EUROPEAN COMMISSION Brussels, 11.10.2019 SWD(2019) 362 final COMMISSION STAFF WORKING DOCUMENT Early Detection and Exclusion System (EDES) - Panel referred to in Article 108 of the Financial Regulation Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 30th Annual Report on the Protection of the European Union's financial interests - Fight against fraud - 2018 {COM(2019) 444 final} - {SWD(2019) 361 final} - {SWD(2019) 363 final} - {SWD(2019) 364 final} - {SWD(2019) 365 final}



Table of Contents 1.INTRODUCTION 2.THE PANEL 2.1.The Composition of the Panel 2.2.Role of the Panel 2.3.The recommendation of the Panel 3.THE PUBLICATION OF SANCTIONS IMPOSED ON ECONOMIC OPERATORS 4.CHANGES BROUGHT BY THE NEW FINANCIAL REGULATION 4.1.Increased transparency of EDES rules 4.2.Additional ground for exclusion and extension of the information to be disclosed in the declaration on honour 4.3.Procedure in front of the Panel 4.4.Merger of the specialised financial irregularities panels into the EDES Panel 5.OVERVIEW OF CASES



1.INTRODUCTION The European Commission manages the Early Detection and Exclusion System (EDES). EDES was set up in 2016 and is rooted in the Financial Regulation applicable to the EU budget revised in 2018 (Articles 135 to 145). Since 2016, EDES has reached maturity and has proven to be a strong tool for reinforcing the protection of the EU's financial interests against unreliable economic operators and fraudsters (e.g. exclusion from participation in obtaining EU funds). EDES provides for a broad range of sanctionable practices. It ensures an independent and transparent central assessment of contemplated administrative sanctions and the respect of the fundamental rights of the economic operators concerned. The Financial Regulation provides for rules that centralise the exclusion process for all EU institutions, agencies, offices and bodies. In particular, Article 143 establishes an inter-institutional Panel presided over by a standing high-level independent Chair, whose role is to issue recommendations on administrative sanctions, i.e. exclusion and/or financial penalties and, where applicable, the publication thereof, following a request from an authorising officer of EU institutions, agencies, offices and bodies. These recommendations are addressed to the requesting authorising officers by delegation who remain sole competent to take the decision to exclude an economic operator and/or to impose a financial penalty on it.

On 29 January 2019, the Chair of the Panel presented to and had an exchange of views with the Committee on Budgetary Control of the European Parliament on the applicable legislation, the role of the Panel, its operation and an overview of its activities over 2016 to 2018. Another notable point in the period under review, is the entry into force in August 2018 of a revised Financial Regulation, which brought further improvements to the system. This Staff Working Document presents the third year of activity of the EDES Panel and also extends to the first semester of 2019. 2.THE PANEL The coherence of the administrative sanctions procedure (i.e. exclusion and/or financial penalties and, where applicable, the publication thereof) is ensured by the Panel. 2.1.The Composition of the Panel As laid down in Article 143 of the Financial Regulation, the Panel is composed of: -a standing high-level independent Chair; -two permanent Member representatives of the Commission as the owner of the system, who express a joint position for the cases submitted to the Panel and; -one ad-hoc Member representative of the requesting authorising officer. The Chair of the Panel and his/her Deputy are appointed by the Commission and are independent in the performance of their duties. They are chosen from among former members of the Court of Auditors, the Court of Justice or former officials who have had at least the rank of Director-General in an institution of the Union other than the Commission. Their term of office is five years. The current Chair is Mr Christian Pennera, former Jurisconsult of the European Parliament and his Deputy is Ms María Isabel Rofes i Pujol, former Member of the Court of Justice of the European Union (Civil Service Tribunal). The two permanent Members of the Panel representing the Commission are Mr. Hubert Szlaszewski who is Principal Advisor in the Secretariat General of the Commission, and Mr. Olivier Waelbroeck, Director of the Central Financial Service in the Directorate-General for Budget. For each case, the additional Member representing the requesting authorising officer is designated in accordance with the rules of procedure and the internal administrative rules of the institution, agency, office or body concerned. The Panel is assisted by observers and in all cases by a representative of the Legal Service of the Commission. The observers do not take part in the adoption of the recommendations. Representatives of OLAF also participate in the Panel meetings as observers in the cases referred to the Panel on the basis of an OLAF investigation. This status allows the Panel to be informed by OLAF of the facts and findings resulting from its investigations, of an assessment of their preliminary classification in law, their estimated financial impact, of the necessary procedural guarantees, and of the state of exchanges of information between OLAF and the competent authorities of the Member States. The active contribution of the Legal Service of the Commission and of OLAF to the work of the Panel is a key element in providing the Panel with relevant information and allowing it to deliver high quality recommendations in a timely way. The Panel is supported by a permanent secretariat provided by the Commission and administratively attached to the Directorate-General for Budget. 2.2.Role of the Panel In the absence of a final national judgment or, where applicable, a final administrative decision, authorising officers who envisage to exclude and/or fine an unreliable economic operator have to first request a recommendation of the Panel. The grounds for excluding economic operators which require a Panel recommendation are the following: -grave professional misconduct resulting from the violation of applicable laws or regulations or ethical standards of the profession to which the economic operator concerned belongs, or from the engagement in any wrongful conduct which has an impact on the professional credibility where such conduct denotes wrongful intent or gross negligence; -fraud, corruption, participation in a criminal organisation, money laundering or terrorist financing, terrorist-related offences or offences linked to terrorist activities, and child labour or other forms of trafficking in human beings; -significant deficiencies in complying with main obligations in the performance of a contract financed by the budget ('serious breach of obligations'), which has led to its early termination or to the application of liquidated damages or other contractual penalties, or which has been discovered following checks, audits or investigations by an authorising officer, OLAF or the Court of Auditors;

