Council of theEuropean Union
Brussels, 19 September 2022
(OR. en)12551/22
Interinstitutional File:2022/0295(NLE)FIN 931RESPR 27
CADREFIN 139
POLGEN 122
PROPOSAL
From:
date of receipt:
To:

Secretary-General of the European Commission, signed by Ms Martine
DEPREZ, Director
18 September 2022
General Secretariat of the Council

No. Cion doc.:

COM(2022) 485 final

Subject:

Proposal for a Council implementing decision on measures for theprotection of the Union budget against breaches of the principles of therule of law in Hungary

Delegations will find attached document COM(2022) 485 final.

Encl.: COM(2022) 485 final

12551/22

AFG/abECOFIN.2.A

EN

EUROPEAN
COMMISSION

Brussels, 18.9.2022
COM(2022) 485 final
2022/0295 (NLE)

Proposal for a
COUNCIL IMPLEMENTING DECISION
on measures for the protection of the Union budget against breaches of the principles of
the rule of law in Hungary

EN

EN

EXPLANATORY MEMORANDUM
1.

CONTEXT OF THE PROPOSAL(1)

Regulation (EU, Euratom) 2020/2092 of the European Parliament and of the Councilof 16 December 2020 on a general regime of conditionality for the protection of theUnion budget1 (‘Conditionality Regulation’) provides in its Article 4(1) that‘appropriate measures shall be taken where it is established in accordance with
Article 6 that breaches of the principles of the rule of law in a Member State affect orseriously risk affecting the sound financial management of the Union budget or theprotection of the financial interests of the Union in a sufficiently direct way.’(2)

Article 6(1) of the Conditionality Regulation provides that ‘where the Commission
finds that it has reasonable grounds to consider that the conditions set out in Article 4
are fulfilled, it shall, unless it considers that other procedures set out in Union
legislation would allow it to protect the Union budget more effectively, send awritten notification to the Member State concerned, setting out the factual elements
and specific grounds on which it based its findings.’(3)

Pursuant to Article 6(9) of the Conditionality Regulation, ‘Where the Commission
considers that the conditions of Article 4 are fulfilled and that the remedial measures,
if any, proposed by the Member State under paragraph 5 do not adequately address
the findings in the Commission’s notification, it shall submit a proposal for an
implementing decision on the appropriate measures to the Council within one monthof receiving the Member State’s observations or, in the event that no observations are
made, without undue delay and in any case within one month of the deadline set’.

(4)

On 24 November 2021, the Commission sent a request for information (‘Request for
information’) to Hungary pursuant to Article 6(4) of the Conditionality Regulation towhich the Hungarian authorities replied on 27 January 2022.

(5)

On 27 April 2022, the Commission sent a written notification to Hungary pursuant
to Article 6(1) of the Conditionality Regulation (the ‘notification’). The notification
presented the findings of the Commission regarding a number of issues concerning
the public procurement system in Hungary, including systemic irregularities,
deficiencies and weaknesses in public procurement procedures; a high rate of single
bidding procedures and low intensity of competition in procurement procedures;issues related to the use of framework agreements; issues in the detection, prevention
and correction of conflicts of interest; concerns related to the use of Union funds bypublic interest trusts. These issues and their recurrence over time demonstrate asystemic inability, failure or unwillingness, on the part of the Hungarian authorities,
to prevent decisions that are in breach of the applicable law, as regards public
procurement and conflicts of interest, and thus to adequately tackle risks ofcorruption. Those breaches constitute breaches of the principle of the rule of law, inparticular the principles of legal certainty and prohibition of arbitrariness of theexecutive powers and raise concerns as regards the separation of powers. In addition,
the notification presented findings regarding investigation and prosecution, and the1EN

OJ L 433I, 22.12.2020, p. 1.

1

EN

anti-corruption framework: there are additional issues as regard limitations toeffective investigation and prosecution of alleged criminal activity, the organisationof the prosecution services, and the absence of a functioning and effective anticorruption framework. These issues also constitute breaches of the principles of therule of law, in particular regarding legal certainty, the prohibition of arbitrariness ofthe executive powers and effective judicial protection. As specified in the
notification, these breaches affect or seriously risk affecting the financial interests of
the Union, and other procedures set out in Union legislation would not allow toprotect them more effectively than the Conditionality Regulation. With thenotification, the Commission also requested Hungary to provide certain informationand data regarding the factual elements and grounds on which it had based its
findings in the reply to the Request for information. Questions were also asked asregards potentially related issues concerning the independence of the judiciary. In the
notification the Commission gave two months to the Hungarian authorities to submit
their observations.

EN

(6)

On 27 June 2022, Hungary replied to the notification (the ‘first reply’). By letters of
30 June and 5 July 2022, the Hungarian Minister of Justice submitted further
information to complement the first reply. Moreover, on 19 July 2022, Hungary sent
an additional letter proposing a number of remedial measures to address the findingsin the notification, which due to the submission at that very late stage of the process,shortly before the Commission was to adopt the next step of the procedure, could not
be taken into account for the assessment of the first reply. The Commission took into
consideration all the relevant elements in those additional letters in the course of thenext stage of the procedure provided for by the Conditionality Regulation, in
accordance with the principle of sincere cooperation with Member States.

(7)

The Commission considered that the first reply and the additional letters sent on 30
June and 5 July 2022 did not contain adequate remedial measures appropriately
committed in the context of the Conditionality Regulation.

(8)

In line with Article 6(7) of the Conditionality Regulation the Commission sent a
letter to Hungary on 20 July 2022 (the “intention letter”) to inform that Member
State of its assessment pursuant to Article 6(6) of the Conditionality Regulation andof the measures it envisaged to propose for adoption by the Council, pursuant to
Article 6(9) of that Regulation, in the absence of adequate remedial measures. In linewith Article 6(7) of the Conditionality Regulation, Hungary was therefore invited tosubmit its observations, in particular on the proportionality of the envisaged
measures, within one month.

(9)

Hungary replied to the intention letter on 22 August 2022 (the ‘second reply’) ,within the one month deadline provided by Article 6(7) of the Conditionality
Regulation.

(10)

In its second reply, Hungary reiterated the arguments raised in its first reply, andexpressed criticism on the way the procedure has been conducted. It contested the
proportionality of the measures envisaged in the intention letter. At the same time,
Hungary submitted seventeen remedial measures. This submission has followed
technical discussions, conducted at the level of the services, between theCommission and the Hungarian authorities, in accordance with the principle ofsincere cooperation with Member States. On 13 September 2022, Hungary sent the2ENCommission a letter which included clarification and further commitments under the
remedial measures proposed (the “September letter”).
2.

ISSUES INDICATIVE OF BREACHES OF THE PRINCIPLES OF THE RULE OF LAW

2.1.

Systemic irregularities, deficiencies and weaknesses in public procurement

2.1.1.

Commission findings(11)

The Commission found in its notification and confirmed in the intention letter that
there are systemic irregularities, deficiencies and weaknesses in public procurement
procedures in Hungary. Such irregularities have been found following consecutive
audits by the Commission services conducted for both the 2007-2013 and the 20142020 programming periods, as well as several European Anti-Fraud Office (OLAF)
investigations that led to financial recommendations for the recovery of significant
amounts. Based on the systemic nature of the irregularities, their recurrence overtime and the magnitude of the financial corrections that were decided, among otherthings, the Commission found that it had reasonable grounds to consider that theconditions set out in Article 4 of the Conditionality Regulation were fulfilled.

(12)

In addition, the available data indicate that there have been unusually highpercentages of contracts awarded following public procurement procedures in whichjust one single bidder participated; attribution of contracts to specific companies,
which have been gradually gaining large parts of the market; as well as serious
deficiencies in the attribution of framework agreements. The Commission consideredthese elements as indicators of a clear risk for transparency and competition
detrimental to the sound financial management of Union funds used in the relevant
procedures, as well as an indicator, under certain circumstances, of an increased riskof corruption and conflict of interest.

(13)

Moreover, the Commission referred to serious deficiencies identified by theCommission services concerning public procurement within certain frameworkagreements and found that there were serious concerns regarding future frameworkagreements.

2.1.2.

Observations submitted by Hungary(14)

Hungary provided a description of its legislation and practice as regards public
procurement. Hungary pointed out that, in its view, its public procurement system isboth operational and in line with the European Union public procurement directives.
In this respect, Hungary referred to certain provisions of Act CXLIII of 2015 on
public procurement, as amended following Commission services’ audits and to anumber of elements of this public procurement system, as well as actions, that it took
in recent years to promote competition and increase transparency2. On this basis,
Hungary argued that the public procurement practice in Hungary would now be in2

EN

Hungary referred to (i) amendment of the Public Procurement Act by Act No LXXXIII of 2018abolishing the previous limitation of subcontracting, (ii) increasing of DPPC’s staffing and operation of
an internal training system, (iii) improvement of the DPPC’s internal procedures and control practices
and issuance of guidance note for practitioners in contracting authorities, (iv) review of the rules
governing the use of assistance from certain Union funds.

3ENline with the European Union’s requirements in terms of prevention and detection ofirregularities in public procurement.
(15)

Concerning the irregularities referred to by the Commission, Hungary argued that therelevant financial corrections were only partially linked to weaknesses in public
procurement that the weaknesses identified during audits were not of a systemic
nature and that they did not lead to interruption or suspension of payments.

(16)

In addition, Hungary argued that given that the Conditionality Regulation applies
only as from 1 January 2021, the alleged irregularities identified before that datecannot be attributed to breaches of the principles of the rule of law under that
Regulation. Hungary also argued that to establish that systemic deficiencies andirregularities identified in the course of Commission services audits constitutebreaches of the principles of the rule of law in the sense of Article 2(a) in
combination with Article 4(2)(a) of the Conditionality Regulation, it must also beestablished that the decisions of the authorities or bodies concerned cannot be subject
to effective judicial review3.

(17)

According to Hungary, the fact that the share of public procurement procedures withsingle bids for Union funds is lower than the one for national funds shows that
Hungary’s control system in the context of Union funds is capable of effectively
counteracting the factors behind limited competition in public procurement.

(18)

Hungary also contests the veracity and reliability of the methodology and theunderlying data contained in the studies on the intensity of competition in public
procurement and the concentration of awards to a small number of companies
mentioned by the Commission in the notification4 and the intention letter.

(19)

Concerning framework agreements, Hungary argued that the level of competition
ensured is high. The tender procedure is conducted in two stages for the effective
award of the contract: first, bidders compete for the right to take part in theframework agreement and then, if specific contracts are awarded following reopening of competition, market competition comes back into play between theeconomic operators. According to Hungary, no decision has been taken at central
government level, requiring anyone to apply framework agreements during thecurrent multiannual financial framework (MFF) period.

2.1.3.

Commission assessment(20)

Although Hungary introduced certain changes in its legislation and management of
the public procurement system, given the data available, these changes do not seemto have led to improvements as regards the result of public procurement proceduresin practice. Despite the actions taken in recent years, sufficient transparency has not
yet been achieved and effective and efficient external scrutiny, which is one of the
purposes of transparency, cannot be effectively conducted.

3
4

EN

According to Hungary’s opinion, this would derive from paragraph 325 of the judgement of the Courtof Justice of the European Union (the “Court”) in case C-157/21.
New Trends in Corruption Risk and Intensity of Competition in the Hungarian Public Procurementfrom January 2005 to April, Flash Report 2020:1, May 2020; Corruption Research Center Budapest,
https://www.crcb.eu/wp-content/uploads/2020/05/2020_hpp_0520_flash_report_1_200526_.pdf.

4

EN

(21)

Contrary to what Hungary argued, the financial corrections requested for the period
2014-2020 were mainly linked to systemic weaknesses in the management of public
procurements, as it is documented by the results of the relevant audits carried out.
These financial corrections were the highest for any Member State of the Union
during that period5, a fact that was not contested by Hungary. Moreover, these audits
related also to the functioning of the management and control system to ensurecompliance with public procurement rules. Thus they concerned systemic issues6.
The Commission cannot agree with Hungary’s argument that the absence ofinterruption or suspension of payments would mean that the Commission did notconsider the presence of a serious deficiency. In that regard, it must be recalled thateven a risk above 5% of the expenditure, the first flat rate financial correction set in
the delegated regulation7, can relate to a serious deficiency. A serious deficiency inthe management and control system is not defined based only on quantitative
thresholds, but also and specifically in this case in relation to breaches of theessential key requirements or a combination of requirements set in the applicable
rules with potential systemic effects.

(22)

As regards the temporal scope of application of the Conditionality Regulation,systemic breaches of the principles of the rule of law that have been established prior
to 1 January 2021, have not been remedied and are recurrent and ongoing beyond
that date, may be covered by the Conditionality Regulation, given the systemic andrepetitive or continuous nature of the breaches, and the ongoing serious risk that they
represent for the sound financial management of the Union budget and the protectionof the Union’s financial interests after 1 January 2021.

(23)

The Commission cannot agree with the argument of Hungary that systemic
deficiencies and irregularities may only constitute breaches of the principles of therule of law within the meaning of the Conditionality Regulation, if the decisions of
the authorities or bodies concerned cannot be subject to effective judicial review. It isclear from the Conditionality Regulation that any systemic deficiencies andirregularities indicative of breaches of the principles of the rule of law identified by
the Commission are self standing and can be covered by the Conditionality
Regulation. Thus no situation indicative of a breach of the principles of the rule oflaw needs an additional condition to be taken into account under the Conditionality
Regulation8.

(24)

The Commission cannot agree either with the argument put forward by Hungary thatas the share of public procurement procedures with single bids for Union funds

5
6
7

8

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Country Report Hungary 2020 Brussels, 26.2.2020 SWD (2020) 516 final, p. 43, available athttps://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020SC0516.
In particular Audit REGC214HU0068, cited in footnotes 10 and 13 of the notification, was an early
preventive system audit.
Commission Delegated Regulation (EU) No 480/2014 of 3 March 2014 supplementing Regulation (EU)No 1303/2013 of the European Parliament and of the Council laying down common provisions on theEuropean Regional Development Fund, the European Social Fund, the Cohesion Fund, the European
Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying
down general provisions on the European Regional Development Fund, the European Social Fund, theCohesion Fund and the European Maritime and Fisheries Fund, OJ L 138, 13.5.2014, p. 5.
In paragraph 325 of its judgement in case C-157/21 , the Court does not add an additional condition to
any type of breach of the principles of the rule of law within the meaning of the Conditionality
Regulation, but only clarifies elements of the general concept of rule of law.

5

EN

appear to be lower than the one for national funds, it must be concluded that
Hungary’s control system in the context of Union funds is capable of effectively
counteracting the factors behind limited competition in public procurement. The factthat the single-bid rate is lower for procurement involving Union funds than for
procurement involving national funds does not mean per se that controls in
procurement involving Union funds work properly. This is also reflected in theCouncil recommendation on the 2022 National Reform Programme of Hungary,which confirms that these issues remain valid for the future910.
(25)

9

10

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Hungary provided no evidence on the recent improvements in the procurement
system (in particular as regards transparency, intensity of competition, conflicts ofinterests checks). The data available to the Commission shows not only an increaseof concentration of awards in public procurement, but also an increase in the odds of
winning of companies that can be considered as politically connected with actors ofthe Hungarian ruling party (“politically connected”). The Directorate-General for
Budget procured a Study which provided statistical empirical analysis of more than
270,000 Hungarian public procurement contracts between 2005 and 202111. The
study demonstrates that the probability of obtaining public contracts (both nationallyand EU-funded) of companies that can be considered as politically connected were
between 1.5 to 2.1 times higher than the probability of success for companies that are
not considered as politically connected in the period 2005-2010. This difference
increased significantly in the period 2011-2021. Considering only the EU-funded
contracts for the period after 2011, the probability of successful bidding forcompanies that can be considered as politically connected exceeded by 3.3 to 4.4
times the probability for companies that are not considered as politically connected.
In the same period, considering both nationally and EU-funded contracts, theprobability of obtaining public contracts for companies that can be considered aspolitically connected was between 2.5 to 3 times higher than those for companies
that are not considered as politically connected. The study concludes that the direct
or indirect political connections of some companies that can be considered aspolitically connected is a decisive factor for increasing their probabilities of successin tender procedures, as compared to companies that are not considered as politicallyconnected, and for receiving a higher aggregated value of contracts won. In addition,
it shows that the effect is stronger depending on how close an economic operator isCouncil recommendation on the 2022 National Reform Programme of Hungary and delivering a
Council opinion on the 2022 Convergence Programme of Hungary, paragraph 30 and Recommendation
4, at https://data.consilium.europa.eu/doc/document/ST-9764-2022-INIT/en/pdf : ‘The procurement
market remains vulnerable to anticompetitive practices. The proportion of contracts awarded inprocedures where there was just one bidder remains among the highest in the Union. […] In February
2021, the government set itself an ambitious target of reducing the percentage of public-procurement
procedures with only a single bid to less than 15%, although without a fixed timeline’(Recommendation 4 ‘Improve competition in public procurement. emphasis added’).
See also Public Procurement Authority (2021), Flash Report: Hungarian Public Procurement in
Numbers. In recent years, after 2018, a worsening trend in the overall number of single bid procurement
procedures has begun, available at https://kozbeszerzes.hu/media/documents/FLASH_REPORT2021.pdf.
Study on concentration of awards and potential risks of fraud, corruption and conflict of interest in
public procurement procedures in Hungary with focus on EU funded public procurements - Empiricalanalysis of Hungarian public procurement data from 2005 to 2021, Corruption Research Center
Budapest. The study was sent to Hungary separately for information purposes.

