CELEX: 62008TJ0549
ESF
Suspension of financial aid
Campaign against discrimination and inequality in the employment market
Serious failings in the system of management and monitoring which could lead to systemic irregularities
Article 39(2)(c) of Regulation (EC) No 1260/1999
Legitimate expectations

Legal context
The first paragraph of Article 147 EC entrusts the administration of the European Social Fund (ESF), which was established
under Article 146 EC, to the Commission of the European Communities. In accordance with the first paragraph of Article 159
EC, the ESF is one of the Structural Funds.
With regard to the programme period 2000 to 2006, to which the present case relates, the legal framework governing the Structural
Funds, in particular the objectives, organisation, functioning and utilisation of the assistance and the role and the powers
of the Commission and the Member States in that field, is determined mainly by Council Regulation (EC) No 1260/1999 of 21
June 1999 laying down general provisions on the Structural Funds (OJ 1999 L 161, p. 1).
In accordance with Article 9(n) of that regulation, ‘managing authority’ means any public or private authority or body at
national, regional or local level designated by the Member State, or the Member State when it is itself carrying out this
function, to manage assistance for the purposes of the regulation. Article 9(o) defines ‘payment authority’ as one or more
national, regional or local authorities or bodies designated by the Member States for the purposes of drawing up and submitting
payment applications and receiving payments from the Commission.
Article 34(1)(f) of Regulation No 1260/1999 provides in particular that the managing authority is responsible for ensuring
the correctness of operations financed under the assistance, particularly by implementing internal controls in keeping with
the principles of sound financial management.
Article 38 of Regulation No 1260/1999 provides as follows:
‘1.      Without prejudice to the Commission’s responsibility for implementing the general budget of the European [Union], Member States
shall take responsibility in the first instance for the financial control of assistance. To that end, the measures they take
shall include:
(a)      verifying that management and control arrangements have been set up and are being implemented in such a way as to ensure that
Community funds are being used efficiently and correctly;
(b)      providing the Commission with a description of these systems;
(c)      ensuring that assistance is managed in accordance with all the applicable Community rules and that the funds placed at their
disposal are used in accordance with the principles of sound financial management;
(d)      certifying that the declarations of expenditure presented to the Commission are accurate and ensuring that they result from
accounting systems based on verifiable supporting documents;
(e)      preventing, detecting and correcting irregularities, notifying these to the Commission, in accordance with the rules, and
keeping the Commission informed of the progress of administrative and legal proceedings;
(f)      presenting to the Commission, when each assistance is wound up, a declaration drawn up by a person or department having a
function independent of the designated managing authority. This declaration shall summarise the conclusions of the checks
carried out during previous years and shall assess the validity of the application for payment of the final balance and the
legality and regularity of the transactions covered by the final certificate of expenditure. The Member States may attach
their own opinion to this certificate if they consider it necessary;
(g)      cooperating with the Commission to ensure that Community funds are used in accordance with the principles of sound financial
management;
(h)      recovering any amounts lost as a result of an irregularity detected and, where appropriate, charging interest on late payments.
2.      The Commission in its responsibility for the implementation of the general budget of the European [Union] shall ensure that
Member States have smoothly functioning management and control systems so that Community funds are efficiently and correctly
used.
To that end, without prejudice to checks carried out by the Member States in accordance with national laws, regulations and
administrative provisions, Commission officials or servants may, in accordance with systems agreed with the Member State in
the framework of cooperation described in paragraph 3, carry out on-the-spot checks, including sample checks, on the operations
financed by the Funds and on management and control systems with a minimum of one working day’s notice. The Commission shall
give notice to the Member State concerned with a view to obtaining all the assistance necessary. Officials or servants of
the Member State concerned may take part in such checks.
The Commission may require the Member State concerned to carry out an on-the-spot check to verify the correctness of one or
more transactions. Commission officials or servants may take part in such checks.
3.      The Commission and the Member States shall on the basis of bilateral administrative systems cooperate to coordinate plans,
methods and implementation of checks so as to maximise the usefulness of those carried out. They shall immediately exchange
the results of the checks carried out.
At least once a year and, in any event, before the annual review provided for in Article 34(2) the following shall be examined
and evaluated:
(a)      the results of the checks carried out by the Member State and the Commission;
(b)      any comments made by other national or Community control bodies or institutions;
(c)      the financial impact of the irregularities noted, the steps already taken or still required to correct them and, where necessary,
adjustments to the management and control systems.
4.      Following this examination and evaluation and without prejudice to the measures to be taken immediately by the Member State
under this Article and Article 39, the Commission may make observations, particularly regarding the financial impact of any
irregularities detected. These observations shall be addressed to the Member State and the managing authority of the assistance
concerned. The observations shall be accompanied, where necessary, by requests for corrective measures to remedy the management
shortcomings found and correct those irregularities detected which have not already been corrected. The Member State shall
have the opportunity to comment on these observations.
Where, following or in the absence of comments from the Member State, the Commission adopts conclusions, the Member State
shall take the necessary steps within the deadline set to comply with the Commission’s requests and inform the Commission
of its actions.
