COMMISSION STAFF WORKING DOCUMENT EU PREVENTIVE AND CORRECTIVE ACTIVITIES TO END 2012 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT PROTECTION OF THE EUROPEAN UNION BUDGET TO END 2012
Date: 2013-09-26
Institutions: European Commission
Subjects: EAFRD, EAGF, budgetary control, budgetary discharge, economic and social cohesion, financial year, fraud against the EU, general budget (EU)













EUR-Lex - 52013SC0404R(01) - EN











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52013SC0404R(01)

COMMISSION STAFF WORKING DOCUMENT EU PREVENTIVE AND CORRECTIVE ACTIVITIES TO END 2012 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT PROTECTION OF THE EUROPEAN UNION BUDGET TO END 2012 /* SWD/2013/0404 final/2 */









Table of
Contents
1... INTRODUCTION. 4
1.1. Background. 4
1.2. Objective and scope of this document 5
1.3. Conclusion. 6
2... OVERVIEW OF ACTIONS ENSURING THE
PROTECTION OF THE EU BUDGET  7
2.1. Legislation. 7
2.2. Methods of implementing and controlling the EU budget 8
2.3. Overview of financial corrections and recoveries implemented. 11
2.4. Impact of financial corrections and recoveries on the EU Budget 15
2.5. Impact of financial corrections and recoveries on national
budgets  16
2.6. Role of financial corrections and recoveries if error rates are
persistently high  17
3... FINANCIAL CORRECTIONS AND RECOVERIES UNDER
AGRICULTURE (EAGF AND RURAL DEVELOPMENT) 18
3.1. Preventive actions under Agriculture (EAGF and Rural Development) 18
3.2. Corrective mechanisms under Agriculture (EAGF and Rural
Development) 20
3.3. Financial corrections in progress as at end 2012. 24
3.4. Financial corrections decided/confirmed in 2012. 25
3.5. Financial corrections implemented in 2012. 26
3.6. Financial corrections – cumulative figures to end 2012. 28
3.7. Recoveries under Agriculture (EAGF & Rural Development) 31
4... FINANCIAL CORRECTIONS AND RECOVERIES UNDER
COHESION POLICY  32
4.1. Preventive actions under Cohesion Policy. 33
4.2. Corrective mechanisms under Cohesion Policy. 36
4.3. Financial corrections in progress as at end 2012. 38
4.4. Financial corrections decided/confirmed in 2012. 39
4.5. Financial corrections implemented in 2012. 40
4.6. Financial corrections: cumulative figures & implementation
rates to end 2012  43
4.7. Recoveries under Cohesion Policy. 49
5... INTERNAL & EXTERNAL POLICIES AND
ADMINISTRATIVE EXPENDITURE  50
5.1. Preventive actions. 50
5.2. Corrective mechanisms. 51
5.3. Financial Corrections. 51
5.4. Recoveries. 52
6... CORRECTIVE ACTIONS MADE BY MEMBER STATES
UNDER COHESION POLICY ON THEIR OWN INITITATIVE. 54
6.1. Background. 54
6.2. Corrections reported by Member States. 54
7... RECOVERY OF PRE-FINANCING AMOUNTS. 56
8... RECOVERIES RELATING TO OWN RESOURCE
REVENUES. 57
9... GLOSSARY. 58
Annex 1: Cumulative financial corrections
confirmed under Cohesion Policy - Breakdown by Member State. 62
Annex 2: Cumulative financial corrections
implemented under Cohesion Policy - Breakdown by Member State. 64

1.       
INTRODUCTION
1.1.   
Background

According
to Article 317 of the Treaty on the Functioning of the European Union (TFEU[1][2]):
Article 317:
The Commission shall implement the
budget in cooperation with the Member States in accordance with the provisions
of the regulations made pursuant to Article 322, on its own responsibility and
within the limits of the appropriations, having regard to the principles of
sound financial management. Member States shall cooperate with the Commission
to ensure that appropriations are used in accordance with the principles of
sound financial management. 
The
regulations shall lay down the control and audit obligations of the Member
States in the implementation of the budget and the resulting responsibilities.
They shall also lay down the responsibilities and detailed rules for each
Institution concerning its part in effecting its own expenditure.
…
Article
322 of the TFEU states that: 
Article 322:
The European Parliament
and the Council, acting in accordance with the ordinary legislative procedure,
and after consulting the Court of Auditors, shall adopt by means of
regulations:
(a) the financial rules
which determine in particular the procedure to be adopted for establishing and
implementing the budget and for presenting and auditing accounts;
(b)
rules providing for checks on the responsibility of financial actors, in particular
authorising officers.
…
According
to the Financial Regulation[3], its
rules of application[4] and various
sector-specific regulations[5], the
Commission protects the EU budget, i.e. EU spending, from undue or irregular
expenditure via two main methods: 
(1)  preventive actions; and 
(2)  correction mechanisms. 
Apart
from the simplification and fraud proofing of regulations, preventive actions
include ex-ante checks made by the responsible services on eligibility of
expenditure being claimed by beneficiaries (including Member States). Under
shared management expenditure, Member States' responsible authorities are in
the first instance responsible for such ex-ante checks. Furthermore, preventive
actions under Cohesion Policy also include interruption of the payment
deadlines and suspending payments for given programmes until the appropriate
corrective actions have been implemented by the Member State.
Ex-post
controls and audits are made by the Commission services, the European Court of
Auditors (ECA), the European Anti-Fraud Office (OLAF) and, in the case of
shared management, by Member States throughout the life cycle (including also
closures) of programmes and projects so as to ensure that expenditure paid out
from the EU budget is legal and regular. The result of these ex-post checks can
be, in the case of irregularities, the application of corrective mechanisms.
They take the form, primarily, of financial corrections under shared management
and recovery activities across all policy areas.
It is stressed that the primary objective of financial
corrections is to ensure that EU funds are used correctly and for the purposes
for which they were given. This is why, for example, under the legislation in
force for Cohesion Policy, detected irregular expenditure must always be
excluded, often by being replaced by regular spending at Member State level.
However, recoveries (and financial corrections related to the Common
Agricultural Policy ("CAP")) result in the return of previously paid
irregular amounts to the EU Budget. See sections 3 and 4 for more
details. 

1.2.   
Objective
and scope of this document

This Commission Staff Working Document, hereafter referred
to as the "SWD", is linked to the Communication of the Commission on
the protection of the European Union Budget, which has been requested by the
European Parliament in the context of the 2011 discharge procedure[6]. It is also communicated to the Council
and the ECA. It provides more details on figures that are disclosed in Note 6 of
the 2012 consolidated annual accounts of the EU.
The
objective of this report is to provide: 
(1)  an overview of the mechanisms
foreseen in the legislation which define the process of identifying and then
dealing with administrative errors, irregularities and suspected fraud[7] detected by EU bodies and by Member
States; and
(2)  a best estimate of the total
amounts[8]
concerned for 2012 and cumulative so as to illustrate in real terms how: 
a.      the EU budget is
protected from expenditure incurred in breach of law,
b.      the Member States are
involved and impacted.
In
addition to the above, information is also provided on amounts recovered
relating to advances (pre-financing) paid out that have not been used by the
beneficiary as this ensures that no excess money is kept without proper expense
justification, thus equally contributing to the protection of the EU budget.
Furthermore,
information is not only presented concerning actions made at the EU level, but
is also given on the additional corrections reported as effected by Member
States. For Agriculture, this concerns amounts reimbursed to the EU budget relating
to irregularities declared by the Member States. For Cohesion Policy this
concerns amounts recovered by Member States following their own controls and
audits, in particular for the programming period 2007-2013, since for previous
programming periods, there was no legal requirement for reporting this
information to the Commission. Thus data was presented by Member States in a
non-structured way and was thus incomplete and/or unreliable. These corrections
are not recorded in the Commission's accounting system because Member States
can reuse, in most cases, amounts released in this way for other eligible
expenditure.

1.3.   
Conclusion

The
importance of financial corrections and recoveries is particularly highlighted
when considering multi-annual residual error rates. This is because these rates
take into account both detected error rates and financial corrections and
recoveries over the entire life cycle of programmes and projects. Therefore,
they indicate the real impact of irregular expenditure and represent key
indicators for assessing how supervisory and control systems manage the risks
relating to the legality and regularity of operations financed by the EU
budget.
The
figures presented in this SWD demonstrate that the result of the multi-annual
preventive and corrective activities undertaken by the Commission is that the
EU budget is adequately protected from expenditure incurred in breach of
applicable law. 

2.       
OVERVIEW OF ACTIONS
ENSURING THE PROTECTION OF THE EU BUDGET
2.1.   
Legislation

The obligation of both the Commission and the Member
States to manage adequately the risks relating to the legality and regularity
of operations financed by the EU Budget is laid down in the legislation. Where preventive
measures fail, there is a clear requirement to ensure that corrective actions
are pursued. 
In accordance with Article 32 of the Financial Regulation,
covering the internal control on budget implementation, the Commission, and
Member States for shared management (see section 2.2.1), have an obligation
to ensure:
Article 32
– Internal control on budget implementation 
1. The
budget shall be implemented in compliance with effective and efficient internal
control as appropriate in each method of implementation, and in accordance with
the relevant sector-specific rules.
2. For the purposes of the implementation of the budget, internal
control is defined as a process applicable at all levels of management and
designed to provide reasonable assurance of achieving the following objectives:
(a) effectiveness, efficiency and economy of operations;
(b) reliability of reporting;
(c) safeguarding of assets and information;
(d) prevention, detection, correction and follow-up of fraud
and irregularities;
(e) adequate management of the risks relating to the legality
and regularity of the underlying transactions, taking into account the
multiannual character of programmes as well as the nature of the
payments concerned. 
…
Article 80 of the same regulation goes on to say:
Article 80 – Rules on recovery 
…
3. The
Member States shall in the first instance be responsible for carrying out
controls and audits and for recovering amounts unduly spent, as provided
for in the sector-specific rules. To the extent that Member States detect and
correct irregularities on their own account, they shall be exempt from
financial corrections by the Commission concerning those irregularities.
4. The Commission shall make financial corrections on Member
States in order to exclude from Union financing expenditure incurred in breach
of applicable law. The Commission shall base its financial corrections on
the identification of amounts unduly spent, and the financial implications for
the budget. Where such amounts cannot be identified precisely, the Commission
may apply extrapolated or flat-rate corrections in accordance with the
sector-specific rules.
The Commission shall, when deciding on the amount of a financial
correction, take account of the nature and gravity of the breach of applicable
law and the financial implications for the budget, including the case of
deficiencies in management and control systems.
The criteria
for establishing financial corrections and the procedure to be applied may be
laid down in the sector-specific rules.
5. The methodology for applying extrapolated or flat-rate
corrections shall be laid down in accordance with the sector specific rules
with a view to enabling the Commission to protect the financial interests of
the Union. 
It is also important to
underline that for a significant portion of EU expenditure, e.g. Cohesion and
Research policies, the programmes concerned are of a multi-annual nature and,
as highlighted above in Article 32 (e) of the Financial Regulation, this must
be taken into account when designing and implementing preventive and corrective
measures, as well as when assessing the results of these actions. 
In general the
life-cycle of an EU funded project/programme could be viewed as follows:
Financial corrections
and recoveries can be made at any stage once expenditure has been incurred and/or
a payment has been made. Nonetheless the majority of corrections tend to occur
at the closure of the project/programme, which can be years after the first expenditure
has been incurred and/or first payment was made.

2.2.   
Methods
of implementing and controlling the EU budget

Preventive
actions and responsibilities depend on the method of implementation of the EU budget[9]. This also impacts how and when corrective
actions are implemented. Furthermore, when setting up such procedures and
controls, the Commission is bound by Article 32 (4g) of the Financial
Regulation to take into consideration efficiency and, in particular, "improving
the cost-benefit ratio of controls".
In summary, the 2012 EU budget was implemented via the following
methods[10]:
2.2.1 Shared Management
Under shared management (i.e. Agriculture and Cohesion policy
expenditure), which accounts for around 80% of the annual EU Budget, the
Commission relies on Member States for the implementation of EU programmes i.e.
the EU contribution is paid, following receipt of payment applications, to
national certifying and management authorities or payment agencies, who are
then responsible  for the payments made to final beneficiaries. As a result, Member
States are primarily responsible for the prevention, detection and correction
of errors and irregularities committed by the beneficiaries, while the European
Commission ensures an overall supervisory role (i.e. verifying the
effective functioning of Member States' management and control systems and
applying financial corrections where necessary) – see Article 59 of the
Financial Regulation below[11]: 
Article 59 - Shared management with Member States 
1. Where the
Commission implements the budget under shared management, implementation tasks
shall be delegated to Member States. The Commission and the Member States shall
respect the principles of sound financial management, transparency and
non-discrimination and shall ensure the visibility of Union action when they
manage Union funds. To this end, the Commission and the Member States shall
fulfil their respective control and audit obligations and assume the resulting
responsibilities laid down in this Regulation. Complementary provisions shall
be laid down in sector-specific rules.
2. When
executing tasks relating to the implementation of the budget, Member States
shall take all the necessary measures, including legislative, regulatory
and administrative measures, to protect the Union's financial interests,
namely by:
(a) ensuring that actions financed from the budget are implemented
correctly and effectively and in accordance with the applicable sector-specific
rules and, for that purpose, designating in accordance with paragraph 3, and
supervising bodies responsible for the management and control of Union funds;
(b) preventing,
detecting and correcting irregularities and fraud.
In order to protect the Union's financial interests, Member States
shall, respecting the principle of proportionality, and in compliance with this
Article, and the relevant sector specific rules, carry out ex-ante and ex-post
controls including, where appropriate, on-the-spot checks on representative
and/or risk-based samples of transactions. They shall also recover funds
unduly paid and bring legal proceedings where necessary in this regard.
 … 
Under
shared management, preventive measures used vary; for example, Member States
have the legal obligation to set up management and control systems. Another
example, for Cohesion spending and in the future for CAP, is where serious
failings in the management and control systems have led or could lead to
individual or systemic irregularities, the Commission can interrupt or suspend
payments. Other measures include guidance and training to support Member
States. The processes are explained in more detail in sections 3 and 4
below.
Regarding corrective measures, errors, irregularities and
fraud are addressed by the Commission itself almost exclusively by means of
what is known as a financial correction procedure, with recoveries used in
limited cases. The results of these Commission corrective actions are
summarised below (see 2.3), with more details given in sections 3
and 4.
It must be
highlighted that the primary responsibility of the Commission in implementing
the EU budget is to protect the Union's financial interests, or in other
words, to protect the EU budget from irregular expenditure. In the context of
shared management, this has two important consequences: 
(1)  While the Commission applies financial
corrections (as well as interruptions and suspensions) linked to Member States'
system weaknesses, it remains the Member States' responsibility to react to
these measures and make improvements in their systems; and 
(2)  The protection of the national
budgets, in particular by recovering amounts from final beneficiaries, remains
the responsibility of the Member States. It is, however, underlined that financial corrections do
not relieve the Member States from the obligation to recover the undue payments from the
beneficiaries whenever it is feasible and cost-effective.
Even if the
Member States do not recover irregular expenditure from the final beneficiary, the
effective deduction of the irregular expenditure either by the Member States or
by the Commission ensures that EU budget is protected. As a result, expenditure
incurred in breach of law is no longer funded by the EU budget.
2.2.2 Other methods of budget implementation
The
European Commission also implements policies under other management modes, as
shown above. In these areas, representing approximately 20% of the annual EU
budget, the key preventive actions to highlight include the Commission’s
internal control system, as well as support and guidance to beneficiaries,
staff training and eligibility assessments. The processes are explained in more
detail in section 5.
Corrective
actions are made via the actual recovery of unduly paid amounts, executed by
recovery order or offsetting with a subsequent payment to the beneficiary – see
Articles 78 and 80 of the Financial Regulation, as well as section 5.
Article 78
– Establishment of amounts receivable 
1. The
establishment of an amount receivable is the act by which the authorising
officer responsible: 
(a) verifies that the debt exists;
(b) determines or verifies the reality and the amount of the debt;
(c) verifies
the conditions according to which the debt is due.
2. …
3. Amounts wrongly paid shall be recovered.
 …
Article 80
– Rules on recovery 
1. The accounting officer shall act on recovery orders for
amounts receivable duly established by the authorising officer responsible.
The accounting officer shall exercise due diligence to ensure that the Union
receives its revenue and shall ensure that the Union's rights are safeguarded.
The accounting officer shall recover amounts by offsetting them
against equivalent claims that the Union has on any debtor who in turn has a
claim on the Union. Such claims shall be certain, of a fixed
amount and due.
 … 

