the Council Regulation 609/2014 (Making Available Regulation –
Member States make available the TOR every two months after establishment, on the basis of Member
States' collection of the relevant duties and levies and after the deduction of the collection costs.
Contributions for VAT, GNI own resources and the resource based on non-recycled plastic packaging
waste are also made available every month based on the call sent by the Commission. The amounts
transferred to the EU are one-twelfth of the estimated annual contribution per Member State, which is
in a first stage defined based on a forecast and ultimately on the information provided by the Member
State (the harmonised VAT base, the GNI data and the annual statement of the amount of the own
resource based on non-recycled plastic packaging waste).
The Commission conducts on-the-spot inspections to check that national customs authorities correctly
apply the EU customs legislation and carry on the necessary controls to prevent and detect customs
tax fraud. If the Commission detects deficiencies in the national customs systems, it will issue a recovery
order - Member States are financially responsible for any resulting loss of EU revenue. As regards the
GNI own resource, the GNI data provided by the Member State is verified by Eurostat officials and is
formally presented for opinion to the GNI expert group, composed of representatives of the Member
States. The verification may be done for the current year or on a multi-annual basis and it may lead to
an upward or downward revision of the Member State´s GNI contribution and a corresponding
adjustment of future payments.
The Member States shall make the payments of own resources within the period requested. A delay in
paying own resources might give rise to payment of interest (Art. 12 MAR). If the Member State refuses
to make the payment, the Commission will consider launching an infringement procedure.
The system to collect EU revenues is generally effective. In its 2021 annual EU budget report, the Court
of Auditors classified the revenue system as free from material error (i.e. all payments were made in line
with the rules and requirements). A recent ECA special report identifies some problems in the
application of customs control by Member States 84. There are also problems with VAT fraud, particularly
intra-community fraud 85, but most of the time these weaknesses are corrected without creating
disputes with the Commission. The Commission´s 2021 annual budget management report indicates
the existence of only one reservation on the revenue side.
4.6 Overall assessment and conclusions
The various layers of protection described in this chapter protect the EU budget from different types of
risks. Some of them (the EDES system) protect the EU budget from risks of insolvency, negligence, fraud
or irregularity committed by private actors (potential beneficiaries of EU funds). The most important
layers of protection, however, are ‘second-level’ layers, applied to EU funds managed by national
authorities (Cohesion, ‘Home’ and CAP Funds, RRF) and protecting the EU budget from actions or
omissions by public authorities.
These second-level ‘layers of protection’ can cover different types of risks. To start with, all EU sectoral
regulations endow the Commission with powers to ‘step in’ in case of malfunctioning of national
authorities in charge of implementing or controlling the use of EU funds. The specific procedures and
Council regulation 609/2014 of 26 May 2014 on the methods and procedure for making available the traditional, VAT and GNI-based own
resources, amended by Council Regulation 2022/615 of 5 April 2022
all measures build upon the assumption that the malfunctioning is not intentional and does not result from a breach of a rule of law principle
but is due to deficiencies or lack of administrative capacity. Consequently, they favour the use of
preventive remedies (interruptions and suspensions) rather than corrective tools, allowing the Member
State to correct the deficiency in the national system. Besides, they are designed to deal with individual
deficiencies affecting a given institution or body in charge of managing and controlling a specific EU
programme. Thus, they are not very effective to deal with systemic deficiencies introduced through
changes in the legal framework or general, nation-wide administrative decisions.
They are also ineffective to protect the EU´s financial interests from the malfunctioning of public
authorities not directly involved in the management or control of the EU funds. This includes public
prosecution or judicial authorities, which are essential to guarantee that fraudsters of EU funds or
public authorities mismanaging EU funds are properly prosecuted and receive appropriate and
dissuasive penalties. This can also include other public authorities whose actions or omissions have
indirect effects on the use of EU funds. This is the case, for instance, of public land registry or land
management authorities, which are in charge of registering land ownership and thus, indirectly,
determine eligibility for CAP payments.
Apart from the classic procedures to react to deficiencies in the management and control of EU funds,
Cohesion policy and ‘Home Funds’ Regulations allow the Commission to suspend payments or the
adoption of new programmes (or amendments to these programmes) in case of non-compliance with
the EU Charter of Fundamental Rights. This is a powerful provision which has proved to be effective to
prevent the adoption of anti-LGTBI measures in some regions. The Hungarian 2021-2027 ESIF Strategic
Partnership agreement seems to indicate that this legal provision could also allow the Commission to
block legislative reforms in areas such as the judiciary system, the education or the asylum system,
insofar as such reforms infringe the Charter and have a concrete and direct impact on the
implementation of ESIFor `Home Funds´.
Finally, through the establishment of RRF milestones related to rule of law issues, the Commission can
induce national governments to adopt reforms in the area of judicial independence, fight against
corruption or anti-money laundering. The real effectiveness of this instrument has not yet been tested
at the moment of writing this study, but a considerable limitation in using RRF rule of law milestones is
that this is a ‘one-shot’ measure: only those countries having received country-specific
recommendations on rule of law issues in 2019 or 2020 (plus Bulgaria and Romania) have been
requested to include milestones and targets on these issues to get their Plans approved, and these
milestones and targets cannot be modified in the future, unless the Member State agrees to do so
through an amendment of the Plan. Thus, if in the coming years, a Member State experiences a process
of rule of law backsliding, the Commission cannot use this tool to remedy this and impose new ‘rule of
law’ milestones to this country.
5 TOWARDS A TYPOLOGY: summary
The lrcm reg, can in some cases be more effective than other instruments
in protecting the EU budget against breaches of the principles of the rule of law. As long as
it complies with the principle of proportionality, the mechanism allows for a considerable
degree of flexibility. It is also the only procedure covering
risks affecting all EU revenues and expenditure, and has more comprehensive (and
effective) coverage of potential risks stemming from breaches of the rule of law principles.
Its procedure follows a fundamentally case-by-case approach, allowing the consideration
of several case-specific dimensions, and involves the Council. However, it might not always
be the most effective solution. The ‘complementarity test’ with other mechanisms
therefore plays a critical role in determining the most appropriate mechanism to be used.
The notion of a ‘sufficiently direct link’ between breaches of the rule of law principles and
the effect or serious risk of effect on the EU´s financial interests is a new concept, and the
Court rulings do not clarify this link in a definitive manner. This gives rise to different
interpretations of what constitutes a link that would allow this mechanism to be triggered.
The typology presented in this chapter describes hypothetical situations that could – but
do not necessarily – trigger the CM. It classifies the potential
situations into three groups according to the type of public authority concerned:
1. Administrative authorities directly involved in the implementation, management
and control of EU funds
2. Public prosecution and judicial authorities
3. Other administrative authorities not directly involved in the management and
control of EU funds, but whose actions are relevant to the sound management of
the EU budget or the protection of the EU´s financial interests
In particular, the typology covers situations that fulfil two conditions: 1) there is a breach
of one or various rule of law principles resulting into real or potential damage for the EU’s
budget or the EU financial interests; 2) the RLCM is likely to be more
effective than existing layers of protection to address this situation. For each situation, we
discuss how different interpretations of the “sufficiently direct link” may or may not allow
the triggering of the CR In all cases, the Commission will need
robust evidence to prove that these conditions are met, which may be difficult in certain
circumstances.
This chapter presents a typology of hypothetical situations that could, under certain circumstances,
justify the triggering of the rule of law CR. More specifically, it defines scenarios
in which:
(a) there are breaches of the principles of rule of law that may have a negative impact on the
EU budget or the EU’s financial interests and
(b) the CR would likely be more effective than existing layers of protection to address the situation.
Each of these situations could fall within the scope of application of the Regulation if a third, important
condition is fulfilled: the existence of a ‘sufficiently direct link’ between the breaches of the principles
of rule of law and the effect or the serious risk of effect on the EU´s financial interests. The notion of
‘sufficiently direct link’ is new. There is still no CJEU jurisprudence on that and there may be different
visions of what constitutes a link that would lead to the triggering of the mechanism. In the
presentation of our hypothetical cases, we discuss how different interpretations of this notion may or
may not allow the triggering of the CRin each case.
The chapter starts with a discussion of the ‘complementarity test’, describing in general terms the
situations in which the new RLCM can be more effective than other
existing layers of protection, either applied alone or in combination with these other instruments. We
then discuss the notion of ‘sufficiently direct link’, pointing at different possible interpretations of this
expression. In section 5.3 we present our typology of possible non-exhaustive situations that may fall
within the scope of the Regulation. For each hypothetical situation, we present a script of a fictitious
case to illustrate it in a non-technical language.
5.1 The ‘complementarity test’ – when would the rlcm be more effective?:
According to the Commission’s Guidelines, to evaluate if the RLCM is more
effective than other existing ‘layers of protection’ the Commission will use two indicative criteria
applied in the light of the specific circumstances of each situation: the scope of the effect (or the risk of
effect) to the EU budget resulting from the breach of the rule of law principle and the types of remedies
available to respond to this risk. The Commission Guidelines also explain that the Conditionality
Mechanism can be used as an alternative to the other layers of protection when there is a risk to the EU
budget not or insufficiently covered by the existing provisions 86. It can also be deployed alongside or
after the adoption of other provisions, if the Commission considers that a cumulative application will
protect the EU budget more effectively.
The effectiveness of an instrument in the light of the two indicative criteria will depend on various
features of the instrument, particularly its coverage (whether it covers all EU revenues and spending or
only EU revenues or some specific EU spending programmes), the type of risk to the EU budget it
addresses as well as the measures that can be applied with this instrument. Table 10 in Annex 2
presents the RLCM and the other layers of protection according to these three
features.
The first thing to notice is that the RLCM is the only procedure covering risks
affecting all EU revenues and expenditure. Even if the EDES is extended to EU spending under shared
management (as proposed by the Commission in the revision of the Financial Regulation), it will not
cover risks linked to the collection of EU revenues – leaving aside the fact that EDES is not designed to
cover risks arising from actions or omissions by public authorities. Thus, as argued by the Commission’s
assessment of the Hungarian case, the CR is particularly appropriate to reinforce
the action of the existing layers of protection in cases of issues having a widespread effect on the whole
EU budget.