-irregularity within the meaning of Article 1(2) of Council Regulation (EC, Euratom) No 2988/95 and; -since 2018, two additional grounds of exclusion have been added in the Financial Regulation, i.e. the creation of entities in a different jurisdiction with the intent to circumvent fiscal, social or any other legal obligations in the jurisdiction of its registered office, central administration or principal place of business, and such entities created themselves. In general, each case is examined by the Panel in two succeeding meetings. In a first session, the Panel examines the facts and findings and their preliminary qualification in law. It ensures the right to be heard by sending a letter to the economic operator in which the latter is requested to submit written observations. In a second session, the Panel examines the written observations, if any, and adopts its recommendation which is addressed to the requesting authorising officer. The Panel must adopt this recommendation within 3 months from the date the Chair has verified the readiness of the file, after requesting additional measures of verification or examination, where applicable. This period may be extended by the Chair in order, i.a., to ensure that the right to be heard is respected. However, in urgent important cases, the Panel is flexible and can act more swiftly, as it did in 1 case in 2018 where a long duration of the procedure would have resulted in difficulties for the administrative operation of the Commission. In that case, it took 2 months to complete the procedure from the opening by the Panel to the adoption of the recommendation . The economic operator concerned by the procedure is granted 3 weeks as a general rules to submit observations. By way of exception, following a reasoned request by the economic operator, the deadline may be extended, by no more than half the period initially granted.. The recommendation of the Panel includes a preliminary classification in law of the conduct referred to above, with regard to established facts or other findings. It is important to recall that the Panel has no investigative powers. It will therefore principally rely on: a)facts established in the context of audits or investigations carried out by the European Public Prosecutor’s Office, the Court of Auditors, OLAF or internal audit, or any other check, audit or control performed under the responsibility of the authorising officer; b)non-final administrative decisions which may include disciplinary measures taken by the competent supervisory body responsible for the verification of the application of standards of professional ethics; c)facts referred to in decisions of persons and entities implementing Union funds under indirect management; d)) information transmitted by entities implementing Union funds under shared management with Member States and; e)decisions of the Commission relating to the infringement of the Union's competition rules or of a national competent authority relating to the infringement of Union or national competition law. Where the Panel considers that the economic operator concerned should be excluded and/or that a financial penalty should be imposed on it, its recommendation contains the facts or findings and their preliminary classification in law as well as one or several of the following assessments: a)the possibility and the need to impose a financial penalty and its amount; b)the need to exclude the economic operator concerned and, in that case, the recommended duration of such an exclusion; c)the need to publish the information related to the economic operator which is excluded and/or subject to a financial penalty; d)the remedial measures taken by the economic operator, if any and provided that the misconduct is not related to fraud, corruption, criminal organisations, money laundering, terrorist financing or offences, child labour or other offences concerning trafficking in human beings; All of those assessments are made in the light of the principle of proportionality as recalled in Article 136(3) of the Financial Regulation, so as to duly consider aggravating and/or mitigating circumstances.