2.3.   
Overview
of financial corrections and recoveries implemented[12]

2.3.1 Financial corrections and recoveries
implemented in 2012
Financial
corrections and recoveries are primarily dependent on the level of
irregularities of previous years, i.e. if weaknesses/ deficiencies observed
increase, it is the Commission's obligation to ensure that the corresponding
financial corrections and recoveries are made. But given the multi-annual
character of the control framework and the complexity of the corrective
mechanisms and procedures, this can only happen over time. Sections 3.6
and 4.6 give an idea of the impact of the corrective measures over a
longer period: for Agriculture (EAGF) (1.5% of all payments for the period
1999-2012 covering all clearance of accounts decisions) and for ERDF and ESF
(4% of all payments for the programming period 2000-2006 which is in the
closure stage).
However,
looking exclusively at 2012, and in order to give an idea of the amplitude of
the financial corrections and recoveries implemented in that year, it is noted
that the amounts, while mostly relating to irregularities of past years,
represent in financial terms 3.2% of all 2012 budget payments.
Table 2.3.1.1: Financial corrections
and recoveries implemented in 2012
EUR
millions
   || 2012 EU budget payments || Financial Corrections || Recoveries || 2012 Total || % of payments of the EU budget 
 Agriculture: ||   ||   ||   ||   ||   
 EAGF[13] || 44 551 || 610 || 161 || 771 || 1.7% 
 Rural Development || 13 123 || 59 || 166 || 225 || 1.7% 
 Cohesion Policy*: ||   ||   ||   ||   ||   
 ERDF || 27 457 || 2 416 || N/A || 2 416 || 8.8% 
 Cohesion Fund || 9 626 || 207 || N/A || 207 || 2.2% 
 ESF || 11 295 || 430 || N/A || 430 || 3.8% 
 FIFG/EFF** || 481 || 1 || N/A || 1 || 0.2% 
 EAGGF Guidance** || 138 || 17 || 3 || 20 || 14.5% 
 Other || 106 || N/A || 11 || 11 || 10.4% 
 Sub-total || 106 777 || 3 741 || 341 || 4 081 || 3.8% 
 Internal policy areas || 16 278 || 1 || 229 || 230 || 1.4% 
 External policy areas || 7 064 || N/A || 99 || 99 || 1.4% 
 Administration || 8 564 || N/A || 9 || 9 || 0.1% 
 Total || 138 683 || 3 742 ||  678 || 4 419 || 3.2% 
* Implemented financial
corrections under Cohesion policy also include recovery orders issued by the
Commission.
** FIFG/EFF and EAGGF
Guidance belong to Cohesion policy only for the programming period 2000-2006
and before.
A breakdown of the
financial corrections implemented in 2012 by Member State for the different
shared management areas is shown in the table below:
Table 2.3.1.2: Shared
management financial corrections implemented per Member State in 2012
   ||   || EUR millions 
 Member State || Payments received from the EU budget || Financial corrections 
 EAGF || Rural Development || ERDF || Cohesion Fund || ESF || Other || Total 2012 || % as compared to payments received from the EU budget || % as compared to the total amount of financial corrections 
 Belgium || 1 114 ||  0 ||  3 ||  0 ||  - ||  11 ||  0 ||  14 || 1.3% || 0.4% 
 Bulgaria || 1 590 ||  15 ||  7 ||  0 ||  6 ||  1 ||  - ||  30 || 1.9% || 0.8% 
 Czech Republic || 4 433 ||  0 ||  - ||  116 ||  8 ||  - ||  0 ||  125 || 2.8% || 3.3% 
 Denmark || 1 101 ||  22 ||  - ||  0 ||  - ||  - ||  - ||  22 || 2.0% || 0.6% 
 Germany || 10 358 || (16) ||  3 ||  23 ||  - ||  0 ||  0 ||  10 || 0.1% || 0.3% 
 Estonia || 915 ||  0 ||  1 ||  0 ||  0 ||  0 ||  - ||  1 || 0.1% || 0.0% 
 Ireland || 1 750 || (1) ||  10 || -  || - || - ||  - ||  9 || 0.5% || 0.2% 
 Greece || 6 022 ||  85 ||  5 ||  0 ||  13 || 159 ||  0 ||  262 || 4.4% || 7.0% 
 Spain || 12 967 ||  47 ||  2 || 1 952 ||  81 ||  84 ||  7 || 2 172 || 16.8% || 58.0% 
 France || 10 868 ||  64 ||  1 ||  20 ||  - ||  37 ||  2 ||  123 || 1.1% || 3.3% 
 Italy || 8 835 ||  209 ||  0 ||  57 ||  - ||  3 ||  7 ||  275 || 3.1% || 7.3% 
 Cyprus || 111 ||  8 ||  0 ||  - ||  - ||  - ||  0 ||  8 || 7.2% || 0.2% 
 Latvia || 1 128 ||  - ||  - ||  1 ||  1 ||  9 ||  0 ||  12 || 1.1% || 0.3% 
 Lithuania || 1 644 ||  3 ||  4 ||  3 ||  1 ||  0 ||  0 ||  10 || 0.6% || 0.3% 
 Luxembourg || 52 ||  0 ||  - ||  0 ||  - ||  - ||  - ||  0 || 0.0% || 0.0% 
 Hungary || 3 973 ||  6 ||  0 ||  0 ||  - ||  - ||  0 ||  6 || 0.2% || 0.2% 
 Malta || 101 ||  0 || -  || - || - || - ||  - ||  0 || 0.0% || 0.0% 
 Netherlands || 1 247 ||  17 ||  2 ||  0 ||  - ||  - ||  0 ||  20 || 1.6% || 0.5% 
 Austria || 1 513 ||  1 || -  || - || - || - ||  0 ||  1 || 0.1% || 0.0% 
 Poland || 15 417 ||  12 ||  2 ||  45 ||  79 ||  23 ||  0 ||  162 || 1.1% || 4.3% 
 Portugal || 6 526 ||  15 ||  1 ||  117 ||  0 ||  - ||  0 ||  134 || 2.1% || 3.6% 
 Romania || 3 290 ||  24 ||  12 ||  22 ||  - ||  81 ||  - ||  139 || 4.2% || 3.7% 
 Slovenia || 836 ||  0 ||  0 || -  || - || -  ||  0 ||  0 || 0.0% || 0.0% 
 Slovakia || 2 190 ||  0 ||  - ||  29 ||  17 ||  11 ||  - ||  57 || 2.6% || 1.5% 
 Finland || 1 107 ||  1 ||  0 ||  0 ||  - ||  - ||  0 ||  1 || 0.1% || 0.0% 
 Sweden || 1 166 ||  72 ||  2 ||  0 ||  - ||  0 ||  - ||  74 || 6.3% || 2.0% 
 United Kingdom || 5 384 ||  27 ||  4 ||  4 ||  - ||  12 ||  2 ||  50 || 0.9% || 1.3% 
 Non-split || 1 140 ||  - ||  - ||  24 ||  - ||  - ||  - ||  24 || - || - 
 TOTAL || 106 777 ||  610 ||  59 || 2 416 ||  207 || 430 ||  19 || 3 742 || 3.5% || 100% 
The
graph below takes into account both the absolute “contribution” of each Member
State to the total financial corrections and the relative weight of financial
corrections for each Member State compared to the payments received from the EU
budget. 
In
2012, 11 Member States present overall percentages below 1% and a further 11
Member States between 1% and the average of 3.5% - in total these 22 contribute
to 29% of the total corrections. Finally, 5 Member States present percentages higher
than the average, over 4.2% in all cases, and contribute to 71% of the amount
of financial corrections implemented in 2012. Spain, with a percentage of 16.8%,
is clearly the most significant due to specific and complex corrections that
were implemented in 2012 in the context of the closure of 2000-2006 programming
period.
Graph 2.3.1: Share of Member
States’ financial corrections implemented as compared to payments received from
the EU budget in 2012*
* The size of the "bubble" is proportionate
to the EU Funds received.
Attention is drawn to
the fact that the above data relates to one year only, 2012. The level of both
the global corrections amount and the split by Member State can change
significantly depending on the year.
Therefore, a meaningful assessment of the corrective
capacity of supervisory and control systems has to be based on a multi-annual
perspective. For this reason, information on the cumulative financial
corrections at end 2012 is presented below. 
2.3.2 Cumulative financial corrections and recoveries to end 2012
The
graph below shows the evolution of financial corrections and recoveries implemented
during the last 4 years:
Graph 2.3.2: Financial corrections and recoveries 2009-2012
 Euro billions 
The average
amount of financial corrections and recoveries implemented per year by the
Commission during the period 2009 to 2012 was EUR 2.6 billion or
2% of the average amount of payments from the EU budget of EUR 127.2 billion (shared
management: EUR 2.3 billion or 2.3% of the average amount of payments (EUR 97.2
billion)). 2012 amounts were significantly higher due to cohesion corrections
relating to the closure of the 2000-2006 programmes for one Member State,
Spain, and a quicker implementation of financial corrections for current
programmes.
In 2012, in
its Synthesis report, the Commission estimated amounts at risk to be between
EUR 2.6 billion and EUR 3.5 billion. This corresponds to 1.9% and 2.6% of all
executed payments in the Commission budget. For internal and external policy
areas, these amounts at risk do include recoveries (average amount implemented
per year for the period 2009 to 2012: EUR 288 million) which corrected irregular
payments of current or previous periods.
With regard
to the two largest spending areas (agriculture, natural resources and health,
and cohesion) these amounts at risk do not take into account future financial
corrections and recoveries which exclude expenditure incurred in breach of law
from Union financing. Noting the average amount of financial corrections and
recoveries implemented for the period 2009 to 2012 under shared management (EUR
2.3 billion), and assuming that similar levels continue to apply, then it can
be seen that financial corrections and recoveries protect adequately the EU
budget (as a whole, as well as most of the different policy areas).
The
table below shows the cumulative financial corrections implemented to end 2012:
Table 2.3.2.1: Cumulative
financial corrections implemented to end 2012
   ||   ||           EUR millions 
   || Implemented to end 2012 ||   Total decided at end 2012 || % Implemented 
 Programming Period || Cumulated annual amounts || Total 
 1994-1999 Period || 2000-2006 Period || 2007-2013 Period 
 Agriculture: || - || 93 || 81 || 7 728 || 7 902 || 8 525 || 92.7% 
 EAGF || - || - || - || 7 728 || 7 728 || 8 286 || 93.3% 
 Rural Development || - || 93 || 81 || - || 174 || 239 || 72.8% 
 Cohesion Policy: || 2 535 || 6 359 || 779 || - || 9 673 || 10 787 || 89.7% 
 ERDF || 1 764 || 4 626 || 154 || - || 6 544 || 7 305 || 89.6% 
 Cohesion Fund || 264 || 464 || 87 || - || 815 || 984 || 82.8% 
 ESF || 407 || 1 206 || 538 || - || 2 150 || 2 224 || 96.7% 
 FIFG/EFF || 100 || 5 || 0 || - || 105 || 201 || 52.2% 
 EAGGF Guidance || 0 || 58 || - || - || 58 || 72 || 80.6% 
 Other || - || - || - || 2 ||  2 || 2 || 100% 
 Total || 2 535 || 6 452 || 861 || 7 730 || 17 577 || 19 313 || 91.0% 
Details on cumulative financial
corrections per Member States are given in section 3 for Agriculture
(EAGF) for all decisions taken up to 2012, and in section 4 for Cohesion
Policy for each programming period. 
The information below
shows the breakdown of recoveries per year for the period 2009-2012 – information
is taken from a technical field (recovery context) specifically introduced in
the Commission's accounting system in 2008:
Table 2.3.2.2: Recoveries
implemented 2009 to 2012
 EUR millions 
   ||   || Total as at end 2012 || Still to be recovered 
 Recoveries || Years 
   || 2009 || 2010 || 2011 || 2012 
 Agriculture: ||   ||   ||   ||   ||   ||   
 EAGF ||  148 ||  172 ||  178 ||  161 || 659 ||  50 
 Rural Development ||  25 ||  114 ||  161 ||  166 ||  466 ||  0 
 Cohesion ||  102 ||  25 ||  48 ||  14 ||  189 ||  9 
 Internal policy areas ||  100 ||  162 ||  268 ||  229 ||  759 || 50 
 External policy areas ||  81 ||  136 ||  77 ||  99 ||  393 || 38 
 Administration ||  9 ||  5 ||  2 ||  9 ||  25 ||  4 
 Total ||  464 ||  614 ||  734 ||  678 || 2 491 || 151 

2.4.   
Impact
of financial corrections and recoveries on the EU Budget

The budget implementation
type and the policy area influence how the EU budget is impacted by the different
correction mechanisms, but in all cases, the correction mechanisms ensure that
the EU budget funds only regular and eligible expenditure. In some cases, notably
under the CAP, the corrective action leads to the return or recovery of
previously paid amounts to the EU budget. However, for other policy areas, many
financial corrections do not result in reimbursements to the EU budget because,
in line with the legal framework, the corrected amounts can be re-used to fund
other eligible projects. For more details, see table 2.4 and information
provided in the sections below[14]. 
Table 2.4: Impact of
financial corrections & recoveries on the EU Budget
 Policy domain || Total amount implemented in 2012 (in EUR millions) || Exclusion of expenditure incurred in breach of law (Yes/No) || Reimbursement to EU budget (Yes/No) || Impact* on Budget || Main budget chapters concerned 
 Agriculture: ||   ||   ||   ||   ||   
 EAGF financial corrections ||  610 || Y || Y || Assigned revenue || 05 02 05 03 
 EAGF recoveries ||  161 || Y || Y || Assigned revenue || 05 02 05 03 
 Rural development financial corrections ||  59 || Y || Y || Assigned revenue || 05 04 
 Rural development recoveries ||  166 || Y || N** || - || - 
 Cohesion Policy ||   ||   ||   ||   ||   
 Financial corrections implemented by withdrawals ||  738 || Y || N || - || - 
 Financial corrections implemented by recoveries ||  49 || Y || Y || Assigned revenue || 13 03 13 04 04 02 11 06 
 Financial corrections implemented by decommitment/ deduction at closure || 2 284 || Y || N** || - || - 
 Recoveries ||  14 || Y || Y || Assigned revenue || 13 03 13 04 04 02 11 06 
 Other policy areas ||   ||   ||   ||   ||   
 Financial corrections implemented by decommitment/ deduction at closure || 1 || Y || N** || - || - 
 Financial corrections implemented by recoveries || 0 || Y || Y || Assigned revenue || 18 03 
 Recoveries ||  337 || Y || Y || Assigned revenue || Various 
 TOTAL || 4 419 ||   ||   ||   ||   
* Assigned revenue goes
back on the expense line or Fund from which the expenditure was originally paid
and may be spent again.
** Under the current
legal framework, financial corrections can lead to reduction in
expenses/envelope only:
- If Member States are
unable to present sufficient eligible expenditure;
- After the closure of
programmes where replacement of expenditure is no longer possible;
- In case of
disagreement with the Commission.

2.5.   Impact of financial corrections and
recoveries on national budgets

Under shared management, all financial corrections and
recoveries have an impact on national budgets regardless of their method of
implementation. It has to be underlined that even if no reimbursement to the EU
budget is made, the impact of financial corrections is always negative at
Member State’s level. In order not to lose EU funding, the Member State must
replace ineligible expenditure by eligible operations. That means that the
Member State bears with own resources (from the national budget) the financial
consequences of the loss of EU co-financing of the expenditure considered
ineligible, unless it recovers the amounts from individual beneficiaries. This
is not always possible, for example in the case of flat-rate corrections at
programme level (due to deficiencies in the national administration managing
the programme) which are not linked to individual irregularities at project
level. However, those flat rate corrections do protect adequately the EU
Budget.

2.6.   
Role
of financial corrections and recoveries if error rates are persistently high

The European Parliament resolution
on the integrated internal control framework adopted on 3rd July
2013[15]
requested a strict application of the Article 32 (5) of the Financial
Regulation which states: 
Article 32
– Internal control on budget implementation 
…
5. If,
during implementation, the level of error is persistently high, the Commission
shall identify the weaknesses in the control systems, analyse the costs and
benefits of possible corrective measures and take or propose appropriate
action, such as simplification of the applicable provisions, improvement of the
control systems and re-design of the programme or delivery system.
The Commission is required to implement this provision of
the Financial Regulation in the most economical way, taking into account the
resources available, in particular during a period of staff reduction. 
However, difficulties have arisen in the legislative
procedure for the period 2014-2020 which could affect the proposed
simplification and the objective of cost-effective controls. The remaining risks
caused by overly complex rules complicate the prevention of errors and
therefore lead to a high cost of control. This is why the Commission considers
that especially in the area of shared management the implementation of this new
requirement foreseen in Article 32(5) cannot be limited to actions which only
focus on identifying and correcting errors at the level of final recipients. 
Financial corrections and recoveries at the level of the
Member States, which are implemented during the lifetime of multi-annual
programmes, will always be an important factor to be taken into consideration,
as well as the continued efforts to simplify rules, redesign and strengthen
systems.

3.       
FINANCIAL CORRECTIONS
AND RECOVERIES UNDER AGRICULTURE (EAGF AND RURAL DEVELOPMENT)

The graph below shows the financial corrections and
recoveries in the area of Agriculture (EAGF and Rural Development) for the
period 2009-2012.
Graph 3: Financial corrections and recoveries implemented
in the area of Agriculture and Rural Development for the period 2009-2012 (in
millions of Euro):[16]

3.1.   
Preventive
actions under Agriculture (EAGF and Rural Development)

3.1.1   Compulsory
administrative structure at the level of Member States
Management
and control of the expenditure is entrusted to dedicated paying agencies, which
prior to their operation must be accredited by the Member States on the basis
of a comprehensive set of criteria laid down in EU law. The paying agencies'
compliance with these accreditation criteria is subject to a detailed review by
an external audit body as well as to constant supervision by the competent
national authority, and clear procedures exist as to how to address and remedy
any problems. Moreover, the heads of the paying agencies are required to
provide an annual statement of assurance which covers the completeness,
accuracy and veracity of the accounts as well as a declaration that a system is
in place which provides reasonable assurance on the legality and regularity of
the underlying transactions. These statements of assurance are verified by
independent certification bodies, which are required to provide an opinion
thereon. These statements of assurance, together with the documents of the
certification body, constitute by definition the annual summary referred to in
Article 59 of the Financial Regulation. They accompany the yearly accounting
declaration on which the Commission applies a yearly financial clearance
procedure – see below. 
3.1.2   Detailed
systems put in place for ex-ante controls and dissuasive sanctions
For each
aid support scheme financed by the European Agricultural Guarantee Fund (EAGF)
or European Agricultural Fund for Rural Development (EAFRD), there is a system
of ex-ante administrative and on-the-spot checks and dissuasive sanctions in
case of non-compliance by the beneficiary. These systems are to be applied by
the paying agencies (i.e. the Member States) and contain some common features
and special rules tailored to the specificities of each aid regime. The systems
provide for exhaustive ex-ante administrative controls of 100% of the aid
applications, cross-checks with other databases where this is considered
appropriate as well as pre-payment on-the-spot checks of a sample of
transactions ranging between 5% and 100%, depending on the risk associated with
the regime in question. All these checks are carried out prior to any payment to
the beneficiaries; the resulting corrections are in most cases executed via a
reduction of the payment. If the on-the-spot checks reveal a high number of
irregularities, additional controls must be carried out, which in extreme cases
cover the entire population.
Amounts erroneously
claimed by beneficiaries and corrected by the Member States do not appear in
the expenditure declared by the Member States because the Member States may
only declare amounts paid to the beneficiaries. According to information
provided by Member States, the aggregated amount of erroneous payment claims
detected and corrected via their own administrative and on-the-spot controls
made in 2012, totalled EUR 161 million for EAGF and EUR 116 million for EAFRD.
By far the
most important system is the IACS (Integrated Administration and Control
System), which in financial year 2012 covered 91.4% of EAGF expenditure. To the
extent possible, the IACS is also used to manage and control rural development
measures relating to parcels or livestock, which in 2012 accounted for 43.0% of
payments under the EAFRD. For both Funds together, the IACS covered 80.4% of
total expenditure.
A detailed
reporting from the Member States to the Commission on the checks carried out by
them and on the sanctions applied is foreseen in the legislation. The reporting
system enables a calculation, for the main aid schemes, of the extent of error
found by the Member States at the level of the final beneficiaries. The
accuracy of the statistical information reported and the quality of the
underlying on-the-spot checks is also verified and validated by the
certification bodies for direct aids and rural development measures. These statistics
are also used by DG AGRI in order to estimate amounts at risk. 
3.1.3   Provision
of advice and guidance to Member States
DG AGRI liaises closely with
Member States, its partners in shared management, to provide them with guidance
and advice and share best practices for the continuous improvement of the Common
Agricultural Policy ("CAP") management and control systems:
·        
Monthly
meetings of the Agricultural Funds Committee, as well as regular meetings of
the Committee for the market measures, the Committee for direct payments and
the Committee for rural development, allow Member States to raise any issues of
concern and the Commission to give information and guidance as appropriate.
·        
Three
conferences for the Directors of the Paying agencies and Co-ordination bodies
are organised each year - two by the Presidency of the Council and one by DG
AGRI. Two conferences for IT experts ("Panta Rhei") are also
organised each year by Member States. Representatives of the audit directorate
and, where relevant, of the operational directorates in DG AGRI participate
both in plenary sessions and workshops. The Learning Network of Directors of
Paying Agencies and Co-ordinating bodies regularly makes presentations on the
outcome of their work. 
·        
In
addition, in the rural development policy area, the Commission participates in
Monitoring Committees for rural development programmes and in annual meetings
with Managing Authorities. 
·        
DG
AGRI also manages the European Network for Rural Development, which aims to
contribute to the efficient implementation of rural development programmes, and
the Evaluation Expert Network, which aims to increase the usefulness of
evaluation as a tool for improving the formulation and implementation of rural
development policies.

