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European Commission

MEMO

Brussels, 4 April 2014

PROTECTING THE EU BUDGET AND THE BUDGET DISCHARGE PROCEDURE: Questions and Answers

What is the EU budget discharge procedure?

The budget discharge is the final approval of the EU budget implementation for a given year. It is granted by the European Parliament, following a recommendation from the Member States in Council. The Parliament uses the Court of Auditors' report (see MEMO/13/947) as the primary basis for this decision. Other sources of information are also examined, in particular the Annual Activity Reports of the Commission's Directors-Generals and the Commission's Communication on the protection of the EU Budget. Discharge equates to approval of how the Commission implemented the EU budget in that financial year and the closure of the accounts.

How does the budget discharge procedure help to ensure good financial management?

The budget discharge procedure is an opportunity to scrutinise how the EU budget was spent, whether it was spent in line with all the rules, how well goals are met and how EU programmes added value. It is therefore an important tool for continually assessing how EU funds are managed, and what further improvements can be made in this regard. The Court of Auditors, the Council and the European Parliament can all make recommendations on specific actions that can be taken to further improve financial management and control. The Commission takes these recommendations very seriously, ensuring appropriate follow up. The Communication on the protection of the EU budget gives a detailed account of the measures that the Commission has taken in this regard, and in consistently reviewing the management and control of EU funds to ensure they are robust.

Who is responsible for managing the EU budget?

Under the Treaty, the Commission is responsible for implementing the EU budget, in cooperation with the Member States. So the European Commission is ultimately accountable and supervises all the financial actors involved in EU spending. It keeps tight control over the way the EU's budget is spent and takes appropriate steps to enforce sound financial management.

However, Member States have first line of responsibility for managing and controlling around 80% of all EU funds. This means that in areas such as agriculture, regional development and social policy, Member States decide on the beneficiaries, distribute the funds and manage the spending. National authorities must also check payment claims and set up effective control systems. Member States, therefore, have an important role to play in ensuring that EU money is spent wisely and in accordance with the rules.

Do errors in EU budget spending mean that money has been lost or wasted?

Absolutely not. Error rates cannot be 'translated' into an amount lost. Errors in procedures do not mean failed projects or wasted funds. Despite errors, the money may have well been spent in line with what it was meant for. Mistakes in a form for a tender procedure for a bridge construction project do not mean that the new bridge should be dismantled or that it is of poor quality.

Second, controls at various levels (project level, national and EU) ensure that EU taxpayers' money is protected. In fact, the multilevel controls for EU spending are probably much tighter than the controls for any national budget. If errors with financial impact are discovered, undue payments are then clawed back from the project or country at fault, usually as part of the multiannual system of checks and audits (EU programmes are multiannual, and so are the checks).

When it comes to payments, the European Court of Auditors (ECA) requires an error rate of less than 2% before it will declare the EU budget to be free from material error. This means that more than 98% of EU spending must be free of error with a quantifiable impact for it to be "signed off".

The Commission, together with the Member States, is constantly working to move closer to this goal. For some years now, the error rate has stayed below 5%. While this is not enough to get the green light from the Court, it does show a high standard of management and control applied to taxpayers' money at EU level. Moreover, millions of citizens and businesses across the EU have benefited greatly from EU funding.

Is a large part of the EU budget affected by fraud?

Not at all! Fraud only amounts to around 0.2% of all spending and the Commission has a very hard-line zero-tolerance to fraud policy. Any suspicions of fraudulent activity involving EU funds are reported to the European Anti-fraud Office (OLAF). In addition, the Commission has worked to strengthen the tools to fight against fraud considerably, including a new anti-fraud strategy for anyone managing for EU funds (see IP/11/783), a proposal to harmonise sanctions across Member States for fraud to the EU budget (see IP/12/767), and of course the proposed European Public Prosecutor’s Office (see IP/13/709).

What does the Commission do to protect the EU budget?

  1. Checking and Controlling

A robust and multi-layered system of controls and audits is in place to avoid irregularities when EU money is spent. In addition to checks and audits by national authorities and the Court of Auditors, the Commission audits the implementation of EU programmes and projects at all levels. This comprises on-the-spot checks as well as audits on national authorities. A risk-based approach is taken, to ensure that areas most susceptible to problems are subject to through control.

  1. Recovering misspent funds

Nonetheless, errors do happen when large sums are distributed to millions of recipients in 28 different countries and beyond. The Commission takes a very strong stance on the principle that when an error is found, the money must be recovered or the amounts must be corrected (i.e. rechanneled into a healthy project).