Second, as regards the type of risk addressed (second column) the existing layers of protection do not
allow the Commission to protect the EU budget from all possible risks resulting from actions or
omissions by national public authorities. The Commission has mechanisms to react in case of
malfunctioning of the authorities in charge of managing and controlling EU funds, be it under shared
management or direct or indirect management (situations referred to in Article 4(2) (a) and (b) of the
CR). However, leaving aside the specific case of rule of law RRF milestones,
existing procedures cannot protect the EU financial interests from the malfunctioning of public
Using the language of the guidelines, ‘situations where the measures under the CR may be more effective in
protecting the Union budget’ prosecution and judicial authorities (situations referred to in Article 4(2) (c) and (d)) including the lack
of effective and dissuasive penalties imposed on fraudsters by independent courts (Article 4(2) (e)).
They are also unable to respond to the malfunctioning of administrative authorities which are not
directly involved in the implementation or control of the EU funds but whose actions indirectly
influence how these funds are used. The CR is more effective than existing layers
of protection to address these situations – even if, as discussed in the subsequent section, it can only
be activated if the Commission proves that the malfunctioning of these authorities results from a
breach of a rule of law principle and the latter affects or risks affecting the Union budget in a sufficiently
direct way.
Third, the various existing procedures to protect the EU budget may have specific gaps in terms of
coverage or effectiveness. Concerning coverage, deficiencies in the system for the recovery of irregular
payments constitute a ground for suspending or cutting CAP funds but not for suspending, let alone
reducing, cohesion policy funds. The same can be said about the lack of effective and timely
cooperation with OLAF and EPPO (Article 4(2) (g)), which can be a ground for cutting RRF funds but not
cohesion or CAP funds. Regarding effectiveness, the imposition of net corrections under cohesion
policy is subject to very strict and restricting conditions, rendering the procedure practically useless. In
these cases, the RLCM can be used in addition to or following the adoption of other
procedures to ensure better protection of the EU´s financial interests.
Fourth, generally speaking, existing procedures and mechanisms are not very effective to deal with
risks to the EU budget resulting from changes in the legal framework or general, nationwide
administrative decisions having an impact on the implementation of EU funds. Most of them are
designed to deal with individual deficiencies affecting a given institution or body in charge of
managing and controlling a specific EU programme. In some cases, to be applied, the Commission even
needs to prove that the risk to the EU budget has materialised (e.g., net corrections under cohesion
policy).....Only some layers of protection can be used in a more forward-looking manner and in response
to general changes in national laws or nationwide administrative decisions. For instance, the
Commission may suspend cohesion or ‘Home Funds’ if a Member State infringes an EU sectoral law
whose compliance is deemed necessary for the implementation of EU-funded actions without having
to prove that this infringement has caused a material loss to the EU budget. The Commission can also
suspend the approval or the amendment of a cohesion policy programme, a ‘Home’ fund's programme
or a CAP strategic plan if it considers that these programmes or plans do not ensure compliance with
the EU Charter of Fundamental Rights. In application of the horizontal enabling condition, it can also
suspend the reimbursement of costs related to operations co-financed with cohesion or ‘Home Funds’
at any time throughout the whole period of execution if it has evidence proving that the Charter is no
longer respected in the implementation of the programme. These provisions have proved to be very
powerful in the past.....However, they only cover certain EU programmes. Besides, the scope of the
enabling condition is more restrictive than the one of the CR. Whereas breaches
of some rule of law principles almost automatically entail non-respect of fundamental rights and
freedoms in the exercise of public action – e.g., prohibition of arbitrariness of the executive power, nondiscrimination, effective judicial protection or equality before the law – in other cases, the link is not so
direct and automatic – e.g. legality and legal certainty, separation of powers.
Fifth, if we look at the type of remedy applied, the RLCM offers a lot of flexibility
regarding the measures to be adopted, even if there is a duty of proportionality. Not only the
Commission has a wide range of possible measures to propose but the Member State concerned can
propose and adopt remedial measures, both before and after the adoption of measures by the Council.
This flexibility and the capacity to combine it with other procedures (as seen in the application of the
RLCM to Hungary) render this instrument quite powerful vis-á-vis the other layers
of protection.
Finally, a last point to take into account is that the ‘complementarity test’ is a relative test of
effectiveness and thus it should not be presumed that the Regulation will be an effective solution in all
cases. In some situations, the Commission may conclude that the Regulation is not very effective
because, for instance, there is a need for a quick response or there are no clear and monitorable
remedial actions to be imposed to the Member State to address the situation.
5.2 The notion of ‘sufficiently direct link’ - different possible interpretations:
Under Article 4(2) of the Regulation, for the CR apply, breaches of the rule of
law must affect or seriously risk affecting the EU budget in a sufficiently direct way. As discussed in
Chapter 3, whereas the Court repeatedly reiterated in its judgments that this condition requires that a
‘genuine’ link be established between the breach of the rule of law and the EU budget, it does not go
into further detail when such a link is genuine. The Guidelines complement the CJEU ruling by saying
that the notion of ‘genuine link’ refers to the fact that the Regulation ‘should not be triggered with
regard to situations in which the connection is merely hypothetical, too uncertain or too vague’.
Despite this clarification, there are still several possible interpretations of what makes a link sufficiently
direct, or certain, to allow the application of the CR.
The existence of such a link is clear in cases in which the breach of rule of law results from actions or
omissions by public authorities in charge of managing and controlling the use of EU funds. As
repeatedly mentioned in the CJEU jurisprudence on CAP corrections, serious deficiencies in national
management and control systems entail a direct and real risk of financial damage to the EU budget. A
different situation is when the infringement comes from the adoption of a national law or a nationwide
administrative decision which is of relevance for the implementation of EU funds. In this case, it is worth
recalling the CJEU jurisprudence as regards the application of the CPR provision allowing the
Commission to suspend EU payments in case of an infringement procedure putting at risk the legality
and regularity of EU expenditure (see section 4.1.4 and box 7). In a CJEU case of 2013, the Court
concluded that to suspend EU cohesion payments, it was sufficient for the Commission to prove the
existence of a ‘sufficiently direct link’ between the national law object of an infringement procedure
and the type of measures eligible under the Member State’s cohesion programme, without having to
prove the existence of a link between the law and the legality of the operations co-financed by the
Member States’ cohesion programme (see box 7).
Following the same reasoning, we can conclude that a ‘sufficiently direct link’ can be
established in case a national law infringes some rule of law principles
and has concrete and direct implications for measures eligible under EU spending programmes
implemented by national public authorities.
A third, more difficult type of situation is when the breach stems from actions or omissions of public
authorities not directly involved in the use of EU funds or not directly determining how these funds will
be used but playing a role in the protection of the EU´s financial interests. This is the case of national
public prosecution services, judicial authorities or administrative authorities in charge of investigating
and sanctioning fraud. In these cases, one may imagine different possible interpretations of the notion
of ‘sufficiently direct link‘. If we take the case of the judiciary, for instance, under a more restrictive
interpretation the mere lack of an independent judiciary would not suffice to establish a sufficiently
direct link.
Rather, to establish such a link, evidence would be needed to prove that a judge in charge,
for instance, of reviewing decisions taken by national authorities implementing EU funds has been
subjected to disciplinary proceedings or relocated without their consent, thereby barring them from
working on the cases concerned. Under a broader interpretation, one could argue that a situation in
which there is strong evidence of total absence of independence in the judiciary – i.e. lack of proper
legal and institutional safeguards, evidence of repeated political interference in judiciary decisions or
decisions concerning the appointment or reassignment of judges - there is a clear and serious risk of
lack of effective judicial review over the actions of public authorities in charge of managing and
controlling the use of EU funds. One may argue that this wider interpretation of the ‘sufficiently direct
link’ is in line with the preventive nature of the Regulation, which does not require hard proof of an
effect of rule of law breaches on the EU budget but proof of a high probability of a risk occurring.
5.3 Developing a typology
The analysis of the CJEU rulings and the Commission’s Guidelines in Chapter 3 and the discussion on
the ‘complementarity‘ test in section 5.1. allow us to create a typology as illustrated in the chart below.
The categories within the typology are inspired by Article 4(2) of the CR, which
lays out situations that may be concerned with a breach of a rule of law principle affecting the sound
financial management of the Union budget or the protection of the Union’s financial interests.
Article 4(2) combines two criteria to classify situations; criteria relating to the public authority whose
actions or omissions result in a breach of rule of law principles (administrative authorities in charge of
implementing EU funds, public prosecution bodies…) and criteria relating to specific tasks or activities
whose performance may result in a breach of rule of law principles (recovery of EU funds, imposition of
effective penalties to fraudsters, effective cooperation with OLAF and EPPO…). Our typology uses the
first criteria and classifies the potential situations into three groups according to the type of public
authority concerned:
1. Administrative authorities directly involved in the implementation, management and control
of EU funds
2. Public prosecution and judicial authorities
3. Other administrative authorities not directly involved in the management and control of EU
funds but whose actions are relevant to the sound management of the EU budget or the
protection of the EU´s financial interests
Figure 5: Typology of situations that may fall within the scope of the RLCM
In the following sections we discuss hypothetical situations within each of these categories that could
fall within the scope of the regulation; that is, could fulfil the conditions indicated in Article 4 of the
Regulation to initiate the procedure. Before presenting these situations, it is important to note that the
fulfilment of these various conditions may be difficult to prove. As discussed in Chapter 3, the
assessment shall be based on facts or robust evidence and shall be carried out on a case-by-case basis,
taking due account of the specific circumstances and contexts as well as the overall situation in the
Member State concerned. At the same time, it shall respect the principle of equality of Member States
before the Treaties. This means, for instance, that if the Commission considers that a given breach of a
rule of law principle falls within the scope of the regulation the same conclusion shall apply to another
Member State unless a different treatment is objectively justified based on the specific circumstances
characterising the concrete situation.
5.4 Situations related to public authorities in charge implementation, management and control of EU funds
The first group of situations are those affecting the functioning of administrative authorities involved
in the implementation, management and/or control of EU funds. This includes authorities in charge of
managing cohesion policy, CAP, Home and RRF funds but also public entities having signed framework
financial partnership agreements or public guarantee agreements with the Commission to manage EU
funds on its behalf (e.g. national public development banks, Erasmus national agencies, Universities…).