6ENto the ruling party. In some cases, the odds of winning public contracts forcompanies that can be considered as politically connected is estimated up to 130%higher than for companies that are not considered as politically connected in the
period after 2011. This data establishes a constant growing trend and includes theyear 2021. The observations were corroborated with findings of an examination ofcertain tender data regarding contracts awarded to some of the companies identified
as companies that can be considered as politically connected. Moreover, reports bymedia and stakeholders were collected in the tourism, communication and sports
sector, pointing in the same direction.

EN

(26)

Concerning framework agreements, the Commission notes that it stems from thenature of the framework agreement that, once such an agreement is signed,
companies that did not participate in the original process leading to the agreement
cannot submit bids. Thus, given the signficiant irregularities in the conduct of public
procurement procedures of such agremeents, established in Commission services
audits, the significant amounts covered by framework agreements envisaged in
sectors such as the IT sector, and their long duration, it is very likely that only certain
companies grouped in certain consortia participating in each of the different
agreements would be awarded all contracts involving Union funds in the relevant
sector for the period 2021-2027.

2.2.

Detection, prevention and correction of conflicts of interest; concerns regarding‘public interest trusts’

2.2.1.

Commission findings(27)

The Commission raised concerns about the ability of Hungary to improve checks
regarding conflicts of interest in the use of Union funds through specific IT tools,
such as Arachne (i.e. the single data-mining and risk-scoring tool that theCommission puts at the disposal of Member States), due to the features of those tools
and the data uploaded therein by the Hungarian authorities for analytical purposes.

(28)

The Commission also raised concerns about public interest trusts not being subject torules under the EU public procurement directives. It also raised concerns about issues
related to conflict of interests and transparency for public interest trusts, including
the explicit legal exception of members of the boards of these trusts from conflict ofinterest requirements and conflict of interest rules not being applicable to membersof Parliament, state secretaries and other public officials of the government who may
serve at the same time as board members of such trusts.

2.2.2.

Observations submitted by Hungary(29)

Concerning conflict of interest checks, Hungary did not submit the information
requested by the Commission but indicated that it regularly sends data to Arachne
and it also uses it to a certain extent, while recalling that the use of Arachne is notcompulsory under EU law. While contesting the usefulness of Arachne and arguingthat the Hungarian IT system (FAIR EUPR) is more efficient, it referred to theongoing negotiations of its Recovery and Resilience Plan (RRP) in relation to its
commitment for the extensive use of Arachne in this respect.

(30)

As regards the applicability of public procurement rules to public interest trusts,
Hungary submitted that such concerns are merely theoretical, as those trusts are

7ENalready considered “contracting authorities” for public procurement purposes under
the currently applicable rules (and in particular under the Hungarian Public
Procurement Act). Concerning conflict of interest requirements for members of theboard of those trusts, Hungary argues that the Commission’s concerns are a mere
hypothesis, while clearly indicating that the members of the board of such trusts are
expressly excluded from the application of conflict of interest rules. It further pointed
to a number of exclusion and conflict of interest rules that are allegedly contained in
the articles of associations of all these entities.
2.2.3.

Commission assessment(31)

Concerning the arguments raised by Hungary on Arachne, the Commission notes
that, as a follow up of the 2016 preventive system audit12, the Commission services
concluded that the Hungarian IT system FAIR EUPR cannot be considered to haveequivalent functionalities with Arachne and that the data uploaded by the Hungarian
Authorities do not include certain categories of data13 which are necessary for risk
test functionalities.

(32)

The Commission considers that even in the case where public interest trusts would
qualify as contracting authorities because they meet the requirements of Article
2(1)(4) of Directive 2014/24/EU14, this does not mean that they are considered ascontracting authorities in all instances. Given the nomination rules of the members of
the board there can be uncertainty as regards the ‘state control’ criterion set by the
directive, while the threshold relevant to the 50% of state funding may not always
apply. Therefore, public interest trusts will not be considered as contracting
authorities within the meaning of the public procurement directives in all instances.

(33)

As regards the issues related to conflict of interests and transparency of public
interest trusts, Hungary did not provide any arguments in relation to the explicit legal
exception of members of the boards of the trusts from conflict of interest
requirements. Furthermore, Hungary did not provide more detailed information about
these articles of association (e.g. if these provisions are to be included by law in thearticles of associations of all public interest trusts) nor did it provide evidence on
possible controls of conflict of interests conducted for the members of the boards oftrustees of public interest trusts, as specifically requested. The Commission notes inthis respect that the establishment of private law entities to which the state donatedsignificant public assets may imply lack of public control over the functioning andgovernance of these entities. In particular, following the transfer of the founder’srights from the competent Minister to the board of trustees, the state seems to lose
any form of control over these trusts. Furthermore, the Commission also notes, in the2022 Rule of law Report, that conflicts of interest rules are not applicable tomembers of Parliament, state secretaries and other public officials of the government
who serve, at the same time, as board members of public interest trusts, despite the

12
13
14

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On the Operational programme Economic Development and Innovation.
Eg. supplier and contract level.
Directive 2014/24/EU of the European Parliament and of the Council on public procurement andrepealing Directive 2004/18/EC, OJ L 94, 28.3.2014, p.65.

8ENfact that these entities receive significant public funding, entailing increased risks ofcorruption15.
3.

ADDITIONAL

3.1.

Investigation and prosecution

3.1.1.

Commission findings(34)

The notification and the intention letter pointed out a serious risk of weakening theeffective pursuit of investigations and prosecutions in cases involving Union funds,
due to the concentration of powers in the hands of the Prosecutor General’s Office,the strictly hierarchical organisation of the prosecution service, the lack of arequirement to give reasons when cases are attributed or reassigned, the absence ofrules to prevent arbitrary decisions that could hamper an effective investigation andprosecution policy, as well as the lack of judicial review of decisions by theinvestigating authorities or the prosecution service not to pursue a case. In thisrespect, the Commission referred to Hungarian Country Chapter of the Commission
2021 Rule of Law report16, pointing to the recommendations regarding prosecutors
issued by the Council of Europe Group of States against Corruption (GRECO) since
201517 and to the lack of effective remedies against decisions of the prosecution
service not to investigate or prosecute alleged criminal activity detrimental to the
public interest, including corruption and fraud affecting the EU’s financial interestsand embezzlement of public funds18.

(35)

As Hungary only cooperates bilaterally with the European Public Prosecutor’s Office(EPPO) and is not a participating Member State19, OLAF remains the sole Union
investigative administrative body competent to investigate allegations of fraud,corruption or any other illegal activity affecting the financial interests of the Union.

15

16

17

18

19

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GROUNDSRELATEDANTICORRUPTION FRAMEWORKTO

INVESTIGATION,PROSECUTION,

See page 17 of the Commission Staff Working Document 2022 Rule of Law Report, Country Chapter
on the rule of law situation in Hungary, Accompanying the document to the Communication from theCommission to the European Parliament, the Council, the European Economic and Social Committee
and the Committee of the Regions 2022 Rule of Law Report, The Rule of law situation in the European
Union, SWD(2022) 517 final “2022 Rule of law Report for Hungary”.
Commission Staff Working Document 2021 Rule of Law Report Country Chapter on the rule of law
situation in Hungary, SWD(2021) 714 final, available at https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:52021SC0714, page 8.
GRECO Fourth evaluation round – Evaluation report of 27 March 2015, Greco Eval IV Rep (2014)10E,
availableathttps://rm.coe.int/CoERMPublicCommonSearchServices/DisplayDCTMContent?documentId=0900001
6806c6b9e.
Commission Staff Working Document 2021 Rule of Law Report Country Chapter on the rule of law
situation in Hungary, SWD(2021) 714 final, available at https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:52021SC0714, footnote 58.
Non-participating EU Member States cooperate bilaterally with EPPO.

9EN

3.1.2.

Observations submitted by Hungary(36)

Hungary contested the reference by the Commission to GRECO recommendations
that remain unaddressed, and compared Hungary’s rate of implementation with thatof other Member States, based on the latest data available from GRECO20.

(37)

Hungary also highlighted that it is not obliged to participate in the EPPO and stressedthat it has concluded a cooperation agreement with it and that the European Chief
Prosecutor stated in an interview that the Hungarian prosecution service replied to all
EPPO’s requests. Hungary argued that in the Member States which are parties toenhanced cooperation on the establishment of the EPPO, the EPPO is a body acting
in its own right and acting independently of the national investigating authorities andpublic prosecutor’s offices. For this reason, national law enforcement agencies do notdeal with matters falling within the competence of the EPPO. By contrast,cooperation with OLAF can indeed have an efficiency-enhancing effect, as OLAF
cooperates with national authorities, complementing their capabilities. In addition,
Hungary highlighted that apart from Hungary, four other EU Member States are notmembers of the EPPO and that the efficiency of the prosecution services of thesecountries is not a matter of concern for the Commission.

(38)

As regards (i) the possibility for the Prosecutor General to directly or indirectly
instruct prosecutors and to attribute or remove cases, and (ii) the set of criteria for thetransfer of cases between subordinate prosecutors, Hungary referred to the relevant
provisions in national law and argued that the hierarchical structure of theprosecution service cannot in itself be a rule of law issue and it disputed theCommission’s claim that this structure may affect the effectiveness of the
adjudication of criminal cases. Hungary also stated that during the mandate of thecurrent Prosecutor General, the latter has not removed cases from prosecutors.
Hungary further referred to the possibility for the Union to exercise the victim’s
rights in the context of criminal proceedings related to fraud affecting the Union’s
financial interests and to the possibility to file a complaint against acts of theinvestigative authority or to act as a substitute private prosecutor. Hungary also
stated that in cases initiated following transmission of a judicial recommendationfrom OLAF, the Hungarian prosecution service would always send decisions
regarding dismissal of criminal proceedings to OLAF, on the basis of the cooperation
arrangement concluded with OLAF on 11 February 2022. Hungary added that the
failure of the Union to challenge the relevant decisions or to act as substitute private
prosecutor would indicate its agreement with or non-objection to the said decisions.

3.1.3.

Commission assessment(39)

The Commission set out the grounds regarding investigation and prosecution inconnection with the other issues it raised in this case, notably irregularities,
deficiencies and weaknesses in public procurement, and as such they were not based
exclusively on the concerns at issue in the GRECO recommendations. A comparisonof Hungary’s performance in addressing the relevant GRECO recommendations withother Member States’ performance does not address the concerns raised by theCommission. The Commission further notes in this respect that, under the

20

EN

GRECO 22nd General Activity Report (2021), available at https://rm.coe.int/greco-general-activityreport-2021/1680a6bb79.

10

ENConditionality Regulation, the assessment of each case, the range and scope ofevidence, is performed on its own merits, taking into account all relevant
circumstances. Furthermore, although GRECO’s most recent evaluation21 of thedegree of implementation of relevant recommendations by Hungary noted a slight
improvement, a number of relevant recommendations in relation to corruption
prevention as regards prosecutors remain not or only partly implemented.
(40)

Contrary to what Hungary seems to argue in its second reply, the Commission did
not imply that Hungary would be obliged to join the EPPO. The Commission is also
fully aware of the bilateral cooperation between Hungary and EPPO, and welcomes agood response from Hungary to EPPO’s requests, in line with its duty of sincere
cooperation. That being said, in the absence of Hungary’s participation in the EPPO,
the Hungarian prosecution service is the only office conducting criminal
investigations into crimes affecting the EU financial interests. Therefore, Hungary’s
non-participation in the EPPO is relevant in the light of concerns regarding theeffective functioning of the Hungarian prosecution service. Furthermore, for
Hungary and as set out in the notification, OLAF remains the sole Union
investigative administrative body competent to investigate allegations of fraud,corruption or any other illegal activity affecting the financial interests of the Union.
Whether or not a Member State participates in EPPO, it remains essential to have inplace an effective and independent national prosecution service, a robust anticorruption framework as well as an effective cooperation with OLAF.

(41)

Concerning the observations Hungary submitted on the prosecution service, theCommission took note of the information provided, which confirmed the strictly
hierarchical structure of the prosecution service and described the requirements forthe removal and transfer of cases and the rules on disciplinary proceedings. Hungary
did not provide complete replies relevant to the organisation and functioning of theprosecution service, including regarding proceedings relevant to OLAF judicial
recommendations to allay the Commission concerns. Thus, concerns remain on
systemic issues relevant to the actual proper functioning of investigative authorities
and the prosecution service in relation to the investigation and prosecution of crimes
or breaches of Union law relating to the implementation of the Union budget or to
the protection of the financial interests of the Union, as the discretionary powers of
the prosecution service are amplified by its strictly hierarchical structure. The
Commission is of the view that the extensive powers of the Prosecutor General
coupled with the absence of checks and balances within the prosecution service may
affect the effective functioning of the service, with an impact on the protection of thefinancial interests of the Union.

(42)

The Commission disagrees with the argument of Hungary that not challenging adecision or not acting as substitute private prosecutor would indicate agreement withor non-objection to a decision to terminate proceedings. Not only does the argument
not take into account decisions not to investigate or to terminate investigation ofcrimes that are relevant for the protection of the financial interests of the Union, but
it also aims at shifting the responsibility for prosecutorial action to the Union,
contrary to the division of responsibilities between the Union and the Member States,of which Article 325 Treaty on the Functioning of the European Union (TFEU) is an

21

EN

See GRECO Fourth Evaluation Round – Second Interim Compliance Report.

11ENexplicit expression. Similarly, the provision of the decision to dismiss proceedings on
the basis of the administrative cooperation arrangement with OLAF cannot be
understood to indicate agreement with or non-objection to a decision to terminate
proceedings.
(43)

In this regard, the Commission notes its assessment as endorsed by the Council in thecontext of the 2022 European Semester, by which ‘[w]hen serious allegations arise,
there is systematic lack of determined action to investigate and prosecute corruption
cases involving high-level officials or their immediate circle. Accountability fordecisions to close investigations remains a matter of concern as there are no effective
remedies against decisions of the prosecution service not to prosecute alleged
criminal activity’22, an issue leading to the recommendation to ‘[r]einforce the anticorruption framework, including by improving prosecutorial efforts […]’23. The
Commission further notes, that in the context of the 2022 Rule of law Report for
Hungary it has been recommended to Hungary to strengthen its track record ofinvestigations, prosecutions and judgments in high-level corruption cases24.

3.2.

Anticorruption framework

3.2.1.

Commission findings(44)

The Commission noted that the anti-corruption strategy or the wider framework(including, for instance, rules on conflicts of interest, beneficial ownership, lobbying
and declaration of assets) appeared not to contain provisions or activities regarding
the effective prevention and repression of criminal offences that may affect the soundfinancial management of the Union budget or the protection of the financial interestof the Union. It also referred to persisting concerns regarding the prevention andcorrection of high-level corruption and noted that the Hungarian authorities had notprovided information regarding the measures taken to recover the amounts affectedby the irregularities which led to the withdrawal of projects from Union funding, nor
did they provide data on recoveries. In that context, the Commission also pointed atlimitations in national legislation regarding cooperation in case of resistance from
economic operators that would affect the effectiveness of cooperation with OLAF.

3.2.2.

Observations submitted by Hungary(45)

Hungary questioned the Commission’s reference to the Corruption Perceptions Index(CPI), which, together with other indicators, suggests that Hungary ranks among thelowest Member States for performance on preventing, detecting and correcting
corruption. In this respect, Hungary referred to the Joint Research Centre (JRC)
analysis published in 201825, which called for caution when interpreting the CPI’s
results. Hungary also referred to the Eurobarometer 502 on corruption perceptions

22

23

24
25

EN

Council recommendation on the 2022 National Reform Programme of Hungary and delivering a
Council opinion on the 2022 Convergence Programme of Hungary, paragraph 26, athttps://data.consilium.europa.eu/doc/document/ST-9764-2022-INIT/en/pdf.
Council recommendation on the 2022 National Reform Programme of Hungary and delivering a
Council opinion on the 2022 Convergence Programme of Hungary, Recommendation 4, athttps://data.consilium.europa.eu/doc/document/ST-9764-2022-INIT/en/pdf.
2022 Rule of Law Report Country Chapter on the rule of law situation in Hungary, available
at https://ec.europa.eu/info/sites/default/files/40_1_193993_coun_chap_hungary_en.pdf, p. 2.
See https://publications.jrc.ec.europa.eu/repository/handle/JRC113251.

12EN

(an indicator not cited in the notification) published in June 2020, showing that
Hungary ranked better than eight other Member States. Furthermore, Hungary
mentioned a Eurojust report of May 202226 to confirm that Hungary ranks in the
middle in terms of involvement in corruption cases.
(46)

In reference to the anti-corruption framework, Hungary referred to the Corruption
Prevention Strategy 2020-2022 and contested the Commission’s finding that thedeadline for implementation of (almost half) of the measures was extended.
According to Hungary, the reason for that would be that the COVID-19 pandemic
made it impossible to carry out training, consultations or research physically and thisis the reason why its implementation was extended to 30 June 2023. Moreover,Hungary indicated that the specific measures of intervention and timeline of theAnti-Corruption Strategy 2020-2022 were included in Government Decision No
1328/2020 of 19 June 2020.

