# EUR-Lex - 52013DC0934 - EN

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# 52013DC0934

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Application of net financial corrections on Member States for Agriculture and Cohesion Policy /* COM/2013/0934 final */**

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Table of Contents

1.          Introduction. 3

2.          General Framework for applying financial
corrections. 4

2.1.              Legislation
and rules on net financial corrections. 4

2.2.              Budgetary
and accounting treatment of amounts subject to net financial corrections – the
assigned revenue instrument 6

3.          Sector specific rules for net financial
corrections. 7

3.1.              Agriculture. 7

3.1.1.     Legal provisions always provide for net
financial corrections. 7

3.1.2.     Legal Mechanisms for net financial
corrections will be further consolidated. 9

3.1.2.1.     Focus
on more risky expenditure. 9

3.1.2.2.     No
discretion and few flat-rate corrections. 10

3.1.2.3.     Shorter
conformity procedure. 11

3.1.3.     Interruption and suspension for CAP will be
aligned with Cohesion Policy Funds  12

3.2.              Cohesion
Policy Funds. 13

3.2.1.     New legal provision for the Commission to
impose net financial corrections on a Member State  13

3.2.2.     Financial corrections for irregularities /
deficiencies identified before 15 February each year 14

3.2.3.     Commission assessment of legality and regularity
on the basis of the accounts, audit opinion and accompanying documents
submitted by 15 February each year 14

3.2.4.     Identification by EU audits of irregularities
indicating a serious deficiency after 15 February each year 15

3.2.5.     Convergence of good practices for the
Commission’s supervisory system under shared management 19

1. Introduction

As
a reaction to the increase of the error rate reported by the European Court of
Auditors (ECA) in its Annual report on the financial year 2012, the Discharge
Rapporteur and the Co-ordinators of the main Political Groups in the European
Parliament's Budgetary Control Committee addressed a letter to President
Barroso asking the Commission to submit a Communication clearly establishing
how it will introduce for the financing period 2014-2020 a more effective form
of net financial corrections for Member States where weaknesses are observed as
regards programmes under shared management[1].
Net financial corrections mean that there is a definitive reduction of funds to
the Member State concerned.

The
present Communication addresses this request by explaining how the Commission
intends to apply new instruments and requirements linked to net financial
corrections which are provided for in the legal framework for the financing period
2014-2020 and how this will impact on Member States.

In
the area of Agriculture net financial corrections leading to a loss of EU funds
for the Member State concerned were already the standard. The new rules for the
financing period 2014-2020 maintain that situation while focusing on the
consolidation of existing mechanisms.

For
Cohesion Policy, net financial corrections leading to the return of previously
paid amounts to the EU budget were the exception. For the new programming
period 2014-2020 there is a major change in the new legislation to be adopted
which will extend the Commission's powers to impose net financial corrections
on Member States where serious deficiencies in management and control systems have
been identified. The framework for net financial corrections envisaged for the
period 2014-2020 leaves no discretion to the Commission in the adoption of a
correction decision. Net financial corrections will become the standard
reaction in case of serious deficiencies and will be applied according to a
clear set of transparent criteria and conditions.

When
applying net financial corrections for the measures and programmes under the
2014-2020 financing period, the services involved will, through application of best
practice, ensure for these two areas of shared management a convergence of effective
use of this important corrective instrument to protect the Union budget. Such a
convergence of best practices will also be applied with regards to the
instruments of interruptions and suspensions of payments.  The model which is
successfully applied in the area of Cohesion has been introduced mutatis
mutandis also in the area of Agriculture for 2014-2020.

The
Commission considers that all financial corrections, including those where
Member States are allowed to bring in new projects and new expenditure to
re-use the corrected amounts, protect the EU Budget. Nevertheless, the
deterrent effect of net financial corrections, whereby Member States cannot
re-use the corrected and recovered amounts and therefore lose the funds, is
certainly higher. It incentivises Member States to detect and correct errors
themselves and therefore contributes to the improvement of management and
control systems.