These situations correspond to those listed in Article 4(2) a and b of the CR. They
may also include some tasks cited in the remaining part of article 4.2. and which are part of the duties
of such authorities, such as the prevention and sanctioning of fraud and corruption (4(2) (e)), the
recovery of funds unduly paid; (4(2)(f)) and the effective and timely cooperation with OLAF and, subject
to the participation of the Member State concerned, with EPPO (Art 4(2)(g)).
As seen in section 5.1., the Commission has many procedures to react in case of risks to the EU budget
arising from the malfunctioning of national authorities in charge of managing and controlling EU funds.
However, they are rather ineffective in case of widespread and recurrent risks. These risks can originate
from two situations: a Member State adopting legislative acts or general executive decisions that
weaken the respect for rule of law principles in the management of the EU funds or a general failure by
the national authorities to prevent and combat fraud and corruption in the use of EU funds. Apart from
situations of systemic risks, we can imagine the use of the Regulation to address individual risks which
are not well covered by existing layers of protection.
5.4.1 Adoption of legislative acts or general executive decisions weakening the respect of
rule of law principles in the implementation of EU funds
A first hypothetical situation is a situation in which a Member State adopts a legislative act or a nationallevel administrative decision which weakens the respect of rule of law principles in the implementation
of EU funds. This could involve, for instance, the adoption of a public procurement law which does not
guarantee basic principles of transparency and fair competition, a legal decision to exempt some
persons or entities which are potential recipients of EU funds from conflict-of-interest rules or the
adoption of laws or decisions offering preferential treatment to some categories of citizens and being
of relevance to determine the eligibility of citizens to certain EU funds.
All these cases constitute a breach of a rule of law principle that may be of relevance for the sound
financial management of the Union budget or the protection of the EU’s financial interests. In all cases,
the ‘complementarity test’ would be likely passed. As explained above, classic procedures of
suspensions or corrections are designed to deal with individual deficiencies affecting a given
institution or body in charge of managing and controlling a specific EU programme but not with
systemic deficiencies introduced through changes in the legal framework or general, nationwide
administrative decisions.
The horizontal enabling condition imposing respect to the Charter of
Fundamental Rights could be of help. However, it would not protect all EU funds, only cohesion and
‘Home Funds’. Besides, whereas a non-compliance with the Charter of Fundamental Rights is evident
in cases in which a law or a national-level decision creates discrimination in the access to EU funds it
may be less evident in other situations of breaches of rule of law principles affecting the EU´s financial
interests – e.g. in case of weak public procurement rules.
Finally, to trigger the rule of law CR, the Commission would have to prove the
existence of a ‘sufficiently direct link’ between the breach of the rule of law principle and the impact or
serious risk of effects on the EU budget. As discussed in section 5.2. following the CJEU jurisprudence
we could interpret this notion of ‘sufficiently direct link’ as requiring that the EU law has concrete and
direct implications for a category of actions potentially eligible under EU spending programmes but
not necessarily affecting specific EU-financed operations.
Script 1. Inclusion of a ‘national priority clause’ in the Constitution
A Member State holds elections and a new party obtains a large majority of seats in the Parliament
and forms a new government. Following the promises made during the elections, it adopts a
Constitutional Reform to include a new ‘national priority clause’. The inclusion of this clause make it
possible to reserve a certain number of social benefits for national citizens and grants them priority
access to various social and employment benefits.
While most of the social benefits are entirely financed by the Member State's social protection
system, some of them are financed or co-financed by EU funds. In particular, some social and
employment grants are co-financed by the European Social Fund (ESF) and some support social
housing - particularly grants to finance energy renovation works - , whose access is given in priority
to national citizens, is financed by the National Recovery and Resilience Plan.
The application of this ‘national priority clause’ in these grants receiving EU funds is against Article
18 of the TFEU and Article 21(2) of the Charter of Fundamental Rights which stipulates that, within
the scope of EU law, any discrimination on grounds of nationality shall be prohibited.
The Commission decides to suspend ESF payments on the basis of the horizontal enabling condition
on compliance with the Charter. However, it realises that the impact of this ‘national priority clause’
on the Union budget is larger as it also affects the distribution of RRF funds. Given the inclusion of
this clause in the Constitution, it concludes that there is a serious risk that this clause results in
discrimination in the access to other measures and grants financed or co-financed by EU funds, such
as Erasmus grants, CAP payments or public employment services. It therefore concludes that the
application of the CR alongside the application of the horizontal enabling
condition would more effectively protect the EU´s financial interests.
5.4.2 General failure to prevent and combat fraud and corruption in the use of EU funds
Another situation is a Member State without effective national-level administrative structures and tools
to prevent and combat fraud in the use of EU funds (i.e., an independent and well-staffed administrative
body in charge of investigating fraud, effective data-mining tools to prevent and detect situations of
fraud and conflict of interest, etc..,). This will result in a major failure to prevent, correct or sanction an
improper use of EU funds at lower levels and, ultimately, a serious risk to the EU´s financial interests.
This general failure may be due to different factors. One may imagine a Member State which does not
take a proactive approach to protect the EU´s financial interests. It does not follow OLAF´s
recommendations on how to improve its anti-fraud policy, is in delay as regards the transposition of
the Directive on the Protection of EU´s Financial Interests (PIF directive), does not use the Commission´s
ARACHNE data-mining tool or a national IT tool having equivalent functionalities and does not
participate in the EPPO. It is also possible, however, to imagine a Member State which adopts all the
relevant legislation and puts in place all necessary administrative structures but suffers from poor
enforcement due to a lack of support by lower-level administrative bodies or a lack of administrative
capacity.
Both cases constitute a breach of rule of law principles as defined in Article 3(b) of the Regulation,
‘failing to prevent, correct or sanction arbitrary or unlawful decisions by public authorities’. Relevance
for the sound financial management of the Union budget can be presumed insofar as it relates to
actions or omissions explicitly aimed to prevent and fight fraud and corruption in the use of EU funds.
Despite that, whether the Commission could prove the existence of a ‘sufficiently direct link’ in this
situation remains open. Proving the existence of this link requires proving that the weaknesses of the
national anti-fraud policy result in a certain – and not only hypothetical – and serious risk of negative
effect on the EU´s financial interests. Two considerations could be made in this respect. First, only in
case of a major and systemic failure of various mechanisms and tools to prevent and fight fraud with
the use of EU funds can we imagine a serious and certain risk for the Union budget. An additional
consideration is that this risk would be more certain and serious in Member States with high levels of
fraud and corruption in the public sector than in those in which the levels of fraud or corruption are
relatively low.
Finally, it is unclear whether the ‘complementarity test’ would be passed. While existing layers of
protection are not very effective to address systemic risks affecting all EU funds, the effectiveness of
using the Regulation could be also questionable, particularly when the failure to combat fraud and
corruption is not intentional but rather the result of poor enforcement. In these cases, the
complementarity test would require a case-by-case approach: if the Commission can identify clear and
monitorable remedial actions the Member State can put in place to address the situation it may make
sense to use the Regulation, otherwise, it is doubtful that it can be of help (Script 2).
Script 2. Systemic failure to prevent and fight fraud and corruption in the use of EU funds
A Member State scores very high in all international corruption indices. National surveys on citizens´
perceptions confirm that corruption in the public sector is very high. The Commission regularly
detects cases of fraud and corruption in the use of EU funds through its own audits and OLAF
investigations. The Member State is continuously subject to interruptions, suspensions of payments
and corrections. The Member State regularly cooperates with OLAF in the investigations of fraud
cases and has imposed the use of the ARACHNE IT tool to all public authorities in charge of
managing EU funds, but this has not resulted in a reduction of cases of fraud and corruption.
Following the Commission´s recommendations, the government has created a new independent
body in charge of investigating cases of fraud and corruption. However, the new authority is understaffed and does not have sufficient investigative powers. There is also evidence of a lack of
systematic recovery of the amounts affected by irregularities. Moreover, staff working in ESI
managing and control authorities are not properly trained in the use of the ARACHNE IT tool and
the number of public prosecutors in charge of investigating and prosecuting EU fraud is very low.
Given all this evidence, the Commission concludes that the conditions are met to trigger the
Regulation. The systemic failure to combat fraud and the persistently high levels of corruption at
lower level result in a serious risk for the EU´s financial interests. Before sending a written
notification, it contacts the Member State and ask it to propose or adopt remedial measures to
address the Commission’s concerns regarding the effectiveness of the anti-fraud body, the recovery
of undue amounts, the capacity to effectively use ARACHNE and the number of public prosecutors.
5.4.3 Deficiencies in the management and control systems which are not fully covered by
existing layers of protection
Apart from a situation of widespread failure to prevent and combat fraud and corruption, the rule of
law CR could be used when national structures and procedures in charge of
managing EU funds present certain deficiencies in the prevention and fight of fraud which are not well
covered by existing layers of protection. For instance, a case explicitly mentioned in article 4(2) (g) is
the recovery of EU funds unduly used. As seen in section 5.1., deficiencies in the recovery procedures
constitute a ground for suspending or cutting CAP funds but it cannot be a ground for suspending, let
alone reducing, cohesion policy funds. The same happens with the lack of effective and timely
cooperation with OLAF and EPPO, mentioned in art 4(2) (g) 87. The Financial Regulation imposes an
obligation on Member States to cooperate with the Commission, OLAF and EPPO but refusal to
cooperate is a ground for cutting EU funds only under RFF, not for cohesion or CAP funds.
All these cases constitute breaches of rule of law principles of relevance for the sound financial
management or the protection of the EU´s financial interests. It may consist of an individual breach –
e.g., a refusal to cooperate with OLAF in a given investigation – but the Regulation explicitly says that
it covers both individual and systemic breaches. As all cases relate to actions or omissions by public
authorities in charge of managing or controlling EU funds, a ‘sufficiently direct link’ is presumed. Finally,
the ‘complementarity test’ would in principle be passed as the Regulation would be used to cover
‘gaps’ from other layers of protection.