(47)

Hungary also contested that notifications from administrative authorities on possible
irregularities reported by whistle-blowers play a smaller role in criminal
investigations by indicating that the National Protective Service (NVSZ) does nothave powers to investigate but verifies whether the allegations are correct andinitiates appropriate follow up. It also contested the Commission’s finding that the
National Tax and Customs Authority can start proceedings only if investigative
authorities have also opened criminal inquiries and referred to the relevant provisions
in national legislation.

(48)

Concerning asset declarations, Hungary stated that the Hungarian system of asset
declaration for Members of the National Assembly and senior political executives isa transposition of the system used by the European Parliament as a good international
practice.

(49)

In addition, although initially Hungary argued that the EU legislation and Member
States’ legislation do not specifically define the concept of high-level corruption, inthe second reply it referred to information it provided in the context of the 2022 Ruleof law report as regards the fight against high level corruption. In addition it
contested the scope of corruption under Union law.

3.2.3.

Commission assessment(50)

It is to be noted that (i) the Commission clearly indicated that the CPI was taken into
account as a complementary indicator, (ii) Hungary itself acknowledged that it wasamong the worst performers (the second last) in the 2021 CPI and, importantly (iii)the methodology to calculate the CPI score was changed immediately after the JRC’s
analysis to comply with the Commission’s recommendations 27. Concerning
Hungary’s argument based on the Special Eurobarometer, the Commission notes that
the Special Eurobarometer on corruption 52328, published on 13 July 2022, indicatesthat 91% of Hungarian respondents consider corruption widespread in their country,

26

27
28

EN

Eurojust Casework on Corruption: 2016-2021 Insights, May 2022, available athttps://www.eurojust.europa.eu/sites/default/files/assets/eurojust-casework-on-corruption-2016-2021insights-report.pdf.
See https://images.transparencycdn.org/images/CPI2020_TechnicalMethodologyNote_ENv2.pdf .
https://europa.eu/eurobarometer/surveys/detail/2658

13

ENfar above the EU average which corresponds to 68%. In addition, there areindications that more and more people consider that there is corruption between thebusiness and politicians with 74% of people asked considering that the only way tosucceed in business is to have political connections. Regarding the reference to theEurojust report, the Commission recalls that Eurojust registers only cross-bordercases29; thus, as such, the report is an indicator amongst others of the state ofcorruption registered within an individual Member State, and of the effectiveness ofnational authorities in tackling corruption without a cross-border element.
(51)

In relation to the argumentation submitted on the measures under the Anti-corruption
strategy, the Country Report in the context of the 2022 European Semester states that‘[h]ad they been implemented, these measures would have helped to more effectively
detect and prosecute corruption in public institutions and state-owned enterprises’30.
The 2022 Rule of law Report for Hungary refers to this issue as well 31. Furthermore,
the Commission considers that several of the measures whose deadline for
implementation has been extended to 2023 would not have been impeded by the
COVID-19 pandemic32.

(52)

The Commission notes that as regards the ‘relatively smaller role’ played bypreventive tools in criminal investigations, relevant information was received fromthe Hungarian prosecution service in the context of the preparation of both the 2021
and 2022 Commission Rule of Law Reports33. The prosecution service considers the
National Protection Service to be the main and indispensable source for evidencegathering to initiate corruption investigations and prosecutions. In the same context,
the Hungarian authorities themselves indicated that criminal proceedings forcorruption offenses are mainly initiated on the basis of the criminal investigation
activities of the investigating authorities, with the majority of the investigated cases
being detected by the (secret surveillance of the) National Protective Service34.

29
30

31

32

33
34

EN

See https://www.eurojust.europa.eu/about-us/what-we-do, as well as the first point of the Executive
Summary of the Eurojust Report cited by Hungary.
Commission Staff Working Document 2022 Country Report – Hungary Accompanying the document
Recommendation for a Council Recommendation on the 2022 National Reform Programme of Hungary
and delivering a Council opinion on the 2022 Convergence Programme of Hungary, Brussels,
23.5.2022, SWD(2022) 614 final, p. 14.
See Commission 2021 Rule of Law Report – Country Chapter on the rule of law situation in Hungary,
SWD(2021)
714
final,
availableathttps://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:52021SC0714, page 13.2022 Rule of Law Report Country Chapter
on
the
rule
of
law
situationin
Hungary,
available
at https://ec.europa.eu/info/sites/default/files/40_1_193993_coun_chap_hungary_en.pdf, p. 12.
That is the case, for instance, for (a) the development of an automated decision-support system toimprove the transparency and accountability of the decision-making process (new deadline 31 January2023), (b) a casebook on tackling corruption for practitioners (new deadline 30 June 2023), (c) data
entries in the risk assessment system of the National Protection Service (new deadline 30 June 2023),(d) a legal framework on corruption in major infrastructure investments (new deadline 30 June 2023),(e) surveys on integrity management models for state entities and state-owned enterprises (deadline 30
June 2023) and (f) implementation report of the tasks set out in the Strategy 2020-2022 by the Ministerof Interior (deadline 31 May 2023 for the report of the Ministers; 30 June 2023 for the summary reportof the Minister of Interior)
See also 2022 Rule of Law Report Country Chapter on the rule of law situation in Hungary, available
at https://ec.europa.eu/info/sites/default/files/40_1_193993_coun_chap_hungary_en.pdf, p. 13.
See Commission 2021 Rule of Law Report – Country Chapter on the rule of law situation in Hungary See Commission Staff Working Document 2021 Rule of Law Report – Country Chapter on the rule of

14

ENInformation resulting from detection tools, such as asset declarations, whistle-blower
disclosures and registries, plays a relatively minor role in corruption investigations35.
(53)

In relation to the National Tax and Customs Authority, the Commission notes that
Hungary itself acknowledges that such checks can take place only in case of a
suspicion of criminal offences by the investigating authority, which confirms thefindings in the notification.

(54)

Moreover, it is important to note that State bodies with supervisory functions haveseen political appointments raising questions as to their impartiality in detecting
corruption36. Deficient independent oversight mechanisms and close interconnections
between politics and certain national businesses are conducive to corruption37.

(55)

Concerning the argumentation provided by Hungary on the asset declarations, theCommission notes that long-standing concerns remain as regards the effective andtransparent supervision, verification and enforcement of rules of codes of conduct,conflicts of interest and asset declarations for members of Parliament and other highrisk officials38 . The amendments to the asset declarations rules for members of
Parliament introduced in July 2022 do not aim to address these concerns. The newrules result in even less stringent requirements for asset declarations compared to theprevious one applicable until 31 July 2022, as members of Parliament are no longer
obliged to report on their assets39. In order to assess the effectiveness of an asset
declaration system, one should take into account the overall situation to which such
system applies. As explained in the notification, in the intention letter and above, the
Hungarian context raises concerns and it therefore requires a more comprehensive
asset declaration system.

(56)

Hungary referred in its second reply to open investigations in high-level corruption
cases that it mentioned in the context of the 2022 Rule of law report. This illustrates
that in essence it understood the concept of high-level corruption and the differencewith low-level/petty corruption, irrespective of the definition of corruption offencesin EU or national law. At the same time, although the Commission welcomed theinformation provided, the latter does not amount to demonstrating a robust trackrecord of investigations of corruption allegations concerning high-level officials and

35
36

37

38
39

EN

law situation in Hungary, SWD(2021) 714 final, available at https://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:52021SC0714, page 13.
See also 2022 Rule of Law Report Country Chapter on the rule of law situation in Hungary, available
at https://ec.europa.eu/info/sites/default/files/40_1_193993_coun_chap_hungary_en.pdf, p. 13
See, in this respect, 2022 Rule of Law Report Country Chapter on the rule of law situation in Hungary,available
at https://ec.europa.eu/info/sites/default/files/40_1_193993_coun_chap_hungary_en.pdf,
footnote 92.
See, in this respect, 2022 Rule of Law Report Country Chapter on the rule of law situation in Hungary,available
at https://ec.europa.eu/info/sites/default/files/40_1_193993_coun_chap_hungary_en.pdf,
footnote 93.
GRECO Fourth Evaluation Round – Second Interim Compliance Report, p. 5.
There is only a requirement to declare revenues and holdings, and not assets. Asset declarations need toinclude assets in the literal sense, i.e. immovable real estate properties, valuable movable possessions(such as vehicles, vessels, valuable antiques and works of art, etc.), savings in bank deposits and in
cash, management arrangements, trusts (including any relation a public official or family member haveregarding a trust), private equity funds, life insurance policies, and beneficial ownership information.

15

ENtheir immediate circle, which remains a serious concern40. Thus, it cannot be
considered that Hungary addressed the concerns regarding the prevention andcorrection of high-level corruption.
4.

CONCLUSION OF COMMISSION’S ASSESSMENT AS REGARDS BREACHES OF THE
PRINCIPLES OF THE RULE OF LAW

(57)

5.

In light of all the foregoing, the Commission considers that the issues identified in
the notification and reiterated in the intention letter are still valid and they constitutesystemic breaches of the principles of the rule of law within the meaning of Article
2(a) of the Conditionality Regulation, in particular of the principles of legal certainty
and prohibition of arbitrariness of the executive powers, pursuant to Article 4(1) of
the Conditionality Regulation in light of Article 3(b) thereof. These concerns relate
to several of the situations listed in Article 4(2) thereof, in particular:•(a) the proper functioning of authorities implementing the Union budget, […]in particular in the context of public procurement procedures;•(b) the proper functioning of the authorities carrying out financial control,
monitoring and audit and the proper functioning of effective and transparent
financial management and accountability systems;•(e) the prevention and sanctioning of fraud, […], corruption or other breachesof Union law relating to the implementation of the Union budget or to theprotection of the financial interests of the Union […];•(h) Other situations […] that are relevant to the sound financial management of
the Union budget or the protection of the financial interests of the Union,
represented in this case by the constant failure to ensure that the regulatory
framework and practice in public procurement avoid risks of corruption andother irregularities in the management of Union funds.

OTHER PROCEDURES DO NOT ALLOW TO PROTECT THE UNION BUDGET MORE
EFFECTIVELY

5.1.

Commission initial assessment(58)

The Commission considers that no other procedure under Union law would allow it
to protect the Union budget more effectively than the procedure set out by theConditionality Regulation. The identified deficiencies, weaknesses, limits and risks
are widespread and intertwined. This prevents other procedures to be more effective
than that provided for by the Conditionality Regulation. For more than ten years,
Hungary has been the addressee of recommendations and corrections due to
weaknesses and serious irregularities, in particular in the public procurement domain.
Even if the Commission took action each time it identified breaches of public

40

EN

See, in this respect, 2022 Rule of Law Report Country Chapter on the rule of law situation in Hungary,available at https://ec.europa.eu/info/sites/default/files/40_1_193993_coun_chap_hungary_en.pdf, page
14.

16

EN

procurement rules or applicable law to protect the Union budget based on procedures
set out in Union legislation, year after year, programming period after programming
period, public procurement in Hungary continued to present deficiencies andweaknesses that affected the sound financial management of the Union budget andthe protection of the financial interests of the Union.

EN

(59)

The preventive approach of the Commission services audits showed, on the one
hand, that Hungary has not been able to ensure the effective functioning of theauthorities in charge of implementing and monitoring the Union budget, and, on theother hand, the need for constant, widespread and forward-looking action by theCommission to protect that budget.

(60)

As regards the very recent reforms concerning public interest trusts, the retrospective
nature of the procedures set out in other Union legislation, coupled with the serious
risks that Union funds may be earmarked and disbursed without checking conflict ofinterest and not necessarily in compliance with procurement rules, makes theprocedure established by the Conditionality Regulation the most effective instrument
to protect the Union budget.

(61)

Even if the use of certain other means available under sectoral rules could beenvisaged, such as audits by the Commission services, which may identify
irregularities not prevented, identified or corrected by the Hungarian authorities,
those measures generally relate to expenditure already declared to the Commission.
Financial corrections are not a sufficient remedy either in this case, as in principle
they are not of a preventive nature and they may not always relate to systemic issues.

(62)

Even a pro-active approach from the Commission, such as the Commission services’
preventive audits, would remain limited to the specific funds concerned by theapplicable sectoral rules. In addition, such an approach would not allow theCommission to protect the budget more or sufficiently effectively, as it would focus
on specific programmes without addressing the full scope of the weaknesses
identified.

(63)

These weaknesses are reinforced by the concerns regarding investigation andprosecution, as well as the limits of the anti-corruption framework. These concerns
and limits are particularly relevant in the case where projects that are investigated by
OLAF are withdrawn from Union funding, as this generally entails that the root
cause for the weakness is not addressed and will recur.

(64)

In practice, these circumstances point to the conclusion that irregularities may also
affect a significant part of the operations that have not been investigated or audited,taking into account that when irregularities are indeed uncovered, Union funds are
replaced with national funds which are likely to reach their designed recipients,
possibly without concrete consequences for the administrative or criminal
irregularities committed, enabling the irregularities to continue or recur in otheroperations that are not investigated or audited, and without the adoption of effective
and deterrent measures as required by Article 325(1) TFEU.

(65)

In the same way, agreements, action plans and other instruments could in principle
improve proper investigation of fraud, corruption or other relevant breaches of Union
law or criminal offences affecting the Union’s financial interests. However, given the

17

ENlack of evidence of their effective implementation, they cannot be considered as suchas capable of protecting against serious risks for the sound financial management of
the Union budget and the financial interests of the Union.
(66)

In conclusion, the Commission’s concerns in the case of Hungary affect a number of
key areas for the implementation of the Union budget and the compliance with soundfinancial management principles and, cumulatively, they pose serious risks to theUnion’s financial interests. Indeed, there are issues in the implementation of theUnion’s budget in Hungary which do not seem to be properly investigated due tostructural, legal or practical limits or obstacles in the detection, investigation andcorrection of fraud and other irregularities; this, constitutes an overall situation which
directly and seriously risks affecting the Union’s financial interests. In this respect,
the issues identified are so widespread and serious that the overall financial risks for
the Union budget and the Union’s financial interests exceed the risks that can beaddressed by other procedures set out in different sectoral instruments.
Consequently, in the Commission’s view, because of the complexity and intertwined
nature of those issues, no other procedures set out in Union legislation would allow it
to protect the Union budget more effectively.

5.2.

Observations submitted by Hungary(67)

Hungary argued that Regulation 1060/2021 (CPR)41, includes measures such as
interruption of payment deadlines, suspension of payments and financial corrections,which are effective and appropriate to protect the Union budget. Hungary also
referred to other means at the Commission’s disposal to guarantee the protection of
the Union’s financial interests in the context of the adoption of the Partnership
Agreement, the Programmes for structural funds, as well as the Recovery and
Resilience Facility (RRF). Hungary also argued that, with regard to public
procurement rules and their interpretation and practical application, the Commission
could also intervene through infringement proceedings.

5.3.

Commission assessment(68)

The Commission does not agree with Hungary that other Union measures could
protect the Union budget better. As regards the application of the financial measuresprovided in Regulation 1060/2021 (CPR)42, the Commission notes that thosemeasures are by definition limited to the scope and criteria contained in that sectorial
regulation and cannot achieve the general preventive and systemic protection that is
possible under the Conditionality Regulation. The importance of this general

41

42

EN

Regulation (EU) 2021/1060 of the European Parliament and of the Council of 24 June 2021 laying
down common provisions on the European Regional Development Fund, the European Social Fund
Plus, the Cohesion Fund, the Just Transition Fund and the European Maritime, Fisheries andAquaculture Fund and financial rules for those and for the Asylum, Migration and Integration Fund, theInternal Security Fund and the Instrument for Financial Support for Border Management and Visa
Policy, OJ L 231, 30.6.2021, p. 159.
Regulation (EU) 2021/1060 of the European Parliament and of the Council of 24 June 2021 laying
down common provisions on the European Regional Development Fund, the European Social Fund
Plus, the Cohesion Fund, the Just Transition Fund and the European Maritime, Fisheries andAquaculture Fund and financial rules for those and for the Asylum, Migration and Integration Fund, theInternal Security Fund and the Instrument for Financial Support for Border Management and Visa
Policy, OJ L 231, 30.6.2021, p. 159.

18

EN

preventive dimension of the Conditionality Regulation has been confirmed by the
Court of Justice43. Concerning the observance and monitoring of the enabling
conditions enshrined in the CPR, the Commission would firstly note that whereas the
only consequence under Article 15 CPR of failure to fulfil an enabling condition isthat the Commission does not reimburse declared expenditure, the Conditionality
Regulation grants a larger scope of possibilities to protect the Union’s budget,
including the suspension of approval of one or more programmes, as well as thesuspension of commitments under shared management. Contrary to the procedure
under Article 15 CPR, this also includes pre-financing. Moreover, the scope of theenabling conditions that could be of relevance in this case, in particular ‘Effective
monitoring mechanisms of the public procurement market’ and ‘Effective applicationand implementation of the Charter of Fundamental Rights’, differs from and is more
restrictive than the one of the Conditionality Regulation.
(69)

As regards infringement proceedings concerning the application of the public
procurement rules and their interpretation, recital (17) of the Conditionality
Regulation clarifies that the ‘legislation’ to which Article 6(1) of the Conditionality
Regulation refers, is financial and sector-specific legislation. Infringement
procedures, which are not based on a legislative act but directly on primary law(Article 258 TFEU), cannot be considered as relevant within the meaning of Article
6(1) of the Conditionality Regulation.