2. General
Framework for applying financial corrections
2.1. Legislation and rules on net financial corrections

In
line with Article 317 TFEU, the legislation for the application of net
financial corrections is set out in the Financial Regulation (FR) and further
elaborated in the sector-specific regulations adopted by the European
Parliament and the Council. Within this legal framework, the Commission adopts
delegated acts and implementing acts and may also issue guidelines clarifying
specific issues.

The
following diagram gives an overview on the relevant levels of the general
framework for applying financial corrections:

The new FR introduces
a coherent framework across all policy areas which includes in particular the
principles for financial corrections on Member States:

Article
80 FR - Rules on recovery

...

4.
The Commission shall make financial corrections on Member States in order to
exclude from Union financing expenditure incurred in breach of applicable law.
The Commission shall base its financial corrections on the identification of
amounts unduly spent, and the financial implications for the budget. Where such
amounts cannot be identified precisely, the Commission may apply extrapolated
or flat-rate corrections in accordance with the sector-specific rules.

The
Commission shall, when deciding on the amount of a financial correction, take
account of the nature and gravity of the breach of applicable law and the
financial implications for the budget, including the case of deficiencies in
management and control systems.
The criteria for establishing financial corrections and the procedure to be
applied may be laid down in the sector-specific rules.

5. The methodology for applying
extrapolated or flat-rate corrections shall be laid down in accordance with the
sector specific rules with a view to enabling the Commission to protect the
financial interests of the Union.

As
provided for in Article 80 FR and sector-specific regulations, the Commission
applies the following three types of financial corrections:

Financial
  corrections on individual cases, based on a precise identification of
  amounts unduly spent, and the financial implications for the budget;
 Extrapolated
  financial corrections; and
 Flat-rate
  financial corrections.

Extrapolated
and flat-rate financial corrections can only be applied if it is not possible
to identify the precise amount for the correction. Extrapolated financial corrections
have to be based on a representative sample which enables the related amount to
be quantified with a sufficient level of confidence.

The
following diagram gives an overview of relevant mechanisms for the application
of financial corrections:

Details concerning the
implementation of financial corrections in the different policy areas under
shared management are provided in section 3 of this Communication.

2.2. Budgetary and accounting treatment of amounts subject to net
financial corrections – the assigned revenue instrument

Financial
corrections lead to "revenue arising from the repayment,..., of amounts
wrongly paid" and are treated as assigned revenue (Art. 21(3)(c) FR).

Apart
from two exceptions, the Financial Regulation[2]
does not include specific provisions on how the assigned revenue generated by a
net financial correction can be used.

However,
Article 7 of the Rules of Application of the Financial Regulation (RAP)
determines that the budget commentary shall show which budget lines may receive
the appropriations corresponding to the assigned revenue. Thus net financial corrections returning
to the EU budget in the form of assigned revenue are not earmarked for specific
Member States.

3. Sector
specific rules for net financial corrections

3.1.
Agriculture

3.1.1.
Legal provisions always provide for net
financial corrections

According
to the Common Agricultural Policy (CAP) legal framework, financial corrections imposed
by the Commission on Member States upon completion of a conformity clearance procedure
have always been net corrections since the first clearance of accounts decision
in 1976 and will continue to be net corrections for both European Agricultural
Guarantee Fund (EAGF) and European Agricultural Fund for Rural Development
(EAFRD) as:

- the
corrected amounts are actually reimbursed by the Member States to the EU
budget; and

- the
amounts received are treated as assigned revenue to the EU budget. They are
used to finance CAP expenditure as a whole without being earmarked for any
particular Member State (see also box below).

Every
year the Commission adopts between 2 and 4 conformity clearance decisions on a
package of individual financial corrections. In 2013 the Commission adopted 4
such decisions, covering 147 individual net financial
corrections for a total amount of 1,1 billion EUR (2
% of the CAP expenditure
budgeted for 2013). This
confirms the increasing trend reported by the Court in its 2012 Annual Report,
paragraph 4.29[3].