An argument against the application of the Regulation in these situations is that the risk to the EU
budget may be minor. Take the case of a lack of effective recovery of amounts unduly paid. Under
shared management, the Commission applies a correction to national authorities in case of
irregularities and then national authorities recover these funds unduly spent from the final beneficiary.
While having effective recovery procedures is important to dissuade potential fraudsters, one could
argue that this does not have a direct and significant effect on the EU's financial interests as the
Commission has already deducted the amounts irregularly spent from the national authorities. Another
counterargument is that, being related to individual breaches and not to systemic and recurrent
breaches, the Regulation may not be able to provide a fast and quick fix to these problems.
However, this understanding presumes that the application of the Regulation starts with the written
notification and necessarily ends with the Council imposing measures. It ignores the importance of the
‘preliminary’ phase i.e., the exchanges with the Member State before sending the written notification,
and the possibility to end the procedure with the Member State adopting remedial actions before a
decision is taken by the Council. If we look at the rule of law CR from a broader
perspective, we can imagine situations in which the Commission concludes that there are reasonable
grounds for the application of the procedure but starts with a preliminary phase of contacts and
bilateral exchanges with the Member State to try to resolve the issue before involving the Council (see
Script 3).
It is worth noting that art 4(2) g only mentions effective and timely cooperation with EPPO for Member States participating in the
enhanced cooperation establishing EPPO. However, the EU law also imposes an obligation to these countries to cooperate with EPPO for
certain issues. A lack of cooperation in these cases could be considered as falling within article 4(2)h, “other situations or conduct of
authorities that are relevant to the sound financial management of the Union budget or the protection of the financial interests of the
Union” (see script 3).
Script 3. Refusal to cooperate with OLAF
In a Member State, there are issues with the cooperation between the national anti-fraud authorities
and OLAF. Specifically, the national authorities have, despite numerous requests, failed to specify an
authority to assist OLAF in cases where an economic operator refuses to cooperate during its onthe-spot-checks. In addition, the Member State regularly withdraws projects from EU funding when
it becomes clear that OLAF has opened an investigation.
OLAF addresses a letter to the concerned ministry, but the situation is not resolved. It then informs
the Commission of this refusal to cooperate with OLAF and provides evidence of various ongoing
OLAF investigations negatively affected by the conduct of the Member State.
The Commission assesses the situation and concludes that there are reasonable grounds to apply
the Regulation. Before sending a written notification, it informs the Member State of the situation
and invites it to propose and adopt remedial measures to address the Commission´s concerns.
5.5 Situations relating to public prosecution and judiciary
The second group of situations are those related to the malfunctioning of investigation and public
prosecution services that concern the investigation and prosecution of fraud, corruption and other rule
of law breaches in the implementation of the EU budget (situations referred to in Article 4(2)(c)). They
also relate to the lack of effective judicial review by independent courts of actions or omissions of public
authorities managing or controlling the use of EU funds or investigating the misuse thereof (situations
referred to in Article 4(2) (d) or the absence of effective or dissuasive penalties imposed on fraudsters
by national courts (situations referred to in Article 4(2) (e), insofar as they are relevant to the sound
financial management of the EU budget.
The application of the ‘complementarity test’ is rather straightforward in these cases. As discussed in
section 5.1., leaving aside the specific case of the RRF, there are no layers of protection that would be
applicable to address risks to the EU budget arising from the malfunctioning of public prosecution and
judicial authorities. What is more difficult to prove is the existence of a breach of rule of law principles
which affects, or seriously risks affecting, the sound financial management of the Union budget or the
protection of the financial interests of the Union ‘in a sufficiently direct way’.
We can imagine different situations potentially falling within the scope of the Regulation. One situation
is a Member State where there are major deficiencies in the investigation and prosecution cases against
the EU´s financial interests. Another situation is a Member State in which there are serious concerns
about the lack of judicial independence which results in a lack of effective and independent judicial
review of actions taken by public authorities in charge of managing and controlling the use of EU funds
or investigating and prosecuting cases against the EU´s financial interests. Finally, a third situation is a
Member State which has not adopted the relevant legal acts allowing the imposition of effective and
dissuasive sanctions to EU fraudsters by national courts or administrative authorities.
5.5.1 Major deficiencies in the investigation and prosecution of cases against EU funds
A first hypothetical situation is a Member State in which there are serious limitations in the capacity to
investigate and prosecute cases of fraud, corruption and conflict of interest affecting the EU's financial
interests. These limitations can be the result of different actions or omissions taken by public
authorities; they can result from legal or executive decisions restricting the powers or independence of
the criminal police in charge of EU fraud investigations or public prosecution services working on cases
of EU fraud or from decisions to withhold financial and human resources of these authorities.
These cases constitute indicative breaches of rule of law principles of relevance for the sound financial
management of the Union budget or the protection of the EU’s financial interests. As said above, the
‘complementarity test’ would be easily passed. However, to trigger the rule of law Conditionality
Regulation, the Commission would have to establish the existence of a ‘sufficiently direct link’ between
the breach of the rule of law principle and the impact or serious risk of effects on the EU budget. For
instance, proving that the criminal police is under-staffed or that the General prosecutor has wide
discretionary powers to allocate cases to different prosecutors alone may not be enough to conclude
that there is such a sufficient and direct link; the Commission would have to demonstrate limitations
and problems with the specific units of the criminal police or the specific prosecution services in charge
of investigating offences against the EU´s financial interests or show that there is a lack of determined
action to investigate and prosecute corruption cases related to the use of EU funds.
It is also important to highlight the specific situation of Member States not participating in the EPPO.
As noted by the Commission in its proposal of the Council Implementing Decision against Hungary, in
those Member States not participating in the EPPO the national prosecutor's office is the only office
conducting criminal investigations into crimes affecting the EU financial interests. A lack of effective
functioning of this service is particularly worrying, as well as a lack of effective and timely cooperation
between this service and OLAF and the EPPO – for investigations having a cross-border nature (see
Script 4).
Script 4. Refusal to cooperate with EPPO from a non-participating Member State
Member States that do not take part in the enhanced cooperation on the establishment of the EPPO
have an obligation to cooperate with the EPPO for cross-border criminal investigations. A Member
State which does not participates in the EPPO refuses to recognise EPPO as a competent authority
and consistently rejects the EPPO’s requests for judicial cooperation since the start of its operations
on 1 June 2021. The European Chief Prosecutor addresses a letter to the concerned Member State
but it continues to refuse to cooperate. She then informs the Commission of this refusal to cooperate
with EPPO and provides evidence of up to six ongoing investigations involving this Member State
which may be negatively affected by this refusal to cooperate.
The Commission assesses the situation and concludes that there are reasonable grounds to apply
the Regulation. Before sending a written notification, it informs the Member State of the situation
and invites it to propose and adopt remedial measures to address the Commission´s concerns.
5.5.2 Risks to the EU financial interests stemming from an absence of an independent
judiciary
Another situation that could fall within the scope of the Regulation is one where the Member State
takes decisions endangering the independence of the judiciary (Article 3). Such decisions would
constitute a breach of rule of law principles falling within the Regulation if they result in a lack of
independent and effective judicial review of actions or omissions of public authorities in charge of
managing and controlling EU funds or investigating and prosecuting cases against the EU financial
interests (Article 4(2) (d)) or a lack of effective and dissuasive penalties to EU fraudsters by courts (Article
4(2) (e)).
These cases constitute indicative breaches of rule of law explicitly mentioned in Article 3, ‘endangering
the independence of the judiciary’. Independence in the context of a judicial system can mean two
things 88: First, external independence, meaning that the courts act autonomously, do not take
instructions from any third party and are protected against external pressure. Second, internal
independence and impartiality, meaning that they remain neutral towards all parties in the
proceedings and do not have any conflicts of interest.
Actions endangering the independence of the
judiciary basically consist of regulatory changes endangering the independence of the bodies
governing the judiciary administration (judicial councils), changes in the rules governing the
functioning of courts or changes in the rules and procedures for the appointment, promotion and
sanctioning of judges. As above, the ‘complementarity test’ would be easily passed as the other layers
of protection are largely ineffective to address these types of situations. The most difficult thing would
be to prove the existence of a ‘sufficiently direct link’ between the action endangering judicial
independence and the effect or risk of effect on the EU budget.
Article 4 explicitly indicates that the action endangering judicial independence must result in either a
lack of effective judicial review of actions of public authorities relevant to the protection of the EU
financial interests or problems with the application of effective sanctions to EU fraudsters. As discussed
in section 5.2., one can imagine different ways of interpreting the requirements of a ‘sufficiently direct
link’. Under an extensive interpretation, it could be argued that strong evidence of a total absence of
independence in the judiciary - i.e., evidence of repeated political interference in judicial decisions or
decisions concerning the appointment or reassignment of judges – inevitably affects the judges’ ability
to take independent decisions and thus entails a real and serious risk of political interference in all
judicial decisions, including those related to cases of corruption with the use of EU funds. Under a
restrictive interpretation, it will be necessary for the Commission to provide evidence of political
interference in judicial decisions concerning offences against the EU financial interests (see Script 5).
Script 5. Ineffective judicial review stemming from the lack of an independent judiciary
The Commission has serious concerns about the independence of the judiciary in a Member State.
In particular, it is concerned about the fact that the body involved in the appointment of judges is
composed of members chosen by parliament and hence not sufficiently independent from political
control by the legislature and executive. It finds that the majority of the members are political
appointees. In addition, a disciplinary regime is in place in the Member State, which allows ordinary
court judges to be subject to disciplinary investigations and sanctions by a disciplinary chamber
based on the content of their judicial decisions, including decisions concerning authorities carrying
out financial control, monitoring and audit
The Commission finds evidence of a particular case where the disciplinary chamber has sanctioned
a judge who had become known for having condemned a high-level public official for passive
corruption in the use of EU funds. The judge has been transferred to a different court against their
will, thereby impeding them to work on similar cases of offences against EU financial interest. The
Commission concludes that this proves the existence of a ‘sufficiently direct link’ between the breach
of the rule of law principle and a serious risk to EU financial interests and informs the Member State
that there are reasonable grounds to apply the Regulation.
