European Union Cohesion Policy Reporting of financial corrections by Member States Frank Rawlinson, DG REGIO This presentation covers the correction of irregularities and the reporting of such corrections by Member States to the Commission. We will deal with the current reporting system for 2000-06, the data to be provided at closure of 2000-06 programmes, and the reporting requirements in the 2007-13 period. For the latter we will refer to the proposed amendments to the provisions. “Train the trainers” European Commission seminar for managing and certifying authorities, 9 June 2009

1. Financial corrections Contents 1. Financial corrections 2. Annual reporting of financial corrections 2000-06 – evolution of current reporting practice, reliability of data 3. Reporting irregularities and corrections at closure 2000-06 4. Annual reporting of financial corrections 2007-13 – based on proposed amendments Outline of presentation. First of all, a revision of the basic concept of “financial corrections” and how and by whom they are applied. Then, in succession, the requirements for Member States’ reporting of their financial corrections in the 2000-06 period, the evolution of the reporting practice and our assessment of how reliable the current data is, the requirements for information on irregularities and financial corrections at closure of 2007-13 programmes and reporting of financial corrections in the current 2007-13 period, based on the proposed amendments of the Commission Regulation which will to some extent change the reporting format originally provided for

Financial corrections (1) “Financial correction” = exclusion of irregular expenditure from statement of expenditure and recovery of unjustified public grant from beneficiary Most irregularities detected in controls or audits by MS MS responsible in the first instance for corrections – i.e., removal of irregular expenditure from expenditure claim to Commission, recovery from beneficiary When MS corrects irregular expenditure, it can reallocate the EU grant released to other projects. Note that the correction of irregularities involves two operations: removing the irregular expenditure from expenditure claims – this safeguards the EU budget, and recovering the overpaid/unduly paid public grant from the beneficiary. Member States are obliged to pursue recoveries when the irregularity is the beneficiary’s fault. There are some circumstances, however, when recovery does not make economic sense (for example, with some public sector beneficiaries). MS are primarily responsible for controls and audits of Cohesion policy spending and therefore detect and correct most irregularities. They can reallocate the EU funds released.

Financial corrections (2) Irregular expenditure can also be found in audits by Commission or the European Court of Auditors or in OLAF investigations In that case Commission requests MS to make the necessary corrections If MS agrees and makes the corrections, it can reallocate the EU grant released to other projects, as when it detects the irregularity itself. If MS does not agree, the Commission can impose the financial correction by a formal decision. In this case, the correction will result in a net reduction in the EU funding to the programme – the MS will not be able to reallocate the EU grant The Commission and the European Court of Auditors also carry out on-the-spot audits of Cohesion policy programmes in the Member States. They may find irregular expenditure or system deficiencies. The Commission follows up its own audits and those of the Court of Auditors with recommendations for improvements in systems, remedial action plans and correction of irregular expenditure. With regard to such corrections, if the MS agrees to make the correction it can reuse the EU funds released, if not, the Commission takes a formal correction decision, which involves a net reduction in the EU funding of the programme.

Financial corrections (3) Part of the process of making a financial correction is for the MS to withdraw the irregular expenditure from the expenditure declared for the programme. MS can do this either at the beginning - immediately they find the irregularity - or later, after they have recovered from the beneficiary. The first procedure – immediate removal – is called “withdrawal”, the second – removal once recovery from beneficiary has been made – is called “recovery”. MSs’ practices vary: some remove irregular expenditure immediately in order to make way for other eligible expenditure from other projects Others remove it only after they have recovered the public funding from the beneficiary. There are risks with “withdrawals” - the MS may not be able to recover – and with “recoveries” – waiting until recovery may not leave sufficient time to allocate the repaid grant to other projects.