Net
financial corrections adopted in 2013 (amounts in EUR):

Decision: || 40 || 41 || 42 || 43 || TOTAL

EAGF || 285.582.274 || -130.136.896,33 || -142.637.397 || -303.566.912 || -861.923.480

EAFRD || -104.699.558 || -88.444.255 || -32.467.218 || -10.598.290 || -236.209.321

OTHERS || -7.091.796 || -8.757.551 || -2.661.224 || -121.357 || -18.631.930

TOTAL || -397.373.628 || -227.338.703 || -177.765.840 || -314.286.560 || -1.116.764.733

70 % of the
financial corrections adopted in 2013 are concentrated in 4 Member States (GR, UK, FR and PL). However, the concentration on the four Member States is not a stable
pattern but can change from year to year depending on the evolution of the
quality of the national or regional control systems.

For
EAGF, financial corrections are executed by deducting the amounts concerned
from the monthly payments made by the Commission in the second month following
the Commission decision on a financial correction to the Member State concerned.

For
EAFRD, the financial corrections are executed through a recovery order
requesting the Member State concerned to reimburse these amounts to the EU
budget.

Treatment of assigned revenue The amounts corrected and clawed back by the Commission are credited to the EU budget as assigned revenue on specific budget lines (item 67 01 for EAGF, item 67 11 for EAFRD). In the EAGF the resulting assigned revenue can be used to finance expenditure budget lines to cover any type of EAGF expenditure without being targeted to any specific Member State . The budget remarks for chapters 05 02 (markets) and 05 03 (direct payments) clearly show that the  financing needs of the EAGF are systematically reduced during the budget procedure by an amount representing the estimated assigned revenue which will be available from financial corrections during the budget year concerned. For instance EUR 600 million of financial corrections were initially budgeted for the 2012 budget, whereas EUR 647,8 million of assigned revenue became actually available and were used in that budget year). For EAFRD, as the budgetary commitments have already been consumed by the Member State when it declared expenditure for reimbursement by the Commission, the recovered amounts cannot be used anymore.  The payment appropriations from the assigned revenue are available for payments under the budget line for the EAFRD. They can be used for any open payment for any rural development programme. Hence, the EAFRD assigned revenue reduces the overall need for payment appropriations and has been used to reduce requests for additional payment appropriations. In 2012 assigned revenues from EAFRD financial corrections amounted to EUR 55 million.

Net financial
corrections do put a real strain on the national budgets of Member States.
Therefore, an option was introduced according to which corrections of a certain
volume can be executed in three annual instalments on request of the Member State concerned. Execution in instalments was so far accepted for Bulgaria, Greece, Portugal, Romania, Spain and Lithuania. In addition, Member States under EU
financial assistance may once request the Commission to defer the execution of
financial corrections for a period of up to 18 months subject to the
implementation of targeted remedial action plans. After the expiry of the
deferral period the corrections are executed in three annual instalments.
Deferrals were so far granted to Portugal and Greece. The deferrals granted
will expire on 31 December 2013 for Greece and on 31 May 2014 for Portugal.

Impact of net financial corrections on Member States In all Member States the national and regional authorities responsible for implementing the CAP are directly affected by EU net financial corrections. Such corrections which relate to expenditure made by Member States in previous budget years lead to a reduction of EU financing in the current budget year. This requires Member States in many cases to find the financial means necessary to fill the gap by making budget transfers or amending budgets. Against this background net financial corrections have led to concrete budgetary and administrative reactions. For instance: - in Germany the Constitution was amended in 2006 following repeated disputes between the federal level and the Länder to clarify the burden-sharing with regard to financial corrections; - in Denmark following a significant financial correction in 2009 a specific burden-sharing mechanism between the Ministry of Finance and the Ministry of Agriculture was recently put in place.