5.5.3 Adoption of a new law or administrative regulation restricting the capacity to impose
effective and dissuasive penalties on EU fraudsters by national courts
Another hypothetical situation that could fall within the scope of the rule of law conditionality is a
situation in which the Member State adopts a legislative act or an administrative regulation which
limits the capacity of courts to impose effective and dissuasive penalties on fraudulent recipients of EU
funds (Article 4(2) (e)). This could include different scenarios, such as a lack of a national law codifying
illegal activities affecting the Union's financial interests as criminal offences within the national criminal
code, or an amendment of the national criminal procedure act imposing very restrictive procedural
rules, ‘de facto’ limiting the availability and effectiveness of legal remedies and the effective
sanctioning of EU fraud.
These cases constitute indicative breaches of rule of law explicitly mentioned in Article 3 (c), ‘limiting
the availability and effectiveness of legal remedies (…) the effective sanctioning of EU fraud’. As in the
previous situations, the ‘complementarity test’ would be easily passed; the most difficult thing would
be to prove the existence of a ‘sufficiently direct link’ and a ‘serious risk’ for the EU budget.
Script 7. Stricter procedural rules preventing the imposition of dissuasive sanctions on EU fraudsters
A Member State amends the Criminal Code shortening the timespan available for the detection,
prosecution and trials related to criminal offences. In this Member State, national case law requires
that all cases of fraud and corruption pending before a higher-level court must be re-examined on
appeal. According to the EPPO, as a result of the legal amendments, EPPO prosecutors will have
drastically less time to investigate offences against the EU financial interests and prepare
indictments while many ongoing cases would need to be closed immediately and definitively. The
EPPO informs the Commission about this situation and provides evidence of ongoing investigations
in the country that risk being compromised due to the new law. In addition to that, it also notes that
such an amendment may negatively affect investigations and prosecutions initiated in other
Member States participating in the EPPO, under which assisting measures would need to be
performed in the concerned Member State.
The Commission assesses the situation of the Member State. It finds evidence of a drop in the
number of investigations and indictments on alleged EU fraud and corruption following the
introduction of the Law. It also finds evidence that, due to the complexity and length of the reexamination on appeal, many cases of EU fraud and corruption have become time-barred. It
concludes that there are reasonable grounds to apply the Regulation.
5.6 Situations relating to the proper functioning of other public authorities
Actions and omissions by public authorities not directly involved in the management and control of EU
funds or the protection of EU financial interests can also potentially fall within the scope of the
Regulation. This category includes two potential situations. The first one includes actions taken by
public authorities involved in the collection of own resources on behalf of the Commission. The second
one entails actions taken by administrative bodies whose tasks can indirectly influence the decisions
of managing authorities in charge of implementing EU funds. None of these two cases is explicitly
mentioned in Article 4(2) but they could fall within point h (‘other situations or conduct of authorities
that are relevant to the sound financial management of the Union budget or the protection of the
financial interests of the Union’).
5.6.1 Serious risks affecting the collection of Own resources
A situation that could fall within the scope of the Regulation is a case in which there is a major problem
with the collection of Own resources in a given Member State, resulting in serious damage to the EU
budget. This may happen in case of major deficiencies in the national customs systems. However, this
case would probably not pass the ‘complementarity test’, as there are mechanisms to protect the EU
budget from deficiencies in the national customs systems (see Chapter 4). Besides, it is not clear that
the Regulation would be very effective to address problems of customs control and collection of taxes,
as all the measures listed in Article 6 are designed to respond to breaches affecting the use of EU funds
rather than the collection of Own resources.
A more appropriate situation is one in which a Member State collects the revenues from the traditional
Own Resources and the VAT but refuses to transfer these revenues and/or to pay its GNI-based
contribution to the EU Commission. In this case, the Commission could argue that the decisions taken
by the government are in breach of the principle of legality and have a severe negative impact on the
EU budget ‘in a sufficiently direct way’. The existing layers of protection of the EU budget would not be
effective to deal with such a situation, and thus the activation of the Regulation could be justified.
Script 8 Opposition to pay the GNI contribution
Eurostat conducts a verification of the GNI data of previous years and concludes that a Member State
has to pay an additional EUR 2.1. billion to the EU budget in view of its GNI own resource. In a context
of pre-elections and with the party in favour of exiting the Union surging in the polls, the Member
State announces that it refuses to pay the extra surcharge to the EU budget.
The Commission opens an infringement procedure against the Member State. In parallel to this, it
concludes that there are reasonable grounds to apply the Regulation. Before sending a written
notification to start the procedure, it informs the Member State to explain the factual elements and
specific grounds on which it bases its findings and invites it to take remedial measures to address
the situation.
5.6.2 Problems with other entities whose tasks have an indirect impact on the use of EU
funds
Another situation that may fall within the scope of the Regulation is in case of breaches of the rule of
law principles by public authorities which are not in charge of managing, controlling or investigating
the use of EU funds but whose tasks indirectly impact how these funds would be used. An illustrative
case would be the situation in case study 4 (Section 4.2.1): a case in which there is clear evidence of
corruption and favouritism in the functioning of the national agency in charge of registering land
ownership. This has an incidence on the distribution of titles of land ownership and therefore on the
eligibility of citizens to CAP payments.
As explained in section 4.2.1., in this case, the ‘complementarity test’ would be passed as the existing
layers of protection are not effective to deal with this problem. The actions of the public land registry
agency would be clearly constitutive of a breach of the rule of law principles of relevance for the sound
financial management of the Union budget. The most difficult thing would be to prove the existence
of a ‘sufficiently direct link’ and a ‘serious risk’ for the EU budget. It is doubtful that simply proving the
irregular functioning of the public land registry agency would be sufficient to activate the Regulation;
the Commission would probably need to provide evidence of cases in which this malfunctioning has
resulted in the deprivation of CAP payments for certain farmers.
CONCLUSIONS
Due to its relatively recent adoption, several questions remain open related to the potential scope of
application of the CR. The European Commission has published guidelines, but
without sufficient jurisprudence to go on they leave some room for interpretation.
This study explores the potential scope of application of the RLCM, in particular by
analysing how this new mechanism can interact with the various other instruments and mechanisms
available to the Commission to protect the Union’s financial interests.
These other procedures, referred to as ‘other layers of protection’ throughout this study, cover different
types of risks. Some of them (the EDES) protect the EU budget from the risk of insolvency, negligence,
fraud or irregularity committed by private actors (potential beneficiaries of EU funds). From the point
of view of this study, however, the most relevant layers of protection are ‘second-level’ layers, applied
to those EU funds managed by national authorities (cohesion, ’Home’ and CAP funds, Recovery and
Resilience Facility) and protecting the EU budget from actions or omissions by public authorities as
their scope of action partly overlaps with that of the RLCM.
The first important finding from this study is that existing layers of protection can, to some
extent, protect the EU budget against breaches of the principles of the rule of law (see Chapter 4).
In particular, some layers of protection can be used in a preventive manner and in response to general
changes in national law or nationwide administrative decisions indicative of breaches of the rule of law
principles. For instance, the Commission can suspend the approval or amendment of Member States’
cohesion policy programmes, national programmes under the Home Funds or the national CAP
strategic plan if it finds that these programmes or plans do not ensure compliance with the EU Charter
of Fundamental Rights. In applying the horizontal enabling conditions, it can also suspend the
reimbursement of costs related to operations co-financed by Cohesion or Home Funds at any time
throughout the whole period of execution if it has evidence that the Charter is no longer being
respected in the implementation of the programme. These provisions have proved to be very powerful
in the past and will remain important in the future.
However, they are less effective than the CR in two respects. First, they are more
restricted in their scope of application than the Regulation, which covers risks affecting all EU revenues
and expenditure and resulting from breaches of all types of rule of law principles, not only those directly
relevant to the exercise of citizens’ fundamental rights and freedoms. Most of the existing layers of
protection are designed to deal with individual deficiencies affecting a given institution or body in
charge of managing and controlling a specific EU programme. Second, the Commission needs to prove
that a risk to the EU budget has materialised before some of the procedures can be applied, thus when
the harm has already been done (e.g. net corrections under the cohesion policy).
The second finding from the study is that the new RLCM has
several advantages vis-à-vis other tools (see Section 5.1). First, it is the only procedure that protects
the EU’s financial interests from the malfunctioning of public prosecution and judicial authorities.
Second, even with the need to adhere to the principle of proportionality, the mechanism allows for a
considerable level of flexibility on the measures to be adopted. Third, its procedure follows a case-bycase approach, thereby allowing several case-specific dimensions to be taken into account.
The third important finding is that the adoption of measures under the Conditionality
Regulation does not lead to an either-or situation with other instruments: different mechanisms
can be combined to ensure the most adequate setup to protect the EU’s financial interests (see
Sections 3.2.2. and 5.1). The case of Hungary provides a good example of the simultaneous use of the
Here, the key implementation steps of the
remedial measures adopted under the CR 90 were integrated as ‘super
milestones’ into the Hungarian Recovery and Resilience Plan.
The fourth important conclusion is that the RLCM might not always be the
most effective solution. In some cases, the Commission may conclude that a breach of rule of law
principles potentially falls within the scope of the CR, but that the Regulation is
not the most effective means to protect the EU budget. This could be, for instance, because a quick
response is needed, or because there are no clear and monitorable remedial actions to be imposed on
the Member State to address the situation. In other situations, the mere threat of activating the
regulation may be sufficient to push the Member State to adopt remedial measures before the Council.
Fifth, the report shows the centrality of the concept of ‘sufficiently direct link’ to be
demonstrated between the breach of rule of law and the effects or serious risk of effects on the
EU budget. Proving the existence of this ‘sufficiently direct link’ is a key condition for adopting
measures under the regulation (see Section 5.2).
In many cases, this link can be presumed in a relatively straightforward manner, for instance when the
breach results from the actions of public authorities in charge of managing and controlling the use of
EU funds. Whether other situations may fall within the scope of the regulation, however, is subject to
debate. This is the case when the breach results from actions or omissions made by the legislature (e.g.
new laws having relevance to the use of EU funds), or by public authorities that are important for the
protection of the EU’s financial interests but have no direct role in the implementation or control of EU
funds. These include national public prosecution services, judicial authorities and administrative
authorities in charge of investigating and sanctioning fraud. In these cases, the lack of jurisprudence
allows for different interpretations of what would constitute a sufficiently direct link leading to the
triggering of this mechanism.