3.2.   
Corrective
mechanisms under Agriculture (EAGF and Rural Development)

3.2.1   Clearance of accounts system
The
clearance of accounts system consists of both an annual financial clearance
and a multi-annual
conformity clearance.
 Description of the current clearance of accounts procedure   The process of the current clearance of accounts procedure is as follows: (a) farmers present claims to an accredited Paying Agency ("PA")  in their Member States; (b) the PA checks these claims and pays the claimant. It then reports expenditure made to the Commission, which reimburses the PA; (c) the accounts and payments of the PA are examined by an independent body (the Certifying Body ("CB")) which reports to the Commission in February of the following year; (d) by 30 April of that year, the Commission must decide on whether to accept the accounts (financial clearance decision) or to ask for more work to be performed or for additional information; (e) the Commission can then still examine the payments made by the PA. For this purpose, a specific directorate within the Commission’s Directorate-General for Agriculture and Rural Development carries out audits selected on the basis of an annual risk analysis which aims to verify that Member States have strictly applied Union rules for checking the legality and regularity of the expenditure (conformity audits); (f ) where these conformity audits reveal that expenditure has not been effected in compliance with Union rules or that Member States have not satisfactorily checked the expenditure in question and that this has resulted in a financial loss to the EU budget, the Commission can impose a correction, which in effect is a refusal to reimburse the Member State for payments it has made. Any such correction proposed by the Commission must be notified to the Member States, who have the right to invoke a conciliation procedure. Only when this procedure has run its course is the Commission in a position to include a financial correction in a conformity decision. 
The financial
clearance covers
the completeness, accuracy and veracity of the paying agencies' accounts.
Moreover, it includes a mechanism under which 50% of any undue payments which
the Member States have not recovered from the beneficiaries within 4 or, in the
case of legal proceedings, 8 years will be charged to their respective national
budgets (50/50 rule). If the undue payments are the result of administrative
errors committed by the national authorities, the entire amount involved is
deducted from the annual accounts and, thus, excluded from EU financing. Even
after the application of the 50/50 rule, Member States are, however, obliged to
pursue their recovery procedures and, if they fail to do so with the necessary
diligence, the Commission may decide to charge the entire outstanding amounts
to the Member State concerned.
The
conformity
clearance,
for its part, relates to the legality and regularity of the underlying
transactions. It is designed to exclude expenditure from EU financing which has
not been executed in conformity with EU rules, thus shielding the EU budget, by
means of financial corrections, from expenditure that should not be charged to
it. It is not, however, a mechanism by which irregular payments to
beneficiaries are recovered; according to the principle of shared management
this is the sole responsibility of Member States. Instead, it results in a
reduction of funding for the Member State concerned. The monies return to the
Commission as assigned revenue which can be re-used in the future.
Where
undue payments are or can be identified as a result of the conformity clearance
procedures, Member States are required to follow them up by recovery actions
against the final beneficiaries. However, even where this is not possible
because the financial corrections only relate to deficiencies in the Member
States' management and control systems, financial corrections are an important
means to improve these systems and, thus, to ensure that they prevent or detect
and recover irregular payments to final beneficiaries. The conformity clearance
thereby contributes to the legality and regularity of the transactions at the
level of the final beneficiaries.
3.2.2   Financial Corrections
Financial
corrections are the main corrective tool used under Agriculture (EAGF) and
Rural Development. The objective of financial corrections is to exclude from EU
funding expenditure that is not in accordance with applicable rules and
regulations, i.e. ensure that all expenditure declared by the Member State (and
paid by the EU) is legal and regular. Financial corrections may also be applied
where the Member States have failed to take corrective measures following the
detection of serious deficiencies in the management and control systems of
their national bodies which led or could lead to systemic irregularities.
As
already mentioned above, under shared management, the primary responsibility
for controlling expenditure and recovering monies from final beneficiaries lies
with the Member States. It is thus in accordance with the underlying legislation,
that financial corrections imposed by Commission do not always result in
repayments from the farmers or other final beneficiaries. Where undue payments
are or can be identified as a result of the conformity clearance procedures,
Member States are required to follow them up by recovery actions against the
final beneficiaries.
Commission's methods for the calculation of
financial corrections
The Commission uses three calculation methods:
(a) When the error revealed by the audit is
based on a specific case (or a few cases), the correction is equal to the value
of the erroneous transactions.
(b) When errors are revealed by the
examination of a representative sample of transactions, the correction is then
based on the extrapolation of these results.
(c) When it is not possible to use one of the
two methods mentioned above, flat-rate corrections are applied to the amount of
expenditure placed at risk.
The level of the flat-rate correction applied
(2 %, 5 %, 10 %, 25 % or higher) depends on the seriousness of the weaknesses
found, whether they are related to key or ancillary controls and whether they
are recurrent or not.
- Use of a 2 % flat-rate: Key controls are
satisfactory, but one or more ancillary controls failed to operate.
- Use of a 5 % flat-rate: Not all the key
controls are executed in the number, frequency or depth required by the
regulations. Therefore, the risk of loss for the fund is significant.
- Use of a 10 % flat-rate: One or more key
controls are not applied or applied so poorly or so infrequently that they are
completely ineffective in determining the eligibility of the claim or
preventing irregularity. Therefore, there is a high risk of widespread loss to
the fund.
- Use of a 25 % flat-rate: When a control
system is absent or gravely deficient and there is evidence of widespread
irregularity and negligence in countering irregular or fraudulent practices.
Therefore, there is a risk of exceptionally high losses to the fund.
- Use of higher flat-rates: Deficiencies are
so serious as to constitute a complete failure to comply with Union rules, so
rendering all payments irregular.
Since the
system was modified to take its present form, a total of 39 decisions have been
adopted to end 2012, (the first in 1999). They have excluded from EU financing
a sum of EUR 8.3 billion. The average correction rate per financial year for
the period 1999-2012 has been 1.5% (see table 3.6.2).
Financial
corrections made under EAGF and EAFRD follow these general steps, which are
common to other policy areas under shared management:
As
can be seen above, the first step is an audit/control one. DG AGRI, and also
the ECA, make on the spot audits throughout the year and in addition Member
State bodies perform their own controls. Moreover, there are specific mechanisms
set-up to control and correct irregular expenditure:
In addition
to the ex-ante controls, all aid measures, other than direct payments covered
by the IACS, are subject to ex-post controls under either Regulation (EC) No.
485/2008[17]:
Article 2
1. Member States shall carry out systematic scrutiny of
the commercial documents of undertakings taking account of the nature of the
transactions to be scrutinised. Member States shall ensure that the selection
of undertakings for scrutiny gives the best possible assurance of the
effectiveness of the measures for preventing and detecting irregularities under
the system of financing by the EAGF, inter alia, the selection shall
take account of the financial importance of the undertakings in that system and
other risk factors.
And for
rural development measures, Regulation (EU) No. 65/2011[18]:
Article 10

General
principles 
1. Member
States shall make use of the integrated administration and control system
provided for in Chapter 4 of Title II of Regulation (EC) No 73/2009
(hereinafter referred to as IACS). 
2.
Verification of compliance with the eligibility criteria shall consist of
administrative and on-the-spot checks. 
3.
Observance of cross-compliance requirements shall be verified through
on-the-spot checks and, where appropriate, through administrative checks. 
Moreover,
the paying agencies' annual accounts and the functioning of their internal
control procedures are verified and certified on an ex-post basis by the
certification bodies. Both types of ex-post controls are carried out in
accordance with an annual audit plan established on the basis of a
pre-determined audit strategy.
DG AGRI
carries out over 100 audits every year in the Member States in order to examine
the effectiveness of management and control systems. Where deficiencies are
found in those systems, conformity clearance procedures are launched involving
a "contradictory" procedure with the Member State which enables both
the latter and the Commission to clarify their positions and to establish the
extent of the risk to the EU budget. The financial corrections shield the EU
budget from expenditure which should not be charged to it. DG AGRI regularly
informs Member States of its most common audit findings.
The
processing of financial corrections, after this initial audit or control, then
follows the three key steps ("in progress",
"decided/confirmed" and "implemented") which are detailed
separately below.
The
final step is reporting where every year the Commission provides the results of
its recovery actions to the Discharge Authority and the ECA via reports such as
this, as well as in the EU consolidated annual accounts, and the DG's Annual
Activity Report.
3.2.3
Recoveries
In
the area of Agriculture (EAGF) & Rural Development, the legislation obliges
Member States to identify and report errors and irregularities and to recover from
beneficiaries amounts unduly paid in accordance with national rules and
procedures. For the EAGF, amounts recovered from the beneficiaries are credited
to the EU budget, after deduction applied by Member States of 20% (to cover
collection costs). For EAFRD, the full amount of the recoveries made by the Member
State are deducted by the Member State from the next payment claim before it is
sent to the Commission. This generally doesn’t lead to a net correction because
the Commission will continue to reimburse eligible expenditure until the agreed
budget is consumed. 
Furthermore,
if a Member State does not pursue the recovery or is not diligent in its
actions, the Commission may decide to intervene and to impose a financial
correction on the Member State concerned, or to initiate an infringement
procedure under Article 258 of the TFEU. See section 3.7 below for the
results of these actions.
Where
the Commission considers that the time taken for a Member State to recover
amounts from a final beneficiary is too long, it can launch procedures against
the Member State involved. This of course is in addition to the fact that the
EU Budget may already be protected via the original financial correction. 
In
addition, as indicated under 3.2.1, 50% of the irregular payments not
recovered from the beneficiaries within 4 years (8 years in case of judicial
procedure) are charged to the national budgets concerned. If the undue payments
are the result of administrative errors committed by the national authorities,
the entire amount involved is borne by to the Member State.
Infringement procedure following
financial corrections
In 2013, the European
Commission, via a letter of formal notice, called on Italy to take action to
address deficiencies in the implementation of EU legislation concerning
imposition of surplus levy on milk and other milk products among milk producers
who have contributed to the overruns of the national quotas, and specifically
to effectively recover levy due from such liable producers. 
The failure to ensure
the effective recovery undermines the possibility for that system to achieve
its objectives of stabilisation of the market and also creates distortions of
competition with other European and Italian producers having abided to the
system of production limitation or having regularly paid the surplus levies due
in case of overrun. The total of levy still not recovered amounts to at least
EUR 1.4 billion and it is due to the Italian budget.
The Commission has
already imposed financial corrections amounting to EUR 750 million linked to this problem. Furthermore, it
raised the issue of Italy's inability to comply with the obligation of taking
all measures necessary to ensure the timely payment of surplus levy by the
concerned producers in its numerous correspondences with the Italian
authorities. Italy manifestly did not take the appropriate measures to
effectively recover the levy due from such liable producers, despite the
repeated requests coming from the Commission. The Commission has accordingly
decided to initiate the infringement procedure under Article 258 of the TFEU.

3.3.   
Financial
corrections in progress as at end 2012

Following
the evidence produced by an audit or other control, the next step in the
financial correction process is the preliminary stage where the amounts are still
only estimates and subject to change since they are not yet finalised for
various reasons: for example in the case of an audit which is not yet completed,
the potential amount of correction thus evolves with the audit findings as the
Commission is still in the contradictory phase with the Member State concerned
and new evidence or arguments may be introduced.
Under
Agriculture (EAGF) and Rural Development, the amount of financial corrections
in progress is based on an estimate of the amount of expenditure which is
likely to be excluded from EU financing by future conformity decisions. Since
EAGF corrections are decided per financial year of expense, it is possible to
calculate the average of financial corrections per financial year closed, and
to extrapolate this percentage to more recent financial years for which
controls are still on-going. The reliability of the method of estimation is
continuously assessed by comparing the estimate amount with the results of the
conformity audits completed in the years concerned.
Table 3.3: Financial corrections
in progress for Agriculture (EAGF & Rural Development) as at end 2012
 EUR millions 
   ||   ||   ||   ||   || Financial corrections in progress as at 31.12.2012 
 EAGF: ||   ||   ||   ||   ||   
 EAGF - future conformity and financial decisions ||   ||   ||   ||   || 2 647 
 Rural Development: ||   ||   ||   ||   ||   
 TRDI 2000-2006 ||   ||   ||   ||   || 36 
 SAPARD 2000-2006 ||   ||   ||   ||   || 82 
 EAFRD 2007-2013 ||   ||   ||   ||   || 626 
 Total ||   ||   ||   ||   || 3 391 
The
amount of EAGF financial corrections in progress at end 2012 shows the
consolidation of the estimation method for future conformity decisions.
SAPARD
and TRDI programmes are in the closure phase which explains the low amounts of
financial corrections in progress. 
Concerning
EAFRD, the amounts are higher than in previous years due mainly to a change in
the estimation method. Until 2010, the extrapolation method used was based on
historical data, i.e. real cases opened for EAGGF 2000-06. This estimation was
then compared to the level of real cases opened for the first years of the
EAFRD programmes. However, two years ago this method proved to give lower
amounts than those actually constituted by cases opened. Therefore the
extrapolation method has been adapted and aligned to that of EAGF since both
funds actually share the same clearance process. The amounts reported in
progress give now a more realistic view on future financial corrections.

3.4.   
Financial
corrections decided/confirmed in 2012

Following
this step of the process, the amounts are final, meaning that they have been subject
to Commission decision. Member States can make an appeal to the Court of
Justice against a financial correction decision.
Table 3.4: Financial
corrections decided/confirmed for Agriculture (EAGF & Rural Development) as
at end 2012
   || EUR millions 
   || 2012 
 EAGF: ||   
 Financial clearance || (28) 
 Conformity clearance || 503 
 Rural Development: ||   
 TRDI 2000-2006 || 4 
 SAPARD 2000-2006 || 5 
 EAFRD 2007-2013 || 67 
 Total || 551 
The
amount effectively implemented is different from the amount decided due to a short
delay in cashing. The negative financial clearance amount results from payments
to certain Member States (mainly Germany, Italy, the United Kingdom, Lithuania
and Ireland) that exceeded amounts to be recovered for the year.

