Documents Considered by the Committee on 22 October 2014 - European Scrutiny Committee Contents

14 Financial management

Committee's assessment Politically important
Committee's decisionCleared from scrutiny

Document details(a) Commission Communication on protecting the EU budget (b) Commission Report on discharge matters for the 2012 financial year (Summary)
Legal base
DepartmentHM Treasury
Document numbers(a) (36226), 13781/14, COM(14) 618

(b) (36366), 13681/14 + ADDs 1-2, COM(14) 607

Summary and Committee's conclusions

14.1 The Commission Communication, document (a), is an annual response to a European Parliament request made in the context of the 2011 "discharge" of the EU Budget and concerns protection of the budget. The Commission Report, document (b), is about the follow-up actions taken to improve management of the EU budget pursuant to the European Parliament discharge resolutions and the Council Recommendation for 2012.

14.2 The Government is generally welcoming of both documents, whilst emphasising the need to continue efforts to improve financial management.

14.3 Whilst clearing these documents, we draw them to the attention of the House as illustrative of continuing efforts to limit abuse of the EU's financial resources.

Full details of the documents: (a) Commission Communication: Protection of the EU budget to end 2013: (36226), 13781/14, COM(14) 618; (b) Commission Report on the follow-up to the discharge for the 2012 financial year (Summary): (36366), 13681/14 + ADDs 1-2, COM(14) 607.


14.4 The Commission receives a "discharge" of the annual General Budget from the European Parliament, on the basis of a recommendation by the Council, which follows from the European Court of Auditors' audit. The Commission is required to report on its actions in response to recommendations made during the discharge process.

The documents

14.5 The Commission Communication, document (a), is an annual response to a European Parliament request made in the context of the 2011 discharge and concerns protection of the EU Budget. It sets out in detail the use of corrective and preventive mechanisms to protect the EU budget from illegal and irregular expenditure. Preventive measures include interruptions and or suspension of payments, while corrective actions include financial corrections and recoveries. Financial corrections involve the recovery of EU funds that have been incorrectly received or applied by a Member State. The Commission details the process for imposing financial corrections and recoveries as well as the outcomes of these processes, with a particular focus on agriculture and cohesion policy. It also notes the distinction between financial corrections that involve the off-setting of the amount against future receipts and net financial corrections which involve funds returning to the EU budget, thereby reducing Member States' national contributions.

14.6 In relation to financial corrections in 2013 the Commission says that:

·  the total amount of corrections and recoveries confirmed in 2013 rose by 20%, compared to 2012, while the number implemented fell to €3.3 billion (£2.6 billion);

·  the majority of the corrections and recoveries confirmed and implemented mostly related to systems weaknesses or irregularities from previous years;

·  financial corrections represented 2.3% of all the budget payments with recoveries representing 2.2%;

·  2,495 financial corrections were confirmed in 2013 with 214 confirmed in the UK;

·  total recoveries implemented in 2013 stand at €862 million (£670 million); and

·  it will take into consideration all evidence from Member States before making final assessments on its summary of the financial corrections in progress at the end of 2013.

14.7 On cumulative financial corrections and recoveries to the end of 2013 the Commission says that:

·  the average amount of corrections and recoveries confirmed each programming period has varied from 2,719 during 1994-99 to 7,840 during 2000-06 and 2,116 during 2007-13;

·  corrections for the European Agricultural Guarantee Fund since 1999 total €9.15 billion (£7.11 billion);

·  material deficiencies identified in Member States' management and control systems are followed-up until sufficient evidence is provided confirming that the weaknesses have been remedied;

·  there are plans to remedy deficiencies in the quality of the Land Parcel Information System and to address weaknesses in the control systems of certain Member States;

·  for the European Regional Development Fund (ERDF) and the European Structural Fund (ESF), the combined amount of financial corrections at the end of 2013 was €8.8 billion (£6.8 billion);

·  with regard to the ESF, it aims to move away from correcting errors towards avoiding them;

·  in the areas of the ERDF and the Cohesion Fund, its action, in cooperation with Member States, to identify and address weaknesses, resulted in an overall improvement for 2007-13 compared to the previous programming period;

·  these actions included strengthening national management and control systems;

·  the Commission's simplification efforts, which included encouraging Member States to remove unnecessarily complex national eligibility rules, resulted in a reduction in the probability of occurrences of errors under the ESF programme; and

·  confirmed recoveries for the 2009-13 programming period stood at 3,530 with 3,353 recoveries implemented.

14.8 Turning to net financial corrections and improvements for 2014-20 the Commission says that:

·  for this programming period, the application of net financial corrections has been extended beyond agriculture to include cohesion policy;

·  further improvements have been implemented, including a greater focus on riskier expenditure, shorter conformity procedure and simplified payments schemes;

·  the new legal framework established by the Common Agricultural Policy Horizontal Regulation is expected to strengthen the Commission's powers to suspend EU financing in relevant cases;

·  under cohesion policy €570 million (£443 million) of financial corrections and recoveries were made in 2013, up from €63 million (£49 million) in 2012 — the factors that contributed to this notable rise include the closure of the 1994-99 programmes;

·  the detail of the new process under the 2014-20 programming period obliges the Commission to impose net financial corrections for cohesion funds; and

·  this will incentivise Member States to further improve their management and control systems, and conduct timely, effective and robust controls.

14.9 On preventive measures the Commission says that:

·  for agriculture, in addition to the use of net financial corrections, compulsory administrative structures have been established within Member States, which are also required to introduce systems for ex-ante controls and dissuasive sanctions; and

·  in addition to these corrective mechanisms used for cohesion, it may interrupt or suspend certain payments to protect the EU budget.