5.      Without prejudice to this Article, the Commission, after due verification, may suspend all or part of an interim payment if
it finds that the expenditure concerned is linked to a serious irregularity which has not been corrected and that immediate
action is needed. The Commission shall inform the Member State concerned of the action taken and the reasons for it. If, after
five months, the reasons for the suspension remain or the Member State concerned has not notified the Commission of the measures
taken to correct the serious irregularity, the provisions laid down under Article 39 shall apply.
6.      For a period of three years, unless otherwise decided in the bilateral administrative systems, following the payment by the
Commission of the final balance in respect of any assistance, the responsible authorities shall keep available for the Commission
all the supporting documents (either the originals or versions certified to be in conformity with the originals on commonly
accepted data carriers) regarding expenditure and checks on the assistance concerned. This period shall be interrupted either
in the case of legal proceedings or at the duly motivated request of the Commission.’
Article 39 of Regulation No 1260/1999, entitled ‘Financial corrections’, is worded as follows:
‘1.      The Member States shall, in the first instance, bear the responsibility for investigating irregularities, acting upon evidence
of any major change affecting the nature or conditions for the implementation or supervision of assistance and making the
financial corrections required.
The Member States shall make the financial corrections required in connection with the individual or systemic irregularity.
The corrections made by the Member State shall consist in cancelling all or part of the Community contribution. The Community
funds released in this way may be reused by the Member State for the assistance concerned, in compliance with the systems
to be defined pursuant to Article 53(2).
2.      If, after completing the necessary verifications, the Commission concludes that:
…
(c)      there are serious failings in the management or control systems which could lead to systemic irregularities;
the Commission shall suspend the interim payments in question and, stating its reasons, request that the Member State submit
its comments and, where appropriate, carry out any corrections, within a specified period of time.
If the Member State objects to the observations made by the Commission, the Member State shall be invited to a hearing by
the Commission, in which both sides in cooperation based on the partnership make efforts to reach an agreement about the observations
and the conclusions to be drawn from them.
3.      At the end of the period set by the Commission, the Commission may, if no agreement has been reached and the Member State
has not made the corrections and taking account of any comments made by the Member State, decide within three months to:
(a)      reduce the payment on account referred to in Article 32(2);
or
(b)      make the financial corrections required by cancelling all or part of the contribution of the Funds to the assistance concerned.
The Commission shall when deciding the amount of a correction take account, in compliance with the principle of proportionality,
of the type of irregularity or change and the extent and financial implications of the shortcomings found in the management
or control systems of the Member States.
In the absence of a decision to do either (a) or (b) the interim payments shall immediately cease to be suspended.
…’
In accordance with Article 3(a) of Commission Regulation (EC) No 438/2001 of 2 March 2001 laying down detailed rules for the
implementation of Council Regulation (EC) No 1260/1999 as regards the management and control systems for assistance granted
under the Structural Funds (OJ 2001 L 63, p. 21), the management and control systems of managing and paying authorities and
intermediate bodies are to, subject to proportionality in relation to the volume of assistance administered, provide for a
clear definition, a clear allocation and, as necessary to ensure sound financial practice, an adequate separation of functions
within the organisation concerned.
Article 4 of Regulation No 438/2001 provides as follows:
‘Management and control systems shall include procedures to verify the delivery of the products and services co-financed and
the reality of expenditure claimed and to ensure compliance with the terms of the relevant Commission decision under Article
28 of Regulation (EC) No 1260/1999 and with applicable national and Community rules on, in particular, the eligibility of
expenditure for support from the Structural Funds under the assistance concerned, public procurement, State aid (including
the rules on the cumulations of aid), protection of the environment and equality of opportunity.
The procedures shall require the recording of verifications of individual operations on the spot. The records shall state
the work done, the results of the verification and the measures taken in respect of discrepancies. Where any physical or administrative
verifications are not exhaustive, but performed on a sample of operations, the records shall identify the operations selected
and describe the sampling method.’
Article 7 of Regulation No 438/2001 reads as follows:
‘1.      Member States’ management and control systems shall provide a sufficient audit trail.
2.      An audit trail shall be considered sufficient where it permits:
(a)      reconciliation of the summary amounts certified to the Commission with the individual expenditure records and supporting documents
held at the various administrative levels and by final beneficiaries including, where the latter are not the final recipients
of funding, the bodies or firms carrying out operations; and
(b)      verification of the allocation and the transfers of the available Community and national funds.
An indicative description of the information requirements for a sufficient audit trail is given in Annex I.
…’
Article 9 of the same regulation, entitled ‘Certification of expenditure’, is worded as follows:
‘1.      The certificates of statements of interim and final expenditure referred to in Article 32(3) and (4) of Regulation (EC) No
1260/1999 shall be drawn up in the form prescribed in Annex II by a person or department within the paying authority that
is functionally independent of any services that approve claims.
