EUROPEAN COMMISSION Brussels, 10.11.2015 SWD(2015) 210 final COMMISSION STAFF WORKING DOCUMENT MONTENEGRO

2015 REPORT Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS



EU Enlargement Strategy {COM(2015) 611 final}

{SWD(2015) 211 final}

{SWD(2015) 212 final}

{SWD(2015) 213 final}

{SWD(2015) 214 final}

{SWD(2015) 215 final}

{SWD(2015) 216 final}



Table of Contents 1. Introduction 1.1. Context 1.2. Summary of the report 2.POLITICAL CRITERIA 2.1. Democracy 2.2.Public administration reform 2.3. Rule of law 2.4. Human rights and protection of minorities 2.5. Regional issues and international obligations 3.Economic Criteria 3.1.The existence of a functioning market economy 3.2The capacity to cope with competitive pressure and market forces within the Union 4. ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP 4.1. Chapter 1: Free movement of goods 4.2.Chapter 2: Freedom of movement for workers 4.3.Chapter 3: Right of establishment and freedom to provide services 4.4.Chapter 4: Free movement of capital 4.5. Chapter 5: Public procurement

4.6.Chapter 6: Company law 4.7.Chapter 7: Intellectual property law 4.8.Chapter 8: Competition policy 4.9.Chapter 9: Financial services 4.10.Chapter 10: Information society and media 4.11.Chapter 11: Agriculture and rural development 4.12.Chapter 12: Food safety, veterinary and phytosanitary policy 4.13.Chapter 13: Fisheries 4.14.Chapter 14: Transport policy 4.15.Chapter 15: Energy 4.16.Chapter 16: Taxation 4.17.Chapter 17: Economic and monetary policy 4.18.Chapter 18: Statistics 4.19.Chapter 19: Social policy and employment 4.20.Chapter 20: Enterprise and industrial policy 4.21.Chapter 21: Trans-European networks 4.22.Chapter 22: Regional policy and coordination of structural instruments 4.23.Chapter 23: Judiciary and fundamental rights 4.24.Chapter 24: Justice, freedom and security 4.25.Chapter 25: Science and research

4.26.Chapter 26: Education and culture 4.27.Chapter 27: Environment and climate change 4.28.Chapter 28: Consumer and health protection 4.29.Chapter 29: Customs union 4.30.Chapter 30: External relations 4.31.Chapter 31: Foreign, security and defence policy 4.32.Chapter 32: Financial control 4.33.Chapter 33: Financial and budgetary provisions Annex I – Relations between the EU and Montenegro Annex II – Statistical Annex



1. Introduction 1.1. Context The European Council granted the status of candidate country to Montenegro in December 2010. Accession negotiations were opened in June 2012 . The Stabilisation and Association Agreement between Montenegro and the EU entered into force in May 2010. In addition to EU accession, Montenegro's key foreign policy priority during the reporting period was securing an invitation to join NATO. Both priorities are linked by the focus on the rule of law: progress in this area is a key condition for both processes. Eight negotiating chapters were opened during the reporting period. Closing benchmarks were set by the EU for the opened chapters, providing guidance for future steps in meeting the obligations of EU membership. Montenegro has made good progress towards meeting opening benchmarks for chapters such as Agriculture and rural development, Energy, Employment and social policy, and Regional policy and preparation for structural instruments. Particular attention needs to be paid now to fulfilling the opening benchmarks in chapters like Competition policy and Environment and climate change, which are challenging for Montenegro. 1.2. Summary of the report As regards the political criteria, the new electoral legislation, adopted in 2014, needs to be fully implemented, including on the electronic identification of voters. There has been no political follow-up to the alleged abuse of public funds for party political purposes ("audio recordings affair"). Some opposition parties embarked on a boycott of parliament in September. A series of protests were also organised outside parliament. These eventually led to confrontation between the police and protesters, resulting in injuries and damage to property. It is expected that all incidents of violence and allegations of excessive use of force during these events will be duly investigated. At the same time, all political parties should re-engage in a constructive political dialogue in the parliament. Some progress was made in improving cooperation between the government and civil society organisations, especially concerning the latters' participation in the accession process, where civil society continued to play an active role. Conditions conducive to voluntary work, civic activism and social entrepreneurship need to be created.

With regard to public administration reform, Montenegro is moderately prepared. However, its results in ensuring merit-based recruitment and tackling politicisation are uneven; this should be ensured at all levels, including for senior positions. On public financial management, Montenegro needs to bring its accounting standards into line with international standards and put in place a strong internal control framework and improve legal compliance. The judicial system is moderately prepared. Important steps were taken to align the legal framework with European standards, increasing professionalism and independence. The emphasis now should be on implementation. In 2014, the backlog of pending cases was not significantly reduced. Codes of ethics for judges and prosecutors are aligned with the relevant European and international standards. A judicial reform strategy (2014-2018) and an accompanying action plan are in place. The full implementation of the new system of recruitment, professional assessment and promotion is now required. In terms of the fight against corruption, Montenegro has achieved some level of preparation. However, the track record on effective investigation, prosecution and final convictions in corruption cases, in particular regarding high-level corruption, remains limited. In the fight against organised crime, the country has some level of preparation. Further efforts are needed, in particular to investigate wider criminal networks and to counter money laundering. Further progress in the accession negotiations overall will also depend on progress on the rule of law: the latter will also have to be demonstrated, and assessed, on the basis of credible track records in the fight against corruption and organised crime. The legal framework for the protection of human rights is broadly in line with European standards, but problems remain with implementation. Montenegro has achieved some level of preparation in the area of freedom of expression. However, concerns remain: There were instances of attacks against media practitioners and property during the reporting period, albeit fewer than in previous years. Some cases of violence against the media remain to be resolved, including the most serious case, that of the murder of an editor-in-chief in 2004. Lack of solid professional and ethical standards, accompanied by lack of efficient self-regulation, does not advance media freedom. Montenegro continued to play a constructive role in regional cooperation and made important steps in finding mutually acceptable solutions to bilateral issues with neighbours, including the signing of border agreements with Bosnia and Herzegovina and Kosovo * in August. As regards the economic criteria, Montenegro is moderately prepared in developing a functioning market economy. Some progress was made in pursuing fiscal consolidation and improving the business environment. The economy recovered in 2013 from the double-dip recession of 2009 and 2012. After a mild slowdown in 2014, economic growth is gaining momentum again, boosted by investments. While the construction of the Bar-Boljare highway, together with other investments in energy, transport and tourism, will support economic growth, the cost of the highway risks challenging fiscal sustainability. Montenegro should make efforts to reduce its public debt. Banks are confronted with a persistently high level of NPLs, problems of debt recovery and low profitability due to the small size of the market, resulting in scarce and expensive credit. In spite of a small improvement, labour market performance remains unsatisfactory with a persistently high unemployment rate, currently 18%. Montenegro is moderately prepared in its capacity to cope with competitive pressure and market forces within the Union. However, for industrial and agricultural products, Montenegro still suffers from low competitiveness, which should be improved. Major reforms are still needed to strengthen the country’s physical infrastructure and human capital, and to ensure a predictable and supportive regulatory environment. As regards its ability to take on the obligations of membership, Montenegro is moderately prepared for most acquis chapters although the level of alignment does vary. Concerning public procurement Montenegro is moderately prepared. More work is needed to prevent corruption occurring during the procurement cycle. On financial control, Montenegro is also moderately prepared but significant efforts are needed to implement public internal financial control (PIFC) at all levels of public administration and in state-owned enterprises. On statistics, Montenegro has achieved some level of preparation: significant efforts are needed, especially to ensure the alignment of macro-economic and business statistics with EU standards. Montenegro is at an early stage of preparation on, inter alia, environment and climate change. Aligning with the acquis and strengthening the administrative capacity remains a substantial challenge for Montenegro. 2. POLITICAL CRITERIA 2.1. Democracy Elections Montenegro’s new electoral legislation, adopted in 2014, needs to be fully implemented and all future elections need to take place in accordance with the new laws. The State Election Commission’s budget has been increased, but this institution needs to be further strengthened. The judicial follow-up on the alleged misuse of public funds for party political purposes remains to be completed and political responsibility ensured. In October 2014, parliament appointed the members of the State Election Commission (SEC). In 2015, the SEC’s budget was significantly increased but this institution needs to be further strengthened. Recruitment has been completed. The electoral legislation adopted in 2014 has not been fully implemented, including new rules on the electronic identification of voters and updating of the single voters’ list. The ad hoc parliamentary committee monitoring the implementation of legislation for building confidence in the election process needs to be established. In December, parliament adopted a new law on the financing of political parties and election campaigns, after the Constitutional Court had previously annulled some of the old law's provisions. The new law means that Montenegro has made progress on meeting its outstanding recommendations made by GRECO (Group of States against Corruption) and the OSCE Office for Democratic Institutions and Human Rights. Some progress has been made on the judicial follow-up to the ‘audio recordings affair’ of 2012, involving the alleged misuse of public funds for party political purposes. In February, the High Court in Bijelo Polje revised the September 2014 decision of the Pljevlja basic court, handing down stiffer sentences for the Director of the Centre for Social Work and an employee of that institution. Ten people previously acquitted for lack of evidence underwent a retrial, which resulted in suspended six-month prison sentences. Most criminal reports submitted to the prosecution over to the audio recordings affair have been dismissed. To date, there has been no political follow-up. In May, five people were convicted by the Podgorica basic court for buying ID cards on behalf of the ruling Democratic Party of Socialists of Montenegro (DPS) prior to the May 2014 Podgorica local elections. One of the defendants was sentenced to five months’ imprisonment and the others received suspended sentences. Six people were acquitted of all charges. The investigation failed to shed light on who ordered the buying of ID cards.