3.1.2. Legal
Mechanisms for net financial corrections will be further consolidated

3.1.2.1.
Focus on more risky expenditure

DG
AGRI audit activities are driven by risk analysis, i.e. more audits focus on
Member States, measures and programmes affected by higher risks. Once a year,
DG AGRI conducts a central risk analysis covering all CAP expenditure in all
Member States: evidence from previous DG AGRI audits, from the ECA, from OLAF
and from the national certification bodies are collected and computed with a
view to identify the most risky areas where future audits shall focus. For
instance as a result of the higher error rate reported by the Court in its DAS
2011 and DAS 2012 the number of EAFRD audits were increased significantly in
2013 (35) and will further increase in 2014 (to 45), thus doubling compared to
2012 (23).  Another consequence is that some Member States are audited every
year, until all serious deficiencies are remedied, as illustrated below with
the example.

Example
of intense supervision

DG
AGRI audits of the Integrated Administrative and Control System (IACS) in 2008
and 2009 revealed and confirmed serious deficiencies: on-the-spot-controls were
late and the Land Parcel Identification System (LPIS) was outdated and not
precise enough. An audit mission in March 2011 concluded that the initial
action plan requested by the Commission to remedy these deficiencies by 2011
had been only partially implemented. The failure to timely implement the
remedial actions triggered a reservation in DG AGRI's 2010 Annual Activity
Report (AAR), accompanied by a new action plan to remedy the deficiencies by
2013. In its AAR 2012 DG AGRI reported that an audit mission in March 2013 had
confirmed that the action plan could be considered as finalised; but DG AGRI
maintained the reservation because solid evidence that the updated LPIS is
correctly used would not be available before a first cycle of
claims/controls/payments. In the meantime, a first financial correction was
imposed in relation to 2008 related expenditure, a second one for 2009; the
conformity clearance procedure for 2010, 2011 and 2012 will be finalised by end
2014 and another conformity clearance procedure for 2013 related expenditure 
should be finished by end 2015.

The
audit strategy for the period 2014-2020 will be based on a reinforced risk
analysis rolling three years programme which will ensure a better coverage of
the overall expenditure. However, more intensive audit activities will continue
to cover the most risky areas.

3.1.2.2.
No discretion and few flat-rate
corrections

Any
identified risk to the EU budget systematically triggers a net financial
correction. The Commission has no discretion to not correct as it is legally bound
to exclude any identified illegal expenditure from EU financing. For both EAGF
and EAFRD financial corrections are governed by the new CAP Horizontal
Regulation which frames the procedure even more tightly to the effect that the
method and the criteria for fixing the amount of financial corrections will now
be set out in a delegated act. The adoption of that delegated act is planned
for the first quarter of 2014.

As
provided for in the Horizontal regulation, the delegated act will establish the
criteria for estimating the risk to the EU budget (see Annex 1). In the case of
flat-rate corrections, it is intended to specify how the severity of the
deficiency shall be assessed, taking into account its nature (key or ancillary
control) but also its recurrence (repetition from a previous year without
improvement) and the accumulation with other deficiencies (the risk of errors
is likely to be higher when there are several deficiencies). The ECA findings
in its 2012 Annual Report, paragraph 4.30[4],
will thus be addressed, notably for cases where several deficiencies are present
for the same population. Once the delegated act is in force, Commission
guidelines will further detail the more technical elements.

Both
the Financial Regulation and the new CAP Horizontal Regulation provide for a
ranking of types of financial corrections where flat-rate corrections may only
be used if calculated or extrapolated corrections cannot be established with
proportionate efforts flat-rate

Calculated
and extrapolated corrections are currently based on DG AGRI auditors' findings
and information provided by Member States during the contradictory procedure.
In the future, DG AGRI will have more information to feed into the process from
the yearly opinions to be delivered as from claim year 2014 by the certifying
bodies carrying out the new task assigned to them examining representative
samples of transactions.