A restrictive interpretation would require this direct link to be demonstrated by hard evidence. This
could involve, for instance, proof that certain judges were barred from working on the implementation
of the EU budget, or that they were put under direct pressure to reach a certain verdict. A broader
interpretation would not necessarily require such a link to be proved with hard facts. For example, in
the case of strong evidence of total absence of judicial independence, it could plausibly be concluded
that there is a serious risk of cases of fraud and corruption in the use of EU funds not being properly
investigated and condemned.
if we interpret ‘sufficiently direct link’,and ‘genuine’ are needing hard evidence,
, it would limit the rlcm’s effectiveness by resulting in a lower number of overall cases.
The rlcm should not be limited to systemic and recurrent breaches of the rl. The CR explicitly allows for the use of the mechanism in
response to individual breaches, and the analysis in this study proves that, in certain circumstances, the
mechanism can be more effective than the existing layers of protection in responding to risks to the
EU budget resulting from individual and occasional breaches of the rule of law principles. Such
breaches could consist, for instance, of a Member State refusing to cooperate with the EPPO 91 or to pay
its contribution to the EU budget. In such cases, it is conceivable that the problem could be solved with
a quick fix at the written notification stage before it goes any further (i.e. without the involvement of
the Council). In some situations, the mere threat of activating the regulation may be sufficient to
convince the Member State to adopt remedial measures. In these cases, the regulation could provide
a fast procedure for solving problems.
Treating rlmc as a new ‘nuclear option’ in the toolbox, risks converting it into a toxic
instrument, very hard to implement, and with considerable political costs
ANNEX 3: LAYERS OF PROTECTION FICHES
FICHE 1. SUSPENSIONS AND NET FINANCIAL CORRECTIONS IN CASE OF MAJOR
DEFICIENCIES IN NATIONAL MANAGEMENT AND CONTROL SYSTEMS (ESIF AND
‘HOME FUNDS’)
Under the EU cohesion policy, the main responsibility to protect the EU budget lies with national
management and control authorities. During the implementation of the programme, if they detect
irregularities in the expenditure declared by the final beneficiaries they shall withdraw the amounts
from the interim payment requests sent to the Commission. The Commission can carry out audits at
any time. If through its own audits or other means (e.g. OLAF investigations), the Commission detects
a deficiency in the Member State’s management and control system, it will send a warning letter to the
concerned Member State. If the Member State does not correct the deficiency, interim payments will
be interrupted (6 months, up to 9 months if requested by the Member State). After this period, if the
Member state has not corrected the problem the Commission will suspend the interim payment until
remedial measures are applied (Art 96 and 97 CPR).
At the moment of assessing the annual accounts submitted by the Member State (at year N+1), if the
Commission detects irregularities not corrected by the Member State it will ask the Member State to
apply financial corrections (e.g. exclude the irregular payment from the accounts). In this case, the
national authorities can reuse the money cancelled in the subsequent accounting year for another
operation within the same programme. However, if the Commission finds evidence of irregularities
resulting from “serious deficiencies” in the national management and control system and providing
these deficiencies have not been identified, reported and subjected to remedial measures by the
Member State, it can open a procedure to apply net financial corrections. In this case, the amounts
subject to financial correction are deducted as net corrections – i.e. the Member State cannot reuse the
money cancelled (Art 104 CPR).
SCOPE OF APPLICATION
EU cohesion policy funds (ERDF, ESF+, CF, JTF, EMFAF) and ‘Home Funds’ (AMIF, ISF and BMVI).
RISK TO THE EU BUDGET COVERED
Major deficiencies in the ESIF or ‘Home Funds’ Operational programmes’ management and control
systems resulting in irregular payments. A delegated regulation 93 establishes detailed rules to
determine what is a “serious deficiency” in the effective functioning of management and control
systems.
PROCEDURE
Before adopting a net financial correction, the Commission shall inform and give the Member State the
opportunity to present its observations within two months. If the Member State accepts the
conclusions of the Commission, it can correct the deficiency itself and re-use the amounts concerned.
If it does not accept the conclusions, it will be invited to a hearing by the Commission. The Commission
will decide on the financial correction through an implementing act within 10 months of the date of
the hearing (Art 104.4 CPR).
MEASURES THAT CAN BE APPLIED
Suspension of payments and partial or total cancellation of commitments to an operational
programme. A delegated regulation 94 provides detailed criteria to calculate the level of financial
corrections (from 5% to 100%) according to the relative importance of the deficiency, the frequency
and the degree of risk of loss for the EU budget.
FICHE 2. NON-REIMBURSEMENT OF COSTS IN CASE OF NON-COMPLIANCE WITH
HORIZONTAL ENABLING CONDITIONS (ESI AND HOME FUNDS)
The CPR conditions the use of EU funds under shared management on compliance with certain ex-ante
conditions, called ‘enabling conditions’. There are various thematic conditions which only apply to the
EU cohesion policy funds and four horizontal enabling conditions which apply to both cohesion policy
and ‘home’ funds. If a Member State does not fulfil an enabling condition the Commission shall not
reimburse the expenditure related to operations linked to the concerned specific objective(s). In the
case of ‘horizontal’ enabling conditions, applicable to all specific objectives, non-fulfilment implies a
non-reimbursement of any costs except for those related to actions contributing to the fulfilment of
these conditions.
The four horizontal enabling conditions are 95: the existence of effective monitoring mechanisms of the
public procurement market; the existence of tools and capacity for the effective application of State
aid rules; effective application and implementation of the Charter of Fundamental Rights and the
implementation and application of the United Nations Convention on the rights of persons with
disabilities (UNCRPD).
SCOPE OF APPLICATION
EU cohesion policy funds (ERDF, ESF+, CF, JTF, EMFAF) and ‘Home Funds’ (AMIF, ISF and BMVI).
RISK TO THE EU BUDGET COVERED
Lack of effective monitoring of the public procurement system, lack of tools and capacity for effective
application of EU state aid rules, non-compliance with the EU Charter of Fundamental Rights or with
the UN Convention on rights of persons with disabilities when implementing ESIF and ‘Home Funds’.
PROCEDURE
When preparing a programme the Member State shall assess if horizontal enabling conditions are
fulfilled. If the Commission disagrees with the assessment of the Member State, it can carry out its own
assessment. In case of non-fulfilment of horizontal conditions, the programme will be adopted and the
Member State will start implementing the actions but the Commission will not reimburse any cost until
the condition is fulfilled, except for expenditures related to actions contributing to the fulfilment of the
condition. The Commission will monitor the fulfilment of conditions throughout the programme and
can at any time stop the reimbursement of costs if there is evidence proving that conditions are no
longer fulfilled.
MEASURES THAT CAN BE APPLIED
Non-reimbursement of declared expenditures until the condition is fulfilled, except for those
expenditures related to actions contributing to the fulfilment of the condition. This measure only
applies after the programme is approved by the Commission. It does not apply to pre-financing.
FICHE 3. SUSPENSION OF THE APPROVAL OF A PROGRAMME OR AN AMENDMENT
OF A PROGRAMME IN CASE OF NON-RESPECT OF THE EUROPEAN CHARTER OF FUNDAMENTAL RIGHTS (ESIF AND HOME FUNDS)
Under the EU Cohesion policy, the Commission is in charge of approving the Operational programmes
prepared by the Member State. To approve a programme, the Commission has to assess that it
complies with the CPR provisions, including the horizontal principles set out in Article 9 CPR. One of
these principles is the need to ‘ensure respect for fundamental rights and compliance with the Charter
of Fundamental Rights of the European Union in the implementation of the Funds’ (Art 9.1. CPR). If the
Commission considers that the structures and procedures foreseen in the plan for the management,
monitoring and control of the ESI funds do not guarantee compliance with the Charter, it may suspend
the adoption of the programme and ask the Member State to review the programme. The suspension
can last until five months after the first submission of the programme by the Member State (Art 23 CPR).
SCOPE OF APPLICATION
EU cohesion policy funds (ERDF, ESF+, CF, JTF, EMFAF) and ‘Home Funds’ (AMIF, ISF and BMVI).
RISK TO THE EU BUDGET COVERED
National management and control structures and procedures that do not guarantee compliance with
the EU Charter of Fundamental Rights. The Charter contains various principles and rights to which all
EU citizens are entitled. Some of them derive from the application of general rule of law principles
enshrined in Article 2 TEU, such as the principle of non-discrimination, effective judicial protection or
equality before the law.
PROCEDURE
If the Commission concludes that the programme does not comply with the CPR provisions, it may
send its observations to the Member State within three months of the date of submission of the
programme (two months in case of an amendment of the programme) and ask the Member State to
review the programme. The suspension can be maintained for up to five months. After that date, the
Commission shall adopt a decision of whether or not to approve the programme through an
implementing act (Art 23(4) CPR). In the case of amendments to a programme, the Commission shall
take its decision no later than four months after its submission by the Member State.
MEASURES THAT CAN BE APPLIED
Suspension of the approval of a programme or an amendment of a programme. The suspension can
last a maximum of five months after the first submission of the programme by the Member State (four
months in case of amendments to a programme).
FICHE 4. SUSPENSION OF PAYMENTS IN CASE OF AN INFRINGEMENT PROCEDURE
ON A MATTER PUTTING AT RISK THE LEGALITY AND REGULARITY OF EXPENDITURE (ESIFAND HOME FUNDS)
Article 97(1) (d) of the CPR 2021-2027 allows the Commission to suspend payments in case there is a
Commission’s reasoned opinion with respect to an infringement procedure on a matter that puts at
risk the legality and regularity of expenditure. This is a procedure that was introduced in the 2000-06
period and maintained in the 2007-13 financial period. It was then removed from the CPR 2014-2020
but has been again re-instated for the 2021-2027 period.
SCOPE OF APPLICATION
EU cohesion policy funds (ERDF, ESF+, CF, JTF, EMFAF) and ‘Home Funds (AMIF, ISF and BMVI).
RISK TO THE EU BUDGET COVERED
Non-compliance with EU law by national public authorities putting at risk the legality and regularity of
EU expenditure.