In October 2014, the Constitutional Court ruled that certain provisions of the law on the election of local councillors and MPs were unconstitutional. The provisions in question stipulated that parliamentary parties, unlike extra-parliamentary ones, did not have to collect signatures in support of their electoral lists. Parliament Montenegro’s parliament has a newly-adopted Code of Ethics intended to strengthen the overall anti-corruption framework and public trust in parliament. Work in these two areas must continue. Parliament continues to function in a transparent manner, but there is still no procedure for acting on citizens’ petitions. Oversight and legislative capacity need to improve. All political parties should show responsibility and re-engage in a constructive dialogue, with parliament as the key forum for political debate. In December, parliament adopted its Code of Ethics. The Code draws on general ethical principles, establishes rules of conduct in carrying out parliamentary duties and promotes transparency. The right to file complaints is currently limited to MPs and parliament entities but should be extended to include citizens, the media and other external stakeholders. There is also room for improvement in a number of other areas, including on the MPs’ obligation to declare private interests, the statute of limitations and the range of penalties applied. In September 2015, opposition parties embarked on a boycott of parliament. They also organised a series of protests outside parliament, calling for the resignation of the government and new elections. These protests eventually led to confrontation between the police and protesters, resulting in injuries and damage to property. It is expected that all incidents of violence and allegations of excessive use of force during these events will be duly investigated. At the same time all political parties should re-engage in a constructive political dialogue in the parliament. Parliament’s capacity to follow up on conclusions and recommendations adopted in oversight hearings remains limited. Parliament continued to display a high level of transparency. During the reporting period, it continued to reply to all access to information requests. Procedures for acting on citizens’ petitions are not yet in place. Administrative and expert capacity need to improve further Parliament should, as a matter of priority, ensure that their premises are accessible to persons with disabilities. Governance Coordination of institutions involved in the EU accession process was strengthened, but there is room for further improvement. Transparency and stakeholder inclusiveness must be further strengthened. Public finances at local level should be consolidated and the budgetary positions, transparency, efficiency and accountability of units of local self-government strengthened. In addition to EU accession, Montenegro's key foreign policy priority during the reporting period was securing an invitation to join NATO. Both priorities are linked by the focus on the rule of law: progress in this area is a key condition for both processes. Coordination among institutions involved in the accession process has improved. As regards transparency, the Open Government Partnership operational team was dissolved due to irregularities in its appointment, and re-established. The e-petitions platform continues to exist, but is underused. The capacity and independence of regulatory authorities should be strengthened, while stakeholder inclusion and consultation should be further enhanced. Despite some improvements related to the Ombudsman's resourcing, the capacity to effectively handle complaints remains limited. In December, parliament adopted amendments to the law on the financing of local self-government, giving the recently-established municipalities of Petnjica and Gusinje access to additional funds. A considerable number of units of local self-government have been struggling with high municipal debts and are not financially self-sufficient. In February, the government approved the restructuring of tax arrears for 14 municipalities. In January, the government adopted the 2015-2018 strategy for the professional development of local civil servants and state employees and its 2015-2016 action plan. To date, 19 out of 23 units of local self-government have adopted action plans to combat corruption. Civil society Some progress was made in improving cooperation between the government and civil society organisations, especially concerning the latters' participation in the accession process, where civil society continued to play an active role. However, more transparency is needed in government procedures for cooperation with and consultation of civil society organisations (CSOs). It is a matter of concern that some civil society activists have been targeted on a personal basis by local media. Conditions conducive to voluntary work, civic activism and social entrepreneurship need to be created. An empowered civil society is a crucial component of any democratic system and should be recognised and treated as such by state institutions. This also means providing opportunities for meaningful consultations, and legal space and material means for its development. In Montenegro, despite some positive examples, there is still room for improvement on this. Civil society representatives have on various occasions voiced their dissatisfaction with their level of involvement in policy-making. Relations between CSOs and the government have occasionally been overly adversarial and characterised by distrust, especially on the political situation, the rule of law and fundamental rights. Instances of government bodies undertaking unlawful surveillance of CSOs and using administrative intimidation and legal threats have been reported and proven with court verdicts. It is a matter of concern that some civil society activists have been repeatedly targeted on a personal basis by local media through smear campaigns. Greater transparency is needed in government procedures for cooperation with and consultation of CSOs, especially in legislative drafting. The new Council for the development of non-governmental organisations has been operational since 2014. Its main tasks include monitoring the strategy for developing CSOs and the relevant sections of the action plan on Chapter 23. So far, the record of implementation of the strategy has been uneven; amendments to the law on NGOs remain pending. Montenegro needs to establish a sustainable system of public funding for CSOs and an appropriate institutional framework. It also needs an institutional culture that facilitates grassroots activities by civil society, through free concessions of public spaces and other forms of support. The current system of public funding has so far proven inefficient, a fact acknowledged by the State Audit Institution. Moreover, the law on gaming, currently the only source of public financing for CSOs, is not being implemented properly and the amount allocated to CSOs' projects is decreasing. Conditions need to be created that are conducive to voluntary work and social entrepreneurship. This involves not only legislation but also bringing about an overall change of society’s approach to volunteerism and civic activism.

2.2. Public administration reform Montenegro is moderately prepared with the reform of its public administration. It made some progress over the past year, mainly on service delivery to citizens and businesses and public financial management. However, while Montenegro made some progress under its 2011-2016 public administration reform (PAR) strategy, it did not achieve all its objectives. Delays with rationalisation of the public sector are also an issue of concern. In the coming year, Montenegro should in particular: → adopt a new 2016-2020 PAR strategy and a multiannual public financial management reform programme; → ensure full implementation of the law on civil servants and state employees, and adhere to the principles of merit, de-politicisation and transparency in recruitment, appraisals and dismissals at all levels, including for senior positions; → prepare for the implementation of the new law on general administrative procedures, and carry out a parallel review and alignment (as necessary) of all other relevant legislation; and → ensure that adopted measures to rationalise public administration are implemented, while ensuring the necessary capacity and skills for European integration. Public service and human resources management Montenegro’s legal framework on public service is in place. The principles of merit-based recruitment, promotion and dismissal are regulated by the law on civil servants and state employees, and are broadly in line with international standards, However, the track record in ensuring merit-based recruitments is uneven at all levels, including for senior positions. Montenegro needs to further strengthen the capacity of its Human Resources Management Authority (HRMA) so that it can monitor and coordinate human resources units in an effective manner. The central personnel records need to be further updated, following the joint efforts of the Ministry of Finance and the HRMA already calling on institutions to do so. Disciplinary procedures are regulated in the law on civil servants and state employees, to avoid arbitrary decisions. The current public sector remuneration system lacks transparency, and the principle of equal pay for equal work is not fully respected. Although the law on wages of civil servants and state employees lays down some rules on the basic and variable portion of salaries, a large proportion is discretionary and can be allocated by senior management. The payment of bonuses also lacks transparency. A law on public sector salaries, designed to increase transparency and fiscal accountability, is currently in preparation. The HRMA is responsible for designing and delivering training programmes according to an annual training plan. However the legal right of public servants for continuous professional development is not fully respected. Rather, the amount of trainings has been decreasing over the past three years. Performance appraisals are carried out only in a limited number of institutions, often in a rather formalistic way. Integrity in public service has increased since the adoption of the law on civil servants and state employees in 2013. A new anti-corruption agency is due to be in place on 1 January 2016. It will monitor conflicts of interest and asset declarations and provide protection for whistle-blowers. Policy development and coordination Montenegro has the legal framework and institutional structures in place to provide the basis for a good policy-making system, including for European integration. There is clear division of responsibilities among those ministries with coordination responsibilities, especially the General Secretariat of the government, the Ministry of Foreign Affairs and European Integration and the Ministry of Finance, and other ministries. However, the medium-term planning system is not fully developed. Specifically, the government has weak capacity to scrutinise draft policies and judge if they meet previous commitments. Sectoral strategies are developed incoherently and often lack costing or a link to the medium-term expenditure framework, therefore putting at risk their future implementation. Inclusive and evidence-based policy and legislative development is only partially ensured. Beside the lack of any specific legal requirements for it, ministries have a relatively low number of civil servants working on policy analysis and development. Ministries rather focus on the implementation of policies. This also detracts from institutions’ capacity to carry out legal drafting, including for the EU acquis. Both inter-ministerial and public consultations are regulated, but there are major weaknesses in implementation. Public consultations are not systematically organised. When they do take place, they do not necessarily include all the relevant stakeholders and often come too late in the process. Legislative and policy proposals are supposed to include regulatory impact assessments. There is evidence that this is taking place, but some of analyses do not provide sufficient detail or only focus on fiscal impacts. The broad publication of government monitoring reports allows public scrutiny of government work. The government reports are however more focused on providing information on outputs than on results and outcomes achieved with government policies. Accountability of the administration