(70)

With regard to the Recovery and Resilience Facility, Regulation (EU) 2021/241
includes provisions linked with the protection of the financial interests of theUnion44, with which the Member State has to comply when implementing measures
under the Facility. In addition, the primary responsibility to comply with Union andnational law when implementing those measures remains with the Member States inaccordance with Article 22(1) of Regulation (EU) 2021/241, whereas theCommission can proceed to corrective measures ex post in cases of fraud, corruption,and conflicts of interests affecting the financial interests of the Union that have notbeen corrected by the Member State, or a serious breach of an obligation resulting
from the loan agreement or the financing agreement in accordance with Article 22(5)of that Regulation. More importantly, the RRP of Hungary is not yet adopted and its
content and capacity to protect the financial interests of the Union depends on theactual measures it will contain, but also how these measures will be implemented, by
Hungary.

(71)

In light of all the foregoing, the Commission considers that no other procedure under
Union law would allow it to protect the Union budget more effectively than theprocedure set out by the Conditionality Regulation.

6.

GENERAL OBSERVATIONS SUBMITTED BY HUNGARY(72)

In addition to the arguments submitted by Hungary on the specific issues raised by
the Commission, Hungary also submitted general observations, with which it

43
44

EN

See judgment of the Court (Full Court) of 16 February 2022, Hungary v European Parliament andCouncil of the European Union, Case C-156/21, ECLI:EU:C:2022:97, paras 262 and 266 in particular.
Article 22 of Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February
2021 establishing the Recovery and Resilience Facility, OJ L 57, 18.2.2021, p.17-75.

19EN

contested several elements of the procedure. In particular, it argued that the initiationby the Commission of the procedure against Hungary was not based on sufficient
factual or legal grounds, contesting in particular the reliability of the sources used by
the Commission. It also argued that the Commission did not ensure
non-discrimination and equal treatment among Member States, while referring inparticular to the performance of other Member States in the Single Market
Scoreboard and recommendations under the European Semester on strengthening the
public procurement framework, establishing anti corruption frameworks andensuring the independence of the prosecution service. Moreover, it argued that theCommission did not take due account of the specific features of Hungary’s legal
system, which provides for a margin of discretion in implementing the principles of
the rule of law. Furthermore, it argued that the principles of the rights of defence incriminal proceedings, as well as in competition law, should apply in this context andthat the Commission has not respected these rights.
(73)

In its second reply, Hungary criticised that the intention letter on 20 July had beensent, without taking into account the fourteen corrective measures submitted to theCommission on 19 July. For twelve out of these measures, Hungary committed tomaintain them unconditionally and indefinitely. Thus, it argued that the Commission
ought to have taken these commitments into account in its assessment before sendingthat letter, in particular also because the deadline set by the Conditionality
Regulation of one month for sending the letter was indicative. It further consideredthat the measures proposed by reference to the draft milestones of its planned RRPshould have been accepted as remedial measures, arguing that neither theConditionality Regulation nor the Guidelines of its application require a specificform in which remedial measures can be proposed in the course of the procedure. On
this basis, it argued that the Commission was in serious breach of the principle ofsincere cooperation between the Commission and the Member State, as well as of therequirement of an objective, impartial and fair assessment set out by theConditionality Regulation.

Commission’s observations
(74)

45
46

EN

The Commission considers that the arguments submitted by Hungary are unfounded,as the Commission carried out a thorough qualitative assessment that is objective,
impartial, fair, and respectful of equality between Member States. The Commission
duly took into account information from several available sources 45, to identify,
crosscheck and assess relevant breaches of the principles of the rule of law, in linewith the Conditionality Regulation as interpreted by the Court of Justice of theEuropean Union,46 including the information submitted by Hungary in its reply to therequest for information. The Commission underlines in that context that theassessment of each case, the range and scope of evidence, is performed on its own
merits, taking into account all relevant circumstances. While it is true that whenlooking at single indicators, other Member States might in some instances perform
worse than Hungary regarding certain aspects, the Commission’s assessment is a
Those sources have been indicated in the footnotes and annexes of the notification and of the intention
letter and they are publicly accessible.
Judgment of the Court of Justice of 16 February 2022 Hungary v Parliament and Council, C-156/21,
ECLI:EU:C:2022:97; judgment of the Court of Justice of 16 February 2022 Poland v Parliament andCouncil, C-157/21, ECLI:EU:C:2022:98.

20

ENcomprehensive qualitative assessment, which takes into account the relevant legal
and institutional context, bringing together information, indicators and observations
from multiple sources to form a more complete picture of the situation in Hungary
than single indicators could provide.

EN

(75)

The notification, as well as the intention letter clarified that the continuation of theissues over more than ten years indicates that there is a continued risk for the soundfinancial management of Union funds, in breach of Union law, and a persistent
failure by the Hungarian public authorities to prevent or correct those breaches andeffectively protect the financial interests of the Union. Based on this, theCommission considered that unless further measures are taken to address the matter
effectively as a matter of urgency, there are no grounds to assume that the situation
will significantly improve.

(76)

Finally, the Commission duly respected the rights of defence of Hungary, in line withthe requirements of the Conditionality Regulation, as well as the principles of Union
law, as it clearly stated its concerns and grounds for initiating the procedure,
provided to Hungary the possibility to submit its observations at every step of theprocedure and took duly into account the observations submitted by Hungary, as wellas the remedial measures it proposed in its first and second reply.

(77)

In relation to the measures or actions Hungary proposed on 19 July 2022, thearguments put forward by Hungary are unfounded for several reasons. Firstly, theremedial measures were not proposed with the observations on the notification letter
and within the time limit specified in that notification letter, as provided for by
Article 6(5) and (9) of the Conditionality Regulation, but later in the process.
Secondly, the fact that the time limit in Article 6(6) of the Conditionality Regulation
is indicative does not mean that the Commission is bound to unnecessarily extend it.
Such an extension is possible when this is justified to analyse the observations andthe adequacy of remedial measures, which must be submitted in good time. The
Commission invited Hungary in the intention letter to submit as early as possible
further details about the remedial measures proposed, both on their nature and on the
different instruments which could be used to take these forward. In particular as
regards the remedial measure relevant to the amendment of the judicial review ofprosecutorial decisions, which was under discussion in the context of the RRP, theCommission clearly stated that the Commission had several reservations on technicalaspects that could compromise its effectiveness. Thus, at that stage, the Commission
did not have any reason to delay sending the intention letter. Finally, those remedial
measures are now fully replaced with those formally submitted in the second reply,
including the additional commitments included in the September letter.

(78)

Furthemore, the Commission clearly explained in its intention letter that to beconsidered adequate for the purpose of the Conditionality Regulation, remedial
measures, including draft legislation where appropriate, should be proposed
unconditionally within the framework of the procedure under the Conditionality
Regulation, and be sufficiently precise in terms of content and timeline of
implementation, as well as not be limited in time. In many cases, the first reply
included references to proposals considered in the context of the draft Hungarian
RRP. Mere references to draft RRP milestones cannot be considered as remedial
measures submitted in the context of the procedure under the Conditionality
Regulation pursuant to its Article 6(5).At the same time, the Commission was not in21ENa position to assess whether they would be adequate to address the findings set out inthe notification, in order to take them into account in the measures it proposed with
its intention letter.
7.

REMEDIAL

MEASURES SUBMITTED BY HUNGARY AND ANALYSIS OF THEIRADEQUACY UNDER THE CONDITIONALITY REGULATION

7.1.

Remedial measures submitted by Hungary(79)

In accordance with Article 6(6) of the Conditionality Regulation, ‘[t]he Commission
shall take into account the information received and any observations made by theMember State concerned, as well as the adequacy of any proposed remedial
measures, when deciding whether to submit a proposal for an implementing decisionon the appropriate measures.’(80)

In its first reply, and the additional letters of 30 June and 5 July 2022, Hungary did
not submit adequate remedial measures, appropriately committed under theConditionality Regulation.

(81)

On 19 July 2022, Hungary sent an additional letter proposing a number of remedial
measures to address the findings in the notification, which due to the submission atthat very late stage of the process, could not be taken into account for the assessmentof the first reply.

(82)

In its second reply, Hungary submitted a number of remedial measures,complementing them with additional committements in the September letter, arguingthey would adequately address all the issues raised by the Commission in the
notification. These remedial measures are:i.
Reinforcing prevention, detection and correction of illegalities andirregularities 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 theexercise of public authority 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 thenational budget;

EN

22

EN

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 increasetransparency;
xi. Development of a performance measurement framework assessing theefficiency and cost effectiveness of public procurements;
xii. Adoption of an action plan to increase the level of competition in public
procurement;
xiii. Training to be provided for micro, small and medium-sized enterprises on
public procurement practices;
xiv. Setting up a support scheme for compensating the costs associated withparticipating in public procurement of micro, small and medium-sized enterprises;
xv.

Application of ARACHNE;

xvi. Strengthening cooperation with OLAF; andxvii. Adoption of a legislative act ensuring enhanced transparency of public
spending
7.2.

Commission assessment of the remedial measures(83)

The Commission welcomes that Hungary submitted remedial measures to address
the issues raised in the notification as regards systemic irregularities, deficiencies andweaknesses in public procurement, risks of conflicts of interest, and concerns
regarding public interest trusts, as well as the additional grounds regarding
investigation and prosecution, anti-corruption framework. In general, Hungary has
committed (as mentioned in its second reply) to unconditionally maintain in force theremedial measures (and the related legislations) without any time limit and to enforce
duly the rules set therein.

(84)

Concerning the assessment of the proposed remedial measures, the Commission
considers that since the specific issues identified in Hungary concern both the legal
framework and, to a large extent, practice, their adequacy to achieve their aim of
putting an end to the breaches of the principles of the rule of law and/or to their risks
for the sound financial management of the Union budget and the Union’s financial
interests cannot be properly evaluated without full knowledge of the details of theconcrete measures and before certain key elements are effectively implemented. In
this respect, further details and key steps for many of the proposed remedial
measures mentioned above need to be taken by Hungary until 19 November 2022
(when the start of operations of the Integrity Authority is envisaged), as indicated in
the timelines of the remedial measures submitted by Hungary on 22 August47.

47

EN

A calendar of the key steps until 19 November is contained in the Annex to the explanatory
memorandum.

23EN7.2.1.

Assessment per remedial measure
i.

(85)

The Hungarian Government has committed to establish an Integrity Authority withthe objective of reinforcing the prevention, detection and correction of fraud,
conflicts of interest and corruption as well as other illegalities and irregularities
concerning the implementation of any Union financial support.

(86)

This is a fundamental remedial measure aimed at addressing the issues and additional
grounds mentioned above (see Sections 2 and 3). The remedial measure proposedcontains specific rules on the appointment of the Integrity Authority’s board and on
the involvement of an ‘eligibility committee’48 aimed at guaranteeing that the
Integrity Authority and the members of its board will be fully independent: they will
be selected following an open call for applications on the basis of the candidates’
professional qualities, their qualifications, their extensive and undisputed experienceand reputation – including internationally – in legal and financial matters concerning
public procurement and anti-corruption and their proven competence in such fields49.
The members of the board will only be appointed following a binding opinion of theeligibility committee. Both the members of the eligibility committee and themembers of the board will be subject to strict conflict of interest rules. The Integrity
Authority will also be endowed with extensive powers, including the following: thepower to instruct contracting authorities to suspend a procurement procedure (for a
maximum of two months); the power to request administrative investigative bodies
to carry out investigations; the power to recommend the exclusion of specificeconomic operators from Union funding for a certain period of time; the power to
instruct relevant national authorities or bodies to carry out their supervisory or
control functions, in particular as regards procedures to verify conflicts of interest
declarations and suspicions in relation to the management of Union funds; the rightto request access to all relevant files, including on ongoing or upcoming public
procurement procedures; the power to recommend contracting authorities to use a
specific procedure in a specific procurement or in a category of procurement
procedures; the right to initiate procedures before the relevant national authorities orbodies with the aim of establishing suspected illegalities or irregularities; thecompetence to verify asset declarations50; the right to request the judicial review of

48
49
50

EN

The Integrity Authority

In line with the commitment in the September letter, the eligibility committee will be selected following
an open call for expression of interest, on which the Commission will be consulted.
The September letter also contains clarifications on the remuneration package that is foreseen for themembers of the Integrity Authority’s board as a further means to guarantee their independence.
As committed by Hungary in the September letter, this includes the power to verify public asset
declarations of all high-risk officials and, in this respect, have access to relevant databases and registries
for the purpose of verifying the assets of the declarants in accordance with data protection and privacy
regulations. Hungary also clarified that these commitments complement the already existing rules on
asset declaration extensively covering other positions, including public servants, permanent statesecretaries, deputy state secretaries, political advisors and political chief advisors, government andministerial advisors and chief advisors, government officials holding executive position, governmental
officials subject to national security control based on legislation, public notaries, bailiffs, leaders of the
Hungarian Development Bank, leaders of the Hungarian National Asset Management Inc., officials anda members of the supervisory board of economic organizations operating with a majority stateshareholding, judges, public prosecutors, members of the local governments. It also clarified that therules applicable to the members of the National Assembly applies to the Prosecutor General and his/her
deputy.

24

ENall decisions of authorities concerning public procurement procedures that involve
any Union support and may be subject to judicial review, etc. The Authority will also
issue annual reports on its activities, containing, inter alia, an analysis of theconcentration of the awards, an assessment of the practice of using frameworkagreements, an analysis of how the control system in place helps identifying andeffectively prevent risks of corruption, fraud and conflict of interests (and how to
detect and address such cases; recommendations on the issues identified. The annual
report will be published and the Government will have the obligation to explain in
writing how it will address the findings of the Integrity Authority. Finally, theremedial measure proposed also contains a detailed timeline with different
implementing steps including the consultation of the Commission and the OECD on
the draft legislative text(s) that will establish the Integrity Authority and containfurther necessary details about the above elements. The start of the Integrity
Authority’s operations, which is a key implementation step for this remedial
measure, as set out in the Annex, is foreseen on 19 November 2022.
(87)

Given the importance of the Authority as a new building block in the governance ofthe system, if correctly specified in detailed rules and implemented accordingly as
envisaged in the remedial measure submitted by Hungary (including the further
commitments included in the September letter), in a way which ensures fullindependence and effective powers on the ground as regards all procedures that may
actually or potentially affect the sound financial management of the Union budget or
the financial interests of the Union, the Integrity Authority would contribute toincrease in principle the level of competition in public procurement procedures,
preventing or reducing the risks of conflict of interests, and more generally
strengthening the prevention, detection and correction of fraud, corruption, conflictof interests and other irregularities in breach of Union law in the Hungarian public
procurement system, to the benefit of a more sound and efficient use of Union
funding. The Integrity Authority will rely on facts established by judicial decisions, itwill be able to seize the courts, and its own decisions will be subject to judicial
review. For this reason, the Commission welcomes Hungary’s additional
commitment in the September letter that all courts in Hungary hearing civil,
administrative and criminal cases including those relevant for the protection of thefinancial interests of the Union shall comply with the requirements of independence,
impartiality and being established by law in accordance with Article 19(1) of theTreaty on European Union and the relevant EU acquis.
ii.

(88)

EN

Anti-Corruption Task ForceThe Hungarian Government undertook to establish an Anti-Corruption Task Forceby 1 December 2022 with the following tasks: a) examining the existing anticorruption measures and elaborating proposals concerning the improvement ofdetection, investigation, prosecution and sanctioning of corrupt practices, b)
proposing measures aimed at improving corruption prevention and detection, c)
drafting an annual report analysing the risks and trends of corruption and corrupt
practices, proposing effective countermeasures and best practices for and assessing
their effective implementation. The Government shall discuss the report and the
proposals included therein within two months and if it does not decide on a proposal,
it shall send a detailed reasoning for its decision to the chair of the Task Force. The
regulatory framework of the Task Force will be included in the Act establishing theIntegrity Authority (see remedial measure i, described above) and the chair of the25

ENIntegrity Authority will be the chair of the Task Force. Relevant non-governmental
actors, that are demonstrably independent from the government, public authorities,
political parties and business interests, proven to be active in the field of anticorruption will be involved in the activities of the Task Force and their full,structured and effective participation will be ensured: the number of such members
shall amount to 50% of the members of the Task Force, the chair excluded, and they
will have the right to draft a shadow report. If the 50% representation cannot be
achieved, the voting power of such members shall be modulated so as to cast 50% of
the votes, the chair excluded. The Task Force shall hold its first meeting before 15
December 2022.It shall adopt its first report for the year 2022 and send it to theGovernment by 15 March 2023. The Anti-Corruption Task Force established byGovernment Decision 1337/2022 of 15 July 2022 shall be discontinued and theGovernment Decision repealed. The Government Decision repealing the previous
one and providing for the timeline and tasking for the establishment of the Integrity
Authority and the Anti-Corruption Task Force is a key element for this measure.
Likewise, the submission to the National Assembly of a draft Act on theestablishment of the Authority by 30 September 2022 is a key implementation stepfor this remedial measure, as set out in the Annex, as it will set out the regulatory
framework for the Task Force.
(89)

The Commission positively notes that the remedial measure aims to ensure full,structured and effective participation of non-governmental actors truly active in thefield of anti-corruption along with government’s representatives, which is a key
element for the Commission. Furthermore, Hungary commits to extensive andmeaningful consultations with national and international stakeholders, including theCommission during the preparation of the draft legislation. If correctly specified indetailed rules and implemented accordingly, this remedial measure would address inprinciple the issues raised as regards ineffective investigation and prosecution or
sanctioning of breaches of law linked to the protection of the financial interests of theUnion, as well as those related to systemic weaknesses of the public procurement
system.
iii.