2.      Before certifying a given statement of expenditure, the paying authority shall satisfy itself that the following conditions
are fulfilled:
(a)      the managing authority and intermediate bodies have fulfilled the requirements of Regulation (EC) No 1260/1999, in particular
Article 38(1)(c) and (e) and Article 32(3) and (4), and observed the terms of the Commission’s decision under Article 28 of
the Regulation;
(b)      the statement of expenditure includes only expenditure:
(i)      that has been actually effected within the eligibility period laid down in the decision in the form of expenditure by final
beneficiaries, within the meaning of paragraphs 1.2, 1.3 and 2 of Rule No 1 of the Annex to Commission Regulation (EC) No
1685/2000 …, which can be supported by receipted invoices or accounting documents of equivalent probative value;
(ii)      that has been incurred in operations that were selected for funding under the particular assistance concerned in accordance
with its selection criteria and procedures and have been subject to Community rules throughout the period during which the
expenditure was incurred; and
(iii)      from measures for which all State aid has been formally approved by the Commission, where relevant.
3.      So that the sufficiency of the control systems and the audit trail can always be taken into account before a statement of
expenditure is presented to the Commission, the managing authority shall ensure that the paying authority is kept informed
of the procedures operated by the managing authority and by intermediate bodies to:
(a)      verify the delivery of the products and services co-financed and the reality of expenditure claimed;
(b)      ensure compliance with the applicable rules; and
(c)      maintain the audit trail.
4.      In cases where the managing authority and the paying authority are or belong to the same body, this body shall ensure that
procedures offering equivalent standards of control to those stipulated in paragraphs 2 and 3 are applied.’

Background to the dispute
On 8 August 2000 the Commission adopted Decision C(2000) 1128 approving the single programming document for Community structural
assistance under Objective 3 to Luxembourg (CCI 1999LU053DO001), which provided for a total cost of EUR 93 578 900 and Community
co‑finance of a maximum of EUR 39 452 700. That decision was last amended by Decision C(2007) 4256 of 10 September 2007, which
raised the total cost to EUR 83 289 224 and the maximum financial contribution of the ESF to EUR 35 576 935.
On 22 March 2001 the Commission adopted Decision C(2001) 42 approving the Community initiative to combat discrimination and
inequality in the employment market (EQUAL) in Luxembourg (CCI 2000LU050PC001), which provided for a total cost of EUR 8 800 000
and an ESF contribution of EUR 4 400 000. That decision was last amended by Decision C(2007) 3658 of 24 July 2007, which raised
the total cost to EUR 8 707 522 and the ESF contribution to EUR 4 353 761.
By letter of 7 February 2002, the Luxembourg authorities submitted, pursuant to Article 5 of Regulation No 438/2001, a description
of their management and control systems for the two assistance cases referred to in Decisions C(2000) 1128 and C(2001) 42
(‘the assistance at issue’).
Between 8 and 10 July 2002, on the basis of the description submitted by the Luxembourg authorities, the Commission services
carried out a preventive audit, pursuant to Article 38(2) of Regulation No 1260/1999, in relation to the programme period
2000 to 2006 to evaluate the management and control systems which had been set up.
By letter of 22 August 2002, the Commission sent the final audit report to the Luxembourg authorities. In the report the Commission
services found in particular, on the basis of a formal summary, that the management and control systems which had been set
up by the Grand Duchy of Luxembourg offered adequate guarantees of compliance with the existing legislation and the generally
accepted criteria of sound management.
In the course of an audit carried out on 7 and 8 July 2003 in order to make a summary of the closure procedures for the programme
period 1994 to 1999, the Commission services also examined the systems set up for the programme period 2000 to 2006.
By letter of 4 September 2003, the audit report relating to that examination was sent to the Luxembourg authorities. In the
report the Commission services found that the recommendations in the previous report had in general been followed.
From 14 to 16 June 2004, the Commission carried out an audit of the management and control systems for the EQUAL programme.
By letter of 11 February 2005, it submitted the audit report, according to which the systems met the legal criteria, except
for the so-called ‘5%’ checks which had not then been carried out.
Between 11 June and 13 July 2007, the Commission services carried out several examinations in order to confirm, on the basis
of random sampling, the reliability level of the management and control systems set up for the assistance at issue. The audit
report was sent to the Luxembourg authorities by letter of 29 November 2007 (‘the audit report of 29 November 2007’). It drew
attention to material failings in the management and control systems set up for the assistance at issue concerning the separation
of the functions of the managing authority and those of the paying authority, the first-level verifications carried out by
the managing authority, the certification by the paying authority of statements of expenditure and the audit trail.
By letter of 16 January 2008, the Luxembourg authorities submitted their observations on the audit report of 29 November 2007.
By letter of 29 January 2008, the Commission reminded the Luxembourg authorities that it was incumbent upon them to restore
sound management of the assistance at issue, particularly by virtue of the principle of sound financial management and having
regard to the risks for the Community budget.
At the annual meeting on 29 February 2008, the Commission warned the Luxembourg authorities that, if they failed in their
obligation to restore sound management of the assistance at issue, the Commission might adopt a decision to suspend the interim
payments.