The overall organisation of Montenegro’s state administration does not ensure effective lines of accountability. The accountability of agencies towards parent institutions over financial and operational reporting varies considerably, which makes efficient monitoring problematic. Also lines of accountability within institutions are weak, and responsibilities are typically not delegated to middle management. Moreover, managerial accountability is not systematically implemented (see Chapter 32 – Financial control). Rationalisation of the state administration has been one of the key priorities of the current public administration reform strategy, but the number of state employees actually rose in 2014, mostly (but not solely) at local level. However, since any new recruitment in local self-government is to be subject to approval by the Ministry of Finance, there may be a leaner and fiscally tighter public sector in Montenegro in the future, which in parallel ensures the necessary capacity and skills for European Integration. Montenegro has put in place the appropriate internal and external oversight mechanisms to ensure the citizens' right to good administration. The total number of the Ombudsman’s recommendations is low although the implementation rate of these recommendations is high. The right to access public information is regulated in the law on free access to public information, but in practice the state administration is not yet very responsive or proactive on this point. The Agency for Personal Data Protection and Access to Information is in place since 2013, but does not have sufficient capacity to deal with the increasing number of complaints it is receiving. Administrative silence is a major issue, causing nearly 50 % of complaints from the public. The right to administrative justice is regulated in the law on administrative procedures. However, there are weaknesses in implementation, especially due to administrative silence. Furthermore, Montenegro has a high number of special procedures, and therefore a lack of transparency in administrative appeals and judicial reviews. Administrative litigation procedures are short, but since cases are often returned to the state administration for further consideration, many of these end up back in court. Montenegro does not have a specific law on public liability to ensure the right to seek compensation. Instead, this subject is covered by several pieces of legislation that are not easily understandable to the public. Public financial management Montenegro has carried out some reforms of its public finances. Significant additional work is needed for example in putting in place multiannual financial planning; in gradually moving to policy-based budgeting; in improving financial forecasting, management and control of commitments; in managing assets; and in preventing tax evasion. Montenegro also needs to improve legal compliance. A comprehensive public financial management reform programme is being finalised to address the identified weaknesses. It should put in place a relevant and credible framework and provide an action plan that will realistically sequence and link reforms in different areas. Budget transparency needs to be further improved. The annual budget is available to the public, but monthly reports on revenues, expenditure and borrowing provide only aggregate information. There is no transparency over how different institutions have spent their budget and no explanations are provided on variations during the year. Parliament's capacity for budget oversight needs to be strengthened and it needs sufficient time for processing budgetary information Service delivery to citizens and businesses Montenegro committed itself to achieving a user-oriented administration in its 2011-2016 public administration reform strategy and in its e-government strategy. Public satisfaction with government services is, however, not yet regularly measured. Equal access to public services, including to e-services, is largely ensured. A central government portal provides access to almost 80 e-services from 25 public institutions, but many provide only basic services, such as information and templates, not full electronic procedures. A 2014 law on e-government sets specific deadlines for developing e-services and interoperability. In summer 2015 the government adopted a decree on its operation and content management. The new law on general administrative procedures was adopted in December and will enter into force in July 2016. Whereas it is a major step forward in simplification of administrative procedures, considerable work is still needed both on training of civil servants on its application and on ensuring consistency with special procedures. Nearly 150 special procedures will need to be either abolished or brought into line with the new law. Strategic framework of public administration reform A public administration reform (PAR) strategy is in place for 2011-2016. The current action plan expires at the end of 2015. In June, Montenegro adopted an analysis of the impact of the strategy. Weaknesses identified include objectives that were not linked with performance targets and an action plan that only focused on output-level indicators, not outcomes or impacts. Such weaknesses need be addressed under Montenegro forthcoming 2016-2020 PAR strategy, planned to be adopted before the end of 2015. Political support is ensured as PAR is identified as a priority in most government planning documents up to and including prime ministerial level. The political and administrative monitoring and reporting framework is in place, with the Ministry of Interior in charge of coordination. The new strategy's financial sustainability needs to be ensured in the 2016 budget and the medium-term expenditure framework. 2.3. Rule of law Functioning of the judiciary Montenegro’s judicial system is moderately prepared. During the reporting period Montenegro made some progress in this field. Good progress has been made on strengthening the legislative framework to increase the independence, accountability and professionalism of the judiciary, but rules are not fully applied in practice. Courts are overall managing to cope with the influx of cases, but measures to reduce the number of cases pending and the total length of proceedings need to continue. In the coming year, Montenegro should pay particular attention to: → strengthening the independence and professionalism of the judiciary by fully implementing the new recruitment, professional appraisal and promotion systems; → strengthening the accountability of the judiciary by developing a track record of implementation of codes of ethics and of the new disciplinary systems for judges and prosecutors; → strengthening the capacity of the Judicial and Prosecutorial Councils, including in strategic planning for budget and human resources. Strategic documents

Montenegro’s action plan for Chapter 23 outlines comprehensive reforms in the area of the judiciary. It is monitored by the Chapter 23 inter-institutional working group, which includes representatives of civil society. In addition, a judicial reform strategy for the period 2014-2018 and accompanying action plan are in place. The strategy reflects and complements the main reform priorities identified and addressed by the action plan for Chapter 23. A mechanism for monitoring the implementation of the strategy is in place. Management bodies The Judicial Council and the Prosecutorial Council are the key bodies in charge of managing the judicial system, including the appointment and promotion of judges and prosecutors and handling disciplinary measures against them. Their composition and appointment procedures are broadly in line with European standards. However, some concerns remain about political influence on the work of these bodies. The Judicial Council has a consolidated administrative structure. However, its secretariat does not have sufficient office space and is finding it difficult to recruit additional qualified administrative staff. Since July the secretariat for the Prosecutorial Council has its own secretariat but recruitment of staff remains to be completed. The budget allocated to the Judicial Council does not sufficiently cover its IT spending needs. While access to Judicial Council decisions has significantly improved and the Council’s meetings are generally open to the public, the operation of the Prosecutorial Council still lacks transparency. Both Councils lack strategic planning on budget and human resources. Independence and impartiality The main principles guaranteeing judicial independence, including the principle of the immovability of judges, are set out in Montenegro’s Constitution and reflected in its legislation. The constitutional amendments introduced in 2013 strengthened the independence of the judiciary by reducing political influence on the appointment of high-level judicial and prosecutorial officials. Judges and prosecutors have tenure until retirement. The power to dismiss judges and prosecutors lies with the Judicial and Prosecutorial Councils respectively. Judges and prosecutors enjoy functional immunity, with the exception of crimes committed in the performance of official duties. However, the internal independence of individual judges may be undermined by the Supreme Court’s possibility to adopt legal positions of principle and by the supervisory powers of higher courts vis-à-vis lower courts. Under the Criminal Code, undue interference in the work of judicial officials is punishable by imprisonment. So far there has been no case where these provisions have been applied. The principle of random allocation of cases is guaranteed by the law on courts and implemented automatically through PRIS, the judicial information system, although for very small courts there are certain limitations. The procedure of assigning cases to judges overnight rather than as soon as they are submitted does not entirely exclude manipulation. Failure to seek judicial disqualification in cases where it is mandatory constitutes grounds for disciplinary action. Rules for withdrawal of allocated cases are stipulated in the law on courts. Accountability Codes of ethics for judges and prosecutors are aligned with the relevant European and international standards and linked to mechanisms for complaints from members of the public. Compliance with the codes is monitored by specialised bodies within the Judicial and Prosecutorial Councils. In February 2015, new systems of disciplinary accountability were introduced for judges and prosecutors. Specialised bodies within the Judicial and Prosecutorial Councils are responsible for disciplinary proceedings. However, the numbers of reported and established violations of the Codes of Ethics and of disciplinary and dismissal proceedings are limited. Most complaints submitted by members of the public refer to the substance of decisions. Like all public officials, judges and prosecutors have an obligation to declare their assets on an annual basis and to report on possible conflicts of interest. Professionalism and competence The power to recruit, appoint, transfer, promote and dismiss judges and prosecutors lies with the Judicial Council and the Prosecutorial Council respectively. New legislation adopted in February 2015 introduces a single, countrywide recruitment system for judges and prosecutors, and a new system of promotion based on periodic professional assessment. The new systems are designed to be transparent, merit-based and seek to apply objective criteria. Full implementation of the new systems is pending. Quality of justice The Judicial Training Centre provides initial and continuous training to judges, prosecutors and legal advisers. For 2015, it has been allocated its own budget line but is still dependent on donor support for certain specialised training courses. Montenegro has observer status in the European Judicial Training Network (EJTN). PRIS, the judicial information system, is used by all courts for tracking cases, for some aspects of case management and for communication with parties. PRIS also collects comprehensive statistical data, which feed into annual reports on the performance of courts. However, the system has security gaps and is not running reliably outside Podgorica, partly due to slow network connections. It is also not backed by a clear institutional framework and remains under-developed with regard to the prosecution service. Final court decisions are publicly accessible online. The law on courts provides for mechanisms to ensure consistency of jurisprudence. However, they risk undermining the internal independence of individual judges.