3.1.2.3.
Shorter conformity procedure

Carrying
out a contradictory procedure is legally indispensable before making financial
corrections. Prior to implementing any net financial correction, the Commission
must therefore offer the Member States the opportunity to provide evidence and
arguments that may contradict its initial findings. Indeed the current CAP
financing regulation[5]
and the new CAP Horizontal Regulation provide that "Member States shall
be given the opportunity to demonstrate that the actual extent of the
non-compliance is less than the Commission's assessment". The
principle of a contradictory process between the auditor and the auditee is
also an essential element of audit quality standards.

In addition to the contradictory procedure, Art
52(3) of the CAP Horizontal Regulation provides for a "procedure aimed at
reconciling each party's position" if an agreement is not reached at the
end of the contradictory procedure. The duration of the conciliation as such is
limited to 4 months. But the whole process from the request of the Member State concerned to the final result of the analysis by the Commission of the
recommendations of the conciliation body takes at least 6 months[6].

The Commission has
engaged in and will continue actions aiming at streamlining the whole
procedure. Firstly, the new CAP Horizontal Regulation describes precisely the
nature, scope and sequence of the successive steps, as well as the different
types of financial corrections. Secondly, provisions in the delegated act
(method and criteria for calculating the financial correction) and implementing
acts (details of the conformity procedure, with mandatory deadlines) are
intended to further streamline the legal framework and limit the risk of
unnecessary delays. Thirdly, on that stronger basis, DG AGRI will intensify its
monitoring of the progress of the conformity procedures to ensure a strict
respect of the deadlines.

Details concerning the envisaged procedure for
applying net financial corrections for Common
Agricultural Policy are provided in Annex 1.

The
following diagram describes the successive steps of a conformity clearance
procedure leading to a net financial correction carried out under the new CAP
Horizontal Regulation. As indicated in the Commission's answer to paragraph 4.31[7] of the
ECA's 2012 Annual report on the excessive length of the conformity procedure,
there is scope for significantly speeding up the conformity procedure so that
in standard cases the financial corrections can be decided two years after the
initial audit took place.

3.1.3.
Interruption and suspension for CAP will
be aligned with Cohesion Policy Funds

Following
the adoption of the new CAP Horizontal Regulation by the legislator, a new
legal framework for interruptions and suspension of CAP funds will enter into
force in 2014 which will strengthen the Commission’s powers to suspend EU
financing in cases where risks of irregular payments have been identified.

Accordingly
the Commission may reduce or suspend monthly (EAGF) or interim payments (EAFRD)
on the following conditions:

where
"one or more of the key components of the national control system in
question do not exist or are not effective due the gravity or persistence of
the deficiencies found" (or there are similar serious deficiencies in
the system for the recovery of irregular payments) and:

- either
the deficiencies are of a continuous nature and have already been the reasons
for at least two financial correction decisions,

or

- the
Commission concludes that the Member State concerned is not in a position to
implement the necessary remedial measures in the immediate future, in
accordance with an action plan with clear progress indicators to be established
in consultation with the Commission.

The
first indent corresponds to the present situation under Regulation (EC) No
1290/2005; the second indent is new. It is in essence the legislative response
to the recommendation by the European Parliament in its 2011 discharge
resolution according to which the suspension rules for the CAP should be
aligned with those of the Cohesion Funds.

For
EAGF, according to the new rules, monthly payments to Member States may
continue until the conditions for a suspension decision are met, the rhythm of
the monthly payments would not allow using an interruption procedure. However,
for EAFRD, the new Common Provisions Regulation (CPR) will provide in addition
for the interruption of interim payments by the Authorizing Officer by
Delegation (i.e. the Director-General) as an
additional, quick and reactive tool in case of concerns on the legality and
regularity of payments.