PROCEDURE
The Commission suspend payments through an implementing decision, and after having given the
Member State the opportunity to present its observations. The suspension shall end when the Member
State has taken the measures remedying the causes at the origin of the suspension.
MEASURES THAT CAN BE APPLIED
Total or partial suspension of payments. It does not include pre-financing.
FICHE 5. SUSPENSIONS AND NET FINANCIAL CORRECTIONS IN CASE OF MAJOR
DEFICIENCIES IN NATIONAL CAP MANAGEMENT AND CONTROL SYSTEMS (CAP)
Under the CAP, the main responsibility to protect the EU budget lies with national management and
control authorities (paying agencies and certification bodies).
The Commission can interrupt, suspend or reduce monthly payments (EAGF) and interim payments
(EAFRD) in case of serious deficiencies in the proper functioning of the CAP governance systems or
serious deficiencies in the system for the recovery of irregular payments (Art 42 CAP Horizontal
Regulation). In this case, the Commission shall first ask the Member State to submit an action plan
including the necessary remedial actions and clear progress indicators. Only if the Member State fails
to submit or to implement the action plan the Commission can suspend the payment.
The suspension cannot last for more than 24 months. If, after this period, the deficiency has not been
resolved the Commission shall launch a conformity procedure to determine whether to impose a
financial correction on the Member State (Art 55 CAP Horizontal Regulation). Unlike under the CPR,
financial corrections under CAP are always net, e.g. they result in a permanent reduction of the Member
State’s funds.
SCOPE OF APPLICATION
European Agriculture Guarantee Fund (EAGF) and European Agricultural Fund for Rural Development
(EAFRD), only expenditure under the national CAP strategic plans.
RISKS TO THE EU BUDGET COVERED
Serious deficiencies in the proper functioning of the CAP governance systems, which are defined in the
CAP Horizontal Regulation (Art 2 (d)) as ‘the existence of a systemic weakness, taking into account its
recurrence, gravity and compromising effect on the correct declaration of expenditure, the reporting
on performance or the respect of Union law’.
PROCEDURE
When detecting a serious deficiency in the CAP governance system, the Commission shall invite the
Member State to submit an action plan to remedy the deficiency, which has to be established in
consultation with the Commission. If the Member State fails to submit or to properly implement the
plan the Commission may adopt implementing acts suspending the CAP payments. This decision has
to be taken after having consulted the Member States´ representatives sitting at the Committee on the
Agricultural Funds (Art 42(3) CAP Horizontal Regulation).
When opening a conformity procedure, the Commission shall inform the Member State and give it the
opportunity to challenge its findings as well as the method to calculate the net correction. If there is no
agreement, the Member State may submit the case to an independent ‘Conciliation Body’, which will
try to reconcile the positions between the Commission and the Member State. After having examined
the Conciliation Body’s report, the Commission will adopt a final decision after having consulted the
Member States´ representatives sitting at the Committee on the Agricultural Funds.
MEASURES THAT CAN BE APPLIED
Suspension of payments for a maximum of 24 months and net financial corrections (exclusion of
amounts from Union financing). Financial corrections are determined on the basis of the loss actually
caused to the EU budget or on the basis of extrapolation. Only when it is not possible to calculate or
extrapolate the cost ‘with determined effort’ the Commission can apply flat-rate corrections. These can
range from 2% to 25% and only in exceptional cases go beyond 25%. The Commission has detailed
guidelines to determine financial corrections which complement these provisions 96. The guidelines for
the current programming period are under preparation. The past guidelines, which were built on CJEU
case law, stipulated that to apply flat-rate corrections, the Commission must prove the existence of a
serious deficiency in the national CAP control system entailing a real risk of financial damage for the EU
budget (’real risk’ defined as a situation in which the Commission has ’reasonable and serious doubts’
that the CAP financed operations have been executed in accordance with the applicable EU and
national law)
FICHE 6. SUSPENSION OF THE APPROVAL OF A CAP STRATEGIC PLAN OR AN
AMENDMENT OF A PLAN IN CASE OF NON-RESPECT OF THE EUROPEAN CHARTER
OF FUNDAMENTAL RIGHTS
Under the new CAP policy, Member States have to design a ‘national CAP strategic plan’ to use the EU
funds for CAP income support, rural development and market measures. These Plans have to be
approved by the Commission. When assessing the Plans, the Commission shall check that the Plan is
compatible with the CAP rules and, particularly, with the general principles set in Article 9. One of these
principles is the need to design the interventions in the CAP plans ‘in accordance with the Charter of
Fundamental Rights of the European Union and the general principles of Union law’. If the Commission
considers that the Plan does not guarantee compliance with the Charter, it may suspend the adoption
of the programme until the Member State remedies it.
SCOPE OF APPLICATION
European Agriculture Guarantee Fund (EAGF) and European Agricultural Fund for Rural Development
(EAFRD)
RISKS TO THE EU BUDGET COVERED
National CAP strategic plans that do not guarantee compliance with the EU Charter of Fundamental
Rights. The Charter contains various principles and rights to which all EU citizens are entitled. Some of
them derive from the application of general rule of law principles enshrined in Article 2 TEU, such as
the principle of non-discrimination, effective judicial protection or equality before the law.
PROCEDURE
If the Commission concludes that the Plan does not comply with the CAP regulation, it may ask the
Member State to review the Plan. The suspension can be maintained for up to six months. After that
date, the Commission shall adopt a decision on whether or not to approve the Plan.
MEASURES THAT CAN BE APPLIED
Suspension of the approval of a Plan (for six months) or an amendment of a Plan (for three months).
FICHE 7. REDUCTION AND RECOVERY PROCEDURES UNDER THE RECOVERY AND
RESILIENCE FACILITY (RRF)
At the time of assessing RRF payment requests, the Commission checks if the national RRF
management and control system works well through the analysis of information provided by the
Member State (the national management declaration and a summary of audits conducted). It can also
carry out, at any time, systems audits and audits on operations financed by the RRF.
If the Commission finds cases of fraud, corruption, and conflict of interests which have not been
corrected by the Member State among the operations provided as evidence for the fulfilment of the
milestone or target, it can reduce proportionately the support under the RRF or recover any amount
due to the EU budget 98. The Commission can also reduce the RRF support in cases of “serious breaches
of an obligation” resulting from the bilateral RRF grants and loans agreements. The RRF bilateral
financial agreements (Art 3(15)) define "serious breach of obligations" as a breach by the Member State
of the obligations incorporated in the financial agreement concerning double funding (Art 4), prefinancing (Art 5), communication and visibility of Union funding (Art 10), protection of EU’s financial
interest (Art 10) and obligation to allow verifications and checks by the Commission, OLAF, ECA and
EPPO (Art 12), insofar as the breach “adversely affects, in a material or substantial manner, the rights of
the Commission or the proper implementation of Union funds”.
SCOPE OF APPLICATION
Recovery and Resilience Facility (RRF)
RISK TO THE EU BUDGET COVERED
Risks from Member States´ “serious breaches of obligations” resulting from the RRF bilateral grants and
loans agreements signed with the Commission. The bilateral agreements (Art 3.15) define ‘serious
breach of obligations’ as a breach by the Member State of the obligations incorporated in the financial
agreement concerning double funding (Art 4), pre-financing (Art 5), communication and visibility of
Union funding (art 10), protection of EU’s financial interest (art 10) and obligation to allow verifications
and checks by the Commission, OLAF, ECA and EPPO (art 12), insofar as the breach “adversely affects,
in a material or substantial manner, the rights of the Commission or the proper implementation of
Union funds”.
PROCEDURE
When finding evidence of irregularities (fraud, corruption or conflict of interest not corrected by the
Member State) or evidence of a serious breach of obligation, the Commission shall publish a provisional
report and formally notify the Member State 99. The Member State shall be given the opportunity to
submit observations within a period of two months, which can be extended 100. After this period, the
Commission must notify the Member State within 60 calendar days. When there is RRF money to be
recovered, the Commission notifies the Member State in a form of a debit note and gives at least 30
calendar days to the Member State to pay the note. If payment is not made by the date specified in the
debit note, the amount to be recovered is increased by late-payment interest 101.
MEASURES THAT CAN BE APPLIED
Reduction of RRF commitments through a reduction of future RRF payments or recovery of RRF
amounts already paid. When the reduction is due to irregularities (fraud, corruption or conflict of
interest), the amount of the reduction will correspond to the amount affected. In case of deficiencies
in the Member State’s RRF control systems, the Commission will apply a flat-rate reduction which can
range from 5 to 100% depending on the frequency and extent of the deficiency 102.
FICHE 8. RRF MILESTONES AND TARGETS
At the moment of assessing the draft national plans (NRRP), the Commission checks if the Member
State has an effective RRF management and control system in place. If it detects deficiencies in the
Member States’ control systems, it may require the Member State to develop an action plan to remedy
the deficiencies as a matter of urgency. Milestones for these measures are then established and
become a pre-condition to receiving the first RRF payment aside from the pre-financing payment.
In addition to these audit and control milestones (also called ‘super milestones’), the Commission can
request Member states to include actions aimed at strengthening the rule of law such as reforms to
guarantee the independence of the judicial system, to strengthen the anti-corruption procedures or to
improve the anti-money laundering system. This request can only be done to Member States having
received country-specific recommendations on these issues. In some cases (Hungary and Poland), ‘rule
of law’ milestones related to the independence of the judicial system have been defined as ‘super
milestones’ and hence imposed as pre-conditions to receive the first payment.
SCOPE OF APPLICATION
Recovery and Resilience Facility (RRF)
RISK TO THE EU BUDGET COVERED
Deficiencies in the Member States’ RRF management and control systems and breaches of the Rule of
Law principles which were previously raised in country-specific recommendations.
PROCEDURE
The calendar for payments and the corresponding milestones or targets to be fulfilled to receive each
payment are defined in a Council Implementing Decision (CID). The so-called ‘Operational
Arrangements’ (OA) establish in detail the type of documents or data (i.e., the verification mechanism)
required to certify the fulfilment of each milestone or target.