3.5.   
Financial
corrections implemented in 2012

This
is the most important step of the process whereby the observed situation of
undue expenditure is definitively corrected. In the case of the EAGF,
financial corrections are always implemented by deduction in the monthly
declarations (two months later) and a recording of corrections on specific
income accounts. There is thus a direct impact on the EU budget which pays out
less money to the Member State in question. 
For
Rural Development financial corrections are implemented by the issue of
recovery orders, which are treated as assigned revenue for the EU Budget. 
Table 3.5.1: Financial corrections
implemented for Agriculture (EAGF & Rural Development) in 2012
   || EUR millions 
   || 2012 Total 
 EAGF: ||   
 Financial clearance || (28) 
 Conformity clearance || 638 
 Rural Development: ||   
 TRDI 2000-2006 || 4 
 SAPARD 2000-2006 || 5 
 EAFRD 2007-2013 || 50 
 Total || 669 
As declarations of corrections are made two months
after the decision is taken, and the financial year of EAGF finishes on 15
October, decisions which are taken from 1 September will not be implemented in
the same financial year. Moreover, due to the financial crisis, under
exceptional circumstances, Member States which are particularly exposed can
obtain an extension of up to 3 years for the reimbursement of the full correction
amount. This explains the difference between decided and implemented amounts
(see section 3.6 below).
A
breakdown of the financial corrections implemented in 2012 per Member State for
Agriculture (EAGF) – including irregularities declared by Member States and
repaid to the EU budget – is shown in table 3.5.2 below:
Table 3.5.2: Total financial
corrections and repayment due to irregularities implemented in 2012 for EAGF -
Breakdown by Member State
EUR millions
 Member State || Payments received from the EU budget || Financial corrections and repayment due to irregularities 
 Financial clearance and non-respected payment deadlines || Conformity clearance || Irregularities declared by Member States (repaid to EU) || Total 2012 || % as compared to payments received from the EU budget || % as compared to total amount of financial corrections and repayment due to irregularities 
 Belgium || 618 || 0 || - || 2 || 2 || 0.3% || 0.3% 
 Bulgaria || 426 || 3 || 12 || 3 || 18 || 4.2% || 2.3% 
 Czech Republic || 769 || 0 || - || 0 || 0 || 0% || 0% 
 Denmark || 954 || 0 || 22 || 4 || 26 || 2.7% || 3.4% 
 Germany || 5 446 || (18) || 2 || 10 || (6) || -0.1% || -0.8% 
 Estonia || 92 || 0 || - || 0 || 0 || 0% || 0% 
 Ireland || 1 290 || (1) || 0 || 9 || 8 || 0.6% || 1.0% 
 Greece || 2 409 || 0 || 84 || 6 || 91 || 3.8% || 11.8% 
 Spain || 5 545 || 0 || 47 || 37 || 83 || 1.5% || 10.8% 
 France || 8 353 || 1 || 63 || 19 || 82 || 1.0% || 10.6% 
 Italy || 4 660 || (2) || 211 || 20 || 229 || 4.9% || 29.7% 
 Cyprus || 46 || 0 || 8 || 0 || 8 || 17.4% || 1.0% 
 Latvia || 127 || - || - || 1 || 1 || 0.8% || 0.1% 
 Lithuania || 331 || (2) || 5 || 1 || 4 || 1.2% || 0.5% 
 Luxembourg || 21 || 0 || - || 0 || 0 || 0% || 0% 
 Hungary || 1 146 || 0 || 5 || 4 || 10 || 0.9% || 1.3% 
 Malta || 6 || - || 0 || 0 || 0 || 0% || 0% 
 Netherlands || 911 || (1) || 18 || 3 || 20 || 2.2% || 2.6% 
 Austria || 744 || - || 1 || 6 || 7 || 0.9% || 0.9% 
 Poland || 2 840 || 0 || 12 || 4 || 16 || 0.6% || 2.1% 
 Portugal || 773 || (1) || 16 || 9 || 24 || 3.1% || 3.1% 
 Romania || 1 024 || 0 || 24 || 5 || 29 || 2.8% || 3.8% 
 Slovenia || 124 || - || 0 || 1 || 1 || 0.8% || 0.1% 
 Slovakia || 333 || 0 || - || 1 || 1 || 0.3% || 0.1% 
 Finland || 551 || 0 || 1 || 1 || 2 || 0.4% || 0.3% 
 Sweden || 710 || 0 || 72 || 4 || 76 || 10.7% || 9.9% 
 United Kingdom || 3 341 || (7) || 34 || 9 || 37 || 1.1% || 4.8% 
 Earmarked || 961 || - || - || - || - || - || - 
 Total implemented || 44 551[19] || (28) || 638 || 161 || 771 || 1.7% || 100% 
The following graph takes into account both the
absolute “contribution” of each Member State to the total financial corrections
and repayments due to irregularities, and the relative weight of these
financial corrections and repayments for each Member State compared to the
payments received from the EU budget.
15
Member States present rates below 1% and 3 Member States between 1% and 2%. Corrections
for these 18 Member States contribute to a 32% of the total corrections.
Another 7 Member States present a rate between 2% and 5% and contribute to 57% to
the total amounts of corrections. Finally, 2 Member States present rates
considerably higher than the average, being 10.7% and 17.4%, and contribute EUR
84 million or 11% to the amount of financial corrections implemented in 2012.
This
reflects the deficiencies raised for these Member States by EU and national
audits and controls.
Graph 3.5: Share of Member States’ financial corrections and
repayments due to irregularities declared as compared to payments received from
the EU budget in 2012 for Agriculture (EAGF)*
* The size of the
"bubble" is proportionate to the EU Funds received.

3.6.   
Financial
corrections – cumulative figures to end 2012

3.6.1
Overview of financial corrections - cumulative figures to end 2012
Concerning Agriculture
(EAGF), the cumulated amount decided of EUR 8 286 million covers all
corrections made as from when the first decision was made in 1999. Concerning Rural
Development, the cumulated amount decided of EUR 239 million covers all
corrections and recovery of irregularities as from 2007. It is to be noted that
in some cases the date of implementation was deferred by 18 months, and some
decisions are also reimbursed in 3 deferred annual instalments. This is notably
the case for Member States subject to financial assistance in accordance with
the European Financial Stability Framework Agreement signed on 7 June 2010. As
a consequence, there is an increasing discrepancy between the cumulative
amounts decided and implemented.
Table 3.6.1:
Agriculture (EAGF & Rural Development) financial corrections – cumulative
to end 2012
   || EUR millions 
   || Decided/ confirmed at end 2012 || Implemented at end 2012 || % Implemented 
 Agriculture (EAGF): ||   ||   ||   
 Clearance of accounts procedure || 8 286 || 7 728 || 93.3% 
 Rural Development: ||   ||   ||   
 TRDI 2000-2006 || 68 || 68 || 100% 
 SAPARD 2000-2006 || 25 || 25 || 100% 
 EAFRD 2007-2013 || 146 || 81 || 55.5% 
   || 239 || 174 || 72.8% 
 Total || 8 525 || 7 902 || 92.7% 
It should be noted that all clearance decisions are
formally taken by means of a Commission decision, noting that conformity clearance
decisions usually take longer than financial clearance decisions to proceed and
will impact the coming years.
The
evolution of the overall Agriculture (EAGF) financial corrections decided per
year since 1999 is shown in the graph below. Year on year, the total amounts of
financial corrections remain relatively stable and even show a positive trend
over the period, in absolute amounts and also in terms of percentage of
expenditure.
Graph 3.6.1: Cumulative financial
corrections decided under EAGF clearance of accounts from the first decision in
1999 to end 2012 as compared to payments received from the EU Budget
The table below provides
a breakdown by Member State of the cumulative financial corrections decided
under EAGF clearance of accounts from the first decision in 1999 to end 2012.
Table 3.6.2: Cumulative
financial corrections decided under EAGF clearance of accounts from the first
decision in 1999 to end 2012: Breakdown by Member State
EUR millions 
 Member State || Payments received from EU budget || Cumulated financial corrections at end 2012 || % as compared to payments received from EU budget || % as compared to total amount of financial corrections 
 Belgium || 11 018 || 34 || 0.3% || 0.4% 
 Bulgaria || 1 441 || 37 || 2.6% || 0.4% 
 Czech Republic || 3 904 || 1 || 0.0% || 0.0% 
 Denmark || 15 414 || 173 || 1.1% || 2.1% 
 Germany || 76 997 || 178 || 0.2% || 2.1% 
 Estonia || 428 || 0 || 0.0% || 0.0% 
 Ireland || 18 225 || 42 || 0.2% || 0.5% 
 Greece || 35 793 || 2 102 || 5.9% || 25.4% 
 Spain || 79 733 || 1 366 || 1.7% || 16.5% 
 France || 124 663 || 1 115 || 0.9% || 13.5% 
 Italy || 64 791 || 1 672 || 2.6% || 20.2% 
 Cyprus || 287 || 10 || 3.5% || 0.1% 
 Latvia || 601 || 0 || 0.0% || 0.0% 
 Lithuania || 1 732 || 7 || 0.4% || 0.1% 
 Luxembourg || 399 || 5 || 1.3% || 0.1% 
 Hungary || 6 007 || 31 || 0.5% || 0.4% 
 Malta || 22 || 0 || 0.0% || 0.0% 
 Netherlands || 15 549 || 179 || 1.2% || 2.2% 
 Austria || 9 731 || 9 || 0.1% || 0.1% 
 Poland || 13 569 || 67 || 0.5% || 0.8% 
 Portugal || 9 511 || 193 || 2.0% || 2.3% 
 Romania || 3 573 || 97 || 2.7% || 1.2% 
 Slovenia || 568 || 5 || 0.9% || 0.1% 
 Slovakia || 1 714 || 0 || 0.0% || 0.0% 
 Finland || 7 376 || 21 || 0.3% || 0.3% 
 Sweden || 9 847 || 116 || 1.2% || 1.4% 
 United Kingdom || 51 953 || 826 || 1.6% || 10.0% 
 Total || 564 847 || 8 286 || 1.5% || 100% 
The
following graph takes into account both the absolute “contribution” of each
Member State to the total financial corrections and the relative weight of the
financial corrections for each Member State compared to the payments received
from the EU budget.
15
Member States present overall rates below 1% - corrections for these 15 Member
States contribute to 18% of the total corrections. A further 4 Member States
present rates between 1% and the average rate of 1.5% and represent 6% of the
total corrections. Finally, 8 Member States present a rate above the average of
1.5% and contribute to 76% of the total amount of corrections. 
Graph 3.6.2: Share of Member
States' cumulative financial corrections under EAGF clearance of accounts from
the first decision in 1999 to end 2012 as compared to payments received from
the EU Budget*
* The size of the "bubble" is proportionate
to the EU Funds received.

3.7.   
Recoveries
under Agriculture (EAGF & Rural Development)

An
explanation of the recovery process in the area of Agriculture & Rural
Development is given under 3.2.3 above. 
Table 3.7: Agriculture
(EAGF & Rural Development) recoveries in 2012
   || EUR millions 
   || 2012 Recoveries Decided || 2012 Recoveries Implemented || % Implemented 
 Agriculture (EAGF): ||   ||   ||   
 EAGF irregularities || 162 || 161 || 99.4% 
 Rural Development: ||   ||   ||   
 TRDI 2000-2006 || 5 || 5 || 100.0% 
 SAPARD 2000-2006 || 26 || 34 || 130.8% 
 EAFRD 2007-2013 || 114 ||  127 || 111.4% 
   || 145 || 166 || 114.5% 
 Total || 307 ||  327 || 106.5% 
Decisions
taken at year-end will be implemented in the next financial year. As a
consequence, amounts implemented in a given year can be higher than amounts
decided.

4.       
FINANCIAL CORRECTIONS
AND RECOVERIES UNDER COHESION POLICY

The
graph below shows the financial corrections and recoveries under Cohesion
policy for the period 2009-2012.
Graph 4: Financial corrections and recoveries
implemented in the area of Cohesion Policy for the period 2009-2012 (in
millions of Euro):
Article 59 of the Financial Regulation defines the responsibilities
of the Commission:
Article 59
– Shared Management with Member States 
…
6. In order to
ensure that Union funds are used in accordance with the applicable rules, the
Commission shall:
(a) apply procedures for the examination and acceptance of the
accounts of the designated bodies, ensuring that the accounts are complete,
accurate and true;
(b) exclude from Union financing expenditure for which
disbursements have been made in breach of applicable law;
(c) interrupt
payment deadlines or suspend payments where provided for in the sector-specific
rules. 
Council Regulation (EC) No. 1083/2006 of 11 July 2006[20] laying down general provisions on the
European Regional Development Fund, the European Social Fund and the Cohesion
Fund defines the responsibilities of Member States:
Article 98
– Financial corrections by Member States 
1. The
Member States shall in the first instance bear the responsibility for
investigating irregularities, acting upon evidence of any major change
affecting the nature or the conditions for the implementation or control of
operations or operational programmes and making the financial corrections
required.
2. The
Member State shall make the financial corrections required in connection with
the individual or systemic irregularities detected in operations or operational
programmes. The corrections made by a Member State shall consist of cancelling
all or part of the public contribution to the operational programme. The Member
State shall take into account the nature and gravity of the irregularities and
the financial loss to the Funds. The resources from the Funds released in this
way may be reused by the Member State until 31 December 2015 for the
operational programme concerned in accordance with the provisions referred to
in paragraph 3. 
3. The contribution cancelled in accordance with paragraph 2 may
not be reused for the operation or operations that were the subject of the
correction, nor, where a financial correction is made for a systemic
irregularity, for existing operations within the whole or part of the priority
axis where the systemic irregularity occurred.

4.1.   
Preventive
actions under Cohesion Policy

In accordance with Articles
91 and 92 respectively of Regulation 1083/2006, under Cohesion Policy, and in
addition to making financial corrections and recoveries, the Commission may:
- interrupt the
payment deadline for a maximum period of 6 months for 2007-13 programmes if:
(a) There is evidence to suggest a significant
deficiency in the functioning of the management and control systems of the
Member State concerned;
(b) The Commission services have to carry out
additional verifications following information that expenditure in a certified
statement of expenditure is linked to a serious irregularity which has not been
corrected.
- suspend all or
part of an interim payment to a Member State for 2007-13 programmes in the
following three cases:
(a) There is evidence of serious deficiency in the
management and control system of the programme and the Member State has not
taken the necessary corrective measures; or
(b) Expenditure in a certified statement of
expenditure is linked to a serious irregularity which has not been corrected;
or
(c) Serious breach by a Member State of its
management and control obligations.
Where the required measures are not taken by the Member
State, the Commission may impose a financial correction.
The
tables below present for the ERDF, the Cohesion Fund, the ESF and the EFF, a
view on the evolution of the interruption cases both in number and in amount.
The opening balance includes all the cases still open at end 2011, irrespective
of the year when the interruption was notified to the Member State (for this
reason certain figures are not directly comparable with those disclosed in the
2011 annual accounts). The new cases only refer to the interruptions notified
in the year 2012. The closed cases represent the cases for which the payment of
cost claims resumed in 2012, irrespective of the year when the interruption
started. The cases still open at end 2012 represent the interruptions that
remain active at 31 December 2012, i.e. the payment of cost claims is still
interrupted pending corrective measures to be taken by the Member State
concerned.
Table 4.1.1:
Interruptions for ERDF and Cohesion Fund 2007-2013
 EUR millions 
   || ERDF / Cohesion Fund 2007-2013 ||   
 Member State || Total open cases at 31.12.2011 || New cases 2012 || Closed cases during 2012 || Total open cases at 31.12.2012 
   || No. of cases || Amount || No. of cases || Amount || No. of cases || Amount || No. of cases || Amount 
 Germany || 3 || 17 ||  2 ||  163 ||  - ||  - ||  5 ||  180 
 Spain || - || - ||  49 || 1 495 ||  41 ||  1 319 ||  8 || 176 
 France || - || - ||  6 || 51 || 5 || 24 ||  1 ||  27 
 Italy ||  10 ||  265 ||  20 ||  1 122 ||  19 || 860 ||  11 || 526 
 Latvia || - || - ||  5 ||  94 || 5 || 94 ||  0 ||  0 
 Lithuania || - || - ||  4 ||  164 || 4 || 164 ||  0 ||  0 
 Hungary ||  - ||  - || 3 || 55 || - || - ||  3 || 55 
 Poland ||  - ||  - || 5 || 605 || - || - ||  5 || 605 
 Romania ||  - ||  - ||  1 ||  41 ||  - ||  - ||  1 ||  41 
 Slovenia || - || - || 1 ||  6 ||  1 ||  6 ||  0 ||  0 
 Slovakia ||  2 ||  71 || - || - || 2 ||  71 ||  0 ||  0 
 United Kingdom ||  - ||  - ||  1 ||  22 ||  - ||  - ||  1 ||  22 
 Cross-border || - || - || 11 ||  59 ||  8 ||  52 ||  3 ||  6 
 Total ||  15 || 353 ||  108 ||  3 878 ||  85 ||  2 592 ||  38 || 1 639 
In
addition to these interruption procedures, 119 warning letters (in cases where
no payment claim was pending) have been sent in 2012 for ERDF, contributing to
the further prevention of irregular amounts.
Table 4.1.2: Interruptions for ESF 2007-2013
 EUR millions 
   || ESF 2007-2013 ||   
 Member State || Total open cases at 31.12.2011 || New cases 2012 || Closed cases during 2012 || Total open cases at 31.12.2012 
   || No. of cases || Amount || No. of cases || Amount || No. of cases || Amount || No. of cases || Amount 
 Czech Republic ||  - ||  - || 1 || 47 || - || - ||  1 || 47 
 Germany ||  - ||  - ||  5 ||  165 || 4 || 145 ||  1 ||  19 
 Spain || 2 || 10 ||  8 ||  159 ||  9 ||  160 ||  1 || 9 
 France ||  2 ||  25 ||  9 ||  142 || 4 || 91 ||  7 ||  76 
 Italy ||  4 ||  53 ||  7 ||  207 || 6 || 231 ||  5 || 30 
 Latvia || - || - ||  2 ||  26 || 2 || 26 ||  0 ||  0 
 Lithuania || - || - ||  1 ||  1 || 1 || 1 ||  0 ||  0 
 Romania ||  - ||  - ||  1 ||  21 || 1 ||  21 ||  0 ||  0 
 Slovakia || - || - ||  1 ||  45 ||  1 || 45 ||  0 ||  0 
 United Kingdom || 2 ||  234 ||  2 ||  69 ||  4 || 303 ||  0 ||  0 
 Total ||  10 || 323 ||  37 ||  881 ||  32 ||  1 023 ||  15 || 181 
Table 4.1.3:
Interruptions for EFF 2007-2013
 EUR millions 
   || EFF 2007-2013 ||   
 Member State || Total open cases at 31.12.2011 || New cases 2012 || Closed cases during 2012 || Total open cases at 31.12.2012 
   || No. of cases || Amount || No. of cases || Amount || No. of cases || Amount || No. of cases || Amount 
 Czech Republic ||  - ||  - || 1 ||  1 ||  1 ||  1 ||  0 ||  0 
 Denmark || 1 || 0 || - || - || 1 || 0 || 0 || 0 
 Germany ||  2 || 1 || - || - ||  - ||  - ||  2 ||  1 
 Estonia || 1 || 0 || 3 || 0 || - || - || 4 || 0 
 Spain ||  1 || 62 ||  2 ||  32 ||  2 ||  84 ||  1 || 9 
 France ||  2 ||  3 || - || - ||  - ||  - ||  2 ||  3 
 Italy || - || - ||  6 ||  38 ||  - ||  - ||  6 || 38 
 Latvia || - || - ||  1 ||  0 ||  - ||  - ||  1 ||  0 
 Netherlands ||  - ||  - || 3 ||  8 ||  3 ||  8 ||  0 ||  0 
 Poland ||  - ||  - || 1 || 2 ||  1 ||  2 ||  0 ||  0 
 Portugal ||  - ||  - ||  3 ||  16 ||  2 ||  12 ||  1 ||  4 
 Romania ||  - ||  - ||  5 ||  35 ||  - ||  - ||  5 ||  35 
 Slovakia || - || - ||  2 ||  2 ||  - ||  - ||  2 ||  2 
 Finland ||  2 ||  0 ||  3 ||  0 ||  5 ||  1 ||  0 ||  0 
 Sweden || 1 || 0 || 2 || 6 || - || - || 3 || 6 
 United Kingdom || 1 ||  34 ||  4 ||  7 ||  2 ||  33 ||  3 ||  8 
 Total ||  11 || 100 ||  36 ||  149 ||  17 ||  141 ||  30 || 108 
Suspensions:
Concerning ERDF and the Cohesion Fund,
suspension decisions were taken for 2 programmes in Germany and in Italy. Both suspensions
were still effective after 31 December 2012. Concerning ESF, 2
suspension decisions were adopted in 2012 and concerned the Czech Republic and
Slovakia. Suspension was still on-going for Czech Republic after 31 December
2012. There were no suspension decisions taken in 2012 for EFF.
Additionally, following the preparation of the DGs' 2012
Annual Activity Reports and the identification of programmes under reservation,
immediate targeted action plans were launched to protect the EU's financial
interests. DG’s will strictly follow up the remedial actions requested from
Member States. The objective of the operational and/or audit actions, to be
carried out by the Member States, is to address systemic weaknesses and to
correct irregular expenditure. Once evidence is available that this is done,
interruptions may be lifted.
The Commission calculates the error rates in the
programmes that it funds. These error rates, reflecting the effective
functioning of management and controls systems, together with the cumulative
residual risk, constitute the cornerstone of the assurance process of the
consolidated methodology to estimate the amount at risk. Other sources include:
(i) the results of the Commission's own audit work, in particular the review of
the work of the audit authorities and the audit of specific risk programmes or
areas such as management verifications and public procurement; (ii) other EU
audit results; (iii) national system audit reports received throughout the
year; (iv) annual summaries of controls and national declarations; (v) the
opinions of the Directors as Authorising Officers by Sub-Delegation for the
programmes and (vi) experience from previous years. 
The Commission also assesses the reliability and
correctness of the total projected error rates reported by the audit
authorities, based on data and detailed information provided or subsequently
requested from audit authorities. In cases where serious inconsistencies/doubts
or lack of information were identified, on-the-spot fact finding missions are
carried out. 
This methodology to assess the cumulative residual risk
therefore reinforces the annual assessment and Commission's supervision for
operational programmes in the context of shared management under a multiannual
control framework. It also requires a more proactive role by managing and
certifying authorities to quickly correct irregular expenditure across the
whole programme or concerned population of operations, based on the results and
analysis of the audit authorities’ work and statistical sampling and thus
increasing the assurance process for the year. As an example, on average for
all ERDF and Cohesion Fund programmes, the cumulative residual risk at end 2012
is 1.3% compared to around 2% at end 2011, which shows improvements in the
corrective actions taken by Member States in 2012.