The
combination of both preventive actions (interruption for EAFRD, suspension for
both Funds) and net financial corrections will allow the Commission to act
promptly and effectively and protect the EU budget: no new payments will be
made or they will be reduced up to the level of the estimated risk during the
suspension; irregular payments already made will be fully covered via the
financial corrections.

3.2. Cohesion Policy Funds
3.2.1.
New legal provision for the Commission to impose
net financial corrections on a Member State

A significant
change is introduced for the 2014-2020 programming period. Under certain
conditions laid down in Article 145(6) of the Common Provisions Regulation
(CPR), the Commission must adopt a decision applying a net financial correction.
In such cases the current possibility for the Member State to accept the
correction and to re-use the amount of EU funds thus made available is removed.

Within the new
financial management cycle, 15 February following each accounting year[8]
is the cut-off date for the application of the new provision on net financial
corrections in relation to expenditure of the preceding accounting year. By
that date, Member States must submit to the Commission the programme’s
accounts, management declaration, audit opinion and corresponding reports. This
means that all national control and verification work has to be finalised so
that the Member State can certify the legality and regularity of expenditure
included in the annual accounts.

3.2.2. Financial corrections for irregularities / deficiencies identified before
15 February each year

The rules of the
2014-2020 programming period concerning financial corrections for
irregularities identified before 15 February each year are similar to those of
the current programming period which were of general application regardless of
the date of detection. The objective is to maintain incentives for Member
States to detect and correct irregularities and to exclude the amounts from the
expenditure declared to the Commission and thus avoid a loss of EU funds (see
3.2.5).

Irregular
expenditure detected through national verifications or audits has to be
deducted from the accounts to be submitted to the Commission by 15 February
each year. Having done so, the Member State will be able to re-use the amounts
thus corrected for new eligible operations under the programme, as in the current
programming period.

In the case of
EU audits which are carried out on expenditure before certified accounts are
submitted to the Commission and which detect irregularities requiring financial
corrections, two scenarios are possible, as in the current period. If the Member State agrees on the financial correction to be made and takes action, it will be
able to re-use the corrected amounts for new eligible operations (Article 145(4)
CPR). If the Member State does not agree, the Commission will adopt a financial
correction decision, following the contradictory procedure provided for in
Article 145 CPR. This financial correction will always be net and the programme
and Member State allocation will be reduced proportionally. The Member State will not be able to re-use this amount.

3.2.3.
Commission assessment of legality and regularity
on the basis of the accounts, audit opinion and accompanying documents
submitted by 15 February each year

The introduction
of the new provision on annual reporting by the Member State and on net
financial corrections implies changes in the way the Commission will carry out
its responsibilities. The Commission will assess and review the audit opinions (elements
relating to the functioning of systems and legality and regularity) and annual control
reports, including the reported error rates, as well as the management
declarations and annual summaries, within three months of reception of these
documents provided by 15 February. The Commission will on this basis make its
risk-assessment and establish its audit plan determining the required
risk-based audits targeted to the selected programmes.

The Commission
will carry out its risk-based audits by the end of the calendar year in which
the Member State submitted the audit opinions, management declarations and
related documents. It will examine, through desk and on-the-spot audit work and
re-performance of samples of national audits, whether reported information is
reliable and therefore constitutes an adequate basis for assurance on legality
and regularity. Priority will be given to auditing programmes that have a
material impact on the Commission payments for the corresponding Fund in the
accounting year. The past performance of Member States authorities will also be
taken into account in the risk-based definition of audit priorities.

3.2.4.
Identification by EU audits of irregularities
indicating a serious deficiency after 15 February each year

If EU
(Commission or European Court of Auditors) audits carried out after 15 February
each year detect irregularities demonstrating a serious deficiency affecting
the corresponding accounting year the Commission has the obligation to take a
formal decision applying a financial correction, if the conditions defined in
the regulation are fulfilled. The Commission has no discretionary power in the
matter. The resulting financial correction will always be net. This means
that the allocation to the programme and the total allocation of the Member State will be automatically reduced by the amount of the correction, even if during the
contradictory procedure the Member State accepts the audit results and agrees
to the financial correction. As a consequence there is no possibility for the
concerned Member State to re-use the amount subject to such a net financial
correction in another programme.