In particular, after an assessment of the remedial measures the Panel may decide to recommend imposing no sanctions on the economic operator. This is based on the procurement Directives in order, where the economic operator has “cleaned” its situation, to avoid its exclusion altogether.The non-exhaustive list of measures referred to in Article 136(7) of the Financial Regulation must be sufficient to demonstrate the reliability of the economic operator for receiving and spending Union funds in future. 2.3.The recommendation of the Panel In the light of the principle of proportionality and of possible remedial measures taken by the economic operator concerned, the Panel can recommend: -The exclusion of the economic operator concerned for up to 3 years (up to 5 years in the case of fraud, corruption and any similar activities punishable under penal law)) from participation in all or part of funding procedures, governed by the Union budget in line with the Financial Regulation and award procedures governed by the European Development Funds; -The imposition of a financial penalty of maximum 10 % of the total value of the contract on an economic operator who has attempted to obtain access to Union funds by participating or requesting to participate in a procurement procedure, while being, without having declared it in one of the exclusion situations; (i) either as an alternative to a decision to exclude the economic operator, where such an exclusion would be disproportionate or; (II) in addition to an exclusion which is necessary to protect the Union's financial interests, where the economic operator has adopted a systemic and recurrent conduct with the intention of unduly obtaining Union funds. -In order to reinforce the deterrent effect of the exclusion and/or financial penalty, the publication on the internet site of the Commission information related to the exclusion and, where applicable, the financial penalty. Even if they have only a non-binding nature, due to the need to respect the administrative autonomy of the Institutions and other EU bodies, the recommendations of the Panel bear a high weight due to the composition of the Panel and the recognised authority of its high level independent Chair. This is further evidenced by the fact that if the Authorising Officer, who is also a member of the Panel, decides not to follow a recommendation of the Panel, he must inform the latter of the reasons which have led him/her to take a different decision. This explains why since the outset of the Early Detection and Exclusion System in 2016, authorising officers have up to now followed the Panel recommendations without deviations. 3.THE PUBLICATION OF SANCTIONS IMPOSED ON ECONOMIC OPERATORS The publication of the sanctions is a powerful tool to ensure a deterrent effect and to prevent misuse of EU funds. Currently, there are 8 sanctions against 7 economic operators published on the europa website: http://ec.europa.eu/budget/edes/index_en.cfm The recommendation to publish must comply with the protection of personal data and be necessary to ensure this deterrent effect. Therefore, the publication is only recommended in serious cases with aggravating factors, for instance the refusal of investigations or audit, or the recurrence of a conduct. In addition, the publication can only intervene three months after the decision is taken by the economic operator, by which time the decision of the authorising officer may be challenged before the General Court. In some cases, the publication will only take place after the judgment of the Court, should the judgment uphold the decision of the Authorising Officer. 4.CHANGES BROUGHT BY THE NEW FINANCIAL REGULATION 4.1.Increased transparency of EDES rules Until July 2018, the exclusion rules and more largely the EDES system have been included in the procurement chapter of the Financial Regulation, as they stemmed from the procurement Directives. In the new Financial Regulation, the rules on the EDES system are part of the new Common Rules applying to all spending instruments (procurements, grants, prizes, selection of experts, financial instruments,etc.). The EDES system was already being applied to these instruments by means of cross references spread over the Financial Regulation. The regrouping of these rules under the Common Rules chapter will increase their coherence and readability. 4.2.Additional grounds for exclusion and extension of the information to be disclosed in the declaration on honour The revised Financial Regulation introduces new grounds of exclusion related to so-called "letter box" of "shell" companies with the aim to enhance the fight against tax avoidance. To this end, an authorising officer shall exclude (Article 136(1)(g) and (h)): -the person or the entity that "has created an entity under a different jurisdiction with the intent to circumvent fiscal, social or any other legal obligations of mandatory application in the jurisdiction of its registered office, central administration or principal place of business"; -as well as "an entity that has been created with the intent" provided for in the previous point.