The judiciary’s current budget of EUR 27.1 million (EUR 40 per capita) amounts to 0.78 % of GDP but is insufficient. The number of judges and prosecutors in Montenegro is relatively high in relation to the size of the population. Spending on salaries limits the scope for other expenses such as necessary investment or free legal aid. Alternative dispute resolution is available through court settlement, arbitration and mediation. Overall, its impact remains low. Efficiency In 2014 the clearance rate, i.e. the ratio of solved cases to new cases filed, was almost 100 % (2013: 98.5 %). However, overall, in 2014 courts solved 16.4 % fewer cases than in the previous year, and the total number of pending cases at the end of the year (37 111) remained more or less constant. The backlog of cases older than three years pending before all courts has further decreased and amounted to 3192 at the end of 2014 (4089 at the end of 2013). In 2014, the disposition time, i.e. the average time from filing the case to a decision, was 242 days for first instance proceedings in civil cases and 261 days for commercial cases. The overall length of proceedings from initiation to final judgment remains a cause for concern. Fight against corruption Montenegro has achieved some level of preparation in the fight against corruption. Corruption remains prevalent in many areas and continues to be a serious problem. Some progress was made in the past year thanks to the strengthening of the legislative and institutional framework but work on this needs to be completed. All institutions should demonstrate a more proactive attitude in fulfilling their mandate. Montenegro’s track record on effective investigation, prosecution and final convictions in corruption cases, in particular regarding high-level corruption, remains limited. In addressing the shortcomings outlined below, in the coming year Montenegro should pay particular attention to: → establishing a fully operational anti-corruption agency by 1 January 2016; → establishing track records in combating corruption, in particular in high-level cases and increasing the capacity to carry out financial investigations; → improving track records in the prevention of corruption, including effective penalties for irregularities. Track record Results on investigation, prosecution and convictions in corruption cases are limited to low and medium-level corruption. A high rate of investigations into reported corruption-related offences never results in indictments. So far there have been no final convictions for high-level corruption. In two cases former mayors have been convicted at first instance but trials are ongoing. Several investigations are ongoing, but a number of high-profile cases have never been subject to serious investigation. The political authorities should ensure that law enforcement bodies are fully empowered to act effectively and impartially when investigating corruption allegations. In cases involving low and medium-level corruption, courts frequently apply sentences below the minimum penalties laid down in the Criminal Code. Financial investigations are not yet systematically used in cases of corruption. In no corruption case has the confiscation of assets been ordered. As regards political influence on law enforcement and judicial officials, some statements by members of the executive and the legislative branch may be interpreted as interference in the independent functioning of the judicial system. Also in the areas of control of conflict of interest, asset declarations as well as financing of political parties and electoral campaigns Montenegro is yet to achieve significant results. Penalties have not been effectively applied and as a result are not serving as a deterrent. The practice of misdemeanour bodies to issue very low sanctions, in most cases below the statutory minimum, counteracts effective enforcement of prevention of corruption rules. The Commission for the prevention of conflicts of interest has continuously increased the number of asset declarations it cross-checks against data held by other institutions. The number of irregularities identified has increased, but until very recently there was no appropriate follow-up. While the Commission has processed a number of cases of incompatibility of functions, its decisions on conflicts of interest so far are limited to requests filed by the public officials concerned to receive an opinion. The Commission does publish data from the asset declarations of public officials. Alleged irregularities in the area of political party and electoral campaign financing (abuse of state funds for political party purposes) have not been appropriately followed up by the State Electoral Commission. As regards free access to information, in 2014 public institutions who received such requests rejected roughly 25 % of them. However, the appeals body, the Agency for Personal Data Protection and Free Access to Information upheld most complaints. Court decisions on access to information are not effectively enforced. On the basis of amendments to the Criminal Code in July 2013 making dismissal of whistle-blowers a criminal offence, criminal charges have been brought against 17 persons. In two cases preliminary investigations are ongoing; in all other cases charges were dismissed. Institutional framework

On the prevention of corruption, in December 2014 parliament adopted the legislative basis for establishing an independent anti-corruption agency with administrative investigation powers, to be operational as of 1 January 2016. The existing supervising institutions are not on the whole taking a proactive approach and their administrative capacity has not been strengthened as required. Codes of ethics are in place for legislative, judicial and executive authorities and integrity plans have been adopted in 77 (out of 102) public bodies. On law enforcement, the institutional and operational capacity of prosecutors, judges and police to fight corruption is insufficient. The prosecution service has the lead in criminal investigations. However, in practice, cooperation between the police and the prosecution in pre-trial investigations remains to be improved. The capacity to carry out financial investigations needs to be improved. The special prosecution division within the Supreme State Prosecutor’s Office lacked direct access to relevant databases and specialised expertise. A new Special Prosecutor’s Office for the fight against corruption, organised crime, war crimes, terrorism and money laundering became operational in July but the recruitment of special prosecutors and specialised experts has not been completed. The fight against corruption is being hampered by frequent changes to the relevant legislation and the annulment of verdicts on appeal, mostly on technicalities. The vast majority of corruption allegations submitted to the state prosecution come from members of the public, NGOs and private companies. Only very few cases are submitted by the police and hardly any complaints result from administrative control and auditing bodies. Legal framework Passive and active corruption are punishable offences under the Criminal Code, which lays down sentences for them ranging from three months to 15 years. Montenegro is a party to the main international instruments against corruption, including the UN Convention against corruption and the relevant Council of Europe conventions. Illicit enrichment has not been made a criminal offence. The legislative framework was significantly strengthened through the adoption of a comprehensive package of laws in December 2014, which also included the legal basis for the future anti-corruption agency. Strategic framework The action plan for Chapter 23 outlines comprehensive reforms on the prevention and combat of corruption. Its implementation is monitored through the Chapter 23 inter-institutional working group, which also includes representatives of civil society. Sectoral action plans are in place for some areas particularly vulnerable to corruption but in practice their impact has been limited. Fight against organised crime Montenegro has achieved some level of preparation in the fight against organised crime. Some progress was made in the past year, notably on strengthening the legal and institutional framework and operational capacity for the prevention of money laundering and terrorist financing. Regional and international cooperation has been smooth, and a number of joint operations were conducted. However, further work is needed in this area. Montenegro’s track record on organised crime needs to be consolidated. In particular, the number of final convictions for organised crime and the number of seizures and confiscations of criminal assets are low. The number of suspicious transactions detected also remains low. In the coming year, Montenegro should pay particular attention to: → improving its track record in the fight against organised crime, including dismantling criminal networks and ensuring quality confiscation of criminal assets; → stepping up intelligence-led investigation on anti-money laundering and financial cases, and on cases of trafficking in human beings; → ensuring stronger, proactive inter-agency cooperation among the recently-established institutions (the Special Prosecutor’s Office and the new specialised police units), the Administration for Prevention of Money Laundering and Terrorist Financing, the Central Bank, the tax authorities and the customs administration. Track record Despite some new cases in the area of drugs, arms trafficking, cybercrime and migrant smuggling, Montenegro’s track record has shown little progress on complex crimes such as trafficking in human beings and money laundering. In various cases, there has been little effort to investigate wider criminal networks. The number of final convictions for organised crime remained low with no major changes to the trend in the last few years. Following the 2014 seizure of 250 kg of cocaine from a cargo ship in the port of Bar, the investigation into the case has not identified the network that organised this drug trafficking operation. Apart from this large amount, there were no other drug seizures in Bar, despite sizeable container traffic, including from southern America. So far there have been no cases of criminal assets seized for drug trafficking, despite Montenegro being a transit country. Trafficking in human beings remains a concern. Despite progress on the legal and institutional aspects, Montenegro has achieved limited results, both in terms of victims identified and cases prosecuted. Despite Montenegro remaining a transit country towards Western Europe and remaining vulnerable to both domestic and regional trafficking, only few criminal cases have been launched and four victims identified. The system in place to combat money laundering remains weak and lacks strong coordination mechanisms between the various players in the chain. Two new indictments on money laundering were brought in 2014; one trial is still ongoing, while the second case resulted in an acquittal. While Montenegro’s anti-money laundering agency is fulfilling its mandate, including through a new policy on penalties, other institutions, including the Central Bank, need to step up systematic checks on other reporting entities. This problem is reflected in the low number of suspicious transactions reported in the country in comparison with the amount of cash transactions. Financial investigations and the seizure and confiscation of assets are also used in a limited number of cases only, due to lack of know-how.