(90)

EN

Strengthening the Anti-Corruption framework

With this remedial measure (including the additional commitments in the September
letter), the Hungarian Government undertook to adopt by 30 September 2022 antifraud and anti-corruption strategies defining the tasks of entities involved in theimplementation of any Union financial support in relation to the prevention,
detection and correction of fraud, conflict of interest and corruption. The strategies
shall include the assessment of the main risks, factors and practices of fraud, conflictof interest, and corruption. The Hungarian Government also commits to adopt a new
National Anti-Corruption Strategy (NACS) and Action Plan (AP) by 30 June 2023,
with special attention given to the strengthening of the institutional and normative
framework for the fight against high-level corruption through enhancing thetransparency of the work of public authorities including on senior political level. The
Anti-Corruption Task Force will be involved in the preparation of the NACS and the
AP as well as in the monitoring of their implementation. According to thecommitments in the September Letter, the AP shall include specific actions aimed at
introducing no later than 1 October 2023 an effective, proportionate and dissuasive
sanctioning regime, including administrative and criminal sanctions with regard toserious violations related to obligations under the asset declaration system. Hungary

26

ENalso commits to fully implement by 30 June 2023 all actions of the National AntiCorruption Strategy for the period 2020-2022. In the September letter, Hungary also
made further commitments on the personal and material scope of asset declarations.
In this respect, Hungary committed to submit to the National Assembly draft
legislation (to be effective as from 1 November 2022) which shall extend thepersonal scope of the asset declaration system to (i) persons entrusted with seniorpolitical functions under Articles 183 and 184 of Act CXXV of 2018 on government
administration and their relatives living in the same household with the person
concerned, and (ii) members of the National Assembly and their relatives living inthe same household with the person concerned. As regards the material scope,
Hungary committed to widen it to include not only revenues but also assets51.
Additionally, with the September letter, Hungary committed to establish (by 31
March 2023) a system of asset declarations filed electronically in a digital format, tobe stored in database which will be searchable for free and without the need toregister. Furthermore, in the September letter, Hungary also committed to extensive
consultations with the Commission during the preparation of all draft legislation
related to the above points. Finally, the Integrity Authority will be tasked with thereview of the regulatory framework and the functioning of the asset declarations
system, including its scope and verification processes, which shall be included in areport by 31 December 2023. Key steps for this remedial measure, as set out in the
Annex, are the adoption of effective anti-fraud and anti-corruption strategies by 30
September 2022, as well as the adoption by the National Assembly of the rules on
the extension of the personal and material scope of asset declarations as described in
the remedial measure and in the September letter, effective on 1 November 2022.
(91)

In the Commission’s view, this remedial measure, complemented by the additional
commitments in the September letter, includes many positive elements such as thecommitment to the adoption of anti-fraud and anti-corruption strategies covering also
all bodies involved in the implementation of Union funds and the submission of thestate of play of the implementation of the current 2020-2022 anti-corruption strategy,
the widening of the personal and material scope of the asset declarations,introduction of sanctions specific actions to increase transparency of asset
declarations. In this respect the database mentioned above should be publicly
accessible. Moreover, the Integrity Authority should have the power to launch an
asset verification process also on its own initiative in all cases. Overall, in theCommission’s view, if correctly specified in detailed rules and implemented
accordingly, this remedial measure would address in principle the issues raised asregards ineffective investigation and prosecution or sanctioning of breaches of law
linked to the protection of the financial interests of the Union, as well as those related
to systemic weaknesses of the public procurement system.
iv.

(92)

51

EN

Public Interest Management Foundations (or Public Interest Trusts)

With this remedial measure, the Hungarian Government has committed by 30
September 2022 to a) the adoption of an amending act to ensure the generalised
application of public procurement rules to public interest asset management
In this respect, the September letter mentions real estate properties; other valuable properties (vehicles,
vessels, valuable antiques and work of art, etc.); savings in bank deposits and in cash; assets in stocks,
securities and private equity funds; life insurance policies; trusts, and beneficial ownership ofenterprises.

27

ENfoundations performing public interest activity and legal persons established or
maintained by the them, b) adopt an amending act in order to ensure full compliancewith Article 61 of the Financial Regulation as well as alignment of instructions andpractice to the Commission Guidance notice on the avoidance and management ofconflicts of interest under the Financial Regulation, in order to improve and clarify
general conflict of interest rules related to public interest asset managementfoundations. The key implementation step for this remedial measure, as set out in the
Annex, are the adoption of both amending acts mentioned above by 30 September
2022.
(93)

The Commission considers that the remedial measure proposed by Hungary, if
correctly specified in detailed rules and implemented accordingly, would be capableof addressing in principle the issues raised, as it would enable the generalised andunconditional application of public procurement rules to public interest trusts and theentities maintained or managed by them (i.e. all of them would be considered
contracting authorities for the purposes of public procurement rules), and as theremedial measure would establish clear conflict of interest rules for such entities andtheir board members.
v.

EN

Judicial review of prosecutors’ decisions(94)

The Hungarian Government has committed to the amendment of the Code of
Criminal Procedure with the aim of establishing a procedure concerning special
criminal offences related to the exercise of public authority or the management ofpublic property. The procedure provides for the judicial review of the decision of theprosecution service or the investigating authority to dismiss a crime report or
terminate the criminal proceedings (i.e. to close a criminal investigation without anindictment). Based on the review, an investigating judge will have the authority toorder the commencement or the continuation of criminal proceedings. The procedure
may be triggered by any person; natural persons and legal persons could file motions
under this procedure with the exception of public authorities. The procedure could
also eventually lead to the possibility to file for an indictment before a court.

(95)

The Commission notes that Hungary has included in the remedial measure (and in
the related additional commitments undertaken with the September letter) several
elements related to the new judicial review procedure against prosecutors’ decisions,such as the possibility for legal entities (i.e. not only physical persons) to start thisprocedure, a guaranteed privileged procedural position for the person reporting acrime, a reference to the fact that exclusive competence to hear the cases under the
new procedure will be attributed to a specialised court (i.e. the Buda Central District
Court), a reference to the fact that all courts and the investigative judges involved in
the new procedure will be compliant with Article 19 TEU and the relevant EU
acquis, and a reasonable timeframe for the procedure in general, which would ensure
its effectiveness. It has also committed to extensively consult the Commission on thedraft legislative text that will be proposed for adoption in line with the remedial
measure, which will contain further important details which are relevant for theassessment. In that context, the draft law would also require in particular that the trial
court does not decide on the merits of the indictment without having consideredevidence. Hungary undertakes to conduct a review on the functioning of theprocedure no later than 31 December 2023 and if necessary to adopt amendments tothe legislative framework (following consultations with the European Commission)

28

ENno later than 30 June 2024. Key implementation steps and further details about this
remedial measure, as set out in the Annex, are the finalisation and adoption of thedraft text of implementing regulations (necessary for the application of the review
procedure) by 31 October 202252, the initiation of an ex ante review of the law by theConstitutional Court and entry into force of the new law amending the Criminal
Procedure Code by 15 November 2022.
(96)

The Commission’s view is that the remedial measure submitted by Hungary contains
several elements that aim at ensuring the effectiveness of the procedure. In addition,
Hungary has undertaken to review the procedure within a reasonable timeframe. This
however, would have to be confirmed once the details of the relevant draft legislation
are submitted to and reviewed by the Commission. If correctly specified in detailed
rules and implemented accordingly, this remedial measure would address in principle
the issues raised as regards ineffective investigation and prosecution or sanctioningof breaches of law linked to the protection of the financial interests of the Union, as
well as those related to systemic weaknesses of the public procurement system.
vi. Strengthening audit and control mechanisms for the implementation of Union
funds

(97)

52

EN

With this remedial measure, the Hungarian Government committed to establish aworking group by 31 August 2022 to develop provisions, to be included in relevant
Government Decrees on the implementation of Union support (e.g. RRF, Funds
under shared management etc.) aiming to strengthen rules and procedures to more
effectively prevent, detect and correct conflict of interest in accordance with thedefinition contained in Article 61 of the Financial Regulation and increase proceduralcapacities of managing authorities and intermediate bodies, and the national authorityof the implementation of the Hungarian RRP to apply strengthened risk management
and prevention, detection and correction of fraud, corruption and double funding andunconditionally maintain and enforce those provisions for an unlimited period oftime. The provisions shall also ensure an effective control mechanism over thevalidity of conflict of interest declarations. The working group shall extensively
consult with the Commission responsible for Union financial support with a view toseek their feedback and take it into account in the relevant Government Decrees.
Furthermore, Hungary committed in the September letter to provide the necessaryfinancial and human resources to the EUTAF, to be further specified by the working
group established with this remedial measure, to guarantee the sound use of Union
support, to safeguard its independence and enable it to carry out its current tasks andthe additional tasks envisaged to be allocated to it by a number of the remedial
measures submitted by Hungary on 22 August 2022. The key implementation stepsof this remedial measure, as set out in the Annex, are the establishment of theWorking Group by 31 August 2022, the establishment of the Directorate of Internal
Audit and Integrity (“DIAI”) in the Prime Minister’s Office by 30 September 2022,
and the adoption of relevant amendments to the relevant Government Decrees(413/2021 and 256/2021) by 30 September 2022. The Working Group has been set
up by Hungary in line with the commitment in the remedial measure and, by thesecond week of September it has already met four times on 8, 9, 13, and 16
September.
These regulations will be necessary once the law is adopted.

29

EN

(98)

If correctly specified in detailed rules and implemented accordingly, this remedial
measure would address in principle (together with other remedial measures) theconcerns raised as regards systemic weaknesses of the public procurement system aswell as the concerns raised as to the effective prevention, detection and correction of
possible conflicts of interest, since it aims at the adoption of provisions to strengthen
rules and procedures to more effectively prevent, detect and correct conflict ofinterest in the use of Union funds, including an effective control mechanism over thevalidity of conflict of interest declarations.
vii.

Reduction of single-bids in procurement procedures involving Union funds(99)

With this remedial measure, the Hungarian Government undertook to a) reduce by 31
December 2022 the share of public procurement tender procedures financed from
Union funds and closed in the year of 2022 with single bids below 15%, as measured
in line with the Single Market Scoreboard methodology, b) unconditionally fulfil theabove-referred target and maintain it without a time limit, and c) in case the share of
single bids would exceed 15% in any given calendar year, it would take additional
measures within four months to facilitate reducing single bid procurements to bring itback below the threshold of 15% and inform the Integrity Authority and theCommission. The key implementation step of this measure, as set out in the Annex,
is the performance of the first audit on the compliance with the Single Market
Scoreboard methodology and every individual data provision to the Commission andto the public in this regard by the Hungarian Directorate General for Audit ofEuropean Funds (“EUTAF”), including for the baseline values, by 30 September
2022.

(100)

The Commission also welcomes this remedial measures as it clearly aims to increasetransparency and competition in public procurement which, if correctly implemented,
can be considered as capable of addressing in principle the concerns raised by theCommission on this ground.
viii. Reduction of single-bids in procurement procedures involving national funds(101)

Similar to the previous remedial measure described above, the Hungarian
Government undertook to a) reduce gradually (in three steps) by 31 December 2024
the share of public procurement tender procedures financed from the national budget
and closed in a calendar year with single bids below 15%, as measured in line with
the Single Market Scoreboard methodology, b) unconditionally fulfil the abovereferred target for subsequent years and maintain it without a time limit, and c) incase the share of single bids would exceed 15% in any given calendar year, it shallpropose additional measures within four months to facilitate reducing single bid
procurements to bring it back below the threshold of 15% and inform the Integrity
Authority and the Commission.

(102)

As for the previous one, the Commission welcomes this remedial measure as itclearly aims to increase transparency and competition in public procurement
provided it is correctly implemented.
ix.

(103)

EN

Single-bid reporting tool

In addition to the remedial measures related to the reduction of single-bid procedures
described above, the Hungarian Government committed to develop by 30 September

30

EN2022 a new monitoring and reporting tool for separately measuring the share of
procurement procedures resulting in single bids financed either from national
resources or from EU support or from both and maintain it for an unlimited period oftime. A written report based on the information gathered by the single-bid reporting
tool shall be prepared by the ministry responsible for public procurement andpublished by 15 February each year on the website of the Electronic Public
Procurement System (EPS - accessible to the public without registration and free ofcharge). Key steps of this remedial measure, as set out in the Annex, are thedevelopment of a new monitoring and reporting tool based on data sources from the
EPS by 30 September 2022, and the confirmation through an audit by the EUTAF
that the single-bid reporting tool is fully functional and operational and its
functionalities are in line with the methodology of the Single Market Scoreboard by
the same date.
(104)

This remedial measure is welcome and its features are positively assessed by theCommission. If correctly developed and implemented accordingly, it will in principle
make the remedial measures on reduction of single-bids more effective andtransparent.
x.

(105)

The Hungarian Government undertook to, a) create and publish in the EPS website aregularly updated database (at least quarterly) available to the public free of charge
which contains information on all contract award notices of public procurement
procedures in a structured form (including data with company identification numbers
and including the names of each individual member of consortia and subcontractors), which is fit to be processed by machine means (in particular allowing
structured research and bulk export of data related to procurement procedures), b)
take all the necessary measures to develop the EPS, ensuring that newly developed
functions are fully operational by 30 September 2022 and c) unconditionally
maintain the EPS and the relevant functions for an unlimited period of time. Key stepof this remedial measure, as set out in the Annex, is the full operability of the newly
developed functions of the EPS by 30 September 2022.

(106)

The Commission considers that if this remedial measure is correctly developed andimplemented, it should increase transparency in public procurement procedures andtherefore, can be considered as capable of addressing in principle the concerns raisedby the Commission as regards systemic weaknesses in the public procurement
system.
xi.

(107)

EN

Electronic Public Procurement System (EPS)

Performance measurement framework

With this remedial measure, the Hungarian Government committed to develop, by 30
September 2022, a performance measurement framework to assess the efficiency andcost effectiveness of public procurements. The remedial measure also envisages thatthe Hungarian Government will unconditionally maintain the regular use of theperformance measurement framework and the publication of its results for an
unlimited period of time. The performance measurement framework will be
operational by 30 November 2022 and will involve independent non-governmentalorganisations (NGOs) and independent public procurement experts with the aim ofassessing the efficiency and cost-effectiveness of public procurements in Hungary.

31

EN

The key implementation step of this measure, as set out in the Annex, is thedevelopment, including the adoption of a Government Decision, of the said
framework by 30 September 2022.
(108)

Together with other remedial measures related to the public procurement system, this
remedial measure, if correctly specified in detailed rules and implemented
accordingly, can be considered as capable of addressing in principle the concerns
raised by the Commission as regards systemic weaknesses in the public procurement
system.
xii.

Action plan to increase level of competition in procurement procedures(109)

The Hungarian Government committed 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
to be set therein. The remedial measure also provides for a review of the action planon an annual basis. The Hungarian Government also committed to make publicly
available without delay the action plan and its review, as well as the annual state ofplay of the implementation of the measures in the action plan.

(110)

The Commission assessment of this remedial measure aiming to increase the level ofcompetition in public procurement is positive. Together with the other remedial
measures related to the public procurement system, if correctly specified in detailed
rules and implemented accordingly, it can be considered as capable of addressing inprinciple the concerns raised by the Commission in this respect.
xiii. Training for micro, small and medium-sized enterprises in public procurement(111)

This remedial measure is aimed to facilitate the participation of micro-, small andmedium enterprises (with a focus on micro- and small enterprises) in public
procurement by providing by 31 March 2024 for at least 1,000 micro, small andmedium-sized enterprises free-of- charge training occasions. The Hungarian
Government also committed to provide such training occasions for at least a further
1,200 (therefore a total of at least 2,200) micro, small and medium-sized enterprisesby 30 June 2026, and to monitor and evaluate the efficiency and added value of the
trainings.