By letter of 13 May 2008, the Commission stated that it stood by its position and replied to the arguments put forward by
the Luxembourg authorities in their letter of 16 January 2008. The Commission added that none of the recommendations in the
audit report of 29 November 2007 could be ‘brought to a close’ on the basis of the information supplied. In accordance with
Article 39(2) of Regulation No 1260/1999, the Commission requested the Luxembourg authorities to submit their observations
within two months after receipt of the Commission’s letter, together with a description of the corrective measures taken to
improve the functioning of the management and control systems for the assistance at issue and the necessary financial corrections.
At a meeting on 20 May 2008 between representatives of the Luxembourg General Inspectorate of Finance and the Commission services,
the latter gave further details of the reasons for their position with regard to the failings in the management and control
systems. The Luxembourg authorities for their part stated that they adhered to their position set out in the letter of 16
January 2008. The managing authority repeated its position at a meeting on 17 June 2008 between the representatives of the
Luxembourg managing authority and the Commission services.
By Decision C(2008) 5383 of 24 September 2008 on the suspension of interim payments from the European Social Fund (ESF) to
the single programming document for Community structural interventions falling under Objective 3 to the Grand Duchy of Luxembourg
and by Decision C(2008) 5730 of 6 October 2008 on the suspension of interim payments from the Community initiative programme
to combat discrimination and inequality in the employment market (EQUAL) to the Grand Duchy of Luxembourg (‘the contested
decisions’), the Commission suspended the interim payments from the ESF relating to the assistance at issue. The Commission
found that there were serious failings in the management or control systems which could lead to systemic irregularities within
the meaning of Article 39(2)(c) of Regulation No 1260/1999 with regard to the assistance at issue.

Procedure and forms of order sought by the parties
By application lodged at the Registry of the General Court on 16 December 2008, the Grand Duchy of Luxembourg brought the
present action.
Upon hearing the report of the Judge-Rapporteur, the Court (Eighth Chamber) decided to open the oral procedure.
The parties presented oral argument and their replies to the questions put by the Court at the hearing on 4 March 2010.
The Grand Duchy of Luxembourg claims that the Court should:
–        annul the contested decisions;
–        order the Commission to pay the costs.
The Commission contends that the Court should:
–        rule that the action is inadmissible in so far as it relates to Decision C(2008) 5383;
–         dismiss the remainder of the application;
–        order the Grand Duchy of Luxembourg to pay the costs.

Admissibility

Arguments of the parties
The Commission considers that the present action is out of time and therefore inadmissible in so far as it is directed at
Decision C(2008) 5383. Under the fifth paragraph of Article 230 EC, actions for annulment must be instituted within two months
of notification of the decision to the applicant. In the present case, Decision C(2008) 5383 reached the Permanent Representation
of the Grand Duchy of Luxembourg to the European Union on 25 September 2008. Consequently the present action is out of time
in so far as it relates to Decision C(2008) 5383.
The Grand Duchy of Luxembourg has made no observations on that point in its written pleadings. It did however state, in reply
to a question from the Court at the hearing, that it did not deny that it received Decision C(2008) 5383 on 25 September 2008,
which was formally noted in the transcript of the hearing.

Findings of the Court
It must be observed that, under the fifth paragraph of Article 230 EC, actions for annulment must be instituted within two
months of notification of the contested decision to the applicant. Under Article 102(2) of the Rules of Procedure of the General
Court, that time-limit is to be extended on account of distance by a single period of 10 days.
It has consistently been held that the time-limit for bringing actions is a matter of public policy and is not subject to
the discretion of the parties or the Court, since it was established in order to ensure that legal positions are clear and
certain and to avoid any discrimination or arbitrary treatment in the administration of justice (Case C‑246/95
Coen
[1997] ECR I‑403, paragraph 21, and Joined Cases T‑121/96 and T‑151/96
Mutual Aid Administration Services
v
Commission
[1997] ECR II‑1355, paragraph 38).
In the present case, pursuant to Articles 101(1)(a) and (b) and (2) of the Rules of Procedure, the time-limit for bringing
an action against Decision C(2008) 5383 began to run on 26 September 2008, the day following the date of notification of the
decision to the Grand Duchy of Luxembourg.
Therefore the time-limit for bringing an action against that decision, which included not only the two-month period provided
for in the fifth paragraph of Article 230 EC, but also the time-limit on account of distance, provided for in Article 102(2)
of the Rules of Procedure, expired on 5 December 2008.
It follows that, in so far as the present action for annulment, which was initiated on 16 December 2008, relates to Decision
C(2008) 5383, the action is out of time and must therefore be ruled inadmissible. The action is, however, admissible in so
far as it relates to Decision C(2008) 5730, of which the Grand Duchy of Luxembourg was notified only on 7 October 2008.

Substance
In essence, the Grand Duchy of Luxembourg bases its action on two pleas. The first alleges breach of the principle of the
protection of legitimate expectations. The second alleges infringement of Article 39(2)(c) of Regulation No 1260/1999 in that
the Commission suspended payments relating to the assistance at issue when in fact the requisite conditions were not fulfilled.