For a number of years, large quantities of cigarettes have been declared transiting through the Port of Bar destined to third countries. Recently, an increase of the quantity of cigarettes has been observed, including to certain destinations located in third countries considered as suspect. Institutional and operational capacity Since 2013 Montenegro has in place a system of prosecutorial-led investigations. Practical problems in coordination and exchange throughout the law enforcement and judicial chain are not yet entirely resolved. This is one of the major shortcomings affecting results. The rules governing the organisation of the police are derived from the law on internal affairs. The changes made in early 2015, following the legislative amendments described below, aim at better cooperation between the public prosecution service and the police by establishing a ‘double-hatted’ special unit. The head of the special unit, once appointed, will report to the Chief of Police and to the Special Prosecutor. The unit is not yet operational. In addition, four specialised police units have been created, focusing on trafficking in human beings, cybercrime, financial investigations and the fight against terrorism. These changes are expected to improve Montenegro’s track record. As part of the reorganisation of the police, the resources dedicated to the fight against organised crime have substantially increased. However, the operational capacity of the new units needs to be improved, both through capacity-building activities and by providing new technical equipment. Inter-agency cooperation needs to be improved. An operational agreement with EUROPOL is in place. The Montenegrin authorities need to look for and identify victims of trafficking in human beings in a proactive manner (e.g. using their inspection services), increase outreach to relevant bodies such as asylum centres, and tackle crimes related to trafficking in human beings. The new police unit dealing with trafficking in human beings needs to be adequately trained. The shelter for victims of trafficking in human beings requires internal reorganisation and better planning ahead, taking into account the low number of victims hosted. Legal framework In recent years, Montenegro’s legal system went through waves of reform to improve its performance in curbing organised crime, while at the same time aligning the national framework with EU and international standards. The Criminal Code was amended in 2013 to incorporate new provisions related to trafficking in human beings, cybercrime, anti-money laundering and the financing of terrorism. A new law on anti-money laundering, adopted in 2014, aimed at incorporating the EU’s Fourth Directive and the standards of the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL). A law establishing the Special Prosecutor’s Office (with a mandate on organised crime, corruption and war crimes) was adopted in February 2015; a new law on the seizure and confiscation of assets was adopted in September 2015. The creation of a Special Prosecutor’s Office centralised powers on organised crime and paved the way for the creation of specialised bodies, including in the police. Amendments to the law on internal affairs were adopted in 2014 to reorganise the police in line with the need to address modern forms of organised crime. The amendments aim at eliminating possible political influence in police work and ensuring that procedural safeguards are in place. For the implementation of these legal provisions, see the section on Institutional and operational capacity above. The overall criminal justice reform and the police reorganisation should increase the Montenegrin authorities’ capacity to fight serious and organised crime and improve its focus on specific areas of the phenomenon. This must now be followed by appropriate training for staff and a solid track record on implementation, including better cooperation between judicial and law enforcement authorities. Future amendments to the law on internal affairs should, in particular, focus on the single entry point and on transparent and merit-based recruitment to increase the professionalism of the police. Strategic framework Montenegro drew up a national serious and organised crime threat assessment (SOCTA) in 2014, based on intelligence-led policing. It is currently implemented and a mid-term assessment was developed in June 2015. However, this key strategic framework has not translated into the dismantling of any of the organised crime groups identified by SOCTA. In May Montenegro adopted a 2015-2018 action plan on fighting money laundering and terrorism financing. In January, the government adopted a 2015 action plan to implement its strategy for the fight against trafficking in human beings. Montenegro has remained active at international and regional level; the Joint Centre for Police Cooperation in Trebinje (bringing together Montenegro, Serbia and Bosnia and Herzegovina) is operational and a Montenegrin liaison officer has been posted there. Montenegro is working to establish interconnectivity with the national IT system of the police. The operational agreement with Europol was signed in September 2014 and a police liaison officer was appointed in April. The agreement needs to be fully implemented. Fight against terrorism Montenegro has been affected by the phenomenon of foreign terrorist fighters and radicalisation. The country has amended its Criminal Code, criminalising the phenomenon of foreign terrorist fighters in line with the relevant UN Security Council Resolution. An inter-ministerial group has been established to monitor the situation and implement actions to prevent possible terrorist threats. An action plan on fighting money laundering and terrorism financing has been adopted and cooperation with international partners has intensified. The phenomenon of foreign terrorist fighters needs a dedicated approach by the intelligence and law enforcement community and a coherent judicial policy towards offenders. 2.4. Human rights and protection of minorities Overall situation Montenegro is gradually shifting its focus from incorporating EU standards into its legal framework to improving its institutional framework and support activities that make the protection and enforcement of human rights possible. The amendments to the Law on the Ombudsman enabled the latter to recruit more qualified staff. The law on gender equality, and that on fighting discrimination against persons with disabilities, were amended to align more closely with European standards. Full alignment with the acquis regarding sanctions has not been achieved. The Roma minority remains the most vulnerable and discriminated community in various areas of life.

Shortcomings particularly affect the following areas: • Human rights institutions remain weak. The Ombudsman and the Ministry of Human Rights and Minorities need to be reinforced, following the reform of the anti-discrimination framework. Staff knowledge on international and European human rights law and standards, and their ability to supervise the spending of funds, remains insufficient. Poor transparency and control of the funds for minorities must be urgently addressed. • Lack of a uniform approach and low levels of penalties in the area of human rights violations create legal uncertainty. • Impunity is still an issue in connection with abuses in prisons and pre-trial facilities. Judges and law enforcement officials' knowledge of European standards and case law needs to be increased. In line with the new reporting methodology, a detailed analysis of freedom of expression as a pilot area follows below. For a detailed analysis of developments on other human rights and the protection of minorities, see Chapter 23 — Judiciary and fundamental rights. For developments in the areas of trade union rights, anti-discrimination and equal opportunities, see also Chapter 19 — Social policy and employment. Freedom of expression Montenegro has achieved some level of preparation in the area of freedom of expression. No progress was made in the past year. Defamation has been decriminalised and guidelines issued to the prosecution concerning penalties. However, Montenegro still needs to achieve an overall alignment with the case law of the European Court of Human Rights. Recently, several vehicles belonging to journalists were damaged. A number of physical attacks and threats of attacks have taken place in the past, including some high-profile incidents. In addressing the shortcomings outlined below, Montenegro should pay particular attention to: → solving older cases of violence against media, including the 2004 murder case, identifying not only the material perpetrators but also those behind the attacks and implementing recommendations issued by the ad hoc media commission set up to monitor attacks; → ensuring the independence of the public service broadcaster RTCG; → providing guidance to the judiciary on aligning decisions with European Court of Human Rights case law on freedom of expression. Intimidation of journalists In Montenegro there is no systematic trend of attacks against journalists resulting in threats to life or serious injuries. However, threats and attacks have occurred in the past, including high-profile incidents targeting investigative journalists. The most serious case was the murder of an editor-in-chief in 2004; to-date there is no information on the motive or the people behind the crime. An ad hoc, and rather low-profile, commission was set up by the government in 2013 to monitor investigations into cases of violence against journalists. It is composed of media, civil society organisations and state representatives and has had its mandate extended until the end of 2015. In 2014, it issued recommendations on prioritising cases and accelerating the resolution of prominent cases. These recommendations have not been fully followed up by the government, most notably on reinstating a reward for witnesses in older cases and identifying flaws in the investigations of the attacks. The effectiveness of police protection granted to a journalist and to the property of one media outlet, following the request of another journalist to discontinue the service, needs to be carefully assessed with a view to improving it. Legislative environment Defamation was decriminalised in 2012 and contributed to the decrease in the number of lawsuits against the media. To help judges in setting standards for penalties, the Supreme Court has issued guidelines that reference European Court of Human Rights case law. Challenges remain in their implementation. Amendments to the law on electronic media aimed at further alignment with the acquis have yet to be adopted. Implementation of legislation/institutions An ongoing smear campaign, mostly by one tabloid newspaper, targeting prominent civil society activists and some politicians, shows that the authorities are not properly implementing the media law and that self-regulation, re-established in 2012, is not working. Its effectiveness is hampered by the fact that it is split in different forms, reflecting divisions within the media community. The lack of a uniform approach to penalties in this area suggests that European Court of Human Rights case law is not sufficiently known, despite the guidelines issued by the Supreme Court in 2012. Public service broadcaster Amendments to the law on public broadcasting services, providing more financial independence and sustainability to the public broadcaster RTCG (Radio i televizija Crne Gore), are yet to be adopted. Under the proposed model, RTCG would receive a fixed amount of 0.3 % of GDP annually, which is about EUR 2 million more than its current budget. Montenegro needs to prioritise the editorial independence of RTCG, since a well-functioning and truly independent public service media represents a key aspect of media pluralism. Economic factors Rules governing the transparency of media ownership, including media concentration, are set out in the law on electronic media. There are concerns about transparency and non-discrimination in state advertising. Some major private media outlets are at risk of failure due to high tax debts. The precarious economic situation of journalists puts them at risk of editorial interference and possible self-censorship. The fact that many media outlets are not financially sustainable has a negative impact on the quality of reporting and professionalism. Professional organisations/professional conditions