After receiving the payment request, the Commission has two months to assess whether the
corresponding milestones and targets are fulfilled. If it considers that there is a need for major
additional information or corrections, it has the capacity to ‘stop the clock’ (e.g., to suspend the two
months period) and ask the country to provide additional or corrected documents 103. If the assessment
is positive, it prepares a decision authorising the disbursement of the payment. This decision is adopted
unless there is a qualified majority of members of the Economic and Financial Committee (EFC) –
composed of senior officials of EU finance ministers – against it104. There is also the possibility that one
or more EFC members have serious doubts about the Commission’s assessment and request the matter
to be discussed in the European Council. In this case, the Commission’s authorising decision is
suspended until the European Council discusses the matter and up to a maximum of three months (Art
24(10) RRF regulation). If the Commission´s assessment is negative, the Commission will suspend the
RRF payment or part of the payment. The decision to suspend the RRF payment is taken by the
Commission alone after having received the observations from the Member State concerned.
MEASURES THAT CAN BE APPLIED
Partial or total suspension of the RRF payments. The amount to be suspended will be calculated by
following a methodology which takes into account the relative importance of each milestone 105.
Reduction of RRF support if the Member State does not take the necessary measures within a period of
six months from the suspension, and after having given the Member State concerned the possibility to
present its observations within two months from the communication of its conclusions
FICHE 9. SUSPENSION, REDUCTION OR TERMINATION OF AWARD PROCEDURES OR AGREEMENTS
Art 131 FR allows the Commission to suspend or cancel an EU tender organised in areas under direct
or indirect management if there is evidence of irregularities or fraud being committed in the
preparation of the tender.
The article also allows the Commission to suspend payments or interrupt the implementation of a grant
agreement or a contract in case of suspected fraud, irregularities or breaches of obligations by the
entity or person signing the agreement or by some final recipients (e.g. in case of a framework
agreement). If the presumed fault is confirmed, the Commission can terminate the agreement as a
whole (if the fault is committed by the entity or person signing the agreement) or in part (if the fault
only concerns some final recipients).
SCOPE OF APPLICATION
EU funds under direct and indirect management.
RISK TO THE EU BUDGET COVERED
Irregularities or fraud committed in the preparation of an award procedure (e.g. non-respect of
principles of transparency and equal treatment as stipulated in the EU public procurement directive);
irregularities or fraud committed during the implementation of a grant agreement or a contract; noncompliance with the obligations included in the grant agreement or contract signed with the
Commission (including, inter alia, respect of the principles of transparency, equal treatment and nondiscrimination).
MEASURES THAT CAN BE APPLIED
Suspension or cancellation of an EU award procedure, refusal to sign a grant agreement or a contract
with an operator that won an EU tender affected by fraud or irregularities; suspension, reduction or
termination of a grant agreement or a contract in case of fraud, irregularity or breach of obligations.
FICHE 10. EARLY DETECTION AND EXCLUSION SYSTEM (EDES)
The Early Detection and Exclusion System (EDES) is a system established in 2016 to protect the EU
budget from unreliable economic operators. The system is regulated in Article 135 of the Financial
Regulation and allows the Commission to blacklist (early detection) and exclude unreliable economic
operators (individual persons or entities) from receiving EU funds. The EDES procedure only applies to
EU funds under direct or indirect management (which roughly represent 26% of the EU budget) but
the revised Financial Regulation (currently under negotiation) foresees the extension of EDES to shared
management.
It is possible to blacklist and exclude economic operators (uas) on various grounds:
Bankruptcy, insolvency and similar situations
Grave professional misconduct
Non-payment of taxes or social security contributions
Fraud, corruption, and other illegal activities
Irregularities relating to EU-funded activities
Significant non-compliance with main obligations under contracts financed by the EU budget
Circumvention of fiscal, social and other legal obligations or creation of an entity for this
purpose
Exclusion lasts one to five years. In severe cases, the operator can be financially penalised and its name
can be published as a deterrent.
SCOPE OF APPLICATION
EU funding under direct or indirect management (roughly representing 26% of EU funds).
RISK TO THE EU BUDGET COVERED
Economic operators (individuals or public or private entities) that pose a risk to the EU budget, either
for integrity reasons (e.g. past fraudulent practices) or for reasons of competence (bankruptcy,
insolvency and similar reasons).
PROCEDURE
Commission’s ‘spending’ DGs, are responsible for detecting risky
operators and registering them in the EDES database. As a first step, they can blacklist the operator
(early detection) if they presume it is in an exclusion situation but need to collect the necessary
evidence to make an exclusion. This does not prevent operators from applying and receiving EU funds,
but serves as an alert for the other authorising officers.
If they have the necessary information, they can exclude the operator. The exclusion procedure
depends on the type of exclusion situation. Authorising officers can directly exclude counterparties for
bankruptcy or insolvency as well as for non-payment of taxes or social security contributions based on
final judgements or administrative decisions. In the other exclusion situations, the authorising officer
should send a request for exclusion to an EDES panel composed of an independent chair, two
permanent members designated by DG Budget and a representative of the authorising officer making
the exclusion request. The authorising officer takes the final decision after receiving the panel’s
opinion.
MEASURES THAT CAN BE APPLIED
-Exclusion of the economic operator from receiving EU funds.
-In severe cases, the operator can be financially penalised and
-its name can be published as a deterrent.
FICHE 11. EX ANTE ASSESSMENT OF IMPLEMENTING PARTNERS
The Commission can entrust budget implementation tasks to Member States’ organisations (Art
62.1.c.v FR) or national bodies governed by private law with a public service mission (Art 62.1.c.vi FR).
Before signing contribution agreements or guarantee agreements with these entities, the Commission
carries out an ex-ante assessment of the systems, rules and procedures of the entities implementing
Union funds. If it concludes that entities´ internal control systems are not sufficiently robust to prevent
and correct fraud, that rules and procedures for providing financing to third parties do not respect
certain principles (such as the principles of transparency and non-discrimination), that they do not have
efficient and effective review procedures or do not have effective rules for recovering funds unduly
paid they will not sign an agreement with these entities (Art 154 FR).
The tools for protecting the EU budget from breaches of the rule of law
SCOPE OF APPLICATION
EU funds under indirect management.
RISK TO THE EU BUDGET COVERED
Public entities implementing EU funds on behalf of the Commission and not complying with some
basic rules and principles (e.g. transparency and non-discrimination) in the implementation of
contribution or guarantee agreements signed with the Commission.
MEASURES THAT CAN BE APPLIED
Refusal to enter into a legal commitment with an entity if it does not have appropriate internal systems
and procedures.
FICHE 12. EARLY REPAYMENT OF LOANS
Article 220 FR stipulates that loan agreements signed between the Commission and a Member State
must include the obligation of the beneficiary country to take appropriate measures to prevent
irregularities and fraud, and, if necessary, take legal action to recover any funds misused (Art 220(5) (a)
FR). The agreement shall also entitle the Commission to early repayment of the loan where it has been
established that, in relation to the management of the financial assistance, the beneficiary country has
engaged in any act of fraud or corruption or any other illegal activity detrimental to the financial
interests of the Union (Art 220(5) (d) FR).
SCOPE OF APPLICATION
Financial assistance (support in form of loans to Member States in difficulty).
RISK TO THE EU BUDGET COVERED
Fraud, corruption or another illegal activity committed by a Member State and directly related to the
management of an EU loan
MEASURES THAT CAN BE APPLIED
Early repayment of the loan.
FICHE 13. RECOVERIES UNDER OWN RESOURCES
Member States’ authorities are responsible for collecting, calculating and making the amounts of Own
Resources (OR) available in a timely manner to the Commission. The methods and procedure to make
available the OR are detailed in a 2014 Council regulation, which was amended in 2022 to enhance
predictability and clarify procedures for dispute resolution
Contributions for Traditional Own Resources (TOR) are made every two months, on the basis of Member States' actual collection of
the relevant duties and levies. The Commission may conduct on-the-spot inspections to verify that
national customs authorities correctly apply the EU customs legislation and carry on the necessary
checks and controls to prevent and detect fraud. If it detects uncollected amounts resulting from
deficiencies in the national customs system, it will issue a recovery order against the Member State.
Contributions for VAT own resources are made every month, based on Member States´ annual forecasts
of the VAT base. The Commission conducts checks to verify that the national authorities have correctly
calculated the annual harmonised VAT base. If it detects errors in the calculus of the VAT base it will
correct the calculation and adjust the payment orders correspondingly. Adjustments can also be made
in subsequent years to adapt payments to the actual VAT data. Contributions to GNI-based own
resources are also made every month, based on the Commission´s calculations and by using Member
States´ GNI data. The Commission verifies this data and may conclude that there are errors in the way
the Member State has calculated its GNI. In this case, it will make adjustments to the amounts to be
paid. Adjustments will be made by changing the payment requests in subsequent years.
SCOPE OF APPLICATION
EU Own Resources.
RISK TO THE EU BUDGET COVERED
Deficiencies in the national customs systems resulting in a lack of prevention and detection of customs
fraud; misapplication of the EU VAT legislation when calculating the VAT harmonisation base, refusal
by a given Member State to make available the own resources to the Commission.
PROCEDURE
-If the Commission detects irregularities in the collection of TOR, it will issue a recovery order against
the Member State for the loss of amounts resulting from errors in the national customs system. The
Member State can contest the Commission´s decision and ask the Commission to review it, but this will
not suspend its obligation to provide the payment. Any delay in paying will give rise to the payment of
interest by the Member State concerned.
-If the Commission detects that the Member State has not correctly calculated the VAT harmonised
base, it will apply an adjustment. The Member State can contest this adjustment and raise a reservation.
This interrupts the period for which interest accrues, but does not suspend the obligation of payment.
Any delay in paying will give rise to the payment of interest by the Member State concerned.
-If the Commission concludes that there are errors in the way a Member State has calculated its GNI it
will apply adjustments. Any delay in paying the GNI own resources or upward adjustments gives rise
to the payment of interest by the Member State concerned
MEASURES THAT CAN BE APPLIED
-Recovery of due amounts through the issuance of a recovery order (Art 101 FR) or
-offsetting the due amounts against future claims to the EU budget (Art 102 FR).
-Imposition of interests in case of delays in making available the own resources to the Commission.