4.2.   
Corrective
mechanisms under Cohesion Policy

4.2.1 Financial Corrections
Financial
corrections are the main tool used under Cohesion Policy for addressing errors
and irregularities. As with Agriculture, the objective of financial corrections
is to exclude from EU funding expenditure that is not in accordance with
applicable rules and regulations, i.e. ensure that all expenditure declared by
the Member State (and reimbursed by the EU) is legal and regular – however the
legal framework does not foresee a sanction mechanism against Member States.
This means that the recovery of monies stricto sensu (i.e. the return of
cash to the EU budget by the issuance of a recovery order by the Commission requesting
reimbursement of amounts unduly paid) is not the main objective of a financial
correction procedure; it is however one of the different means to implement
financial corrections (see 4.5 below).
In this
context, it should be noted that the Commission's proposal for the Common
Provisions on Regulations covering the Structural Funds for the period
2014-2020[21],
provides for the possibility of financial corrections reducing the budgetary
allocation to the particular Member State, thus having a net reduction effect.
This would be foreseen for cases of irregularities that demonstrate serious
deficiencies in the effective functioning of the management and control
systems, and which were detected by the Commission or the ECA after the
submission of the annual accounts by the Member State. This should set better
incentives for Member States to operate effective supervisory and control
systems. The
result of the controls and corrections made by Member States under Cohesion
policy are presented in section 6 below.
Financial
corrections may also be applied by the Commission where the Member States have
failed to take corrective measures following the detection of serious
deficiencies in the management and control systems of their national bodies
which led or could lead to systemic irregularities.
The Commission bases
its financial corrections on individual cases of irregularity identified.
However, where it is not possible or cost effective to quantify the amount of
irregular expenditure precisely, the Commission has the possibility to apply
extrapolated or flat-rate corrections. Extrapolation is used when there are
results of a representative sample available in relation to a systemic
irregularity. Flat-rate corrections are calculated on the basis of standard
scales of corrections decided by the Commission for each programming period and
applied in the case of individual breaches or systemic irregularities where the
financial impact is not precisely quantifiable and it would be too costly to
audit each project potentially affected.
 Commission's methods for the calculation of flat rate financial corrections   When it is not possible to use individual or extrapolated corrections, flat-rate corrections are applied to the amount of expenditure placed at risk. The level of the flat-rate correction applied (2 %, 5 %, 10 %, 25 % or 100%) depends on the seriousness of the weaknesses found, whether they are related to key or ancillary controls and whether they are recurrent or not*.   - Use of a 2 % flat-rate: Key controls are satisfactory, but one or more ancillary controls failed to operate. - Use of a 5 % flat-rate: Not all the key controls are executed in the number, frequency or depth required by the regulations. Therefore, the risk of loss for the fund is significant. - Use of a 10 % flat-rate: One or more key controls are not applied or applied so poorly or so infrequently that they are completely ineffective in determining the eligibility of the claim or preventing irregularity. Therefore, there is a high risk of widespread loss to the fund. - Use of a 25 % flat-rate: When a control system is absent or gravely deficient and there is evidence of widespread irregularity and negligence in countering irregular or fraudulent practices. Therefore, there is a risk of exceptionally high losses to the fund. - Use of 100% flate-rate: Deficiencies are so serious as to constitute a complete failure to comply with Union rules, so rendering all payments irregular. * See Commission Decision C(2011) 7321 final of 19.10.2011 
 
The
general process is outlined below:
The
first action is generally an audit/control by the Commission services, by the
ECA or the Member State itself, or an anti-fraud investigation conducted by
OLAF. This audit/control may provide evidence of irregular expenditure or
weaknesses in control systems and should also provide an estimate of the
amounts concerned.
Cohesion
policy is built on a multiannual and multilevel control system whereby one level
of control may rely on the work of previous controls performed by other bodies
(single audit concept). Section 6 provides details on the impact of the
actions of the Member States.
Throughout
the implementation period the Commission services hold regular meetings with
Member States authorities to ensure the correct monitoring of implementation of
all programmes and audit/control activities. The Commission has an audit
strategy in place covering all structural fund instruments, which is updated
annually.
During
programme implementation the audit work by the Commission consists of a
combination of desk reviews of the work of the national audit authorities and
on-the-spot audit missions. At the end of the programming period, the audit
authority gives its opinion on the legality and regularity of expenditure
declared for each programme, based on the examination of the audit results, the
expenditure and irregularities declared and withdrawals and recoveries made by
the certifying authority. The Commission scrutinises all closure documents
(desk review) and may perform ex-post closure audits using a risk based
approach so as to obtain additional assurance that the submitted closure
documents are reliable.
The
processing of financial corrections, after these initial audits or controls,
then follows the three key steps ("in progress",
"decided/confirmed" and "implemented") which are detailed
separately below.
The
final step is reporting where every year the Commission provides the results of
its corrective actions to the Discharge Authority and the ECA via reports such
as this, as well as in the EU consolidated annual accounts and in the relevant DGs'
Annual Activity Reports and other ad-hoc reports[22]. Quarterly reports on the status of
financial corrections are also sent to the Discharge Authority.  
4.2.2 Recoveries
In the area of Cohesion Policy, Member States (and not the
Commission) are primarily responsible for recovering amounts unduly paid from
the final beneficiaries, increased where applicable by late payment interest. In
most cases, corrections initiated at the Commission's request lead to
withdrawals by the Member State in a payment claim (see below). For this
reason, recoveries by the Commission from Member States are generally a
residual way of implementing financial corrections. 

4.3.   
Financial
corrections in progress as at end 2012

Under
Cohesion Policy, the estimate of the amount of financial corrections in
progress is based on audit findings of the Commission, the ECA or OLAF, all of
which are followed up by the relevant Directorate General through on-going
contradictory procedures with the concerned Member States. A best and prudent
estimate is made, which takes into account the state of play of the follow up
of the audits and the issuance of final position letters or pre-suspension
letters at 31 December 2012. This amount may be subject to change following the
contradictory procedures, under which Member States are given the opportunity
to present further evidence.
Table 4.3: Financial corrections in progress as at end 2012
 EUR millions 
   ||   ||   ||   ||   || Financial corrections in progress as at 31.12.2012 
 ERDF ||   ||   ||   ||   || 1 350 
 Cohesion Fund ||   ||   ||   ||   || 114 
 ESF ||   ||   ||   ||   || 590 
 FIFG/EFF ||   ||   ||   ||   || 7 
 EAGGF Guidance ||   ||   ||   ||   || 102 
 Total ||   ||   ||   ||   || 2 163 
ERDF and Cohesion Fund: At the end of 2012, correction
procedures were in progress at Commission level for an estimated total of EUR 1
464 million. The decrease in amounts compared to previous years reflects the
phasing out of financial corrections previously reported as "in
progress" for the 2000-06 programmes. 
ESF: At the end of 2012, correction procedures were in progress at
Commission level for an estimated total amount of EUR 590 million. The increase
in the estimated amounts in progress from prior years is mainly due to the
closure of a significant amount of programmes under 2000-2006 programming
period for which the closure proposal with financial corrections has been
communicated to the Member State or a suspension has been merged with closure
process. When the amount of a financial correction is not yet known, e.g. the
contradictory procedure is on-going, then the case is reported at EUR 1 value
for prudence reasons. This is the case for the current financial corrections in
progress in relation to the 2007-13 period.

4.4.   
Financial
corrections decided/confirmed in 2012

These amounts are final, meaning
that they have been either agreed by the Member State concerned or decided by
the Commission. In the area of Cohesion Policy, financial corrections
decided/confirmed are the result of EU controls and audits by the
Commission, the ECA or OLAF.
Table 4.4: Financial
corrections decided/confirmed under Cohesion Policy by programming period in
2012
 EUR millions 
  Cohesion Policy || 1994-1999 Period || 2000-2006 Period || 2007-2013 Period || Total as at end 2012 
 ERDF || (2) || 428 || 531 || 958 
 Cohesion Fund || (2) || 106 || 99 || 203 
 ESF || 11 || 41 || 374 || 425 
 FIFG/EFF || - || 2 || 1 || 2 
 EAGGF Guidance || 0 || 31 || - || 31 
 Total || 7 || 608 || 1 005 || 1 619 
    A breakdown of these amounts
per Member State is disclosed in Annex 1.
ERDF and the Cohesion
Fund:
Amounts both confirmed/decided have significantly increased compared to last
year:
- Period 2007-2013: Due to stricter
supervision by the Commission (e.g. more audits completed) leading to more
timely procedures for financial corrections, a significant amount (EUR 631
million) of financial corrections were confirmed. These mainly concern Spain
(EUR 267 million), the Czech Republic (EUR 111 million), Greece (EUR 82
million) and Poland (EUR 77 million).
- Period 2000-2006: EUR 534 million covers
corrections related to the on-going closure process of the programming period
2000-2006. The corrections at closure result from the analysis of winding-up
declarations, or the extrapolation of the residual error rate. The main
corrections concern Spain (EUR 316 million), Italy (EUR 65 million) and
Portugal (EUR 53 million). These corrections should continue in 2013 as the
result of the finalisation of the closure exercise, with lower amounts though.
ESF: 
- Period 2000-2006:
most of the financial corrections reported relate to either the extrapolation
of the residual error rate at closure (following the analysis of the winding-up
declarations), or net corrections at closure. Closure audits are on-going. 
- Period 2007-2013:
the amounts reported relate to irregular amounts deducted from interim payment
claims submitted by Member States during the life cycle of the programme. The
increase in the amounts reported compared to previous years comes from the
joint audit strategy developed for this programming period. 

4.5.   
Financial
corrections implemented in 2012

These
amounts are linked to the final step of the process whereby the observed
situation of undue expenditure is definitively corrected in order to protect
the EU budget. They are implemented as follows:
a.      if the correction is
accepted, as it is in the vast majority of cases, the Member State either
deducts (withdraws) this amount from a subsequent payment claim to the
Commission before recovery proceedings are completed at national level, or it first
recovers the amount from the beneficiary and then deducts it from a subsequent
payment claim (recovery at national level). In both cases the replacement of
irregular expenditure by other eligible operations is allowed by the applicable
regulations. In these cases there is no impact in the Commission's accounts, as
the level of EU funding to a specific programme is not reduced since the funds
were re-used for eligible actions. The validation of the payment request by the
authorising officer in the accounting system is a necessary step to establish
the implementation of financial corrections.
b.      if the Member State
disagrees with the correction proposed by the Commission, following a formal
contradictory procedure with the Member State (that may include the suspension
of payments to the programme), the Commission will adopt a formal financial
correction decision and issue a recovery order to obtain repayment from the
Member State. Therefore, there is no possibility for the Member State to re-use
the corrected amount for other eligible operations and there is a net reduction
in EU funding with a return of monies to the EU budget. It should be noted that
this situation arises in only a very small number of cases (e.g. only 1% of the
corrections in 2012.) The issuance of the recovery order is of course recorded
in the Commission's accounting system.
c.      At programme closure
when no further re-use of the funds is possible by the Member State, the amount
of the irregular expenditure is deducted from the final cost claim either by
the Member State or by the Commission services within the closure process of
the programme.     
A summary of the possibilities for
implementation under Cohesion Policy are given below:

Table 4.5.1: Financial corrections
implemented under Cohesion Policy in 2012 (split by decided/confirmed in 2012
and in previous years)
 EUR millions 
   || ERDF || CF || ESF || FIFG/ EFF || EAGGF Guidance || Total 2012 
 Financial Corrections 1994-1999 period: ||   ||   ||   ||   ||   ||   
        Confirmed in 2012[23] || (2) || (2) || - || - || 0 || (4) 
        Confirmed previous years || - || - || 11 || - || - || 11 
 Subtotal 1994-1999 period || (2) || (2) || 11 || - || 0 || 7 
 Financial Corrections 2000-2006: ||   ||   ||   ||   ||   ||   
        Confirmed in 2012 || 395 || 85 || 35 || 0 || 17 || 532 
        Confirmed previous years || 1 871 || 37 || 6 || - || - || 1 914 
 Subtotal  2000-2006 period[24] || 2 267 || 122 || 41 || 0 || 17 || 2 447 
 Financial Corrections 2007-2013: ||   ||   ||   ||   ||   ||   
        Confirmed in 2012 || 151 || 87 || 377 || 0 || - || 615 
        Confirmed previous years || 0 || - || 2 || - || - || 2 
 Subtotal  2007-2013 period || 151 || 87 || 379 || 0 || - || 617 
 Total financial corrections implemented in 2012 || 2 416 || 207 || 430 || 1 || 17 || 3 071 
 || A breakdown of these amounts per Member State is disclosed in Annex 2. || 
These corrections concern
primarily the 2000-2006 period and financial corrections that were
decided/accepted in previous years. It includes a major correction for Spain
(EUR 1.8 billion) that has been reported as implemented following the
completion of the verification of all closure documents, the full validation of
the cost claims submitted by the national authorities from which the
corrections were deducted, as well as the processing of the partial payment of
the remaining balance to this Member State. 
Table 4.5.2: Financial corrections
implemented under Cohesion Policy in 2012 (by implementation type)
 EUR millions 
   || ERDF || CF || ESF || FIFG/EFF || EAGGF Guidance || TOTAL 
 Financial Corrections 1994-99: ||   ||   ||   ||   ||   ||   
 - By decommitment/deduction at closure || (2) || (2) || 11 || - || - || 7 
 - By recovery order || 0 || 0 || - || - || 0 || 0 
 Subtotal 1994-1999 period || (2) || (2) || 11 || - || 0 || 7 
 Financial Corrections 2000-2006: ||   ||   ||   ||   ||   ||   
 - By decommitment/deduction at closure || 2 163 || 115 || 29 || 0 || 15 || 2 323 
 - By Member States || 70 || 4 || 2 || - || - || 76 
 - By recovery order || 34 || 4 || 9 || 0 || 2 || 48 
 Subtotal 2000-2006 period || 2 267 || 122 || 41 || 0 || 17 || 2 447 
 Financial Corrections 2007-2013: ||   ||   ||   ||   ||   ||   
 - By decommitment/deduction at closure || - || - || - || 0 || - || 0 
 - By Member States || 151 || 87 || 379 || - || - || 617 
 - By recovery order || - || - || - || - || - || - 
 Subtotal 2007-2013 period || 151 || 87 || 379 || 0 || - || 617 
 Total financial corrections implemented in 2012 || 2 416 || 207 || 430 || 1 || 17 || 3 071 