Journalists are jointly represented in Montenegro’s media trade union. However, the media community remains highly divided overall. Membership of the Media Self-Regulatory Council is not representative of the entire media community. Dialogue on improving ethical standards in reporting, facilitated by the OSCE, should continue. According to the media trade union, journalists are poorly paid and their jobs are not secure. In the past three years, at least 500 journalists lost their jobs, while three TV stations and one newspaper closed due to poor financial performance. 2.5. Regional issues and international obligations There were no developments in Montenegro’s cooperation with the International Criminal Tribunal for the former Yugoslavia. For the handling of domestic war crimes cases, see Chapter 23 — Judiciary and fundamental rights. Montenegro still maintains a 2007 bilateral immunity agreement with the United States, granting exemptions for US citizens from the jurisdiction of the International Criminal Court. In doing so, it is not complying with the EU common positions on the integrity of the Rome Statute or with the related EU guiding principles on bilateral immunity agreements. Montenegro needs to align with the EU position as part of its accession negotiations. Montenegro has continued to cooperate closely with Bosnia and Herzegovina, Croatia and Serbia under the Sarajevo Declaration Process, which aims at sustainable solutions for some 74 000 people who became refugees and displaced persons as a result of the armed conflicts in ex-Yugoslavia during the 1990s. At the same time, all countries need to further step up efforts to deliver on the implementation of the agreed housing solutions. In Montenegro, the first delivery of the 344 housing solutions approved so far is expected for mid-2016. The authorities are putting in place complementary sustainability measures for the housing solutions planned. The unresolved fate of missing persons resulting from the conflicts of the 1990s remains a humanitarian concern in the Western Balkans. As of February 2015, a total of 10 880 people were still missing according to the International Committee of the Red Cross. Ascertaining the fate of missing persons remains vital for reconciliation and stability in the region. The number of cases in Montenegro, 61, is low but all efforts should be made to ensure identification as soon as possible Regional cooperation and good neighbourly relations form an essential part of Montenegro’s process of moving towards the EU. Montenegro has continued to actively participate in regional initiatives, including the South-East European Cooperation Process, the Regional Cooperation Council, the Central European Free Trade Agreement and the Energy Community Treaty. Montenegro continues to actively support the Coalition for Reconciliation Commission (RECOM) and the Igman Initiative on regional reconciliation. Fresh impetus has been given to regional cooperation through the 'Berlin process' and the Western Balkan six initiative, intensifying cooperation among the Western Balkan countries and with the EU, notably regarding our connectivity agenda. In April, the Western Balkan six countries reached an agreement on the core transport network and in June 2015 on extending three Trans-European Transport Networks core corridors to the Western Balkans. They also identified the priority projects along sections of these corridors to be implemented by 2020. To ensure sustainability and also achieve short term results, the countries agreed to implement before the next summit in Paris a number of 'soft' measures such as aligning and simplifying border crossing procedures, road safety and maintenance schemes. Montenegro continues to maintain good bilateral relations with other enlargement countries and neighbouring EU Member States. Border demarcation agreements with Bosnia and Herzegovina and with Kosovo were signed in the margins of the Vienna Summit in August. The delimitation of borders with Croatia and Serbia remains pending. A bilateral convention on regional cooperation under Article 15 of the Stabilisation and Association Agreement was concluded with Albania in May and negotiations have been launched for a similar agreement with Bosnia and Herzegovina. Relations with Albania continue to be good. An economic cooperation agreement was signed in February. Albania continues to support Montenegro’s NATO accession process. The economic cooperation agreement was ratified in April. In January, Montenegro lodged a diplomatic demarche with Albania on the display of the ‘Greater Albania’ flag at the residence of the Albanian Prime Minister. The incident was, however, followed by two high-level visits, which took place in the next few months. With Bosnia-Herzegovina an agreement on consular protection and visa issues entered into force in May and the border agreement signed in August (see above).. In September 2014, Montenegro and the former Yugoslav Republic of Macedonia signed an agreement on the mutual recognition of driving licences. In February, the two countries signed a protocol housing their diplomatic and consular offices at the same site in Paris, France. The joint committee on EU affairs met in March in Skopje. Relations with Serbia remained good. The Speaker of the Serbian parliament visited Podgorica in October 2014. The Prime Ministers met at the ‘16+1’ SEE-China summit in Belgrade in December. The Serbian Minister of Foreign Affairs visited Montenegro in February in his capacity as OSCE Chairperson-in-Office. A protocol on cooperation on European integration was signed in July. There were no developments on issues related to citizenship rights in the two countries. Relations between Montenegro and Kosovo remained good. There were no developments concerning the constitutional recognition of the Montenegrin minority in Kosovo. In July, Montenegro ratified the agreement on police cooperation. A joint commission on border demarcation concluded its work in June 2015 and Ministers signed the border agreement during the August Western Balkans Summit (Vienna), now pending parliamentary approval by both Cooperation between Montenegro and Turkey continued, including through the Joint Commission for Economic Cooperation. In October 2014, the two countries signed an agreement on cooperation in military training. In December, Montenegro and Turkey signed an agreement on cooperation on health and medical sciences. The agreements on mutual assistance on customs issues and on social security were ratified. Joint work on finding a solution for the border demarcation between Montenegro and Croatia is ongoing. In 2014, the two countries signed agreements on study programmes on military engineering and leadership, and on the training of Montenegro cadets in Croatia. In January, Montenegro adopted a decision to open a consulate in Trieste, Italy. A cooperation agreement in the area of health and medical sciences was signed in October. A memorandum on cooperation in the fight against corruption was signed in July. 3. ECONOMIC CRITERIA Key economic figures 2013 2014 Gross domestic product per capita (% of EU28 in PPS) 40 39 GDP growth (%) 3.3 1.4* Unemployment rate (female; male) (%) 19.5 (18.8; 20.1) 18 (18.2; 17.8) Economic activity rate for persons aged 20–64: proportion of the population aged 20–64 that is economically active (female; male) (%) 65.1 (58.3; 71.9) 67.6 (60.7; 74.5) Current account balance (% of GDP) -14.6* -15.4* Foreign direct investment (FDI) (% of GDP) 9.7* 10.3* Source: Eurostat, *National Statistics Agency

In line with the conclusions of the European Council in Copenhagen in June 1993, EU accession requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union. The monitoring of these economic criteria should be seen in the context of the increased importance of economic governance in the enlargement process. In order to enhance their economic governance, in 2015 the enlargement countries were invited to prepare Economic Reform Programmes (ERPs), which set out a medium-term macro-fiscal policy framework, together with key structural reforms aimed at supporting the framework and boosting competitiveness. The ERPs were the basis for country-specific recommendations jointly adopted by the EU and the Western Balkans and Turkey in the Economic and Financial Dialogue meeting on 12 May 2015. 3.1. The existence of a functioning market economy Montenegro is moderately prepared in developing a functioning market economy. Some progress was made in addressing some economic challenges, in particular on fiscal consolidation and the business environment. The economy recovered in 2013 from the double-dip recession of 2009 and 2012. After a mild slowdown in 2014, economic growth is gaining momentum again, boosted by investments. The construction of the Smokovac-Mateševo priority section of the Bar-Boljare highway as well as ongoing investments in energy, transport and tourism will support economic growth. However, challenges to macroeconomic stability remain. The cost of the highway risks challenging fiscal sustainability. Banks are confronted with problems of debt resolution and low profitability resulting in scarce and expensive credit. Further efforts are necessary to reduce the structurally high unemployment. In line with the 2015 ERP recommendations and in order to support long-term growth, Montenegro should pay particular attention to: → sustaining its commitment to fiscal discipline and revising its public debt management strategy to reduce the public debt and to improve the sustainability of public finances; → addressing the high burden of non-performing loans (NPL) and improving the efficiency of contract enforcement; → amending labour legislation to introduce further market flexibility and better target active labour market policies as well as further improving the business environment. Economic policy essentials ERP recommendation 1: "Sustain the commitment to fiscal discipline, establish a credible track record on the basis of the new rules-based fiscal framework and revise the public debt management strategy to bring the public debt into a downwards trajectory in line with the ERP medium-term framework. In this context, municipalities are also called to contribute by strengthening their own budgetary position. In order to improve transparency, develop the necessary administrative capacity to implement the European System of Accounts (ESA 2010)." The government remained committed to pursuing market-based reforms, attracting FDI, and developing the private sector. In January 2015, Montenegro submitted its first Economic Reform Programme (ERP), covering the period 2015-2017. The ERP partially complied with the targeted policy guidance adopted by the Joint Ministerial dialogue of 6 May 2014. A number of major reforms still need to be implemented, including the ERP recommendations set out below. These include sustaining the commitment to fiscal discipline, implementing the voluntary bank loan restructuring programme, improving the business environment, and actively pursuing the reform of education to align it with labour market conditions. Macroeconomic stability The fast recovery after each recession episode is indicative of the Montenegrin economy's resilience to shocks. After suffering two recessions in 2009 and 2012, the economy recovered strongly in 2013, but moderated its pace in 2014. The economy has started to pick up speed again in 2015 boosted by a surge in public works and private investments, particularly in the transport, energy and tourism sectors. However, consumer spending and domestic investments have remained subdued, also due to banks' tight credit conditions, high unemployment and lower wages. The recessions marginally reduced the average per-capita income to 39% of the EU28 average in 2014, compared to 40% in 2013. There has been no signficant improvement in Montenegro's trade deficit in the last four years. After a substantial decline in 2009, and a somewhat stronger export performance in 2010 and 2011, the trade deficit has since remained flat (at 40 % of GDP). The current account deficit widened in 2014 to 15.4 % of GDP and to 16.1 % of GDP in the four quarters to June 2015 on the back of a higher trade deficit and lower transfers from abroad. Net financial inflows consisted mainly of foreign direct investments (FDI), which remain above 10 % of GDP. The labour market situation improved in 2014, but high unemployment is still a concern. The number of workers increased by 7.1 % compared with the previous year, and registrations with the employment agency also grew (by 4.7 %). This was in part due to efforts to reduce undeclared work. However, employment and activity rates have remained low, at 55.6 % and 67.6 % respectively, and are markedly lower for women. ERP recommendation 4: "Amend labour legislation to introduce further market flexibility. Reinforce sanctions to discourage undeclared work. Better target active policies for workers at risk of losing their employments and enhance labour market participation in view of an ageing population." After having been stagnant at above 19 % for five consecutive years, the average unemployment rate fell to 18.0 % in 2014 and to 17.7 % in the second quarter of 2015. However, regional differences are huge. The average unemployment rate in the coastal region was 6.7 %, in sharp contrast with the figure of 13.4 % in the central region and 39 % in the north. Youth unemployment (15-24 years old) remained high at 35.8 %. Two-thirds of the unemployed were without a job for more than two years. Inflation has been largely driven by global commodity prices. In 2014, lower import prices for energy and food coupled with falling wages contributed to a fall in prices. As a result, the average consumer price inflation contracted by 0.5 % in 2014, compared with a moderate increase of 1.8 % a year before. Overall, prices grew by 1.1 % on average in the first seven months of 2015, driven by food prices and despite a further decline in oil prices. ERP recommendation 2: "Consider additional reforms for attaining long-term sustainability of the budget, such as the introduction of further restriction for early retirement and the consideration of options for individual participation into the old-age pension system on a mandatory basis, as well as the implementation of a common policy for public sector wages in the context of rationalisation and modernisation of the public sector."