(112)

The Commission assessment of this remedial measure aiming to increase the level ofcompetition in public procurement, and in particular to increase the level ofparticipation of micro and small enterprises in procurement procedures, is positive.
This remedial measure, together with other remedial measures related to the public
procurement system, if correctly implemented, can be considered as capable ofaddressing in principle the concerns raised by the Commission in this respect.
xiv. Support scheme for participation in public procurement by micro, small andmedium-sized enterprises

(113)

EN

In addition to the measure above related to training support, the Hungarian
Government committed to set up and launch by 31 March 2023 a support scheme
providing a lump sum compensation – based on objective, non-discriminatory andtransparent selection criteria – for at least 1,800 eligible micro, small and mediumsized enterprises (with a focus on micro- and small enterprises by 30 June 2026 for

32

ENtheir costs associated with their participation in public procurement procedures, withthe aim of facilitating their participation in public procurement and reducing theirentry barriers. A mid-term evaluation should be performed by 30 September 2024
and a final evaluation should be completed at the end of the support programme by
31 July 2026.
(114)

The Commission positively assesses this remedial measure aiming to increase thelevel of competition in public procurement, and in particular to facilitate theparticipation of micro- and small enterprises in procurement procedures. This
remedial measure, together with other remedial measures related to the public
procurement system, if correctly implemented, can be considered as capable ofaddressing in principle the concerns raised by the Commission in this respect.
xv.

Extended use of the Commission’s Arachne risk-scoring tool

(115)

Under this remedial measure, the Hungarian Government undertook to apply
procedures for the systematic and extended use of all the functionalities of the single
data-mining and risk-scoring tool which the Commission puts at the disposal of
Member States, i.e. Arachne, in the implementation of any Union support, for all
programming periods, to effectively prevent and detect conflict of interest, fraud,corruption, double funding and other irregularities. It committed to unconditionally
maintain the full and effective application of the Arachne system for an unlimited
period of time, while undertaking that all the relevant audit and control bodies shallhave full access to the data sets uploaded into the Arachne system. The key step of
this measure, as set out in the Annex, is the application of the procedures for thesystematic use of all the functionalities of Arachne in the implementation of any
Union support by 30 September 2022. The procedures shall ensure that all relevant
data is uploaded, the results of risk-scoring are followed-up, and the respective audit
bodies have full access to Arachne.

(116)

In addition to the establishment of the Integrity Authority (described above) and theremedial measure on strengthening the control and audit for the use of Union funds,
as regards the concerns raised about the ability of Hungary to improve conflicts ofinterest checks regarding the use of Union funds, the Commission considers that theremedial measure submitted by Hungary on the extended use of all functionalities ofthe single data-mining and risk-scoring tool which the Commission puts at thedisposal of Member States (i.e. Arachne) for any Union support, if correctly
developed and implemented, is capable of addressing in principle the concerns raisedby the Commission.
xvi. Strengthening cooperation with OLAF

(117)

EN

The Hungarian Government undertook to submit to the National Assembly a draft
act on the amendment to Act CXXII of 2010 on Nemzeti Adó- és Vámhivatal, whichshall be adopted by 30 September 2022 and by which it shall designate the National
Tax and Customs Administration (Nemzeti Adó- és Vámhivatal, NAV) as thecompetent national authority to assist OLAF when carrying out on-the-spot checks in
Hungary and when an economic operator subject to those checks refuses tocooperate. It also committed to submit to the National Assembly a draft act on theamendment to Act XXIX of 2004 to introduce a dissuasive financial-type of sanction
to be imposed in case an economic operator refuses to cooperate with OLAF for the33

ENpurposes of OLAF’s on-the-spot checks and inspections. The key step of this
remedial measure, as set out in the Annex, is the adoption of both acts mentioned
above by 30 September 2022.
(118)

Concerning the remedial measure proposed on strengthening cooperation with
OLAF, the Commission considers that it is capable of addressing the limitations
identified, as it will designate a competent national authority to assist OLAF whencarrying out on-the-spot checks in Hungary and when an economic operator subject
to those checks refuses to cooperate. The new rules to be adopted by Hungary in linewith the remedial measure submitted will also include a dissuasive financial-type ofsanction to be imposed in case an economic operator refuses to cooperate with OLAF
for the purposes of OLAF’s on-the-spot checks and inspections. Provided that thecommitments taken are correctly specified in detailed rules and implemented
accordingly, the Commission considers that this issue has been addressed inprinciple.
xvii. Enhanced transparency of public spending

EN

(119)

With this remedial measure, the Hungarian Government committed to a) submit to
the National Assembly and have it adopted by it by 31 October 2022 a legislative act
setting out an obligation for all public bodies to proactively publish a pre-defined setof information on the use of public funds into a central register, b) provide
information on the subcontractors in the central register and c) unconditionally
maintain in force the above-referred legislative act for an unlimited period of timeand ensure its enforcement (in particular that public bodies upload all relevant data infull and in a timely manner in the registry). An advanced draft of the legislative act
will be sent to the Commission by 30 September 2022. The key steps of this remedial
measure, as set out in the Annex, are (a) sending to the Commission an advanced
draft of the legislative act setting out the obligation for all public bodies toproactively publish a pre-defined set of information on the use of public funds by 30
September 2022 and (b) adoption of that legislative act by 31 October 2022.

(120)

In the Commission’s view, this remedial measure also contributes (together withother remedial measures) to increase transparency in public procurement. If correctly
specified in detailed rules and implemented accordingly, it can be considered ascapable of addressing in principle the concerns raised by the Commission in thisrespect.

7.2.2.

Conclusion of the assessment(121)

The Commission has to decide on the next step of the procedure within one monthafter receiving the Member State’s observations. It welcomes the proposal made by
Hungary, albeit at a late stage, and considers that the proposed remedial measures,
taken together, if correctly specified in the enacting laws and implementing rules,
and implemented accordingly, could in principle, depending on the details of themeasures, be capable of addressing the issues described in the notification regarding
systemic irregularities, deficiencies and weaknesses in public procurement, risks ofconflicts of interest, and concerns regarding ‘public interest trusts’, as well as the34ENadditional grounds regarding investigation, prosecution and the anti-corruption
framework53.
(122)

However, important details of the proposed measures are still to be determined andassessed, notably how their key elements will be reflected in the actual legal texts(for example to ensure that the Integrity Authority has the power to verify asset
declarations relevant for carrying out its tasks). Secondly, several of the issues
identified in Hungary require not only changes in the legal framework, but more
prominently concrete implementation of changes in practice, the latter requiring amore extended timeframe to produce concrete results. Pending the assessment of thedetails and of the implementation of the key implementaion steps of all the remedial
measures as set out in Table 1 of the Annex, a risk for the budget remains. Therefore
at this stage, pending the details and the correct, full and effective implementation of
all the key implementation steps of these measures, the Commission cannot consider
that they are adequate to address the findings set out in the Commission notification
sent to Hungary on 27 April 2022 and to protect the Union budget.

(123)

The Commission will continue to monitor the situation through this procedure andother relevant instruments, and to exchange with the Hungarian authorities after the
adoption of this proposal. It is noted, in particular, that a number of the remedial
measures proposed by Hungary are to be implemented by 19 November 2022. The
Commission will keep the Council informed of any relevant element which may
have an effect on its present assessment.

(124)

Pursuant to Article 6(10) of the Conditionality Regulation, the Council shall adopt
the implementing decision within one month, that could be extended by a maximumof further two months which would allow for consideration of the fulfilment of thecommitments referenced in paragraph (123).

8.

MEASURES PROPOSED FOR ADOPTION AND THEIR PROPORTIONALITY(125)

The proposal respects the principle of proportionality. It does not go beyond what isnecessary to achieve the objectives sought by the instrument.

(126)

The Conditionality Regulation requires that measures to be proposed to the Council
be proportionate to the actual or potential impact of the identified breaches of theprinciples of the rule of law on the sound financial management of the Union budget
or on the protection of the financial interests of the Union and, insofar as possible,
target the Union actions affected by the breaches. In identifying the measures to be
proposed, the Commission shall take into account all relevant elements, such as thenature, duration, gravity and scope of the breaches of the principles of the rule oflaw, as well as the adequacy of any possible remedial measure submitted by theMember State concerned in the context of the procedure.

53

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These findings do not pre-empt the Commission’s monitoring and further analytical assessment underother Commission instruments, including the annual EU Rule of Law mechanism.

35

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EN

8.1.

Proportionality of measures - potential impact of the breaches of the principlesof the rule of law on the Union budget(127)

The identified breaches are intrinsically linked to the process under which Union
funds are used by Hungary, as they consist in improper functioning and processes ofthe public authorities deciding on the award procedure of contracts financed throughthe Union budget. Therefore, their potential impact on the sound financial
management of the Union budget or the protection of the financial interests of theUnion is considered to be particularly significant. In addition, if the identified
breaches are coupled with the limits and obstacles in the detection, investigation andcorrection of fraud due to the additional grounds related to investigation, prosecution
and anti-corruption framework, the abovementioned impact could be consideredeven more significant, as potentially affecting all Union funds implemented by
Hungary.

(128)

As regards the nature of the breaches, the Commission considers that the assessmentof the breaches relevant to public procurement, as well as those relevant to conflictsof interest for public interest trusts has led to the conclusion that these issues areindicative of breaches of the rule of law, in particular of those of Article 3(b) ofRegulation (EU, Euratom) 2020/2092, as they fail to prevent, correct or sanction
arbitrary or unlawful decisions by public authorities and fail to ensure the absence of
conflicts of interest. Thus the nature of the assessed breaches, which relates inessence with the way public funds, including Union funds, are being implemented
entails a significant impact on the Union budget.

(129)

Moreover in particular the breaches relevant to the issues identified in relation to
public procurement are recurrent and with a long duration of over 10 years, entailinga risk for the sound financial management of the Union budget and the financial
interests of the Union.

(130)

The Commission furthermore considers that the identified breaches of the principlesof the rule of law concern important parts of the public sector in Hungary, i.e. all
public entities implementing Union funds that may be or become contracting
authorities, as well as all public interest trusts, which despite being private entities,
have a public interest objective, such as education, research, environment andclimate protection and heritage protection. Thus, the identified breaches of theprinciples of the rule of law are systemic and widespread, and thus serious.

(131)

Concerning the scope of the breach of the principles of the rule of law, theCommission 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 theUnion budget or the financial interests of the Union must be considered as being
substantial. In this case, the identified issues risk affecting all programmes that are
mainly implemented through public procurement, which relate most significantly tothree of the Cohesion policy programmes in Hungary under the Multiannual
Financial Framework 2021-2027, which correspond to the a significant part of theUnion budget allocated to Hungary under Cohesion policy. The Commission audits
which identified the public procurement issues described above covered the area of
Cohesion policy and despite the fact that their impact on the EU budget has been
financially corrected in application of Cohesion policy rules in relation to theindividual audits, these findings demonstrated a systemic inability, failure or

36

ENunwillingness by the Hungarian authorities to prevent decisions that are in breach of
the applicable law as regards public procurement and conflicts of interest, and thus toadequately tackle risks of corruption.
(132)

In addition to the above, if the identified issues related to public procurement and the
public interest trusts are coupled with the limits and obstacles in the detection,
investigation and correction of fraud due to the additional grounds related toinvestigation, prosecution and anti-corruption framework, the financial impact could
be considered to be even more significant. This aspect would indeed hamper theprotection of the Union’s financial interests both ex ante, hampering the deterrent
effect of criminal proceedings, and ex post, blocking the repressive action of Stateinstitutions.

8.2.

Union actions targeted by the measures(133)

Taking into account the Commission services’ past audits (and despite the fact that
their impact on the EU budget has been financially corrected in application of
Cohesion policy rules), and the findings outlined above, the Union actions that are
most likely to be affected again in the future by the breaches of the principles of therule of law are those of the Cohesion policy programmes that are mainly
implemented through public procurement, as well as programmes under which public
interest trusts and the entities maintained by them may be beneficiaries.

(134)

The Commission considers that, taking into account the established risk for the soundfinancial management of the Union budget and the Union’s financial interests, aswell as the preventive nature of the Conditionality Regulation, and to protect thebudget against serious risks, the measures should concern in priority the Cohesion
policy programmes 2021-2027 that are expected to be implemented mainly throughpublic procurement taking as a benchmark the way the equivalent Cohesion policy
programmes have been implemented under the MFF 2014-2020. The programmes
under Cohesion policy that are concerned by the proposed measures (hereinafter the“programmes concerned”) are the following:

(135)

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(a)

Environment and Energy Efficiency Operational Programme Plus,(b)

Integrated Transport Operational Programme Plus,(c)

Territorial and Settlement Development Operational Programme Plus.

As regards the breaches of the principles of the rule of law affecting funds
implemented by public interest trusts and the entities maintained by them, theCommission considers that, taking into account the nature of the activities in whichthese entities may be involved54, all actions of programmes under direct or indirect
management that may have public interest trusts or other entities maintained by themas beneficiaries or implementing entities, should be targeted by the measures theCommission intends to propose in this case.

These activities would mainly relate to education and research, but also to many other activities, such asenvironmental and climate protection, heritage protection, and sports.

37

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8.3.

Choice of appropriate and proportionate measures(136)

In light of the foregoing analysis, which concludes that there is a significant potential
impact of the identified breaches of the principles of the rule of law on the soundfinancial management of the Union budget or on the financial interests of the Union,
the following measures are proposed.
•

EN

Programmes under shared management: suspension of commitments undercohesion policy programmes for the period 2021-2027(137)

To determine the level of suspension of commitments, the Commission notes that at
this stage it is not possible to quantify precisely the potential impact on the Union
budget, as the proportion of the funds that will be implemented through procurement
under the MFF 2021-2027 period cannot be determined in advance with sufficientaccuracy. Therefore, since it is not possible to define precisely the amount ofexpenditure linked to the serious irregularities that have been detected, theappropriate level of the measures to be applied is determined by a percentage thatreflects the estimated ensuing risk for the Union budget. This percentage isdetermined in the light of the seriousness, frequency and duration of the systemic
breaches identified, as well as of the expected maximum financial risk for the soundfinancial management of the Union budget, taking into account the remedial
measures submitted by Hungary in the context of this procedure.

(138)

Given the particularly significant potential impact of the identified breaches of theprinciples of the rule of law on the sound financial management of the Union budget
and on the financial interests of the Union, and taking into account the nature,
duration, seriousness and scope of those breaches, this could imply a very significant
potential impact on the relevant funds and thus justify a very significant level ofsuspension of commitments as proportionate. As regards public procurement,
appropriate and proportionate measures should therefore extend to the amount ofUnion funds that risks to be managed in breach of the principles of sound financial
management. This being said, only part of the funds of the above identified
operational programmes is expected to be implemented through procurement (inprinciple between 85% and 90% of funds) and, also in principle, some public
procurement procedures may not be affected by those systemic breaches. On theother hand, those breaches could also involve serious risks for other Union
programmes which are also, to a lesser extent, implemented through public
procurement but would not be affected by the envisaged measures. Taking into
account all the foregoing, in its intention letter, the Commission had estimated therisk for the budget to correspond to 70% of the funds of the programmes concerned.
However, such risk could be significantly mitigated by the commitments made by
Hungary in the remedial measures submitted with the second reply, should they be
confirmed with the key steps to which Hungary committed.

(139)

Indeed, while Hungary has submitted remedial measures that in principle could be
able to address the Commission’s concerns, and started taking first implementation
steps, at this stage they are still insufficiently detailed considering that the key
legislative texts and other key steps that would start implementing many of theremedial measures submitted by Hungary are still pending, so that it is difficult toconclusively evaluate whether they address the concerns. Therefore, the Commission
considers that a reasonable approximation of the level of remaining risk for the38

ENbudget at this stage correspond to 65% of the funds of the programmes concerned.
As this level can be considered as a reasonable approximation of the impact on or theserious risks for the Union budget, the Commission considers that the suspension of
65% of commitments in these operational programmes is a proportionate measure.
The Commission will continue to monitor the situation and may suggest adaptations
as necessary.
(140)

Should the identified programmes not have been approved by the time the Council
would take a decision, the suspension of approval of one or more of the programmes
concerned, in proportion to the risk for the Union’s financial interests, should be
decided instead. This is based on the same line of reasoning set out in paragraph(139) above.
•

EN

Programmes under direct and indirect management: prohibition on entering
into new legal commitments with public interest trusts and entities maintainedby them(141)

The measures should also concern actions under programmes implemented under
direct and indirect management, for which public interest trusts and the entities
maintained by them may be beneficiaries or implementing entities. As regards theidentified breaches relevant to public interest trusts, as the measure would concern
only these entities as such, all programmes implemented under direct and indirect
management should be targeted. The Commission considers proportionate as ameasure the prohibition on entering into new legal commitments with any public
interest trust and any entity maintained by them under any programme under direct
and indirect management.

(142)

As there is currently a general exception for board members of public interest trusts
to abide by conflict of interest requirements, while the applicability of public
procurement rules to trust funds would depend on a case by case assessment of
whether they meet the criteria to be considered contracting authorities, suchexceptions may affect any budget these entities may implement or manage. Thus it ispractically impossible to consider that the prohibition should apply for some public
interest trusts and the entities maintained by them, or that the Commission can enterin partial legal commitments with such entities. Moreover, as the prohibition ofentering into new legal commitments is limited to these entities, the allocation offunds to from all Union programmes under direct and indirect management may still
be used for any other entity, as beneficiary or implementing entity. Thus, in light of
the list of measures applicable to direct and indirect management pursuant to Article
5(1)(a) of the Conditionality Regulation, the prohibition of entering into any newlegal commitment with these entities can be considered proportionate to address therisk for the sound financial management of the Union budget and the Union’s
financial interests, pending the adoption of the relevant legislative text.