4.6.   
Financial
corrections: cumulative figures & implementation rates to end 2012

4.6.1   Overview
The graph below shows the
cumulative financial corrections under Cohesion policy for the different
programming periods: 
Graph 4.6.1: Financial corrections implemented under Cohesion Policy–
cumulative figures (in EUR millions)
Table 4.6.1: Financial
corrections decided/confirmed under Cohesion Policy and implementation rates as
at 31 December 2012 (cumulative figures)
 EUR millions 
   || ERDF || CF || ESF || FIFG/EFF || EAGGF Guidance || Total 2012 
 1994-1999 programmes ||   ||   ||   ||   ||   ||   
 Confirmed/decided || 1 767 || 271 || 407 || 100 || - || 2 545 
 Implemented || 1 764 || 264 || 407 || 100 || - || 2 535 
 Confirmed/decided but not yet implemented || 3 || 7 || - || - || - || 10 
 Rate of implementation || 99.9% || 97.2% || 100% || 100% || - || 99.6% 
 2000-2006 programmes ||   ||   ||   ||   ||   ||   
 Confirmed/decided || 5 004 || 614 || 1 225 || 100 || 72 || 7 015 
 Implemented || 4 626 || 464 || 1 206 || 5 || 58 || 6 359 
 Confirmed/decided but not yet implemented || 378 || 150 || 19 || 95 || 14 || 654 
 Rate of implementation || 92.5% || 75.7% || 98.6% || 4.8% || 80.9% || 90.7% 
 2007-2013 programmes ||   ||   ||   ||   ||   ||   
 Confirmed/decided || 535 || 99 || 592 || 1 || - || 1 227 
 Implemented || 154 || 87 || 538 || 0 || - || 779 
 Confirmed/decided but not yet implemented || 381 || 12 || 54 || 0 || - || 448 
 Rate of implementation || 28.8% || 87.4% || 90.9% || 60.9% || - || 63.5% 
 Total financial corrections ||   ||   ||   ||   ||   ||   
 Confirmed/decided || 7 305 || 984 || 2 224 || 201 || 72 || 10 787 
 Implemented || 6 544 || 815 || 2 150 || 105 || 58 || 9 673 
 Confirmed/decided but not yet implemented || 761 || 169 || 74 || 96 || 14 || 1 112 
 Rate of implementation || 89.6% || 82.8% || 96.7% || 52.2% || 80.6% || 89.7% 
As would be expected
for the 1994-1999 period, which has been closed for some time, there is a
very high level of implementation (99.6%). For the following period, 2000-2006,
the closure is advancing. This can be seen by the increased implementation rate
for ERDF for the programming period 2000-2006 in 2012 (from 52% in 2011 to 92%
in 2012) which is explained by the sending to Member States of all but seven
ERDF closure letters covering operational programmes by end 2012, followed by
the authorisation of partial ERDF 2000-2006 final payment claims (within the
limits of available credits). This high implementation rate at end 2012 applies
to ESF as well. For FIFG, closure documents and final payment
claims are still being processed by the Commission services, which explain the
low implementation rate for this programming period.
For the period 2007-2013,
the cumulative amount of corrections decided/ confirmed or implemented by end
2012 increased, compared to previous year, as a result of stricter supervision
by the Commission and growing number of audits completed at this stage of execution
of the programmes. The corrections confirmed/decided or implemented will
continue to increase in the coming years, as a result of the Commission
supervisory role and EU audits.
4.6.2   Closure
of the 2000-2006 programming period – the impact of financial corrections
imposed by the Commission
As the
closure of the period 2000-2006 is in the completion stage, the overall results
of the corrective actions and the total monies spent can be compared and a more
complete view of the impact of corrective mechanisms is possible, as indicated
in a recent report of the Commission services[25].
For the ERDF and ESF funds at the end of 2012 the rates of financial correction,
based on Commission supervision only, were 4.9% for the ERDF and 2.4% for the
ESF of the decided allocations (EUR 129.6 billion and EUR 67.3 billion respectively). This corresponds to
EUR 6.3 billion for the ERDF and EUR 1.6 billion for the ESF of financial
corrections. 
The closure
process has been essential in ensuring that residual risks are appropriately
covered for both Funds since financial corrections imposed at the closure stage by the
Commission represent roughly one third of the total financial corrections
imposed by the Commission (EUR 5 billion for the ERDF and EUR 1.2 billion for the ESF, corresponding to 3.9%
and 1.8% of allocations respectively). They were implemented through deduction
from expenditure reimbursed by the Commission for 92% (ERDF) and 98% (ESF). 
This
includes amounts of corrections in progress at end 2012 corresponding to 1% for
the ERDF and 0.6% for the ESF of allocations (EUR 1.3 billion and EUR 0.4
billion respectively). Such amounts are
included in closure letters formally communicated to Member States authorities
but not yet accepted by Member States[26]. These
estimated rates of financial correction do not include additional potential
ERDF corrections linked to unfinished projects nor additional corrections that
may result from the completion of the closure process[27].
Table
4.6.2.1: ERDF – Programming period 2000-2006: Financial corrections decided/confirmed
and in progress (at 31/12/2012) – Breakdown by Member State
 EUR millions 
 Member State || ERDF contribution Amount || Financial corrections decided/ confirmed || Financial corrections in progress (closure letters sent) || Total Financial corrections imposed for 2000-2006 || Financial corrections imposed as compared to ERDF contribution || Share of Financial corrections imposed compared to total financial corrections 
 Belgium ||    865 ||    7 || - ||    7 || 0.8% || 0.1% 
 Czech Republic ||    986 ||    5 ||    10 ||    15 || 1.5% || 0.2% 
 Denmark ||    147 ||    0 || - ||    0 || 0.3% || 0.0% 
 Germany ||   15 575 ||    23 ||    88 ||    112 || 0.7% || 1.8% 
 Estonia ||    233 ||    1 || - ||    1 || 0.4% || 0.0% 
 Ireland ||   1 952 ||    18 ||    160 ||    178 || 9.1% || 2.8% 
 Greece ||   15 177 ||   1 135 ||    81 ||   1 216 || 8.0% || 19.2% 
 Spain ||   28 019 ||   2 446 ||    254 ||   2 700 || 9.6% || 42.7% 
 France ||   8 270 ||    111 ||    26 ||    137 || 1.7% || 2.2% 
 Italy ||   18 753 ||    739 ||    459 ||   1 197 || 6.4% || 18.9% 
 Cyprus ||    28 || - || - || - || 0.0% || 0.0% 
 Latvia ||    382 ||    1 || - ||    1 || 0.2% || 0.0% 
 Lithuania ||    584 ||    3 || - ||    3 || 0.5% || 0.0% 
 Luxembourg ||    44 ||    0 || - ||    0 || 0.1% || 0.0% 
 Hungary ||   1 239 ||    4 || - ||    4 || 0.3% || 0.1% 
 Malta ||    47 || - || - || - || 0.0% || 0.0% 
 Netherlands ||    971 ||    0 || - ||    0 || 0.0% || 0.0% 
 Austria ||    894 ||    0 || - ||    0 || 0.0% || 0.0% 
 Poland ||   4 973 ||    129 || - ||    129 || 2.6% || 2.0% 
 Portugal ||   13 249 ||    181 ||    3 ||    184 || 1.4% || 2.9% 
 Slovenia ||    137 || - || - || - || 0.0% || 0.0% 
 Slovakia ||    881 ||    42 || - ||    42 || 4.8% || 0.7% 
 Finland ||    916 ||    0 || - ||    0 || 0.0% || 0.0% 
 Sweden ||    611 ||    0 ||    0 ||    0 || 0.0% || 0.0% 
 United Kingdom ||   8 991 ||    132 ||    40 ||    172 || 1.9% || 2.7% 
 Interreg ||   5 645 ||    25 ||    202 ||    227 || 4.0% || 3.6% 
 Total ||   129 566 ||   5 004 ||   1 322 ||   6 325 || 4.9% || 100% 
The
graph below takes into account both the absolute “contribution” of each Member
State to the total financial corrections and the relative weight of the
financial corrections for each Member State compared to the payments received
from the EU budget.
15
Member States present overall rates below 1% - corrections for these 15 Member
States contribute to 2% of the total corrections. A further 6 Member States
plus INTERREG present rates between 1% and the average rate of 4.9% and
represent 14% of the total corrections. Finally, 4 Member States present rates
above the average of 4.9% and contribute to 84% of the total corrections.  
Graph 4.6.2.1 Share of Member
States' cumulative financial corrections decided/confirmed and in progress (at
31/12/2012) for ERDF programming period 2000-2006*
* The size of the "bubble" is proportionate
to the EU Funds received.
Table
4.6.2.2: ESF – Programming period 2000-2006: Financial corrections decided/confirmed
and in progress (at 31/12/2012) – Breakdown per Member State
 EUR millions 
 Member State || ESF contribution Amount || Financial corrections decided/ confirmed || Financial corrections in progress (closure letters sent) || Total Financial corrections imposed for 2000-2006 || Financial corrections imposed as compared to ESF contribution || Share of Financial corrections imposed compared to total financial corrections 
 Belgium ||   1 080 ||    5 ||    2 ||    7 || 0.6% || 0.4% 
 Czech Republic ||    470 ||    - || - ||    - || 0.0% || 0.0% 
 Denmark ||    423 ||    0 || - ||    0 || 0.0% || 0.0% 
 Germany ||   11 385 ||    13 ||    0 ||    13 || 0.1% || 0.8% 
 Estonia ||    73 ||    0 || - ||    0 || 0.3% || 0.0% 
 Ireland ||   1 115 ||    3 || - ||    3 || 0.3% || 0.2% 
 Greece ||   5 034 ||    19 || - ||    19 || 0.4% || 1.1% 
 Spain ||   12 667 ||    474 ||    114 ||    589 || 4.6% || 36.1% 
 France ||   6 555 ||    198 ||    7 ||    205 || 3.1% || 12.6% 
 Italy ||   8 748 ||    273 ||    281 ||    554 || 6.3% || 34.0% 
 Cyprus ||    25 ||    - || - ||    - || 0.0% || 0.0% 
 Latvia ||    136 ||    3 || - ||    3 || 2.3% || 0.2% 
 Lithuania ||    189 ||    0 || - ||    0 || 0.0% || 0.0% 
 Luxembourg ||    27 ||    2 || - ||    2 || 6.7% || 0.1% 
 Hungary ||    455 ||    8 || - ||    8 || 1.8% || 0.5% 
 Malta ||    11 ||    - || - ||    - || 0.0% || 0.0% 
 Netherlands ||   1 731 ||    0 || - ||    0 || 0.0% || 0.0% 
 Austria ||    753 ||    - || - ||    - || 0.0% || 0.0% 
 Poland ||   2 059 ||    51 || - ||    51 || 2.5% || 3.1% 
 Portugal ||   4 928 ||    0 || - ||    0 || 0.0% || 0.0% 
 Slovenia ||    79 ||    2 || - ||    2 || 2.4% || 0.1% 
 Slovakia ||    365 ||    1 || - ||    1 || 0.3% || 0.1% 
 Finland ||    873 ||    - || - ||    - || 0.0% || 0.0% 
 Sweden ||   1 023 ||    11 || - ||    11 || 1.1% || 0.7% 
 United Kingdom ||   7 139 ||    161 || - ||    161 || 2.3% || 9.9% 
 Total ||   67 344 ||   1 225 ||    404 ||   1 629 || 2.4% || 100% 
In the context of the
ESF, at the end of 2012, there were still 61 programmes to be closed where
potential financial corrections might be identified.
The
graph below takes into account both the absolute “contribution” of each Member
State to the total financial corrections and the relative weight of the
financial corrections for each Member State compared to the payments received
from the EU budget.
15
Member States present overall rates below 1% - corrections for these 15 Member
States contribute to 3% of the total corrections. A further 5 Member States
present rates between 1% and the average rate of 2.4% and represent 11% of the
total corrections. Finally, 5 Member States present rates above the average of 2.4%
and contribute to 86% of the total corrections.  
Graph 4.6.2.2 Share of Member
States' cumulative financial corrections – decided/confirmed and in progress
(at 31/12/2012) for ESF programming period 2000-2006*
 LU 
* The size of the "bubble" is proportionate
to the EU Funds received.
4.6.3
Preventive effect of financial corrections
It is underlined that
the reported amounts in the sections above do not reflect the totality of the
amount of financial corrections accepted by Member States as a result of the
supervisory role of the Commission. Remedial action plans may have a preventive
impact on expenditure already incurred by beneficiaries and registered at
national level in the certifying authority's accounts but not yet declared to
the Commission. For such expenditure, the certifying authority (under Cohesion
policy) applies the financial correction requested by the Commission prior to
declaring expenditure. Particularly in the case of extrapolated or flat rate
corrections, where there are weaknesses in management and control systems
covering a large population of projects, the amounts concerned can be
significant. 
Preventive effect of
financial corrections under Cohesion policy
As a
result of the Commission action plan and interruptions, at the end of 2012, the
Czech Republic accepted a Commission request for a correction of about EUR 450
million covering two ERDF programmes. The Commission could formally report only
EUR 108 million as withdrawals from previously certified expenditure; the
remaining corrections do not appear in the official Commission reporting, as an
amount of EUR 151.4 million was not included in the certification of October
2012 and a further amount of approximately EUR 189 million will be deducted by
the certifying authority before certifying future claims to the Commission in
2013. A similar preventive effect, not reflected in the official reporting of
financial corrections, concerns an ERDF/CF Slovak programme where a 7.3% deduction
of all expenditure certified and to be certified in the future for hundreds of
contracts was deemed necessary by the Commission in order to adequately protect
the EU budget and it is now implemented by the Member State.
Another
case concerns an ESF flat-rate correction for Romania: The Commission
identified serious problems in a Romanian operational programme during 2012.
The Commission and Romanian authorities agreed on a 25% flat-rate correction
covering all expenditure incurred as at end 2012, plus further claims affected
by the same irregularities identified by the Commission. As a result Romania
made a further declaration of expenditure (exceeding 25 % of all expenditure
declared previously), on the basis of which the Commission paid a very small amount
to Romania in December 2012 after offsetting the agreed financial correction.
The impact of the financial correction is that expenditure incurred, which was
in breach of law, is excluded from Union expenditure.
This preventive effect
of the Commission supervisory role is not reflected in the official reporting
even though it leads to an increased protection of the EU budget. Warning
letters sent out by the Directorates-General when system deficiencies are
identified before a payment claim is submitted to the Commission may have the
same preventive effect on the protection of the EU budget, but in this case no
financial correction is reported by the European Commission/ Member States
either.

4.7.   
Recoveries
under Cohesion Policy

Due
to the reasons described in the sections above, recoveries by the Commission
are generally a residual way of implementing financial corrections under
Cohesion Policy. Amounts concerned are therefore not significant.
Table 4.7: Recoveries under
Cohesion Policy in 2012
 EUR millions 
   || Confirmed || Implemented 
 Cohesion Policy || 22 || 14 
The
amounts recovered by the Member States, based on their own initiative,
are also disclosed in this report (see section 6), noting that these
cover only the 2007-2013 period, where Member States are legally required to
provide the Commission with clear and structured data on amounts withdrawn from
co-financing before the national recovery process is finalised and the amounts
deducted from payment claim after having been effectively recovered from beneficiaries
at national level. These recoveries are not recorded the Commission's
accounting system. Figures available for prior programming periods are not
considered complete and/or reliable and present potential overlaps with
Commission's figures and so are not reported.

5.       
INTERNAL &
EXTERNAL POLICIES AND ADMINISTRATIVE EXPENDITURE

This
heading concerns the preventive and corrective actions for the remaining parts
of the budget which are not executed under shared management, essentially
external and internal policy areas as well as administrative expenditure. Centralised-direct
management means that the Commission, at Headquarters or in Delegations,
undertakes the contract award procedures and payments to final beneficiaries.
Centralised-indirect management means that implementation tasks are given to EU
or other bodies. Decentralised management implies that implementation tasks are
entrusted (partially, substantially or fully) to a third country. Joint
management means that implementation tasks are entrusted to an international
organisation. In total these areas cover about 15% of the annual EU budget.
Graph 5: Financial corrections and recoveries implemented for internal
and external policy areas 2009-2012 (in EUR millions):

5.1.   
Preventive
actions

Across the
DGs implementing the non-shared management expenditure, there are of course
varying measures applied. Examples of the main types are given below.
5.1.1 Support and guidance of operations
DGs provide
guidance via internet and other sources and support (by email, telephone, field
visits), particularly on contractual issues, with the aim of ensuring a sound
and efficient management of funding and therefore a lower risk of
irregularities. Comprehensive and up to date guidance is used to mitigate the
risks associated with what can often be a complex financial management
environment.
5.1.2 Core training
DGs invest
time and resources in training their staff so as to ensure that they are
competent to manage the underlying expenditure and make the necessary checks. Horizontal
courses are also available to staff in the areas of finance and contracts.
5.1.3 Eligibility assessments
Depending
on the management type, the underlying legislation and the contractual
conditions, varying eligibility criteria will be defined for a given
expenditure. The Authorising Officer services have to demonstrate that the
eligibility criteria are met both prior to and throughout the subsequent life
of a project. The continuous assessment of the eligibility criteria enables the
Commission to ensure the legality of the programmes, through commitments to
payments.
5.1.4
Fraud prevention
Anti-fraud
measures and actions are embedded in various ex-ante controls for prevention
purposes. External audits ensure the follow-up of fraud cases and fraud
suspicions including coordination with OLAF. In line with the relevant
Commission decision and recent developments, DGs are required to have an
Anti-Fraud Strategy, which should enhance the functioning of the fraud risk
related controls. 
5.1.5 Ex-ante transactional checks performed by the
Commission
Depending
on their underlying business and risk assessments, some DGs focus more on
ex-ante controls, while others have found it more efficient and effective to
rely more on ex-post controls (see section 5.2). Comprehensive and
rigorous ex-ante transactional controls performed by Commission staff are key
financial controls on contracts and payments. Before any operation is
authorised, the operational and financial aspects are initiated and verified by
two different (operational/financial) entities. This is the "four
eyes" principle of the Financial Regulation, which can be reinforced
further if a DG wishes (e.g. by requiring controls by two separate agents for
each of these two stages). Ex-ante checks are made, for example, on cost claims
and audit certificates on cost statements established by external auditors. Staff
will check, for example, the eligibility of costs and key documents such as
valid financial guarantees (tender guarantee, pre-financing guarantee,
performance guarantee) and certificates of acceptance issued by the project
managers or supervisors. These controls are regularly reviewed and updated to
respond to feedback from controls and subsequent risk analysis.

5.2.   
Corrective
mechanisms

Ex-post audits
and on-the-spot verifications are made based on mandatory requirements and/or
risk based audits and verifications, often using external auditors contracted
(either by the Commission or by third parties e.g. beneficiaries). For many
DGs, at the moment the payment is authorised, the Commission is not able to
ensure fully that the amount paid is accurate and in compliance with the
applicable legal and contractual provisions. This can generally only be
achieved through checks carried out at the beneficiaries' premises after costs
have been incurred and declared. The result of these checks is primarily
recoveries to the Commission (see section 5.4), although the use of
financial corrections is growing.

5.3.   
Financial
Corrections

While
financial corrections are primarily a method used under Agriculture and
Cohesion policies, it is a mechanism that is beginning to be applied in the
policy of Home Affairs. The amount of financial corrections decided and
implemented in 2012 is EUR 1 million (2011: EUR 0.4 million) and is expected to
increase in the coming years.