The economic crisis put a significant burden on public finances through declining revenues and further increases in mandatory expenditures. Over the last few years the country has recorded large budget deficits of around 5 % of GDP. As a major concern, total public debt has practically doubled since 2008 to reach 60.3 % of GDP in June 2015. A process of fiscal consolidation, supported by tax increases and expenditure restraint, brought the budget deficit to 1.3 % of GDP in 2014. Improvements were largely concentrated on the revenue side, expanding to 46 % of GDP, up from 43 % a year before, following increases in excise duties, vehicle registration fees, insurance taxes and real estate tax rates, as well as the introduction of incentives to facilitate repayment of tax arrears and tightening sanctions against tax debtors. On the expenditure side, freezes on pensions and public sector wages were enacted. Total spending stands at 47.3 % of GDP compared with 47.7 % a year before. The 2015 budget provides for a substantial increase in capital spending to 9.2 % of GDP, most of it intended for the construction of the highway. With this increase, the budget deficit is planned to rise to 5.3 % of GDP. The Law on Budget and Fiscal Responsibility introduced upper limits for the budget deficit of 3 % of GDP and public debt of 60 % of GDP, to be effective as of 2015. However, investment projects of national importance (such as the highway) are excluded from the deficit calculation. In the first half of 2015, the headline deficit reached 6 % of GDP, due to substantial capital spending resulting from the start of the highway construction, calling for continued fiscal discipline in particular on current spending. In September 2015, the government raised the limit for state guarantees to allow municipalities to clear arrears to the tax administration and suppliers. Montenegro's institutional public finance framework requires additional reforms. The new fiscal policy aims to ensure the sustainability of public finances, while introducing a tax shift and incentives in favour of investment. However, its efficiency needs to be tested. The budget is also designed to boost capital spending to finance the construction of the highway. While supporting economic growth, this project will also entail significant fiscal risks. Montenegro will need to make a sustained commitment to fiscal discipline to rebuild fiscal buffers, including expenditure-side reforms and a sound public debt management strategy. Interplay of market forces The privatisation process is quite advanced and just a few firms remain in the privatisation programme for 2015. The final instalment for the sale of KAP's aluminium smelter was made in August 2015 (see also chapter 8 – Competition policy). The same investor also procured the bankrupt Nikšić bauxite mine. However, high production costs threaten the revival of the aluminium industry. There is also litigation ongoing with one of the former owners. Discrepancies in the ruling coalition over the concession of long-term leases for tourism resorts failed to secure a sufficient majority in Parliament. In June 2015, the commercial court launched a bankruptcy procedure for the Adriatic shipyard Bijela in order to facilitate the sale and restructuring of the company. In 2015, the management of the bankrupt saltworks Bajo Sekulic was temporarily given to the public enterprise National Parks of Montenegro. Market entry and exit The recovery of the economy is also reflected in the growing number of new companies. In 2014 there were 3,179 new companies established, 91 % of which as limited liability firms. The cost of setting up new businesses was reduced through the introduction of lower fees for public utility connections on building land, and tax exemptions for companies in strategic sectors (i.e. tourism, energy and food production). However, there is still room for further improvement for starting a business, in particular by streamlining administrative procedures. Scarce and expensive bank loans, in particular for small and medium enterprises (SMEs), also hinder enterprise creation and operation. To support investments, Montenegro should further simplify the regulatory environment, facilitate the issuing of construction permits and improve its land registration system, in accordance with ERP recommendation 7. Legal system ERP recommendation 7: "Further improve the business environment by ensuring the timely implementation of the so-called "regulatory guillotine" (simplification) project, enhancing the functioning of one-stop shops at municipal level for the issuing of construction permits and the quality of the land registry." Licensing, contract enforcement, access to credit and cumbersome tax administration procedures are the main obstacles for the business community. Progress has been made on reducing the number of documents needed for customs procedures through the establishment of a centralised electronic registry and by exempting companies from providing printed documents. In the context of e-Government, 300 government sites have so far been connected to a single communications network and begun to provide services to corporate users. However, full interoperability has not been achieved. Electronic registration of companies, and its extension to all regional tax administration offices, remains to be completed. The number of enforcement cases in the courts has been significantly reduced since the introduction of a bailiff system in April 2014. Amendments to the Law on Enforcement and Securing of Claims replaced three-judge panels with decisions by individual judge, speeding up court enforcement proceedings and foreclosure of collateral. The number and the value of commercial disputes successfully resolved tripled in 2014, reaching a total of 869 cases. Financial sector development The recovery of the banking system remained unfinished given the need for further balance sheet adjustments. The Greek crisis did not have any significant effect on Montenegro's financial sector as none of the 14 banks operate with majority Greek capital. Banks' deposits have recovered to pre-crisis levels, but the recovery of credit is slower and more uneven. In June 2015, the stock of loans remained 15 % below its 2009 level. Although financial results remained positive and capital was reinforced, banks confront problems with debt resolution and low profitability related to high overhead costs and scale inefficiencies that add to high risk premiums. As a result, the decline in the interest rate on loans has been marginal, averaging 8.93 % in July 2015 compared to 9.55 % a year before. In July 2015, the Central Bank of Montenegro (CBCG) approved a decision on maximum interest rates on new loans in order to facilitate their reimbursement and thus reduce credit risk. However, given the weak profitability of banks, this measure could instead result in further restriction of lending. ERP recommendation 3: "Implement the planned voluntary financial restructuring programme (the so-called "Podgorica approach") to address the high burden of non-performing loans on bank balance sheets from a flow perspective. In order to address the NPL stock issue, improve deadlines and efficiency of contract enforcement. Introduce effective supervision of factoring companies to improve the transparency of the financial system." In July 2015, the non-performing loans (NPL) ratio remained high at 16.4 % of total loans. Credit risk remained concentrated, with three banks totalling 63 % of the NPL stock. This challenge is addressed in the Law on Voluntary Financial Restructuring of Debts to Financial Institutions, known as the 'Podgorica Approach'. Adopted in April 2015, it provides a framework for voluntary out-of-court proceedings for restructuring the debts of economically viable companies. In August 2015, the parliament adopted the law for conversion of Swiss franc loans into euro. The measure concerns indexed loans totalling some € 30 million of one bank, which has challenged the measure at the constitutional court. To improve their balance sheets, some subsidiaries sold part of their troubled loans to parent banks but also to factoring companies set up by the latter, bringing up the need for a regulatory framework for effective supervision of these companies too, as also underlined by ERP recommendation 3. The size of the non-banking sector remained modest. In 2014, the turnover of Montenegro's Stock Exchange reached 3.2 % of GDP, the highest level in the last five years, thanks to trading –for the first time– in corporate bonds, and in government coupon bonds on the secondary market. Yet, the number of financial instruments remained limited. In 2014, the value of insurance and leasing contracts totalled 2.0 % and 3.4 % of GDP respectively. 3.2 The capacity to cope with competitive pressure and market forces within the Union Montenegro is moderately prepared in its capacity to cope with competitive pressure and market forces within the Union. Some progress was made, particularly on launching several infrastructure and tourism investment projects and some further improvement of the business environment. Montenegro's economy suffers from low competitiveness, especially as regards industrial and agricultural products. Montenegro should improve its export capacities by gradually bringing market standards for its products and industries in line with EU standards. Competitiveness will also improve as a result of investments in energy, transport and tourism. Major reforms still need to be implemented to strengthen the country's physical infrastructure and human capital, to further improve the business environment, and to ensure a predictable and supportive regulatory environment. In line with the ERP recommendations and in order to support long-term growth, Montenegro should pay particular attention to: → actively continuing education reform in order to increase the quality of education, by teaching basic and transversal skills and focusing on learning outcomes; → aligning with EU food safety, sanitary and phytosanitary standards in order to receive accreditation for exporting agricultural and food products to the EU; → strengthening its transport development strategy. Human and physical capital ERP recommendation 5: "Actively continue education reform with a view to better aligning education and skills with labour market needs, and strengthening cooperation between education and business." The persisting challenge of skills mismatches requires more effective active labour market policy measures and a higher quality education system that is responsive to labour market needs. Funds for active labour market programmes have remained limited and mainly focused on young graduates and seasonal workers. There is low labour mobility between regions, including during the peak tourist season. Efforts to promote lifelong learning and ensure a higher quality of education at all levels are ongoing, but have yet to yield clear results. (See chapters 19 – Social Policy and Employment, and 26 – Education and Culture).