(143)

Provided that the measure is specified in detailed rules and enacted in the necessary
legislative text and implemented as Hungary has committed, it can be considered asaddressing all of the Commission’s concerns in this regard.

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8.4.

Observations submitted by Hungary on the measures proposed in the intention
letter(144)

Hungary argued that the remedial measures it submitted address all the issues
identified by the Commission in this case. It recalled the principle of sincere
cooperation with which it complied with a view to submitting the remedial measures.
Furthermore, it referred to the Court’s judgement55 requirement that the measurestaken under the Conditionality Regulation must be “strictly proportionate” to theimpact of the established breach of the principles of the rule of law on the Union
budget or on the Union’s financial interests, to argue that a potential impact or effecton the sound financial management of the EU budget or on the protection of theUnion’s financial interest may not justify measures on all Unionfunds used by aMember State. Moreover, it argued that the systemic and widespread character ofbreaches cannot automatically render the breaches serious. Furthermore, it stated that
there is no justification as to why and to which extent the Operational programmes
concerned by the measures have been identified as being implemented throughpublic procurement.

(145)

In addition, it argued that there is an infringement of the requirements for an
objective, impartial and fair assessment, given that the conclusion on 70% reductionof commitments is not justified. By referring to the 10% flat rate corrections appliedin the course of the 2017 audit, it argues that the principle of proportionality would
require that only 10% of the 70%, i.e. 7%, of the commitments of the relevant
operational programmes could be suspended. It further argues that the Commission
did not justify why it proposed suspension of payments which were higher thanfinancial correction levels set out in the Commission Guidance on financial
corrections for non-compliance with the rules on public procurement56.

(146)

As regards the alternative measure of suspension of approval of operational
programmes in case they have not been approved by the Commission at the time theCouncil will take its decision, it states that it was not given the opportunity tocomment, given that the Commission has not defined the specific programmes thatwould be concerned in such a case.

(147)

Concerning the prohibition of entering into new legal commitments with public
interest trusts and the entities maintained or managed by them, Hungary argues that it
is unnecessary and disproportionate, given the alleged remedial measures submitted
on 19 July 2022, the fact that the Commission did not present any specific casewhere these entities did not act as contracting authorities or that did not comply with
EU rules on conflict of interest.

Commission assessment

55

56

EN

See judgments of the Court (Full Court) of 16 February 2022, Hungary v European Parliament andCouncil of the European Union, Case C-156/21, ECLI:EU:C:2022:97, para 271 and Poland v
Parliament and Council, C-157/21, ECLI:EU:C:2022:98, para 302.
Commission Decision of 14 May 2019 laying down guidelines for determining financial corrections to
be made to expenditure finances by the Union, for non-compliance with the rules on public
procurement, C(2019)3452 final.

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EN

(148)

The Commission welcomes the remedial measures submitted by Hungary with its
second reply, as well as its cooperation in this respect. This being said, the intention
letter sets out the reasons why the remedial measures proposed on 19 July 2022,
could not be taken into account in the definition of the measures that the Commission
intended to propose to the Council. Concerning the measures submitted by Hungary
with its second reply, the Commission explained above in paragraphs (121) and(122) why at this stage they cannot be considered as adequate to address the issues
identified by the Commission.

(149)

Concerning the argument made by Hungary relevant to the potential impact oreffects on the Union budget, the Commission notes that article 4(1) of theConditionality Regulation requires the Commission to propose measures to theCouncil also when breaches of the principles of the rule of law seriously risk
affecting the sound financial management of the Union budget in a sufficiently direct
way. As the Commission has established such a serious risk for the future, it did notneed to establish a specific risk as argued by Hungary, in order to propose measures
to the Council. The interpretation suggested by Hungary would deprive theConditionality Regulation from its purpose, which is the preventive protection of thesound financial management of the Union budget and the Union’s financial interests.

(150)

As regards the application of the rates of financial corrections applied in case ofCommission services audits, the Commission notes that the Conditionality
Regulation is a preventive instrument that aims at protecting the sound financial
management of the Union budget and the Union’s financial interests in a morehorizontal manner than other Union financial rules. Thus the application mutatis
mutandis of the financial correction levels included in the CPR and the abovementioned Commission decision would not serve its purpose, which is separate andadditional.

(151)

Concerning the alternative measure of suspension of the approval of programmes,
the Commission has clearly indicated the operational programmes that could be
subject to this measure. The Commission could not indicate at the time of theintention letter, and it cannot indicate at this stage either, precisely which concerned
programmes would be included in the alternative measure of suspension of approvalof programmes. This would depend on the stage of approval of programmes at thetime the Council adopts its decision. However, the Commission has indicated that, incase the suspension of approval of programmes is to be applied, this should concern
one or more programmes in proportion to the risk for the Union’s financial interests.

(152)

Finally, as regards the measure relevant to the public interest trusts, theConditionality Regulation does not require to define specific cases in which a breachof the principles of the rule of law has affected the Union budget or the Union’s
financial interests. In particular as regards public interest trusts, the legislation inplace clearly entails a serious risk for the sound financial management of the Union
budget and the Union’s financial interests. Thus, the prohibition of entering into newlegal commitments, is the only measure able to ensure the protective and preventive
character of the procedure under the Conditionality Regulation.

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9.

LEGAL BASIS(153)

The legal basis for this instrument is Regulation (EU, Euratom) 2020/2092 of theEuropean Parliament and of the Council of 16 December 2020 on a general regimeof conditionality for the protection of the Union budget.

10.

MEASURES PROPOSED FOR ADOPTION•

Programmes under shared management(154)

Suspension of 65% of the commitments in three operational programmes for theperiod 2021-2027 financed from the European Regional Development Fund (ERDF),
Cohesion Fund (CF), Just Transition Fund (JTF), European Social Fund Plus (ESF+).

(155)

Should the identified programmes not have been approved by the time the Council
adopts its decision, the suspension of approval of one or more of the programmes
concerned, in proportion to the risk for the Union’s financial interests, should be
decided instead. This is based on the same line of reasoning set out in paragraph 140
above.

•

Programmes under direct and indirect management(156)

Prohibition on entering into new legal commitments with any public interest trust
and any entity maintained by them under any Union programme under direct andindirect management. This does not necessarily have a budgetary impact as theprohibition of entering into new legal commitments is limited to these entities andthe corresponding allocation of funds from all Union programmes under direct andindirect management may still be used for any other entity, as beneficiary or
implementing entity.

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EN2022/0295 (NLE)
Proposal for a
COUNCIL IMPLEMENTING DECISION
on measures for the protection of the Union budget against breaches of the principles of
the rule of law in Hungary

THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union,
Having regard to Regulation (EU, Euratom) 2020/2092 of the European Parliament and of theCouncil of 16 December 2020 on a general regime of conditionality for the protection of theUnion budget57 , and in particular Article 6(10) thereof,
Having regard to the proposal from the European Commission,
Whereas:(1)

On 24 November 2021, the Commission sent a request for information to Hungary
pursuant to Article 6(4) of Regulation (EU, Euratom) 2020/2092, to which the
Hungarian authorities replied on 27 January 2022.

(2)

On 27 April 2022, the Commission sent a written notification to Hungary pursuant
to Article 6(1) of Regulation (EU, Euratom) 2020/2092 (the ‘notification’). In that
notification, the Commission raised its concerns and presented its findings regarding
a number of issues related to the public procurement system in Hungary, including:

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(a)

systemic irregularities, deficiencies and weaknesses in public procurement
procedures;(b)high rate of single bidding procedures and low intensity of competition in
procurement procedures;(c)issues related to the use of framework agreements;(d)detection, prevention and correction of conflicts of interest;

OJ L 433I, 22.12.2020, p. 1.

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(e)

EN

issues related to public interest trusts.

(3)

These issues and their repetition over time demonstrate a systemic inability, failure
or unwillingness, on the part of the Hungarian authorities, to prevent decisions thatare in breach of the applicable law, as regards public procurement and conflicts ofinterest, and thus to adequately tackle risks of corruption. They constitute breaches ofthe principles of the rule of law, in particular the principles of legal certainty andprohibition of arbitrariness of the executive powers and raise concerns as to theseparation of powers.

(4)

In the notification the Commission set out additional grounds and presented its
findings regarding a number of issues related to investigation and prosecution, andthe anti-corruption framework, including limitations to effective investigation andprosecution of alleged criminal activity, the organisation of the prosecution services,and the absence of a functioning and effective anti-corruption framework in practice.
These issues constitute breaches of the principles of the rule of law, in particularregarding legal certainty, the prohibition of arbitrariness of the executive powers andeffective judicial protection.

(5)

In the notification, the Commission set out the factual elements and specific grounds
on which it based its findings and also requested Hungary to provide certain
information and data regarding those factual elements and grounds. In the
notification, the Commission gave two months to the Hungarian authorities to submit
their observations.

(6)

On 27 June 2022, Hungary replied to the notification (the ‘first reply’). By letters of
30 June and 5 July 2022, the Hungary submitted further information to complement
the first reply. Moreover, on 19 July 2022, Hungary sent an additional letter
proposing a number of remedial measures to address the findings in the Notification.

(7)

The Commission assessed the observations submitted in the first reply and concluded
that they did not allay its concerns and findings set out in the Notification.
Furthermore, the Commission considered that neither the first reply nor the
additional letters of 30 June and 5 July 2022 contained adequate remedial measuresappropriately committed in the context of Regulation (EU, Euratom) 2020/2092. Dueto the late submission of the letter of 19 July 2022, it could not be taken into accountin the assessment of the first reply. However, the Commission took into
consideration all the relevant information in that letter in the course of the next stepsof the procedure set out in Article 6 of Regulation (EU, Euratom) 2020/2092, in
accordance with the principle of sincere cooperation with Member States.

(8)

In line with Article 6(7) of Regulation (EU, Euratom) 2020/2092, the Commission
sent a letter to Hungary on 20 July 2022 (the “intention letter”) to inform theMember State of its assessment pursuant to Article 6(6) of that Regulation, and of themeasures that the Commission envisaged to propose for adoption by the Council
pursuant to Article 6(9) of that Regulation, in the absence of a commitment from
Hungary to take adequate remedial measures. In the intention letter, the Commission
gave Hungary the opportunity to submit its observations in particular on the
proportionality of the envisaged measures.

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(9)

Hungary replied to the intention letter on 22 August 2022 (‘second reply’), in which
it provided its observations on the Commission’s findings, the procedure and the
proportionality of the measures referred to in the intention letter. Despite having
contested the Commission’s findings, Hungary proposed certain remedial measures
to address the concerns raised by the Commission. On 13 September 2022, Hungary
sent the Commission a letter which included clarifications and further commitments
relevant to the remedial measures proposed. In Hungary’s view, the remedial
measures, including the additional commitments included in the letter of 13
September 2022, fully address the Commission’s concern and therefore theCommission should not propose any measures to the Council.

(10)

The main findings of the Commission are summarised in the following recitals.

(11)

Firstly, there are serious systemic irregularities, deficiencies and weaknesses inpublic procurement procedures. Such irregularities have been found following
consecutive audits conducted by the Commission services for the both 2007-2013
and 2014-2020 programming periods. These audits closed with significant overall
amounts of financial corrections, as well as several OLAF investigations that led tofinancial recommendations for the recovery of significant amounts from Hungary. In
addition, the available data indicate that there have been unusually high percentagesof contracts awarded following procedures in whichparticipated just one single
bidder; attribution of contracts to specific companies, which have been gradually
gaining large parts of the market; as well as serious deficiencies in the attribution offramework agreements. Moreover, there are concerns regarding the non-applicationof public procurement and conflict of interest rules to ‘public interest trusts’ and theentities managed by them, and the lack of transparency with regard to the
management of funds by those trusts. Those issues and their recurrence over timedemonstrate a systemic inability, failure or unwillingness, on the part of the
Hungarian authorities, to prevent decisions that are in breach of the applicable law,as regards public procurement and conflicts of interest, and thus to adequately tackle
risks of corruption. They constitute breaches of the principle of the rule of law, inparticular the principles of legal certainty and prohibition of arbitrariness of theexecutive powers and raise concerns as regards the separation of powers.

(12)

Secondly, there are additional issues as regard limitations to effective investigationand prosecution of alleged criminal activity, the organisation of the prosecution
services, and the absence of a functioning and effective anti-corruption framework.
In particular, there is a lack of effective judicial remedies by an independent court
against decisions of the prosecution service not to investigate or prosecute alleged
corruption, fraud and other criminal offences affecting the Union’s financial
interests, a lack of a requirement to give reasons when such cases are attributed orreassigned, and an absence of rules to prevent arbitrary decisions in their regard. In
addition, there is a lack of a comprehensive anti-corruption strategy covering also themost relevant corruption prevention areas; an under-utilisation of the full range ofpreventive tools to assist corruption investigation, in particular high-level corruption
cases; as well as an overall lack of effective prevention and repression of criminal
fraud and corruption offences. Those issues constitute breaches of the principles of
the rule of law, in particular regarding legal certainty, the prohibition of arbitrarinessof the executive powers and effective judicial protection.

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(13)

The observations put forward in the replies from Hungary do not adequately address
the findings set out in the notification and the intention letter. In particular, thereplies provided no evidence following the recent improvements brought about by
Hungary in it procurement system (as regards transparency, intensity of competition,
conflicts of interests checks). While some changes took place in the Hungarian
public procurement system following the Commission services’ audits, there are no
indications that those changes have had an impact on the level of competition on the
Hungarian market. The data available to the Commission shows not only an increasein concentration of awards in public procurement, but also an increase in the odds of
winning for actors of the Hungarian ruling party (the ‘politically connectedcompanies’). The Commission procured a study which provided a statisticalempirical analysis of more than 270 000 public procurement contracts in Hungary
between 2005 and 202158. The observations of the study were corroborated withfindings of an examination of certain tender data regarding contracts awarded tosome of the companies identified as companies with political connections. Moreover,reports by media and stakeholders were collected by the Commission in the tourism,
communication and sports sectors. Hungary did not provide any evidence on theapplicability (nor application in practice) of conflict of interest rules relevant for theprotection of the Union budget in relation to public interest trusts.

(14)

Other procedures set out in Union legislation would not allow the Commission toprotect the Union budget more effectively. The identified irregularities, deficiencies
and weaknesses are widespread and intertwined, which means that procedures otherthan those provided for by Regulation (EU, Euratom) 2020/2092 cannot address therisks for the Union budget more effectively. Even if certain means available under
sectoral rules may be used, such as audits performed by Commission services, andfinancial correctionson for irregularities not corrected by the Hungarian authorities,
those measures generally relate to expenditure already declared to the Commission
and the continuation of deficiencies over many years shows that financial corrections
are not sufficient to protect the Union’s financial interest from current either futurerisks.

(15)

Concerning the observance and monitoring of the enabling conditions enshrined inRegulation (EU) 2021/1060 of the European Parliament and of the Council59, it
should be noted that the only consequence of failure to fulfil an enabling condition
set out in Article 15(5) of that Regulation is that the Commission shall not reimburse
expenditure related to operations linked to the specific objective to the Member Statein question. Regulation (EU, Euratom) 2020/2092 grants a broader range of possible
measures to protect the Union’s budget, including the suspension of approval of one
or more programmes, as well as the suspension of commitments under shared

58

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Study on concentration of awards and potential risks of fraud, corruption and conflict of interest in
public procurement procedures in Hungary with focus on EU funded public procurements - Empiricalanalysis of Hungarian public procurement data from 2005 to 2021, Corruption Research Center
Budapest.
Regulation (EU) 2021/1060 of the European Parliament and of the Council of 24 June 2021 laying
down common provisions on the European Regional Development Fund, the European Social Fund
Plus, the Cohesion Fund, the Just Transition Fund and the European Maritime, Fisheries andAquaculture Fund and financial rules for those and for the Asylum, Migration and Integration Fund, theInternal Security Fund and the Instrument for Financial Support for Border Management and Visa
Policy (OJ L 231, 30.6.2021, p. 159).

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ENmanagement. The possible measures under Regulation (EU, Euratom) 2020/2092
also concern pre-financing, which is not provided for under Article 15 of Regulation(EU) 2021/1060.
(16)

As regards the application of public procurement rules and their interpretation, recital
17 of Regulation (EU, Euratom) 2020/2092 clarifies that the Union legislationreferred to in Article 6(1) of that Regulation, is financial and sector-specific.
Infringement procedures, which are not based on a legislative act but directly on
Article 258 TFEU. That provision of primary law cannot be considered as ‘ Union
legislation’ within the meaning of Article 6(1) of Regulation (EU, Euratom)
2020/2092.