With regard to the order in which the pleas raised by the Grand Duchy of Luxembourg should be examined, a question on which
the parties disagree, it seems appropriate to examine the plea alleging infringement of Article 39(2)(c) of Regulation No
1260/1999 before that alleging breach of the principle of the protection of legitimate expectations.

Plea alleging infringement of Article 39(2)(c) of Regulation No 1260/1999
Arguments of the parties
The Grand Duchy of Luxembourg submits that the Commission infringed Article 39(2)(c) of Regulation No 1260/1999 by suspending
the assistance at issue although the conditions required by that provision had not been fulfilled. The finding that there
were serious failings which could lead to systemic irregularities is manifestly erroneous. Even assuming that irregularities
had been found, they would have been minor and not systemic.
First, regarding the organisation of the managing authority and the paying authority, neither Article 3 of Regulation No 438/2001
nor any other provision of that regulation prevents those two authorities from belonging to the same body. That is the situation
envisaged by Article 9(4) of the same regulation and there is nothing to prevent the managing authority and the paying authority
from carrying out their verifications jointly. In requiring such a degree of functional separation, the Commission erred in
law. In the reply, the Grand Duchy of Luxembourg adds that, although the auditors of the two authorities carry out the verification
at the same time in relation to the same final beneficiary, that does not give rise to a risk of complicity between the auditor
and the person subject to the audit because of the different ethical rules applying within the Luxembourg civil service.
Second, with regard to the verification at first level by the managing authority and the certification of expenditure by the
paying authority, the Grand Duchy of Luxembourg submits that the certification of expenditure
en cascade
, that is to say, the choice made by the national managing authority to declare expenditure as to which doubt exists, but
which has not been legally classified as ineligible at the date of the declaration, conforms with Article 4 of Regulation
No 438/2001. Likewise, the Grand Duchy of Luxembourg claims that the exclusion of only the doubtful item from so-called ‘partly
ineligible’ expenditure and not the full amount of the expenditure does not contravene that provision. This leaves the national
authorities with a margin of discretion with regard to the functioning of their management and control systems, provided that
those systems provide for procedures for verifying the delivery of co‑financed products and services and for verifying that
the declared expenditure was actually incurred, and ensure compliance with the conditions laid down in the respective decisions
of the Commission. According to the Grand Duchy of Luxembourg, the working document of 21 December 2005 on sound practice
concerning the management verifications to be made by the Member States on projects co-financed by the Structural Funds and
by the Cohesion Fund, upon which the Commission relies in support of its interpretation, did not command observance at the
time when the programmes were being carried out. In short, because of the subsequent checks carried out by the Luxembourg
authorities, the European Union’s financial interests were safeguarded.
Third, the Grand Duchy of Luxembourg considers that the findings of the audit report of 29 November 2007 concerning the audit
trail, which are repeated at paragraphs 30 to 32 of the contested decisions and according to which the files kept by the managing
authority are incomplete and do not include certain essential information for proving the eligibility and legality of expenditure,
are incorrect. This point was referred to by the Luxembourg authorities in their observations of 16 January 2008, which pointed
out that it was perfectly possible to find all the information relating to the detailed budget and the results to be achieved
in the application document for each project financed. Finally, in the rejoinder, the Grand Duchy of Luxembourg stresses that
the information which is allegedly missing was never requested by the Commission from the national authorities.
The Commission disputes all the arguments of the Grand Duchy of Luxembourg. It points out that, contrary to the Grand Duchy
of Luxembourg’s submission, in the present case it is not a question of minor irregularities, but a number of serious failings
concerning the organisation, the first-level verifications by the managing authority, the certification of statements of expenditure
by the paying authority and the audit trail, which are key elements of the management and control systems, and each of those
failings would have justified the suspension of interim payments.
Findings of the Court
First of all, it must be observed that it is clear from the case-law that the rule that only expenditure incurred by the national
authorities in conformity with the Community rules is to be charged to the Community budget applies equally to the grant of
financial assistance under the ESF (Case C-199/03
Ireland
v
Commission
[2005] ECR I‑8027, paragraph 26).
Under Article 39(2)(c) of Regulation No 1260/1999, the Commission is to suspend interim payments if, after completing the
necessary verifications, it concludes that there are serious failings in the management or control systems which could lead
to systemic irregularities. Article 39(3) of the same regulation states that the Commission may then, if necessary, make the
financial corrections required by cancelling all or part of the Fund’s contribution to the assistance concerned.
In accordance with the requirement of sound financial management underlying the use of the Structural Funds and having regard
to the responsibilities of the national authorities in using the Funds, the obligation of the Member States to set up the
management and control systems referred to in Article 38(1) of Regulation No 1260/1999, the detailed rules for which are set
out in Articles 2 to 8 of Regulation No 438/2001, is crucial.