ERP recommendation 6: "Strengthen the transport development strategy ensuring alignment with the regional agenda on connectivity, with a particular focus on the core investment priorities (core network), and establish a credible planning and funding mechanism in the form of a single sector pipeline." Montenegro made further progress on some major infrastructure projects. In 2014, the value of investments in fixed assets rose by 5 % to some 15 % of GDP, of which 56 % in construction and 37 % in equipment. In 2015, works started on the highway and the building of three large seaside tourism resorts continued. The power system network is gradually improving and several investments are in progress, including the interconnection cable with Italy, two wind-farms, and several small hydropower plants. However, the decision for construction of a second block in the thermal plant Pljevlja was delayed, and the construction of large hydropower plants stalled. While infrastructure investment increased in recent years, Montenegro is advised to bring its transport development strategy in line with the regional agenda on connectivity, as per ERP recommendation 6. As regards the requirement to establish a planning and funding mechanism, Montenegro set up a National Investment Committee for the development of a single sector pipeline for priority infrastructure projects. Montenegro's innovation and research capacity remained limited. Funds for research and development (R&D) programmes have increased by more than 30 % in 2014, although gross expenditure on R&D remained very modest (around 0.38 % of GDP). In July 2015 construction work started on the science and technology park in Nikšić with the aim of connecting science and business sectors. The centre will comprise laboratories of biochemistry and industrial design. Sectoral and enterprise structure The structure of the economy has changed little over the past five years. Services remain the main engine of the Montenegrin economy, producing more than 70 % of gross value added, while industry accounts for 11 % (with 6 % coming from utilities), agriculture 8 % and construction 4 %. The manufacturing sector is being transformed after several years of being dominated by metals production. Other industries -like pharmaceuticals- are gaining in importance, but the production of competitive high value-added products is very limited. Industry and construction performance recovered in 2015, while the more resilient tourist industry expanded further. After registering negative output in five out of the seven years since the outbreak of the economic crisis, industrial production expanded by 12.9 % y-o-y in the first seven months of 2015. However, production was dominated by low value-added industrial products. In the first half of 2015, the value of construction works increased by 9.7 % y-o-y, compared to 2.0 % growth in the whole 2014. In the first seven months of 2015, tourism surged 21.3 % y-o-y, fuelling a number of sectors of the economy like transport, accommodation, telecommunications, retail trade and restaurants. The vast majority of companies (around 23,000) are small, with some 200 classified as medium-sized and 100 as large. Access to finance remains a particular challenge for SMEs. Public sector support for SMEs has been limited and mainly relies on Investment and Development Fund (IDF) loan support, which in 2014 totalled €71 million and additional € 31 million in the first half of 2015. The Employment Agency also provided loans totalling € 260,000 in 2014 and € 15,000 in the first half of 2015, to finance new job creation. It is important that Montenegro follows up on the ERP reform measures intended to strengthen SMEs. Further controls on excise goods (in particular tobacco) and labour inspections are necessary to reduce the large informal economy. State influence on competitiveness Subsidies have been significantly reduced following the liquidation of the former aluminium conglomerate. The government provided some EUR 460 million in state aid to companies in the 2007-2014 period. The support was more pronounced in the years following the recessions, when substantial state guarantees were activated. The government maintained a favourable investment policy including a flat tax regime with low tax rates, and the possibility to transfer profits, dividends and interest earnings without restrictions. In 2015, in an effort to further encourage the key sectors of the Montenegrin economy, tax exemptions were introduced for the building of new facilities in tourism, energy and food. However, Montenegro should avoid specific measures aimed at only some businesses as these could potentially distort the market and create problems over state aid (see chapter 8 – Competition, chapter 16 - Taxation). The 2015 general government budget provided for a modest allocation of state aid (0.6 % of GDP for subsidies plus 0.3 % of GDP for state guarantees). Economic integration with the EU The Central European Free Trade Agreement (CEFTA) countries and the EU remain Montenegro’s main trading partners. In 2014, merchandise exports to the EU represented 36 % of Montenegro’s total sales abroad compared with 46 % to CEFTA. Yet, the EU was the major source of goods imports, accounting for 46 % of total imports as compared with 38 % from CEFTA. In services and foreign investment, Russia remained Montenegro’s single most important partner, accounting for 30 % of tourism stays and 25 % of FDI inflows (mostly real estate). However, investments from Russia declined in 2014 by 10 % compared with the previous year. In 2014, the EU accounted for 20 % of tourism and 39 % of foreign investment, the latter rising by 6 % y-o-y. ERP recommendation 8: "Make further progress with a comprehensive and strategic approach in the field of EU food safety and sanitary and phytosanitary standards to receive accreditation for exporting agricultural and food products to the EU. Efforts in this direction should commence with those products where preparations are advanced and where Montenegro sees the biggest export potential." Trade openness in Montenegro is high (101.2 %), reflecting the strong dependency on goods imports and services exports. However, exported goods consist predominantly of low added value products, and only a few companies trade internationally. To address this issue, the government launched a direct support scheme for SMEs' harmonisation with international standards of business. In line with ERP recommendation 8, Montenegro needs to make more progress on its alignment with EU product and quality standards so that it can access relevant EU markets. 4. ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP 4.1. Chapter 1: Free movement of goods The free movement of goods ensures that many products can be traded freely across the EU based on common rules and procedures. Where products are governed by national rules the principle of the free movement of goods prevents these creating unjustified barriers to trade. Montenegro is moderately prepared for the free movement of goods. Good progress was made, particularly on its strategic and legislative framework. In the coming year, Montenegro should in particular: → strengthen the capacity and increase the resources allocated to the relevant horizontal bodies.

→ implement its plan for legislative alignment on the free movement of goods. As regards general principles, in October 2014 Montenegro adopted its strategy to implement the acquis under the free movement of goods chapter and a five-year action plan, and submitted an updated draft action plan for compliance with Articles 34-36 of the Treaty on the Functioning of the European Union (TFEU) to the Commission in summer. The capacity, coordination role and competence of the Department for Quality Infrastructure have been strengthened, though as yet no legal basis is in place setting out its role in the system of government. Resources remain insufficient, which endangers the implementation of the new strategy on free movement of goods. On horizontal measures, some progress was achieved: on standardisation, the 2010-2018 strategy and 2015 action plan were adopted in November 2014. The Institute for Standardisation of Montenegro (ISME) adopted 1 133 Montenegrin standards. In December, ISME and the European Telecommunication Standards Institute signed a memorandum of understanding recognising ISME as a national standards organisation and meeting a precondition for transposition of standards in telecommunications. However, ISME’s capacity and resources remain at critical level, which risks undermining its ability to keep up the necessary pace of change on standardisation. The number of accredited conformity assessment bodies increased to 24. Two more are in the process of being accredited, but their overall number remains low. On accreditation, in November Montenegro adopted its 2015-2018 strategy for accreditation and 2015 action plan. In July amendments to the law on accreditation were adopted by the government to strengthen the cross-border accreditation policy, However, the Accreditation Body of Montenegro (ATCG)'s limited financial resources put the implementation of the strategy at risk, impede it in raising of public awareness of the benefits of accreditation and prevent it from participating in the activities of the European Cooperation for Accreditation. On metrology, the Croatian Accreditation Agency and ATCG have accredited three further calibration laboratories: one on time and frequency, one on pressure and one on electrical quantity, bringing the total number to six. On market surveillance, the law on general product safety was adopted in October 2014. Amendments to the law on inspections were adopted in February, while in April the government adopted a decree determining which product groups would be subject to market supervision, and another establishing the coordination body for market surveillance. On product safety, in 2014 2 873 inspections were performed in the reporting period, which identified 131 dangerous products types (12 045 items, 5 939 of which permanently taken of the market). Five further inspection services were integrated into the Administration for Inspection Affairs in February. However, the Administration’s budget remains insufficient. On ‘Old Approach’ product legislation, 18 rulebooks were adopted, including on pharmaceutics, textile, footwear, and crystal glass. In January, the government adopted its 2015-2018 national strategy for managing chemicals and its related action plan. Some steps have been taken to ensure partial alignment with the provisions of REACH, however administrative capacity necessary to implement REACH also needs strengthening. For the ‘New and Global Approach’ product legislation, 11 rulebooks were adopted, including on toy safety and on electromagnetic compatibility, though some were not yet fully aligned to the acquis. On procedural measures, the law on weapons was adopted in February. 4.2. Chapter 2: Freedom of movement for workers Citizens of one Member State have the right to work in another Member State and must be given the same working and social conditions as other workers. Preparations in this area are still at an early stage. No progress was made on freedom of movement for workers. On access to the labour market, the new law on foreigners was adopted in December. It imposes additional limitations on the employment of foreigners in Montenegro and needs to be brought in line with the acquis. Its enforcement was put on hold due to administrative constraints. On the coordination of social security systems, negotiations with Bosnia-Herzegovina, Bulgaria and Romania on a bilateral agreement on social security are ongoing. 4.3. Chapter 3: Right of establishment and freedom to provide services EU natural and legal persons have the right to establish themselves in any Member State and to provide cross-border services. For certai