This new ground will ensure a better coverage of the protection of the financial interests and the image of the European Union against some unreliable economic operators. In the light of the general principle of legal certainty, these provisions will apply to such facts that will have occurred after the entry into application of the revised Financial Regulation. Again, exclusions on these grounds could be applied on the basis of a final judgment or a final administrative decision, or in their absence, on the basis of a preliminary classification in law made by the Panel. The revised Financial Regulation also requests from economic operators additional information to be submitted in the declaration on honour that participants or recipients of Union funds must submit as part of a procedure of application for EU funds. In this respect, participants will also have the obligation to disclose their beneficial ownership structure (Article 137(2)(b) FR). 4.3.Procedure before the Panel If the Panel had 45 calendar days from the referral of the case to adopt its recommendation, practice has shown that the deadline given for the person or entity concerned to submit observations was tight, and therefore an extension of the deadline was often requested by the latter to the Panel. The legislator has therefore decided to remove this requirement, which should benefit the right of defence of the persons or entities subject to a Panel procedure and the legal soundness of the ensuing decisions on sanctions. 4.4.Merger of the specialised financial irregularities panels into the EDES Panel Up to the entry into application of the new Financial Regulation, the EDES Panel was solely competent to assess cases of misconducts committed by economic operators. In parallel, other panels set up in EU institutions had also to assess financial irregularities incurred by staff members subject to the Staff Regulations (known under the name of "specialised financial irregularities panel" (or ISIF)). For reasons of efficiency, economy of procedures and use of existing expertise, the competences of these former panels have been merged into the EDES Panel. This means that the EDES Panel will now be competent to also assess cases of internal financial irregularities (.Where it acts in this respect, the Panel will have the same core composition as in EDES cases with additional ad hoc members. It will retain its independent features and shall not have any investigative powers either. 5.REVISION OF THE RULES OF PROCEDURE OF THE PANEL Following on the adoption of the new Financial Regulation and also in the light of the lessons drawn from the first 2 years of operation of the Panel, the Commission adopted new Panel rules of procedure in the second semester of 2018. These rules provide among others for: – an improvement of the conditions under which the right to be heard of economic operators is ensured; -practical arrangements for close cooperation between the Panel and OLAF; -specific provisions on the exercise of the consultative powers where financial irregularities on the part of the members of EU staff have been committed. 6.AUDIT OF THE EDES SYSTEM BY THE INTERNAL AUDIT SERVICE OF THE EUROPEAN COMMISSION The overall objective of the audit was to assess whether the Commission has designed and implemented an effective and efficient control system for the management of EDES aimed at protecting the EU budget, in line with the legal provisions. The audit also covered the effectiveness and efficiency of the EDES Panel, a key actor in the process, assisted in fulfilling its tasks by the EDES secretariat, which is provided by the Commision. The audit found that EDES has undeniable strengths: -It uses good practice from the World Bank suspension and debarment system; -The Commission had been able to attract high-level individuals as Chair and Vice-Chair. Together with the internal standing members, this ensures that the Panel has the necessary expertise and experience to carry out its tasks effectively; -It is well integrated inlocal IT system notably in the research:the electronic workflow and grant management system in place checks whether an economic operator receiving funds from Horizon2020 programmes is registered for early detection or exclusion in EDES.

The audit also made recommendations: -Finalisation and regularly update of the dedicated corporate guide; -Increase of awareness of EDES; -In shared management, analysis of access to EDES Database by Member States’ authorities to target awareness raising efforts, and assess cost/benefits of use of other databases; -Improve the follow-up of OLAF reports and recommendations and; -Monitor length of Panel procedure and identify steps that could lead to delays. 7.AWARENESS RAISING WITH INTERNAL AND EXTERNAL STAKEHOLDERS Following on the audit, the Commission has stepped up its efforts for raising awareness all over the board In particular, it is being: – spreading information and disseminating good practice among others Commission services, EU Delegations and CSDP missions, including at senior and middle management level and this by various communication tools, including instructions given to services, dedicated workshops and training; – with due respect to the independence of the investigative function of OLAF, strengthening the internal cooperation with the Office at senior level, including as regards the monitoring of OLAF administrative and financial recommendations; - participating in events with international organisations where EDES has been highlighted and acknowledged as an important tool for sanctioning fraud and serious misconducts and; - developing a targeted communication strategy. 8.OVERVIEW OF CASES In 2018, 6 admissible cases, all coming from the Commission were referred to the Panel through its permanent secretariat by authorising officers. In addition, 4 cases sent to the permanent secretariat in 2017 are considered in the present report, since they were, once the respective files had been completed,dealt with by the Panel in 2018, Out of these 10 cases, the Panel issued a recommendation to exclude economic operators from EU funds in 7 occurrences. This was based on various legal grounds, including fraud and significant breaches with complying with main obligations in the implementation of a contract. In 1 case, the Panel also recommended to register in the EDES database "a person with power of representation, decision-making or control" over the excluded operator, as linked to the exclusion. The purpose of this registration is to inform all authorising officers that these persons were personally involved in the related situations of exclusion of the economic operators concerned.