5.4.   
Recoveries

5.4.1   Recovery
procedure under indirect centralised, decentralised and joint management 
As with
shared management, the recovery of amounts unduly paid under decentralised and
indirect centralised management modes is the primary responsibility of Member
States, third countries or agencies. The joint management mode applies also
corrective tools that are defined in the agreements concluded with
international organisations. But the Commission also issues recoveries in all
these areas.
Recoveries at
the level of the Commission are made so as to ensure that expenditure that is
not in accordance with applicable rules and regulations is excluded from EU
financing. Amounts concerned can either be the subject of a recovery order
established by the Commission or deducted from the subsequent request for
payment. It should be noted that some DGs may have a low rate of recovery for undue
payments from funds' recipients because the deduction is directly made by the
beneficiary in the request for payment. Therefore, the information cannot be
registered in the Commission's accounting system.
In
accordance with the Financial Regulation, recovery orders should be established
by the Authorising Officer. Recoveries are then implemented by direct bank
transfer from the debtor or by offsetting from other amounts that the
Commission owes to the debtor. The Financial Regulation foresees additional
procedures to ensure the collection of recovery orders overdue, which are the
object of a specific follow up by the Accounting Officer of the Commission.
5.4.2   Recovery procedure in
direct centralised management
When the Commission
implements the budget directly, financial operations are performed by its
departments under the principle of segregation of duties between the Authorising
Officers and the Accounting Officer. The powers of Authorising Officer are
delegated by the College to each Director General and head of service of the
Commission who can sub-delegate these powers to their staff (Article 65 of
the Financial Regulation).
The responsibility to establish an amount
receivable lies with the Authorising Officer, who verifies that the debt is
certain, of a fixed amount and due (Article 78 of the Financial
Regulation). The authorisation of recovery is the act by which the Authorising
Officer responsible instructs the Accounting Officer, by issuing a recovery
order, to recover an amount receivable that the Authorising Officer has
established (Article 79 of the Financial Regulation)[28]. 
If the full amount has not been recovered by the
deadline set by the Authorising Officer, the Accounting Officer launches the
procedure for effecting recovery by any means offered under the law. This
implies that the Accounting Officer sends reminders and letters of formal
notice and negotiates, when appropriate, additional time for payment under the
stringent conditions laid down in the rules of application of the Financial
Regulation (Article 89 of the Rules of Application, "RAP").
In addition, the Accounting Officer must call any guarantee lodged in
advance by the debtor per Article 88 (1) of the RAP and offset the amounts
to recover with equivalent claims that the debtor has on the Union. The claim
of the Union and the claim of the debtor must be certain, of a fixed amount and
due. In exceptional circumstances, where it is necessary to safeguard the
financial interests of the Union, when the Accounting Officer has justified
grounds to believe that the amount due to the Union would be lost, the Accounting
Officer shall recover by offsetting the amount due to the Commission against a
payment to be made to the same beneficiary before the deadline set by the
Authorising Officer. In 2012, 688 offsettings were made for a total amount
of EUR 106 million.
Failing voluntary payment or offsetting, the
Accounting Officer shall launch a forced recovery either; (a) by enforcing a
recovery decision adopted by the Commission under Article 299 of the TFEU,
(b) by legal action before the national competent Court or, (c) in case of
compromissory clause, before the Court of Justice of the European Union.
Recovered
amounts are booked as assigned revenues (in the cases listed under Article 21
of the Financial Regulation, e.g. recovery of undue payments) or as miscellaneous
revenues for other cases. Revenue pertaining to competitions fines are booked
when all legal remedies have been exhausted (Article 83 Financial Regulation).
5.4.3   Recoveries implemented
Due
to the multi-annual nature of a large portion of EU spending, recoveries should
be viewed over a period of time rather than on a one year basis alone. Table 5.4.3
below shows the recoveries made per year from 2009 to 2012, excluding shared
management. The table indicates an average correction rate of 1%
(compared to budget payments received) over this four year period. Excluding
Administration expenditure, the average would be 1.3%.
Table 5.4.3: Recoveries
implemented for internal and external policy areas and administration 2009-2012
 EUR millions 
 Expenditure type || 2009 || 2010 || 2011 || 2012 || Total Recoveries || Total budget payments 2009-12 || % of recoveries compared to payments of the EU budget 
 Internal policies ||   100 || 162 || 268 || 229 || 759 || 57 436 || 1.3% 
 External policies ||    81 || 136 || 77 || 99 || 393 || 29 636 || 1.3% 
 Administration || 9 || 5 || 2 || 9 || 25 || 32 644 || 0.1% 
 Total ||   190 || 303 || 347 || 337 || 1 177 || 119 716 || 1.0% 

6.       
CORRECTIVE ACTIONS MADE
BY MEMBER STATES UNDER COHESION POLICY ON THEIR OWN INITITATIVE
6.1.   
Background

Under shared
management, Member States have the primary obligation to prevent and detect
irregularities, and thus to make financial corrections and recover undue
amounts from beneficiaries. Thus, they perform management verifications,
controls and audits in the first instance, these being in addition to those of
the Commission detailed above. Under the regulations for the current
programming period, Member States have to report annually the corrections
stemming from all controls performed. Such a requirement was only introduced for
2007-2013 and the Commission is performing risk-based audits to test the reliability
of these figures for the purpose of its assurance process. 
Throughout the
implementation period for Cohesion Policy, the managing authority (and its
intermediate bodies) performs management verifications, i.e. desk checks on all
payment claims and on-the-spot checks on sampled operations. The certifying
authority takes steps to ensure that adequate verifications have been made by
the managing authority before certifying the legality and regularity of
expenditure declared to the Commission, including carrying out its own checks
when necessary. The audit authority is responsible for setting an audit
strategy to perform system audits on the management and control systems and
audits on representative samples of operations. It reports the results annually
to the Commission in an annual control report, which includes an annual audit
opinion on the functioning of the systems and the total projected error rate
resulting from audits on operations. Audits carried out by the national audit
authorities are carried out ex-post after certification of expenditure to the
Commission.
Graph 6.1: Cohesion Policy:

6.2.   
Corrections
reported by Member States

The cumulative
corrections implemented to end 2012, following the controls made by the Member
States for Cohesion Policy programming period 2007-2013, are given below. These
amounts are in addition to, and after deduction of, the corrections reported
cumulatively by the Commission above.
Table 6.2: Cumulative
corrections reported by Member States for Cohesion Policy period 2007-2013
 EUR millions 
 Member State || ERDF/CF || ESF || EFF || Total 2012 
 Belgium ||  3 ||  11 ||  - ||  14 
 Bulgaria || 13 || 2 ||  0 || 15 
 Czech Republic ||  191 ||  37 ||  - ||  228 
 Denmark ||  0 ||  0 ||  0 ||  0 
 Germany ||  290 ||  49 ||  1 ||  340 
 Estonia ||  4 ||  0 ||  0 ||  4 
 Ireland ||  0 ||  5 ||  0 ||  5 
 Greece ||  63 || - ||  0 ||  63 
 Spain ||  204 || 39 ||  9 ||  252 
 France ||  42 ||  37 ||  0 ||  79 
 Italy ||  141 ||  27 ||  0 ||  168 
 Cyprus ||  0 ||  0 ||  0 ||  1 
 Latvia ||  10 || - ||  0 ||  10 
 Lithuania ||  6 ||  0 ||  0 ||  6 
 Luxembourg ||  - ||  0 ||  - ||  0 
 Hungary ||  26 || - ||  0 ||  26 
 Malta ||  1 ||  0 ||  - ||  1 
 Netherlands ||  1 ||  2 ||  0 ||  3 
 Austria ||  4 ||  1 ||  0 ||  5 
 Poland ||  204 || - ||  0 ||  204 
 Portugal ||  46 ||  28 ||  1 ||  75 
 Romania ||  43 || - ||  0 ||  43 
 Slovenia ||  5 ||  5 ||  - ||  10 
 Slovakia ||  33 || 4 ||  0 ||  37 
 Finland ||  1 ||  0 ||  0 ||  1 
 Sweden ||  2 ||  1 ||  1 ||  4 
 United Kingdom ||  38 ||  13 ||  1 ||  52 
 Cross-border ||  8 ||  - ||  - ||  8 
 TOTAL IMPLEMENTED ||  1 377 ||  261 ||  14 ||  1 652 
The table above shows
the cumulative financial corrections reported by each Member State since the
beginning of the 2007-2013 programming period to end 2012. These are in
addition to the corrections reported cumulatively by the Commission above. Complete
and/or reliable figures are not available for previous programming periods
since the requirement to report such corrections to the Commission had not been
included in the underlying legislation.
So as to gain
additional assurance as to the completeness and reliability of the Member
States’ reporting on recoveries and withdrawals, the Commission started an
audit of structural actions (ERDF, CF, ESF, EFF) in 2011. Based on a risk
analysis, a sample of 12 certifying authorities in 10 Member States was
selected (the conclusions of this audit, based on the final reports and
follow-up implemented by the concerned Member States, were communicated to the
Discharge Authority). During 2012, the Commission services obtained reasonable
assurance that 11 of the 12 audited certifying authorities have satisfactory
arrangements in place for keeping an account of amounts concerning for the
recovery and withdrawal of undue payments and for the reporting of them to the
Commission. The Commission will continue this audit in 2013 and beyond in other
Member States, following analysis of the annual statements from Member States
on withdrawals and recoveries.

7.       
RECOVERY OF
PRE-FINANCING AMOUNTS

Another
important protective control of the Commission, which is not covered by any of
the above mechanisms, is the recovery of unused (i.e. unspent) pre-financing
amounts. In almost all areas, the EU makes pre-financing, or advance payments
to beneficiaries. These are payments intended to provide the beneficiary with a
cash advance or float. When a beneficiary has not used (spent) the
pre-financing amount received from the EU on eligible expenditure, the
Commission services issue a recovery order to return the monies to the EU
budget. This procedure represents an important step in the control system of
the EU to ensure that no excess money is kept by the beneficiary without proper
expense justification, thus contributing to the protection of the EU budget.
Table 7: Recovery of
Pre-financing amounts in 2012
 EUR millions 
   ||   ||   || 2012 
 Agriculture: ||   ||   ||   
 EAGF ||   ||   ||  0 
 Rural Development ||   ||   ||  0 
 Cohesion Policy: ||   ||   ||   
 ERDF ||   ||   ||  38 
 Cohesion Fund ||   ||   ||  5 
 ESF ||   ||   ||  214 
 FIFG/EFF ||   ||   ||  0 
 EAGGF Guidance ||   ||   ||  5 
 Internal policy areas ||   ||   ||  207 
 External policy areas ||   ||   ||  104 
 Administration ||   ||  2 
 Total recovered Pre-Financing ||   ||   ||  575 
The above amounts are
all the result of the issuance of a recovery order by the Commission, and are
recorded in the accounting system as such. The diagram below shows how the process
works:
The above recovery of
unused pre-financing amounts should not be confused with irregular expenditure
recovered. Where Commission services identify and recover such expenditure in
relation to pre-financing amounts paid out, these are included in the normal
financial correction or recovery processes described above.

8.       
RECOVERIES RELATING TO
OWN RESOURCE REVENUES

So as to provide a complete
picture of all the tools used by the Commission to protect the EU budget, it is
also necessary to consider the recoveries made in the area of own resource
revenue. Own resource revenue is the primary element of the EU’s operating
revenue and therefore the bulk of expenditure is financed by it. There are
three categories of own resources: traditional own resources, the VAT-based
resource and the GNI-based resource. Traditional own resources comprise sugar
levies and customs duties. Member States retain, by way of collection costs,
25% of traditional own resources, and the above amounts are shown net of this
deduction.
The Commission makes on-the-spot
inspections so as to verify that the correct amounts are being supplied to the
EU budget. Amounts can also be audited as part of the ECA’s annual audit
process. Recoveries of amounts due to the budget are made following: European
Commission's inspection reports, ECA's audits, financial responsibility cases
resulting from Member States' administrative errors or lack of diligence in
their recovery action, infringement proceedings, European Court of Justice's
rulings and also amounts resulting from spontaneous payments from Member States
and interest on late payments related to own resources.
In 2012, the amounts recovered
were as follows:
Table 8: Recoveries
relating to Own Resources revenue in 2012
   || EUR millions 
   ||   ||   || 2012 
 Amounts recovered: - Principal - Interest ||   ||   ||   133 160 
 Total recovered ||   ||   || 293 

9.       
GLOSSARY

AAR                                 Annual
Activity Reports: Since the 2001 budget exercise for the Commission, and since
2003 for all Union institutions, the authorising officer by delegation must
report to his/her institution on the performance of his/her duties in the form
of an annual activity report together with financial and management
information. This report indicates the results of the operations by reference
to the objectives set, the risks associated with these operations and the way
the internal control functions.
Administrative error            A
case of non-compliance with Commission instructions or procedures but which
does not imply lack of compliance with regulatory or contractual provisions.
Annex III and Annex
IIIA     The overview of amounts to be recovered from final beneficiaries
provided by the paying agency to the Commission as part of its annual accounts
(under Agriculture).
Assigned revenue               Amounts
recovered (cashed) are assigned to a specific budget line which triggers
payment appropriations for the programme concerned. The amount is available
again for expenditure. 
Authorising Officer             Is
responsible in each institution for implementing revenue and expenditure in
accordance with the principles of sound financial management and for ensuring
that the requirements of legality and regularity are complied with. 
Budget                             Annual
financial plan, drawn up according to budgetary principles, that provides
forecasts and authorises, for each financial year, an estimate of future costs
and revenue and expenditures and their detailed description and justification,
the latter included in budgetary remarks.
CAP                                 The
Common Agricultural Policy
Certifying Body                  Public
or private legal entity designated by the Member State with a view to
certifying the truthfulness, completeness and accuracy of the accounts of the
accredited paying agency.
Clearance of accounts        The
procedure (under Agriculture) by which the Commission accepts the accounts of
the Member States and thereby the expenditure made by the paying agencies to
farmers and beneficiaries. Firstly the accounts of paying agencies are checked
for accuracy by certification bodies in the Member States and are then subject
to an annual financial clearance decision by the Commission. Secondly the
Commission itself then carries out the conformity clearance procedure based on
audits which permit it to identify and exclude (in later years) payments not
complying with the rules.
Cost claim                        A
statement of costs incurred often linked to a request for further funds (in
line with the underlying contract).
EAFRD                             European
Agricultural Fund for Rural Development
EAGF                               European
Agricultural Guarantee Fund
EAGGF                             European
Agricultural Guarantee & Guidance Fund
ERDF                               European
Regional Development Fund
ESF                                 European
Social Fund
Error                                A
non-deliberate clerical or technical error committed by the beneficiary, i.e.
arithmetical or transmission errors.
Financial corrections           The
Commission shall make financial corrections on Member States in order to
exclude from Union financing expenditure incurred in breach of applicable law.
The Commission shall base its financial corrections on the identification of
amounts unduly spent, and the financial implications for the budget. Where such
amounts cannot be identified precisely, the Commission may apply extrapolated
or flat-rate corrections in accordance with the sector-specific rules.
                                      The
Commission shall, when deciding on the amount of a financial correction, take
account of the nature and gravity of the breach of applicable law and the
financial implications for the budget, including the case of deficiencies in
management and control systems.
The criteria for establishing financial corrections
and the procedure to be applied may be laid down in the sector-specific rules.
Financial Regulation            Sets
out the operating principles and basic rules governing the EU budget. Deals
thoroughly with budget implementation and control issues, which are not fully
covered in the EU treaties.
Fraud                               Fraud
covers a range of irregularities and illegal acts characterized by intentional
deception or misrepresentation, damaging interests of the EU.
Irregularities                     Irregularities
mean any infringement of a provision of Union law resulting from an act or
omission by an economic operator, which has, or would have, the effect of
prejudicing the general budget of the Union or budgets managed by them, either
by reducing or losing revenue accruing from own resources collected directly on
behalf of the Union, or by an unjustified item of expenditure.
Legal basis                       Legal
base or basis is, as a general rule, a law based on an article in the Treaty
giving competence to the Union for a specific policy area and setting out the
conditions for fulfilling that competence including budget implementation.
Certain Treaty articles authorise the Commission to undertake certain actions,
which imply spending, without there being a further legal act.
OLAF                               European
Anti-Fraud Office
Paying Agency                  A
paying agency is the organisation responsible within a Member State for the
proper assessment, calculation, inspection and payment of subsidies. Part of
the work of the paying agency may be done by delegated bodies.
Pre-debtor                        Under
Agriculture, the ‘pre-debtors’ fulfil the criteria of the Commission to be included
in the accounts (Annex III/IIIA tables) and are the result of a
pre-notification where the debtor has been informed by the PA of a potential
debt which may end up in a recovery notification. The time elapsing between
informing of a potential debt and the recovery notification can take several
months or even years.
Recoveries                        Entitlements
vis-à-vis the Union's debtors. Authorising Officers establish third parties'
debts towards the Union and instruct the accounting officer to recover money
due. Actual recovery of amounts due to the Union may take different forms:
voluntary payment by the debtor, offsetting of mutual debts, resort to a
financial guarantee or enforcement action (either directly through a Union
decision in accordance with Art 256 ECT or following an enforcement title
obtained before the competent jurisdiction). 
Recovery order                  The
recovery order is the document issued by which the Authorising officer (AO)
registers an entitlement by the Commission in order to retrieve the amount
which is due to the Commission. The entitlement is the right that the
Commission has to claim the sum which is due by a debtor, usually a beneficiary.
Residual error rate              The
residual error rate is the estimate of the remaining level of error in an
audited population after corrective measures have been taken. It is used to
assess whether corrective measures have adequately mitigated the risks of
irregularities.
Rules of Application            Lay
down detailed rules for the application of the Financial Regulation. They are
set out in a Commission Regulation adopted after consulting all institutions
and cannot alter the Financial Regulation upon which they depend.
Structural Funds                The
Structural Funds and the Cohesion Fund are funds allocated by the European
Union as part of its regional policy. The purpose of the Structural Funds is to
strengthen the economic and social cohesion of the enlarged European Union in
order to promote the harmonious, balanced and sustainable development of the
Community (Article 3 of Regulation (EC) No. 1083/2006).
Systemic irregularity           A
systemic irregularity is a recurrent error due to serious failings in
management and control systems designed to ensure correct accounting and
compliance with rules and regulations.