(17)

Article 22(1) of Regulation (EU) 2021/241 of the European Parliament and of theCouncil60 provides that Member States are to take all the appropriate measures toprotect the financial interests of the Union when implementing measures under the
Recovery and Resilience Facility. The primary responsibility to comply with Unionand national law when implementing those measures remains with the Member
States, in accordance with Article 22(1) of Regulation (EU) 2021/241, whereas theCommission, in accordance with Article 22(5) of that Regulation, can proceed tocorrective measures in cases of fraud, corruption, and conflicts of interests affecting
the financial interests of the Union that have not been corrected by the Member State,or in the case of a serious breach of an obligation resulting from the loan agreement
or the financing agreement. More importantly, the Recovery and Resilience Plan of
Hungary is not yet finalised and its content and capacity to protect the financial
interests of the Union depends on the actual measures it will contain, but also on how
those measures will be implemented by Hungary. Therefore, the application of theprovisions of Regulation (EU) 2021/241 would not allow the Commission to protect
the Union budget more effectively in this case.

(18)

In light of all the foregoing, no other procedure under Union law would allow theCommission to protect the Union budget more effectively than the procedure set out
in Article 6 of by Regulation (EU, Euratom) 2020/2092.

(19)

The potential impact of the identified breaches on the sound financial management of
the Union budget or the protection of the financial interests of the Union isconsidered to be particularly significant, given that those breaches are intrinsicallylinked to the process under which Union funds are used by Hungary in that they
consist in improper functioning of the public authorities deciding on the award ofcontracts financed through the Union budget. In addition, if the identified breaches
are coupled with the limits and obstacles in the detection, investigation andcorrection of fraud, identified as additional grounds related to investigation,prosecution and the anti-corruption framework, the impact can be considered evenmore significant.

(20)

Considering the nature of the findings in relation to public procurement, theappropriate measures to be adopted under Regulation (EU, Euratom) 2020/2092 (the‘appropriate measures’) should concern Union funding that is mainly implemented
through public procurement. The Commission audits that identified deficient and60

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Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021
establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

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irregular public procurement processes covered the area of Cohesion policy, anddespite the fact that the impact of those deficiencies and irregularities on the Union
budget has been financially corrected in application of the Cohesion policy rules,
they demonstrate a systemic inability, failure or unwillingness by the Hungarianauthorities to prevent decisions that are in breach of the applicable law as regards
public procurement and conflicts of interest, and thus to adequately tackle risks ofcorruption.
(21)

The programmes to be protected by the appropriate measures should in priority be
the Cohesion policy programmes 2021-2027 that are expected to be implemented
mainly through public procurement by analogy to the way Hungary implemented theequivalent programmes under the MFF 2014-2020. Those programmes are theEnvironment and Energy Efficiency Operational Programme Plus, the Integrated
Transport Operational Programme Plus and the Territorial and Settlement
Development Operational Programme Plus (the ‘programmes concerned’). As
regards the programmes concerned, the level of implementation through public
procurement is estimated at 85% to 90%.

(22)

The appropriate measures should also concern actions under Union programmes
implemented under direct and indirect management, for which public interest trusts
and the entities maintained by them, which are considered as government entities
within the meaning of Articles 2(b) and 5(1)(a) of Regulation (EU, Euratom)
2020/2092, may be beneficiaries or implementing entities. As regards the identified
breaches relevant to public interest trusts, all Union programmes implemented under
direct and indirect management should be targeted by this appropriate measure.

(23)

In line with the proportionality requirements set out in Article 5(3) ofRegulation(EU, Euratom) 2020/2092, the appropriate level of the measures to be applied should
be determined by a percentage that reflects the ensuing risk for the Union budget.

(24)

In light of the seriousness, frequency and duration of the systemic breaches identified
in public procurement, the financial risk for the sound financial management of theUnion budget can be considered as very significant and therefore, justifies measureswith very high level of financial impact.

(25)

In accordance with Article 6(6) of Regulation (EU, Euratom) 2020/2092, theinformation received and any observations made by the Member State concerned, as
well as the adequacy of any proposed remedial measures, are to be taken into accountwhen deciding on the appropriate measures. Therefore, the remedial measures
proposed by Hungary should be included in the assessment.

(26)

In its second reply, Hungary submitted 17 remedial measures, the commitments ofwhich it then complemented with a letter submitted to the Commission on 13
September 2022. According to Hungary’s opinion, they would address all issues
raised by the Commission in the notification (the ‘proposed remedial measures’).
These remedial measures are as follows:(a) Reinforcing prevention, detection and correction of illegalities andirregularities concerning the implementation of Union funds through a newly
established Integrity Authority;(b)EN

Anti-Corruption Task Force;

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(c)

Strengthening the Anti-Corruption Framework;(d) Ensuring the transparency of the use of Union support by public interest asset
management foundations;(e) Introduction of a specific procedure in the case of special crimes related to theexercise of public authority or the management of public property;(f) Strengthening audit and control mechanisms to guarantee the sound use of EU
support;(g) Reducing the share of tender procedures with single bids financed from Union
funds;(h) Reducing the share of tender procedures with single bids financed from thenational budget;(i)
Development of a single-bid reporting tool to monitor and report on public
procurements closed with single-bids;(j)
Development of the Electronic Public Procurement System to increasetransparency;(k) Development of a performance measurement framework assessing theefficiency and cost effectiveness of public procurements;(l)
Adoption of an action plan to increase the level of competition in public
procurement;(m) Training to be provided for micro, small and medium-sized enterprises on
public procurement practices;(n) Setting up a support scheme for compensating the costs associated withparticipating in public procurement of micro, small and medium-sized enterprises;(o)Application of ARACHNE, the Commission’s risk scoring tool;(p)Strengthening the cooperation with OLAF;(q) Adoption of a legislative act ensuring enhanced transparency of public
spending.

EN

(27)

In general, Hungary committed to take remedial measures proposed in its second
reply to address the issues raised in the notification unconditionally and to maintainthem and the related legislation in force without any time limit and to enforce duly
the rules set therein.

(28)

However, since the issues identified in Hungary concern both the legal framework
and, to a large extent, administrative practices, the assessment of the adequacy of theremedial measures proposed by Hungary to achieve their aim of putting an end to thebreaches and/or to the risks for the Union’s financial interests will depend on theanalysis of the details of the measures and of the correct, full and effective
implementation of all key implementation steps as indicated in the relevant timelines

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ENsubmitted by Hungary on 22 August. In this respect, key steps for many of the
proposed remedial measures still need to be taken by Hungary.

EN

(29)

Hungary committed to establish a new Integrity Authority reinforcing the prevention,
detection and correction of illegalities and irregularities concerning theimplementation of Union funds. Hungary has included in the proposed remedial
measure a number of elements which are positively assessed at this stage by theCommission, notably on: (i) the purpose and objectives of the new Integrity
authority, (ii) the scope of its mandate and (extensive) powers, including powers to
instruct contracting authorities to suspend tenders, powers to request administrative
investigative bodies to carry out investigations, powers to recommend the exclusionof specific economic operators from Union funding; the right to request a judicial
review of all decisions of authorities concerning public procurement procedures thatinvolve any Union support (and that may be subject to judicial review) etc.; (iii) therules on the appointment of the Integrity Authority’s board and on the involvementof an ‘eligibility committee’ aimed at guaranteeing that the Integrity Authority will
be fully independent. In addition, the Integrity Authority will rely on facts
established by judicial decisions, it will be able to seize the courts, and its own
decisions will be subject to judicial review. For this reason, Hungary also committed
that all courts in Hungary hearing civil, administrative and criminal cases including
those relevant for the protection of the financial interests of the Union shall comply
with the requirements of independence, impartiality and being established by law inaccordance with Article 19(1) of the Treaty on European Union and the relevant EU
acquis. The proposed remedial measure includes a timeline outlining the first key
implementation steps, going from a Government Decision charging the Hungarian
government with submitting draft legislation to the National Assembly by 30
September 2022 for the establishment of the Integrity Authority (this Government
Decision was adopted on 5 September 2022) to the start of the activities of theIntegrity Authority on 19 November 2022.

(30)

If correctly and effectively implemented as envisaged in the proposed remedial
measure, with full independence and effective powers on the ground as regards allprocedures that may actually or potentially affect the sound financial management of
the Union budget or the financial interests of the Union, the Integrity Authority could
contribute to increased levels of competition in procurement procedures, preventing
or minimising the risks of conflict of interests, and in general enhance the prevention,
detection and correction of fraud, corruption, conflict of interests and otherirregularities in breach of Union law in the Hungarian public procurement system, tothe benefit of a more sound and efficient use of Union funding. However, details andkey steps of this proposed remedial measure are still pending, including in particularon the Integrity Authority’s powers and tools to effectively verify asset declarations.

(31)

Hungary has committed to the establishment of an Anti-Corruption Task Forceaddressing the Commission’s concerns, in particular to ensure full, structured andeffective participation of non-governmental actors active in the field of anticorruption along with government’s representatives. Furthermore, Hungary commits
to extensive consultations with national and international stakeholders, including theCommission during the preparation of the draft legislation. However, details and key
steps of this proposed remedial measure are still pending.

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EN

(32)

The proposed remedial measure on the anti-corruption framework includes most of
the elements considered by the Commission as fundamental to ensure theeffectiveness of the measure, such as the adoption of anti-fraud and anti-corruption
strategies covering all bodies involved in the implementation of Union funds and thesubmission of the state of play of the implementation of the medium-term National
Anti-Corruption Strategy for the period 2020-2022, as well as the widening of thepersonal and material scope of asset declarations, rules aimed at increasingtransparency of asset declarations and the introduction of administrative and criminal
sanctions. However, details and key steps of this proposed remedial measure are still
pending. Notably, the database mentioned above should be publicly accessible.
Moreover, the Integrity Authority should have the power to launch an asset
verification process also on its own initiative in all cases.

(33)

As regards public interest trusts, the proposed remedial measure is in principle
capable of addressing the issues raised, as it will enable the generalised andunconditional application of public procurement rules to public interest trusts and theentities maintained or managed by such trusts (all of them will be considered
contracting authorities for the purposes of public procurement rules), and as themeasure will establish clear conflict of interest rules for such entities and their board
members. However, details and key steps of this proposed remedial measure are still
pending.

(34)

Furthermore, Hungary committed to establish a new judicial review procedure,
which has many positive elements, such as the possibility for legal entities to file forthis procedure, a guaranteed privileged procedural position for the person reporting acrime, a reference to the fact that exclusive competence to hear the cases under the
new procedure will be attributed to a specialised court (i.e. the Buda Central District
Court), a reference to the fact that all courts and the investigative judges involved in
the new procedure will be compliant with Article 19 of the Treaty on the European
Union and the relevant EU acquis, and a reasonable timeframe for the procedure in
general. Finally, Hungary has committed to review the procedure within a reasonable
timeframe. The proposed remedial measure is capable of addressing the limitations
identified by the Commission. However, details and key steps of this proposed
remedial measure are still pending.

(35)

As regards the concerns raised about the ability of Hungary to improve conflicts ofinterest checks regarding the use of Union funds, the proposed remedial measure on
the extended use of all functionalities of the single data-mining and risk-scoring tool
which the Commission puts at the disposal of Member States (i.e. Arachne) for any
Union support, is in principle capable of addressing the concerns raised by theCommission, if implemented correctly. Moreover, the proposed remedial measure on
strengthening audit and control mechanisms to guarantee the sound use of Union
support would also address the concerns raised, if implemented correctly and timely,
as it will allow for the adoption of provisions to strengthen rules and procedures tomore effectively prevent, detect and correct conflict of interest in the use of Union
funds, including an effective control mechanism over the validity of conflict ofinterest declarations. However, details and key steps of these proposed remedial
measures are still pending.

(36)

Furthermore, the proposed remedial measures aiming to address the systemic
irregularities, deficiencies and weaknesses in public procurement are positively

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ENassessed by the Commission. However, some of the measures still appear at thisstage insufficiently detailed in certain aspects, and their key steps have not yet beentaken. Therefore, they cannot be considered as sufficiently adequate to address theissues raised in the procedure under Regulation (EU, Euratom) 2020/2092. On thisbasis, the adoption of the appropriate measures pursuant to Article 4(1) of Regulation(EU, Euratom) 2020/2092 is required.

EN

(37)

The proposed remedial measure on strengthening cooperation with OLAF is capableof addressing the limitations identified by the Commission, as it will designate acompetent national authority to assist OLAF when carrying out on- the-spot checksin Hungary when an economic operator subject to those checks refuses to cooperate.
It also introduces a dissuasive financial-type sanction to be imposed in case an
economic operator refuses to cooperate with OLAF for the purposes of OLAF’s onthe-spot checks and inspections. However, details and key steps of this proposed
remedial measure are still pending.

(38)

The proposed remedial measures, taken together, would in principle be capable ofaddressing the issues regarding systemic irregularities, deficiencies and weaknesses
in public procurement, risks of conflicts of interest, and concerns regarding ‘public
interest trusts’, as well as the additional grounds regarding investigation, prosecution
and the anti-corruption framework, provided that all the measures are correctly andeffectively implemented(39)

However, the detailed implementing rules for the proposed remedial measures arestill to be determined, notably how key elements of the measures will be transposedin the actual legal texts to be adopted for the implementation of the remedial
measures. Given that several of the issues identified in Hungary are not only aboutchanges in the legal framework, but more prominently about the concrete
implementation of changes in practice, the latter requiring a more extended
timeframe to produce concrete results, pending the implementation of at least the key
elements of some of the remedial measures at this stage, as indicated in the timelinesof the remedial measures submitted by Hungary on 22 August, a risk for the Union
budget remains. Pending the entry into force of key legislative texts that would
implement many of the proposed remedial measures and taking into account theassessment above, as well as the possibility that the measures may not be correctly
implemented, or that their effectiveness is weakened in the details of the measures, areasonable estimation of the level of risk for the Union budget currently corresponds
to 65% of the programmes concerned, i.e. 5 percentage points less than the risk
estimated in the absence of remedial measures.

(40)

As the level of 65% of the programmes concerned can be considered as a reasonableapproximation of the impact on or the serious risks for the Union budget, taking into
account the remedial measures submitted, a suspension of [65% of the commitmentsin the programmes concerned is a proportionate measure.

(41)[Alternative wording should the programmes concerned not be approved at the timeof the adoption of this implementing decision: Given the programmes concerned
have not been approved yet, the only possible appropriate measure that may be
adopted under Article 5(1)(b) of Regulation (EU, Euratom) 2020/2092 is thesuspension of approval of one or more programmes. In line with the principle of52

ENproportionality, the suspension of approval of one or more programmes should be
proportionate to the risk for the Union’s financial interests] .
(42)

Concerning the identified breaches in relation to public interest trusts, the general
exception from conflict of interest rules and the lack of transparency may have an
impact on any budget that these public interest trusts and any entity maintained bythem s may implement or manage. Hungary has committed in its proposed remedial
measures to address all of the Commission’s concerns in this regard. In light of this
impact and pending the entry into force of the corresponding Hungarian legislation,
the Union budget can best be protected by a prohibition to enter into new legal
commitments with any public interest trust and any entity maintained by them under
any programme under direct or indirect management.

(43)

Pursuant to Article 5(2) of Regulation(EU, Euratom) 2020/2092, this Decision does
not affect the obligations of Hungary to implement the programmes and funds
concerned by the Decision, and in particular its obligations towards final recipientsor beneficiaries, including the obligation to make payments under the applicablesector-specific or financial rules. Hungary has to report to the Commission on its
compliance with those obligations every three months from the adoption of thisDecision.

(44)

Hungary should inform the Commission on a regular basis of the implementation of
the remedial measures it has committed to,

HAS ADOPTED THIS DECISION:
Article 1(1)

The conditions set out in Article 4(1) of Regulation (EU, Euratom) 2020/2092 are
fulfilled for the adoption of appropriate measures for the protection of the Union
budget against breaches of the principles of the rule of law in Hungary.

(2)

The remedial measures proposed by Hungary on the basis of Article 6(5) ofRegulation (EU, Euratom) 2020/2092, are not fully adequate to address the findings
set out in the Commission notification sent to Hungary on 27 April 2022.
Article 2(1)

65% of the budgetary commitments under the following operational programmes in
Cohesion Policy shall be suspended:(a)Environmental and Energy Efficiency Operational Programme Plus;(b)

Integrated Transport Operational Programme Plus;(c)

Territorial and Settlement Development Operational Programme Plus.

Alternative wording in case the identified programmes have not been approved by
the Commission at the time of the adoption of the Council implementing decision

EN

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The approval of the following programs shall be suspended: Environmental andEnergy Efficiency Operational Programme Plus and/or Integrated Transport
Operational Programme Plus and/or Territorial and Settlement Development
Operational Programme Plus.
(2)

Where the Commission implements the Union budget in direct or indirect
management pursuant to of Article 62(1) points (a) and (c), of Regulation (EU,
Euratom) 2018/1046 of the European Parliament and of the Council61, no legal
commitments shall be entered into with any public interest trust estalished on thebasis of the Hungarian Act IX of 2021 or any entity maintained by such a public
interest trust.
Article 3

Hungary shall inform the Commission by 19 November 2022, and every three months
thereafter of the implementation of the remedial measures Hungary has committed to with its
second reply including the additional commitments included in the letter of 13 September
2022.
Article 4This Decision is addressed to Hungary.
Done at Brussels,

For the Council
The President

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Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on
the financial rules applicable to the general budget of the Union, amending Regulations (EU) No
1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU)No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing
Regulation (EU, Euratom) No 966/2012 (OJ L 193, 30.7.2018, p. 1).

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