2005 guidance note on reporting and amendment of Regulation 448/2001 2. Annual reporting of financial corrections 2000-06 – evolution, reliability (1) History – separate legal bases for reporting of withdrawals, recoveries and pending recoveries, with different frequency 2005 guidance note on reporting and amendment of Regulation 448/2001 From year 2006 onwards Commission introduced annual reporting of the three pieces of data together introduced, plus request for cumulative data for whole period Growing pressure from Court of Auditors and Parliament for accurate and complete data on financial corrections The 2000-06 regulations have three requirements for reporting financial corrections : Annex II of Regulation 438/2001 – recoveries; Article 8 of Regulation 438/2001 – pending recoveries; and Article 2(3) or Regulation 448/2001 – “cancellations” or “withdrawals”. Recoveries were to be reported with each expenditure claim but pending recoveries and withdrawals annually (with the fourth-quarter irregularity report to OLAF) In the early years of the 2000-06 period the Commission did not receive this data systematically – in part the MS did not understand what was required – and the Commission did not monitor compliance with the requirements closely. After the European Court of Auditors commented on this situation in its Annual Report for 2005, the Commission clarified the requirements in a guidance note (which is attached to the closure guidelines of 2006 – in the materials for this workshop) and in an amendment of Regulation 448/2001 (Regulation 1978/2006). From the 2006 financial year onwards, the Commission decided to rationalise the three requirements and ask for a single report containing all three pieces of information once a year. This is the approach that had been adopted in the legislation for 2007-13. In the annual report the MS were also asked to provide cumulative data for the whole of the 2000-06 period – because the Commission had not received these data (especially on withdrawals) systematically in previous years. There was growing pressure from the Court of Auditors and from the European Parliament in the discharge procedure to publish complete and reliable information on financial corrections, both those resulting from the Commission’s and ECA audit work and those carried out by the MS.

Definitional problems 1. Annual reporting of financial corrections 2000-06 – evolution, reliability (2) Results – from analysis of information received, from audits of data in 10 MS in 2008 Definitional problems Incomplete and missing data, especially cumulative figures for whole period (problem of legal basis) Misunderstanding of difference between total public funding and EU contribution etc… But overall, progress towards more complete and reliable data By end of 2007 total MS reported having withdrawn or recovered €2.2 billion (but this figure does not for some MS cover the whole programme period). The Commission has been requesting data on financial corrections – withdrawals, recoveries and pending recoveries – from the MS, in a single annual package, now for three years, 2006, 2007 and recently 2008. The information was requested by 31 March each year or (for 2007 and 2008), at the option of the MS, as part of the Annual Summary of audits and declarations under Article 53b(3) of the Financial Regulation. In 2008, as part of the Action Plan to strengthen the Commission’s supervisory role in the shared management of structural actions, the Commission contracted the accountancy firm Deloitte to audit the data supplied by 10 MS: Belgium, Greece, Spain, Ireland, France, Italy, Portugal, Slovenia, Slovakia and the UK. The purpose of the audits was to assess the completeness and reliability of the data supplied. Audits of other MS will be carried out in the second half of 2009. The conclusion of this work is that while the completeness and reliability of the data has improved, there are still some misunderstandings about the terminology (esp. the difference between withdrawal and recovery) and that some data is still not supplied. This is particularly the case for cumulative data covering the earlier years of the programme period. Some of the bigger MS have not responded to the Commission’s request for cumulative data from the beginning of the programme period, claiming that this will take away resources from closure. They have promised to provide complete data at closure, however.

Definition of withdrawal and recovery 1. Annual reporting of financial corrections 2000-06 – evolution, reliability (3) Definition of withdrawal and recovery Withdrawal – when irregular expenditure is removed from expenditure claims immediately it is detected and confirmed Recovery – when irregular expenditure is removed from expenditure claims only after recovery has been effected Pending recoveries only to be reported when recovery option chosen NB: Withdrawal and recovery are different phases of the correction process. The distinction hinges on the timing of the withdrawal – immediately or only after recovery from the beneficiary. NB: To avoid double counting a given case must be reported only either as a withdrawal or a recovery It is worth repeating the basic distinction between withdrawal and recovery and the fact that, although both operations will usually occur in the same case, it is important to report the case only as one or the other. Note that pending recoveries are only to be reported when the recovery option is chosen. This is also true for irrecoverable amounts.