The conditions
set-out in the regulation obliging the Commission to apply net financial
corrections are the following:

-
The irregularities detected by EU audits
show a serious deficiency affecting an accounting period for which the Member State submitted a management declaration and an audit opinion which did not identify
the problem.

-
After 15 February and prior to detection
by the EU audits, the Member State has not identified the problem in other
audit reports submitted to the Commission (with the appropriate measures) or has
not taken appropriate remedial measures.

When the
conditions for a net financial correction are met, the Member State will have the right to present its observations within two months[9],
and any additional audit evidence in a hearing, before the financial correction
decision is adopted by the Commission. The timing of this contradictory
procedure with the Member State is clearly framed in the regulation. Finally,
independently from whether the Member State eventually accepts or not the
Commission position as regards the required financial correction, the
Commission has to adopt a formal decision within maximum six months of the
hearing with the Member State.

Definition
of a serious deficiency

To ensure legal
security, the notion of “serious deficiency in the effective functioning of a
management and control system” is defined in the CPR itself (Article 2).
Essentially it means that if the deficiency in one of the key requirements of
the system is such as to give rise to a risk of material error, it is serious.

Article 2 (39) CPR:

...

'serious
deficiency in the effective functioning of a management and control system'
means, for the purposes of implementation of the Funds and the EMFF under Part
Four, a deficiency for which substantial improvements in the system are
required, which exposes the Funds and the EMFF to a significant risk of
irregularities, and the existence of which is incompatible with an unqualified
audit opinion on the functioning of the management and control system.

...

Under the CPR,
the Commission is empowered to lay down in a delegated act detailed rules
concerning the criteria for the assessment of the functioning of management and
control systems, including the main types of serious deficiencies, the criteria
for establishing the level of financial correction to be applied and the
criteria for applying flat-rates or extrapolated financial corrections. The
delegated act will be of general application regardless of the timing of the
detection of the deficiencies.

The delegated
act will be based on the current guidance framework for the assessment of the
key requirements of management and control systems and for setting the level of
flat-rate corrections. The Commission will therefore have a stronger legal
basis compared to the current programming period, and intends to adopt the
delegated act in early February 2014. The criteria for the assessment and the levels
of flat-rate corrections will therefore be well-known in advance to all
programme stakeholders.

The approach
foreseen by the Commission is that it will conclude on the existence of a
serious deficiency based on its assessment of the system key requirements (see
diagram below) when at least one of the main key requirements (in bold in the
diagram below) or two of the other key requirements are considered as working
partially or not functioning. In such cases it will apply a flat-rate financial
correction, unless the Member State can provide within four months a more
precise estimate of the risk through the audit of an appropriate and
representative sample of the concerned expenditure as a basis for an extrapolated
correction.

It is envisaged
that current levels for flat-rate correction will be maintained: 5%, 10%, 25%
and 100%. This approach for the application of flat-rate corrections has been confirmed
by the case law of the Court of Justice.

Nonetheless the
decision to apply any level of financial correction must take account of
proportionality and of the residual risk to the Union budget, as required in
the CPR. Therefore in exceptional cases the Commission may apply an
intermediate level of flat-rate correction (e.g. 50% or 20%).

Increased
level of correction for repeated deficiencies

When the same
deficiencies have been detected by EU audits despite a previous financial
correction, the Commission intends to include a provision in the delegated act
allowing for a higher rate of correction than in the case of the first
correction. This will be a clear message to Member States that they need to
ensure a rapid and permanent adjustment of their management and control systems
once a serious deficiency has been detected.

Details
concerning the envisaged procedure for applying net financial corrections for Cohesion
Policy Funds are provided in Annex 2.