In 2012, for example, the Commission recovered and corrected €4.4 billion of incorrectly paid amounts. In total, financial corrections and recoveries for 2009 to 2012 correspond to 2% of the average volume of payments in that period. Moreover, Member States now risk definitively losing EU funds for programmes if they fail to identify and address irregularities on time.

  1. Blocking payments

In Structural and Investment Funds, the Commission blocks interim payments if Member States systems are not up to standard. Payments are interrupted and programmes are suspended when serious weaknesses are identified too.

In 2012, payments were interrupted in every Member State at one point or another, until the identified problems were properly addressed. This not only ensures that the EU budget is protected, but also provides incentives for the national authorities to implement proper structural improvements. The Commission also provides support and guidance to both beneficiaries and national authorities on how to comply with EU spending rules.

How will EU spending be further improved under the new Financial Framework (2014-20)?

For the multiannual financial framework 2014-2020 (MFF), much focus has been put on designing rules and programmes in a way which will further reduce the risk of errors across the board, while also ensuring greater focus on the quality of the spending. Among the key measures are:

  1. Simplification

Simpler rules are easier to comply with and easier to control. Therefore, rules, procedures and eligibility requirements have been simplified under the new MFF. For example, eligibility rules have been harmonised across all structural and investment funds (Regional development, Social Fund, Cohesion, Rural Development and Fisheries). This will cut costs, reduce the scope for error and increase the efficiency of controls. Greater use of simplified cost options, such as flat rate financing and lump sums, will also reduce the administrative burden for beneficiaries and national control authorities. And greater electronic, online management of EU funds will help cut the administrative burden and decrease the number of mistakes.

In Research, simplification has been put at the heart of Horizon 2020. The principle of "one project – one funding rate" will considerably reduce the administrative burden for beneficiaries.

  1. Stronger incentives

More focus will now be put on the performance of programmes and the added-value of EU funds for citizens and businesses. Clear transparent and measurable targets will be set, and best performers will be rewarded with additional funds at the end of the programming period.

  1. Stronger deterrents

For the new generation of programmes, there are now even stricter corrective measures to protect EU funds. For example, Member States will risk definitively losing EU funds for programmes if they fail to identify and address irregularities on time. And Commission's right to interrupt and suspend payments when serious mismanagement is identified has been extended to cover agricultural payments.

Why does the Commission not increase controls to avoid errors?

Millions of projects and programmes are co-financed by the EU budget, bringing countless benefits to citizens across the Union. It is not possible for the Commission to check each and every payment made to final beneficiaries i.e. every farmer, researcher, project manager and SME that receives EU funds. The costs of such a level of control would far outweigh the benefits. More controls cost more money and may also increase the administrative burden for final beneficiaries. The Commission has to ensure a reasonable cost-benefit ratio of controls.

Member States themselves are also obliged to check spending and to establish control systems at national level, which are then checked by the Commission. The Commission works continuously to reinforce its controls, identify risky areas and incite Member States to further improvements in their control of EU funds.

What can Member States do to improve the spending of EU funds in their countries?

Given that the spending of around 80% of the EU budget is under shared management of the Commission and Member States, national authorities have an important role in ensuring that EU money is properly managed, controlled and spent. Shared management means shared responsibility between the Commission and the Member States.

The Court of Auditors, European Parliament and Commission have repeatedly called on national authorities to take their responsibilities for protecting the EU budget more seriously. For example, the Court of Auditor's last report said that 56% of errors in Cohesion Policy "could, and should" have been spotted by the Member States, even before any claim for funds was submitted to the Commission.

To improve the situation under shared management, the Member States need to establish and maintain reliable management and control systems. New rules for the MFF 2014-20 aim to encourage Member States to do better through a “stick and carrot” approach (see above). In addition, Member States are asked to submit national declarations of assurance, testifying to the quality of their management and control of EU funds.

Does the Commission follow up on the recommendations and requests made by the European Court of Auditors, the Council and the European Parliament?

Yes. The Commission has an effective procedure in place to follow up on the recommendations made by the European Court of Auditors and the Council as well as on the requests made by the European Parliament in its discharge resolution.

In its recent Special Report n°19/2013, the ECA concluded that “the Commission adequately follows up the Court’s recommendations” and “the Court’s review of a sample of recommendations showed that the recommendations implemented by the Commission have contributed towards improving financial management in a number of areas of the EU budget”. This demonstrates that the Commission has been taking the European Court of Auditor's recommendations very seriously, using them to help identify the areas where improvements could be made.

The Commission also follows up on the specific recommendations and requests made by the Council and the European Parliament and reports in detail on the actions taken in an annual report to both institutions.


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