Annex 1: Cumulative financial corrections confirmed under
Cohesion Policy - Breakdown by Member State

 EUR millions 
 Member State || Cumulative end 2011 || Financial corrections confirmed in 2012 || Cumulative end 2012 
 ERDF || CF || ESF || FIFG/ EFF || EAGGF Guidance || Total 2012 
 1994-1999 || 2 539 || (2) || (2) || 11 || 0 || 0 || 7 || 2 545 
 Belgium || 3 || 0 || - || 11 ||  - ||  - || 10 || 13 
 Denmark || 3 || 0 || - ||  - ||  - ||  - || 0 || 3 
 Germany || 327 || 1 || - ||  - ||  - ||  - || 1 || 328 
 Ireland || 41 ||  - || - ||  - ||  - ||  - || 0 || 41 
 Greece || 520 || 0 || 0 ||  - ||  - ||  - || 1 || 521 
 Spain || 655 ||  - || - ||  - ||  - ||  - || 0 || 655 
 France || 85 ||  - ||  - ||  - ||  - ||  - || 0 || 85 
 Italy || 476 || (2) ||  - ||  - ||  - || 0 || (2) || 474 
 Luxembourg || 5 ||  - ||  - ||  - ||  - || 0 || 0 || 5 
 Netherlands || 178 ||  - ||  - ||  - ||  - ||  - || 0 || 178 
 Austria || 2 ||  - ||  - ||  - ||  - ||  - || 0 || 2 
 Portugal || 97 || (1) || (2) ||  - ||  - ||  - || (4) || 94 
 Finland || 1 ||  - ||  - ||  - ||  - ||  - || 0 || 1 
 Sweden || 1 ||  - ||  - ||  - ||  - ||  - || 0 || 1 
 United Kingdom || 135 || 0 ||  - ||  - ||  - ||  - || 0 || 135 
 INTERREG || 10 ||  - ||  - ||  - ||  - ||  - || 0 || 10 
 2000-2006 || 6 405 || 428 || 106 || 41 || 2 || 31 || 608 || 7 015 
 Belgium || 11 || 2 || - || 0 ||  - ||  - || 2 || 13 
 Bulgaria || 22 ||  - || - ||  - ||  - ||  - || 0 || 22 
 Czech Republic || 19 || 1 || 4 ||  - ||  - ||  - || 5 || 24 
 Denmark || 0 || 0 ||  - ||  - ||  - ||  - || 0 || 0 
 Germany || 13 || 22 ||  - || 0 || 0 ||  - || 22 || 35 
 Estonia || 0 || 1 ||  - ||  - ||  - ||  - || 1 || 1 
 Ireland || 44 ||  - ||  - ||  - ||  - ||  - || 0 || 44 
 Greece || 1 183 ||  - || 8 ||  - ||  - ||  - || 8 || 1 191 
 Spain || 2 963 || 228 || 88 || 19 ||  - || 18 || 353 || 3 316 
 France || 288 || 13 ||  - || 19 ||  - || 2 || 33 || 321 
 Italy || 954 || 65 ||  - || 0 || 1 || 8 || 75 || 1 029 
 Cyprus || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Latvia || 4 ||  - || 1 ||  - || 0 ||  - || 2 || 6 
 Lithuania || 2 || 3 || 1 ||  - ||  - ||  - || 3 || 5 
 Luxembourg || 2 || 0 ||  - ||  - ||  - ||  - || 0 || 2 
 Hungary || 55 ||  - ||  - || 1 ||  - ||  - || 1 || 56 
 Malta || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Netherlands || 2 ||  - ||  - ||  - || 0 ||  - || 0 || 2 
 Austria || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Poland || 274 || 22 || 1 || 0 ||  - ||  - || 23 || 297 
 Portugal || 201 || 50 || 3 ||  - ||  - ||  - || 53 || 254 
 Romania || 12 ||  - ||  - ||  - ||  - ||  - || 0 || 12 
 Slovenia || 2 ||  - ||  - ||  - ||  - ||  - || 0 || 2 
 Slovakia || 45 ||  - || 0 ||  - ||  - ||  - || 0 || 45 
 Finland || 1 || 0 ||  - ||  - ||  - ||  - || 0 || 1 
 Sweden || 11 ||  - ||  - || 0 ||  - ||  - || 0 || 11 
 United Kingdom || 289 || 4 ||  - || 2 ||  - || 2 || 8 || 297 
 INTERREG || 8 || 18 ||  - ||  - ||  - ||  - || 18 || 26 
 Member State || Cumulative end 2011 || Financial corrections confirmed in 2012 || Cumulative end 2012 
 ERDF || CF || ESF || FIFG/EFF || EAGGF Guidance || Total 2012 
 2007-2013 || 221 || 531 || 99 || 374 || 1 || 0 || 1 005 || 1 227 
 Belgium || 0 ||  - ||  - || 3 ||  - ||  - || 3 || 3 
 Bulgaria || 2 || 0 ||  - || 1 ||  - ||  - || 1 || 3 
 Czech Republic || 0 || 111 ||  - || 36 ||  - ||  - || 147 || 147 
 Denmark || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Germany || 3 || 0 ||  - || 6 || 0 ||  - || 6 || 9 
 Estonia || 0 || 10 || 0 ||  - ||  - ||  - || 10 || 10 
 Ireland || 2 ||  - ||  - ||  - ||  - ||  - || 0 || 2 
 Greece || 0 || 82 ||  - || 159 ||  - ||  - || 241 || 241 
 Spain || 85 || 267 ||  - || 23 ||  - ||  - || 291 || 376 
 France || 0 || 2 ||  - || 19 ||  - ||  - || 21 || 21 
 Italy || 1 || 18 ||  - || 2 || 0 ||  - || 20 || 21 
 Cyprus || 0 ||  - ||  - ||  - || 0 ||  - || 0 || 0 
 Latvia || 0 ||  - ||  - || 9 ||  - ||  - || 9 || 9 
 Lithuania || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Luxembourg || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Hungary || 27 || 1 || 4 ||  - ||  - ||  - || 6 || 33 
 Malta || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Netherlands || 0 ||  - ||  - ||  - || 0 ||  - || 0 || 0 
 Austria || 0 || 2 ||  - ||  - ||  - ||  - || 2 || 2 
 Poland || 92 || 6 || 71 || 19 || 0 ||  - || 95 || 187 
 Portugal || 1 || 1 ||  - || 0 ||  - ||  - || 1 || 2 
 Romania || 0 || 22 ||  - || 81 ||  - ||  - || 103 || 103 
 Slovenia || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Slovakia || 0 || 8 || 25 || 11 ||  - ||  - || 43 || 43 
 Finland || 0 ||  - ||  - ||  - || 0 ||  - || 0 || 0 
 Sweden || 0 ||  - ||  - || 0 ||  - ||  - || 0 || 0 
 United Kingdom || 6 ||  - ||  - || 5 ||  - ||  - || 5 || 11 
 INTERREG || 0 || 0 ||  - ||  - ||  - ||  - || 0 || 0 
 Total || 9 166 || 958 || 203 || 425 || 2 || 31 || 1 619 || 10 787 

Annex 2: Cumulative financial corrections implemented
under Cohesion Policy - Breakdown by Member State

 EUR millions 
 Member State || Cumulative end 2011 || Financial corrections implemented in 2012 || Cumulative end 2012 
 ERDF || CF || ESF || FIFG/ EFF || EAGGF Guidance || Total 2012 
 1994-1999 || 2 528 || (2) || (2) || 11 || 0 || 0 || 7 || 2 535 
 Belgium || 4 || 0 ||  - || 11 || - ||  - || 11 || 15 
 Denmark || 3 || 0 ||  - ||  - || - ||  - || 0 || 3 
 Germany || 326 || 1 ||  - ||  - || - ||  - || 1 || 327 
 Ireland || 38 ||  - ||  - ||  - || - ||  - || 0 || 38 
 Greece || 517 || 0 || 0 ||  - || - ||  - || 1 || 518 
 Spain || 648 ||  - ||  - ||  - || - ||  - || 0 || 648 
 France || 87 ||  - ||  - ||  - || - ||  - || 0 || 87 
 Italy || 474 || (2) ||  - ||  - || - || 0 || (2) || 472 
 Luxembourg || 4 ||  - ||  - ||  - || - ||  - || 0 || 4 
 Netherlands || 178 ||  - ||  - ||  - || - ||  - || 0 || 178 
 Austria || 2 ||  - ||  - ||  - || - ||  - || 0 || 2 
 Portugal || 97 || (1) || (2) ||  - || - || 0 || (4) || 93 
 Finland || 1 ||  - ||  - ||  - || - ||  - || 0 || 1 
 Sweden || 1 ||  - ||  - ||  - || - ||  - || 0 || 1 
 United Kingdom || 139 || 0 ||  - ||  - || - ||  - || 0 || 139 
 INTERREG || 9 ||  - ||  - ||  - || - ||  - || 0 || 9 
 2000-2006 || 3 912 || 2 267 || 122 || 41 || 0 || 17 || 2 447 || 6 359 
 Belgium || 8 || 0 ||  - || 0 ||  - ||  - || 1 || 8 
 Bulgaria || 12 ||  - || 6 || - ||  - ||  - || 6 || 18 
 Czech Republic || 5 || 5 || 8 || - ||  - ||  - || 13 || 19 
 Denmark || 0 || 0 ||  - || - ||  - ||  - || 0 || 0 
 Germany || 11 || 22 ||  - || 0 || 0 ||  - || 22 || 33 
 Estonia || 0 || 0 ||  - || 0 ||  - ||  - || 1 || 1 
 Ireland || 26 ||  - ||  - ||  - ||  - ||  - || 0 || 26 
 Greece || 1 149 ||  - || 12 ||  - ||  - ||  - || 12 || 1 162 
 Spain || 1 051 || 1 952 || 81 || 19 ||  - || 6 || 2 058 || 3 109 
 France || 250 || 20 ||  - || 18 ||  - || 2 || 40 || 290 
 Italy || 833 || 55 ||  - || 0 ||  - || 7 || 62 || 895 
 Cyprus || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Latvia || 4 || 1 || 1 ||  - || 0 ||  - || 3 || 6 
 Lithuania || 1 || 3 || 1 || 0 ||  - ||  - || 3 || 4 
 Luxembourg || 2 || 0 ||  - ||  - ||  - ||  - || 0 || 2 
 Hungary || 55 ||  - ||  - ||  - ||  - ||  - || 0 || 55 
 Malta || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Netherlands || 1 || 0 ||  - ||  - ||  - ||  - || 0 || 1 
 Austria || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Poland || 151 || 39 || 9 || 1 ||  - ||  - || 49 || 200 
 Portugal || 121 || 118 || 3 ||  - ||  - ||  - || 121 || 242 
 Romania || 11 ||  - ||  - ||  - ||  - ||  - || 0 || 11 
 Slovenia || 2 ||  - ||  - ||  - ||  - ||  - || 0 || 2 
 Slovakia || 6 || 24 || 0 ||  - ||  - ||  - || 24 || 30 
 Finland || 0 || 0 ||  - ||  - ||  - ||  - || 0 || 0 
 Sweden || 11 ||  - ||  - ||  - ||  - ||  - || 0 || 11 
 United Kingdom || 201 || 4 ||  - || 2 ||  - || 2 || 8 || 208 
 INTERREG || 1 || 24 ||  - ||  - ||  - ||  - || 24 || 25 
 Member State || Cumulative end 2011 || Financial corrections implemented in 2012 || Cumulative end 2012 
 ERDF || CF || ESF || FIFG/ EFF || EAGGF Guidance || Total 2012 
 2007-2013 || 162 || 151 || 87 || 379 || 0 || 0 || 617 || 779 
 Belgium || 0 ||  - ||  - || 0 ||  - ||  - || 0 || 1 
 Bulgaria || 1 || 0 ||  - || 1 ||  - ||  - || 1 || 2 
 Czech Republic || 0 || 111 ||  - || 0 ||  - ||  - || 111 || 111 
 Denmark || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Germany || 3 ||  - ||  - ||  - ||  - ||  - || 0 || 3 
 Estonia || 0 ||  - || 0 || 0 ||  - ||  - || 0 || 0 
 Ireland || 2 ||  - ||  - ||  - ||  - ||  - || 0 || 2 
 Greece || 0 ||  - ||  - || 159 ||  - ||  - || 159 || 159 
 Spain || 41 || 0 ||  - || 65 ||  - ||  - || 65 || 106 
 France || 0 ||  - ||  - || 19 ||  - ||  - || 19 || 19 
 Italy || 0 || 4 ||  - || 3 ||  - ||  - || 6 || 6 
 Cyprus || 0 ||  - ||  - ||  - || 0 ||  - || 0 || 0 
 Latvia || 0 ||  - ||  - || 9 ||  - ||  - || 9 || 9 
 Lithuania || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Luxembourg || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Hungary || 28 || 0 ||  - ||  - ||  - ||  - || 0 || 28 
 Malta || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Netherlands || 0 ||  - ||  - ||  - || 0 ||  - || 0 || 0 
 Austria || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Poland || 86 || 6 || 71 || 22 || 0 ||  - || 98 || 184 
 Portugal || 1 || 1 ||  - || 0 ||  - ||  - || 1 || 1 
 Romania || 0 || 22 ||  - || 81 ||  - ||  - || 103 || 103 
 Slovenia || 0 ||  - ||  - ||  - ||  - ||  - || 0 || 0 
 Slovakia || 0 || 6 || 16 || 11 ||  - ||  - || 33 || 33 
 Finland || 0 ||  - ||  - ||  - || 0 ||  - || 0 || 0 
 Sweden || 0 || 0 ||  - || 0 ||  - ||  - || 0 || 0 
 United Kingdom || 0 ||  - ||  - || 11 ||  - ||  - || 11 || 11 
 INTERREG || 0 || 0 ||  - ||  - ||  - ||  - || 0 || 0 
 Total || 6 601 || 2 416 || 207 || 430 || 1 || 17 || 3 071 || 9 673 
[1] See Official Journal C 115 of 9 May 2008.
[2] See also Article 325 of the TFEU, which
states that: 
"1. The Union and the Member
States shall counter fraud and any other illegal activities affecting the
financial interests of the Union through measures to be taken in accordance
with this Article, which shall act as a deterrent and be such as to afford effective
protection in the Member States, and in all the Union's institutions,
bodies, offices and agencies.
2. Member States shall take the
same measures to counter fraud affecting the financial interests
of the Union as they take to
counter fraud affecting their own financial interests.
…
5. The Commission, in cooperation
with Member States, shall each year submit to the European
Parliament and to the Council a
report on the measures taken for the implementation of this Article."
[3] Regulation (EU, Euratom) No
966/2012 of the European Parliament and of the Council of 25 October 2012
(Official Journal L 298, 26 October 2012).
[4] Commission Delegated Regulation (EU) No 1268/2012
of 29 October 2012 (Official Journal L 362, 31 December 2012).
[5] See sections 3 & 4 of this document.
[6] European Parliament resolution of
17 April 2013 with observations forming an integral part of its Decisions on
discharge in respect of the implementation of the general budget of the
European Union for the financial year 2011, Section III – Commission and
executive agencies (COM(2012)0436 – C7-0224/2012 – 2012/2167(DEC)) – Priority
Action 1.
[7] See also the 2012 Annual Report on
the Protection of the European Union's financial interests — Fight against
fraud which has been adopted on 24 July 2013.
[8] Due to the rounding of figures
into millions of Euros, amounts in some tables may appear not to add up.
[9] It is noted that the Commission's
Anti-Fraud Strategy adopted in June 2011 led, with OLAF's involvement and
support, to important progress in the field of fraud prevention and detection.
[10] The methods of implementing the EU budget have been
adapted following the adoption of the new Financial Regulation and the new
methods will come into force in 2014. 
[11] The clear
responsibility for Member States to make controls and to recover monies from
beneficiaries is also laid down in Article 80 of the Financial Regulation, as
quoted earlier. 
[12] As
explained in more detail later in this SWD, implementation is the last step in
the financial correction or recovery process. Implementation means that for a
financial correction or recovery that has been previously detected and then
decided/agreed upon, the observed situation of undue expenditure is
definitively corrected.
[13] EAGF amounts executed
under shared management total EUR 44 495 million.
[14] For example, for the implementation mechanism of
financial corrections for cohesion policy see explanations provided in the
section 4.2.1.
[15] Ref. P7_TA(2013)0319
[16] It should be noted that in the area of Agriculture
and Rural Development for the 2007-2013 period, the European Agricultural
Guarantee Fund ("EAGF") and the European Agricultural Fund for Rural
Development ("EAFRD") have replaced the European Agricultural
Guidance and Guarantee Fund ("EAGGF") 2000-2006.
[17] Council regulation (EC)
No 485/2008 of 26 May 2008 (Official Journal L 143, 3 June 2008).
[18] Commission Regulation
(EU) No 65/2011 of 27 January 2011 (Official Journal L25, 28 January 2011).
[19] EAGF amounts executed
under shared management total EUR 44 495 million.
[20] Official Journal L210,
31 July 2006.
[21] COM(2011)615 final of
6.10.2011
[22] For example, "Report on financial corrections
carried out for ERDF and ESF on 2000-2006 programmes" sent to the EP/CONT
Committee on 12/04/2013, Ares (2013)689652.
[23] Please note that the negative amount of EUR 4 million reported under
1994-99 programming period is the result of a reclassification of a financial
correction, previously reported under 1994-1999, but actually pertaining to the
2000-2006 period.
[24] Due to the lack of
payment appropriations in the 2012 budget, at the end of the year (following
the rejection by the budget authority of the proposal for an amending budget
with higher payment appropriations), the Commission services could not make a
full payment of the balance due.
[25] “Report on financial
corrections carried out for ERDF and ESF on 2000-2006 programmes”, reference
note ARES(2013)689652 of 12/04/2013, sent to CONT and note ARES(2013)1041808 of
14/05/2013 sent to the ECA.
[26] These estimated rates
of financial correction do not include additional potential ERDF corrections
linked to unfinished projects nor additional corrections that may result from
the completion of the closure process. In the context of the ESF, at the end of
2012, there were still 61 programmes to be closed where potential financial
corrections might be identified.
[27] A
prudent estimate of the Commission services of additional corrections carried
out by Member States themselves and reported to the Commission until March 2010
is EUR 0.96
billion for the ERDF and 0.32 billion for the ESF, representing at least 0.7% and
0.5% of allocations respectively. This means that by end 2012 the overall rate of
correction for the 2000-2006 period is at least 5.6% for the ERDF decided
allocations and 2.9% for the ESF (for details, see Report on Financial corrections
carried out for ERDF and ESF on 2000-2006 programmes sent to EP CONT Commitment
on 12/04/2013 ARES(2013)689652 pages 12 to 18).
[28] In
2012, some 16,000 recovery orders (with a value of roughly EUR 140 billion)
have been issued by the Authorising Officers of the Commission relating to the
implementation of the EU budget. Of course, the bulk of the total
(approximately EUR 130 billion) relates to own resource revenues received from
the Member States.