14.10 In regard to independent corrective actions by Member States the Commission, noting that recovery procedures under CAP are the responsibility of Member States and subject to national judicial processes, says that in 2013 Member States repaid a total of €197 million (£153 million) to the EU as part of cases identified by national controls and checks.

14.11 Finally, on other resources, the Commission says that in 2013, its recovery of unused pre-financing amounts totalled €435 million (£338 million) with total recoveries relating to own resources amounting to €43 million (£33.4 million).

14.12 The Commission Report, document (b), is on the follow-up actions taken to improve management of the EU budget pursuant to the European Parliament discharge resolutions and the Council Recommendation for 2012. The Report is accompanied by two Commission Staff Working Documents which detail its responses to both the European Parliament and Council's recommendations. Having considered these the Commission agrees to start new actions on 142 requests, says that for 240 requests the required action has already been taken or remains ongoing and that it is unable to action 40 of the requests.

Issues arising from the Annual Activity Reports of Directors-General

14.13 The European Parliament expressed concern regarding the number of reservations within the Annual Activity Reports (AARs) of the Commission's Directors-General. The Commission broadly welcomed the European Parliament's endorsement of specific reservations, but considered the request to audit all operational programmes during the course of the programming period to be in conflict with both the single audit approach and the European Parliament's request to enhance cost-efficiency by targeting audits to high risk programmes.

Member States' definition and application of regulations and rules

14.14 In the area of shared management, the Commission concludes that adequate processes existed in relation to some of the European Parliament's recommendations. However, it confirms that it has complied with the European Parliament's request for a clear definition of "serious deficiencies" (which triggers the procedure for net financial corrections) and the assessment of key requirements for management and control systems to be set out in a delegated act. The Commission says that it also introduced a new suspension mechanism for agriculture, which can be used as an ex-ante instrument to protect the EU budget from weaknesses in Member States' control systems.

Stronger control and audit strategies for 2014-20

14.15 The Commission sets out action it has taken in response to seventeen recommendations from the European Parliament relating to controls and audits. Of the seventeen recommendations, six relate specifically to the Directorate-General for agriculture (particularly shortcomings in the Land Parcel Information System) and six concern collectively the Directorates-General for regional and urban policy, for employment, social affairs and inclusion and for agriculture. The Commission says that in many cases it assessed that the European Parliament's recommendations fell outside the Commission's remit, being the responsibility of Member States, or that existing systems and processes were already being successfully implemented to address those points. It says that in other cases, it took action pursuant to the European Parliament's recommendations, including through the development of new and reinforced audit strategies in both cohesion and agriculture.

Further improving the Annual Activity Reports

14.16 In this area, the Commission highlights efforts made to independently audit national managing authorities, intermediate bodies and those beneficiaries identified as high risk. The Commission also confirms that AARs already report the examination of Member States' control statistics and audit reports.

Taking necessary protection measures

14.17 Among other actions to address the European Parliament's requests in this area, the Commission sets out its commitment to provide information on interruptions, suspensions, financial corrections and recoveries as well as data on those net financial corrections which lead to assigned revenue for the EU budget and the results of Member States' corrective work.

Other measures

14.18 The Commission confirms that steps have been taken to address the European Parliament's requests to publish every stage of public procurement procedures online and that it is committed to tackling weaknesses identified in particular Member States.

EU Anti-Fraud Office (OLAF)

14.19 The European Parliament raised a number of issues relating to the Dalli case (a former Commissioner who has a case before the Court of Justice) focussing particularly on information provided to the European Parliament, accountability by the Commission and OLAF, respect for the principle of innocence, legality of recordings, cooperation with the judicial authorities of Member States and respect for fundamental rights. The Commission considers that it has acted appropriately and in accordance with existing rules and regulations. Further, it notes that, where relevant, it has already provided detailed explanations to the European Parliament. The Commission also addresses the European Parliament's concerns regarding the financial indicators for opening an investigation, the follow-up measures taken on cases of suspected fraud, cases dismissed and referred back to the Commission in 2012-13, surveys among OLAF staff and a request for a non-redacted version of a document.

The Government's view

14.20 In his Explanatory Memorandum of 15 October 2014 on the Commission Communication, document (a), the Financial Secretary to the Treasury (Mr David Gauke) says that the Government supports efforts to protect EU budget funds through improved financial management, including the use of net financial corrections which can serve as a deterrent, encouraging Member States to ensure that they comply with the rules governing the use of EU budget funds. He comments further that:

·  a number of problems have been identified, however, with the way in which financial corrections are currently applied and the Government welcomes the Commission's commitment to address these;

·  the Government also supports the efforts to shorten the conformity procedure during the 2014-20 programming period and believes that the Commission should abide by the same deadlines for issuing responses as apply to Member States; and

·  it also strongly encourages close collaboration between the Commission and Member States' paying agencies on issues arising from the implementation of the regulations, as well as efforts to simplify the existing complex rules and legislation governing the use of EU budget funds.

14.21 In his Explanatory Memorandum, also of 15 October 2014, the Minister says that the Government welcomes the Commission Report, document (b), which highlights efforts to address the concerns raised by Council in their discharge recommendations. He comments that:

·  at a time when public resources are scarce, governments across the EU need to have confidence that their money is being spent as effectively as possible and that monitoring systems are robust and effective;

·  however, at the same time as driving down the error rates, it is also important to ensure that the costs of controls incurred by Member States is reduced;

·  further, the Commission should calculate error rates using a statistically valid methodology, drawing on the work of audit bodies in Member States;

·  the Government will continue to work with other Member States in the Council to encourage the Commission to satisfy the recommendations put forward by the European Parliament and the Council, particularly those relating to the simplification of existing rules and legislation governing the use of EU budget funds; and

·  the Government also welcomes the mandate given to the Commissioners-designate to make faster progress on simplification and better regulation.

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