In the present case, it is necessary to determine whether the Commission was right to suspend the interim payments relating
to the EQUAL programme to the Grand Duchy of Luxembourg in view of the failings which it identified and which are connected
with, first, the organisation of the managing authority and the paying authority, second, with the verification at first level
by the managing authority and the certification of expenditure statements by the paying authority and, third, the audit trail.
First, regarding the organisation of the managing authority and the paying authority, the Commission states, at paragraph
3.1.1.5 of the audit report of 29 November 2007, that ‘it appeared that the persons responsible for carrying out the verifications
provided for in Article 4 [of Regulation No 438/2001] and those provided for in Article 9 [of the same regulation] for the
purpose of certifying expenditure carried out those functions jointly’.
From that finding the Commission concluded, in recital 18 of Decision C(2008) 5730, that ‘the organisation of the managing
authority and the paying authority [could] not be regarded as appropriate and did not meet the requirements of Article 3 of
Regulation No 438/2001 (clear definition, clear allocation and adequate separation of functions; guarantee that functions
are carried out satisfactorily)’. The Grand Duchy of Luxembourg claims in substance that, contrary to the conclusion reached
by the Commission, the joint checks by the managing authority and the paying authority respectively in relation to the assistance
which is the subject of Decision C(2008) 5730 (‘the EQUAL assistance’) are not contrary to Regulation No 438/2001.
On that point, it must be observed that Article 3(a) of Regulation No 438/2001 provides that ‘the management and control systems
of managing and paying authorities and intermediate bodies shall, subject to proportionality in relation to the volume of
assistance administered, provide for a clear definition, a clear allocation and, as necessary to ensure sound financial practice,
an adequate separation of functions within the organisation concerned’.
Although, as the Grand Duchy of Luxembourg pointed out, Article 9(4) of the regulation does not prevent the managing authority
and the paying authority from belonging to the same body, there must still be a ‘clear allocation’ and an ‘adequate separation’
of functions within the organisation concerned.
In the present case, it is clear from the reasoning of Decision C(2008) 5730 on that point that it is not so much the irregularities
in the checks carried out by those authorities as their lack of reliability that was highlighted by the Commission. In the
Commission’s opinion, the joint performance of the duties of management and payment gives rise to a degree of doubt as to
the impartiality of the persons responsible for the checks in view of the proximity and the ‘complicity’ that such joint duties
entail. In particular, recital 17 of Decision C(2008) 5730 states that ‘the verifications provided for by Article 4 of Regulation
No 438/2001 and the checks provided for by Article 9 of the same Regulation cannot … be carried out jointly in view of the
risk of distorting the judgment of the authority responsible for certifying demands for payment’.
That conclusion must be endorsed. As the managing authority and the paying authority are required, by the legislation applying
to assistance financed by the ESF, to carry out different checks at different stages, the simultaneous performance of the
functions of those authorities creates a significant risk of coordination, or even the merging, of those checks and is therefore
such as to give rise to doubt concerning their reliability.
Therefore, without the need to refer to the information in the working document on sound practice concerning the paying authority’s
duty of certification, presented by the Commission services to the Member States and cited by the Commission, the Commission
was right in finding that the organisation of the Luxembourg managing and paying authorities contravened Article 3 of Regulation
No 438/2001.
Second, with regard to the failings in the first-level verifications by the managing authority and the certification of expenditure
by the paying authority, the Grand Duchy of Luxembourg contends, in substance, that the Commission, in criticising the system
of first-level verification and certification in relation to the EQUAL assistance, disregarded the fact that no ineligible
expenditure was taken into account in the subsequent checks and that, ultimately, the financial interests of the Community
were safeguarded.
However, it must be pointed out that, in the audit report of 29 November 2007, the Commission found that there were certain
items of expenditure in relation to which not only had the managing authority failed to carry out a first-level verification,
or carried out an inadequate verification, contrary to Article 34 of Regulation No 1260/1999 and Article 4 of Regulation No
438/2001, but also the paying authority had not certified that expenditure in accordance with Article 38(1)(d) of Regulation
No 1260/1999 and Article 9 of Regulation No 438/2001. In certain cases those authorities declared expenditure with regard
to which they were doubtful. More precisely, the managing authority had carried out incomplete verifications of declared expenditure.
Moreover, the irregularities which may have been found in first-level verification were not systematically taken into account
by the paying authority at the stage of certifying the statements of expenditure.
Such shortcomings are serious failings in the management and control systems which may lead to systemic irregularities. At
both the stage of first-level verification by the managing authority and that of certification by the paying authority, which
are guarantees of sound financial management, the national authorities must, before the event, completely satisfy themselves
that the expenditure in question was incurred and was duly incurred. Contrary to the Grand Duchy of Luxembourg’s argument,
it is not sufficient for the national authorities to carry out verification after the event and then make financial corrections
if necessary.
Third, those considerations also apply to the following of the audit trail which is the subject of Article 7 of Regulation
No 438/2001. In that respect the Grand Duchy of Luxembourg has not shown that mere reference to the application documents
relating to the EQUAL assistance could on its own provide all the specific information required by Article 7(2) and (3) of
the regulation.