3.2.5. Convergence of good practices for the Commission’s supervisory
system under shared management

For the
2007-2013 period the main preventive legal instrument putting pressure on
Member States to put in place effective management and control systems consists
of procedures to interrupt payments or the suspension of payments to (part of)
an Operational Programme. The Commission considers that these procedures have
been instrumental in improving substantially error rates compared to the
2000-2006 period.

Interruption
and suspension procedures 2012-2013 combined

|| ERDF and Cohesion Fund || ESF

Warnings || 175 || 16

Interruptions || 184 || 60

Pre-suspensions || 137 || 34

Suspension decisions || 6 covering 13 programmes || 11 covering 11 programmes

Nevertheless, the progress made in reducing error rates has proved to be
insufficient, and for the next programming period the existing preventive
instruments will be complemented with stronger corrective ones, extending best
practices across shared management policy areas.

The key
components of the Commission’s supervisory system for the 2014-2020 programming
period are therefore:

-
Interruptions and suspensions
(respectively Articles 83 and 142 of the CPR), existing for Cohesion policy
under the current programming period 2007-2013,

-
Compulsory net financial corrections for
serious systems deficiencies on the basis of a new provision (Article 145(7)) introduced
in the CPR.

The introduction
of the legal basis for compulsory net financial corrections under certain
conditions in the next programming period addresses a weakness in the current
legal framework, reported by the European Parliament and the Council in their
discharge recommendations of the last years. The
deterrent effect of the new net financial correction provisions, whereby Member
States cannot re-use the corrected and recovered amounts and therefore lose the
funds, will be significantly higher than in the current period, and will provide
strong incentives for effective control arrangements.

This convergence
with practices already existing for Common Agricultural Policy will complete
the legal arsenal for the Commission to exercise its supervisory role under
Cohesion Policy Funds, including on the corrective side, and will further
enhance harmonization of the legal framework across EU budget areas under
shared management.

[1] The
letter also referred to the Communication on the Protection of the EU budget
(COM(2013) 682 final/2) which was published on 30 September 2013 as requested
by the European Parliament in its resolution on the budgetary discharge for the
financial year 2011

[2] For European Agricultural Guarantee Fund (EAGF) the appropriation
are assigned to the ''origin of the revenue'' (Art. 174(1) FR) and for
financial instruments to the ''same financial instrument'' (Art.140(6) FR).

[3] In 2012, the Commission took three conformity
decisions, leading to financial corrections of 651 million euro (503 million
euro relating to EAGF and 148 million euro to EAFRD). The average amount of
financial corrections in the last five-year period (2008 - 2012) was 30 %
higher than in the preceding period (2003 - 2007), taking into account the
budget increase between those two periods.

[4] ECA Annual report 2012 paragraph
4.30: ''The use of flat-rate corrections does not sufficiently take into
account the nature and gravity of the infringement, as the same flat-rate
correction of 5% is applied, regardless of whether weaknesses were found for a
single key control or for many such controls.''

[5] This date can be extended to 1st March in exceptional
cases at the request of the Member State, cf. Article 59(5) of the Financial
Regulation (EU, Euratom) N° 966/2012 of the European Parliament and of the
Council.

[6] It can take even longer if the whole case has to be re-examined.

[7] ECA Annual report 2012 paragraph 4.31 Commission reply: "Notably
in the framework of the preparation for the implementation of the CAP reform,
the Commission will continue in its efforts to improve and speed up the
process, bearing in mind the need to maintain quality standards and the Member State's right of reply."

[8] This date can be extended to 1st March in exceptional
cases at the request of the Member State, cf. Article 59(5) of the Financial
Regulation (EU, Euratom) N° 966/2012 of the European Parliament and of the
Council.

[9]  With an
additional two months allowed in case of proposed extrapolated or flat-rate
correction for the Member State to demonstrate that the actual extend of the
irregularity is less than that assessed by the Commission.