On that point, it must be stressed that Annex I to Regulation No 438/2001, entitled ‘Indicative description of information
requirements for a sufficient audit trail’, gives very specific details with regard to the obligations of national authorities.
It states clearly that they must maintain and keep accounting records at the appropriate management level and a body of information
for each co-financed operation.
Therefore the Commission rightly found that there were serious failings in the management and control systems which could
lead to systemic irregularities and, consequently, the Commission suspended the interim payments for the EQUAL assistance.
In that connection, it must be observed that the obligation of applicants and beneficiaries of Community funding to ensure
that they provide the Commission with sufficiently specific information for the management and control system put in place
to ascertain whether the conditions for the grant of funding are fulfilled to be able to function correctly is inherent in
the system of ESF assistance and is essential for it to function properly (see, by analogy, judgment of 6 June 2007 in Joined
Cases T-251/05 and T-425/05
Mediocurso
v
Commission
, not published in the ECR, paragraph 67, and the case-law cited).
Therefore the present plea cannot succeed.

Plea alleging breach of the principle of the protection of legitimate expectations
Arguments of the parties
The Grand Duchy of Luxembourg considers that the Commission breached the principle of the protection of legitimate expectations
because it had expressly found, in the preventive audit reports submitted on 22 August 2002 and 4 September 2003 respectively,
that the management and control systems for the assistance at issue offered very satisfactory safeguards. Consequently the
conclusions reached by the Commission on those audits were diametrically opposed to those in the contested decisions.
First, the preventive audits of 2002 and 2003 pursuant to Article 38(2) of Regulation No 1260/1999 were the only ones in the
programme period in question and, second, the contested decisions were made only as a result of a later audit, that is to
say, when it was no longer possible to modify the management and control systems in question. In the present case, the Luxembourg
authorities had no reason not to rely on the assessment in those reports with regard to the compliance of their management
and control systems.
The Grand Duchy of Luxembourg adds that, in previous audits, the Commission services had expressly approved the organisation
of the managing authority and the paying authority, as well as the audit trail and the procedure for the certification of
expenditure
en cascade
, used by the Luxembourg authorities.
Regarding the working documents on sound practice to which the Commission refers, they were in all probability drawn up at
the end of 2005, that is to say, long after the beginning of the assistance falling within the relevant programme period.
As for the report of 7 February 2005, which followed the additional audit of June 2004, which was produced by the Commission
as an annex to its statement in defence, it confirms that the Commission services were generally satisfied with the system
for selecting projects and declaring expenditure, and the control system.
The Grand Duchy of Luxembourg considers that, contrary to the position taken by the Commission, the audits of July 2002, July
2003 and June 2004 did not have a limited scope. An objective reading of the three reports relating to them shows that they
followed a detailed examination for the purpose of, first, determining whether the procedures actually put in place were indeed
those notified to the Commission and conformed with the relevant legislation and, second, verifying whether the systems could
actually be validated by means of sampling for specific promoters. On that point, it cannot be alleged that the sample of
operations checked in the course of those audits was limited and, therefore, not representative, nor can the Grand Duchy of
Luxembourg be criticised for that.
Consequently the Commission was perfectly informed and approved entirely the Luxembourg management and control systems.
The Commission disputes the arguments of the Grand Duchy of Luxembourg. It submits, in essence, that the audit reports are
not such as to create legitimate expectations and that, in any case, they did not create legitimate expectations in the present
case.
Findings of the Court
It has consistently been held that three conditions must be satisfied in order to claim entitlement to the protection of legitimate
expectations. First, precise, unconditional and consistent assurances originating from authorised and reliable sources must
have been given to the person concerned by the Community authorities. Second, those assurances must be such as to give rise
to a legitimate expectation on the part of the person to whom they are addressed. Third, the assurances given must comply
with the applicable rules (see Case T-347/03
Branco
v
Commission
[2005] ECR II-2555, paragraph 102, and the case-law cited, and Case T‑282/02
Cementbouw Handel & Industrie
v
Commission
[2006] ECR II‑319, paragraph 77).
In the present case, the question arises as to whether the assessments in the audit reports of 2002, 2003 and 2005 concerning
the projects co‑financed by the ESF were such as to create a legitimate expectation on the part of the national authorities,
which are responsible in the first place for the management and control of the assistance.
On that point, it is clear from settled case-law that a breach of the protection of legitimate expectations may not be relied
upon by a person who has committed a manifest infringement of the rules in force (see, to that effect, Case 67/84
Sideradria
v
Commission
[1985] ECR 3983, paragraph 21;  order of 25 November 2004 in Case C‑18/03 P
Vela and Tecnogrind
v
Commission
, not published in the ECR, paragraphs 117 to 119; and Case T‑217/01
Forum des migrants
v
Commission
[2003] ECR II‑1563, paragraph 76, and the case-law cited).
The case-law makes it clear that the principle of the protection of legitimate expectations cannot prevent the suspension
of Community funding where the conditions laid down for the grant of the funding have manifestly not been fulfilled (see,
to that effect, Case T-126/97
Sonasa
v
Commission
[1999] ECR II‑2793, paragraph 39, and judgment of 14 December 2006 in Case T‑162/04
Branco
v
Commission
, not published in the ECR, paragraph 123, and the case-law cited).
In the present case, it is clear from the examination of the first plea that there was no manifest error of assessment on
the Commission’s part when it found in Decision C(2008) 5730 that there were ‘serious failings in the management or control
systems’ which could lead to systemic irregularities and that, consequently, the interim payments relating to the EQUAL assistance
should be suspended.
Irregularities of that kind, just as in cases where the applicant manifestly failed to comply with the requirements governing
the grant of Community funding or with the provisions of a decision granting funding (see, to that effect,
Sonasa
v
Commission
, paragraphs 35, 36 and 39, and order in
Vela and Tecnogrind
v
Commission
, paragraphs 117 and 118), must be described as manifest infringements of the legislation in force.
The possible existence of irregularities which have not been investigated or brought to light previously can under no circumstances
give rise to a legitimate expectation (see, to that effect and by analogy, Case C-339/00
Ireland
v
Commission
[2003] ECR I-11757, paragraph 81). Consequently there is nothing to prevent the Commission from drawing financial conclusions
after detecting faults in the course of a specific investigation. The national authorities, which are responsible in the first
instance for the financial control of assistance (see Article 38(1) of Regulation No 1260/1999), cannot escape liability by
pointing to the fact that the Commission found no irregularities during an earlier investigation (see, to that effect, Case
C-28/94
Netherlands
v
Commission
[1999] ECR I-1973, paragraph 76).
Therefore, as serious failings under the relevant legislation have been shown to exist, the Grand Duchy of Luxembourg cannot
contend that the assessments in the 2002 to 2004 audit reports gave rise to justified expectations that the management and
control system in the present case complied with the Community legislation and, therefore, that the payments made in respect
of the EQUAL assistance would be finally granted.
In any case, as the Commission pointed out at the hearing, the audit reports prepared by its services in connection with setting
up operations financed by the Structural Funds are not, in principle, such as to give rise to legitimate expectations within
the meaning of the case-law cited at paragraph 71 above that the management and control systems to be set up by the Member
States comply with the requirements. Such reports are generally prepared by means of sampling on the basis of information,
which is representative but not exhaustive, relating to the assistance and the reports are limited to the situation observed
at the date when the audit was carried out. In addition, the reports reflect only the professional opinion of the officials
responsible for the control operations on the spot and not the opinion of the Commission, which is manifested at a later date
following a procedure closely involving the Member State concerned.
That consideration is all the more relevant to the present case as the documents in the file do not show that the findings
in the audit reports prepared before that of 29 November 2007 provided the Luxembourg authorities with any specific assurance
whatever such as to justify expectations that the management and control systems for the EQUAL assistance satisfied the requirements
and, therefore, that the Commission would not suspend the Community funding for that assistance.
The earlier audit reports manifestly did not have the same purpose or the same scope as that of 29 November 2007. First, the
report on the preventive audit carried out from 8 to 12 July 2002 clearly states that its purpose is to draw up a ‘general
summary of the characteristics of the management, payment and control system relating to the assistance’. In the words of
the report, that audit had merely ‘enabled it to be shown that the management and control system set up by the Member State
offered adequate guarantees’ on the basis of a ‘formal summary’. Second, the report of 4 September 2003 on the audit conducted
in July 2003 states that, apart from the summary of the closure procedures for the programme period 1994 to 1999, it aimed
to ‘take stock of the follow-up to the 2002 audit report’. Third, the report of 7 February 2005 relating to the June 2004
audit had the purpose of taking stock of the situation on the basis of various aspects of the legislation mentioned by the
auditors (see Part I, point 6, of the report).
Consequently those audits were intended to carry out certain verifications of the management and control systems set up for
the EQUAL assistance. Only the audit report of 29 November 2007, which states that its purpose is ‘to monitor projects on
the basis of random sampling in order to confirm the reliability level of the management and control systems for the programme
period 2000 to 2006’, was such as to confirm the reliability level attributed to the systems in place at the time of the previous
audits (see point 1 of the report). The Commission cannot be blamed for the fact that the final audit report was not drawn
up until after the programme period referred to in the present case, that is to say, 2000 to 2006, because that is inherent
in the financial control system arising from Regulation No 1260/1999.
On those grounds, this plea of the Grand Duchy of Luxembourg must be dismissed and, with it, the action as a whole.

Costs
Under Article 87(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been
applied for in the successful party’s pleadings. Since the Grand Duchy of Luxembourg has been unsuccessful, it must be ordered
to pay the costs, in accordance with the Commission’s pleadings.
On those grounds,
THE GENERAL COURT (Eighth Chamber)
hereby:
1.
Dismisses the action;
2.
Orders the Grand Duchy of Luxembourg to pay the costs.
Martins Ribeiro
Papasavvas
Wahl
Delivered in open court in Luxembourg on 18 June 2010.
[Signatures]
*
Language of the case: French.