2. Reporting irregularities and corrections at closure 2000-06 Source – closure guidelines 2000-06 - C(2006) 3424 and esp. section 4.3 and Annex 2 “Guidance on preparation for and contents of winding-up declaration” Requirements: 1. Closure guidelines, Annex 2 guidance, section 1.2: summary table based on debtors’ ledger of irregularities and their correction, namely amounts awaiting recovery (same as “pending recoveries”) and amounts recovered (recoveries) – details of cases, referring to irregularity report number 2. Under the legal bases referred to above: Final aggregate figures on withdrawals and recoveries for the whole programme period Reference should be made to the material provided at the seminar “Towards successful closure of 2000-06 Structural Fund programmes”, in particular the collection of Questions and Answers published on 9 January 2009 (http://ec.europa.eu/regional_policy/conferences/closure/doc/pdf/qa0903_2009.pdf) The winding-up declaration should contain a summary table of irregularities reported and how they have been dealt with, including those with amounts awaiting recovery and those recovered. Separately, the MS should provide a final statement of the financial corrections it has made throughout the programme period up to the final declaration of expenditure comprising aggregate figures for withdrawals and recoveries since the beginning of the programme period and a statement of the aggregate amount of recoveries pending at closure (this could be done with the winding-up declaration).

Aggregate data (priority axis level) 3. Annual reporting of financial corrections 2007-13 – including proposed amendments (1) Definitions of withdrawal and recovery (and pending recovery) unchanged Aggregate data (priority axis level) Differences in reporting table (as about to be amended) Only two figures: total expenditure and public contribution Section on part of aggregate amounts reported as irregularities The practice of providing an annual report containing aggregate statements of withdrawals, recoveries and pending recoveries by the end of March of each year will be continued in the 2007-13 period. Annex XI of Commission Regulation 1828/2006 contains the model reporting table. This table is now being amended. The annual statements are to be uploaded into SFC2007. The system will calculate the EU contributions withdrawn, recovered or awaiting recovery on the basis of the priority axis co-financing rate. For this the only figures needed are the total eligible expenditure and (when public expenditure is the basis of co-financing) the total public contribution. There is no column for the EU contribution. In order to serve in future as a monitoring tool for the correction of irregularities, the statements will have to indicate the amounts related to reported irregularities.

Examples of completion of new (amended) form Scenario 1 :Reimbursement of Funds calculated with reference to public eligible expenditure 1. Total amount of eligible expenditure paid by beneficiary € 100.000 2. Corresponding public contribution (90%) € 90.000 3. Co-financing rate of priority axis applied to public contribution 70% 4. Co-financing rate applied by MS at level of operation to public contribution 50% 5. Amount of total expenditure affected by irregularity € 20.000 6. Amount of public contribution affected by irregularity € 18.000 7. Amount of EU funds affected by irregularity € 12.600 These examples illustrate how to fill in the statements when calculation of reimbursement is with reference to public eligible expenditure and to total eligible expenditure. There are instructions in footnotes to the table.

Total amount of expenditure paid by beneficiaries withdrawn Scenario 1 (Reimbursement of Funds calculated with reference to public eligible expenditure) Option A (withdrawal) Priority axis Withdrawals Total amount of expenditure paid by beneficiaries withdrawn Corresponding public contribution withdrawn Total amount of expenditure withdrawn relating to irregularities reported under Art.28 (1) Amount of corresponding public contribution withdrawn relating to irregularities reported under Art.28 (1) 1 20.000 18.000 2 3 4 … Total This shows how to fill in the table in Annex XI when the MS has opted for withdrawal. The figure for the public contribution affected by the irregularity must be filled in when it is the basis for co-financing. The Commission will calculate the EU contribution withdrawn at the co-financing rate for the priority axis (EUR 12.600). It is this figure, and not the amount of irregular expenditure withdrawn for the individual operation (EUR 9.000), that the Commission will record. On average over the whole programme, the result will be roughly the same.

Option B (recovery) Priority axis Recoveries Scenario 1 (Reimbursement of Funds calculated with reference to public eligible expenditure) Option B (recovery) Priority axis Recoveries Public contribution recovered Total amount of expenditure paid by beneficiaries Amount of public contribution recovered relating to irregularities reported under Art.28 (1) Total amount of expenditure relating to irregularities reported under Art.28(1)(1) 1 18.000 20.000 2 3 4 … Total This shows how to fill in the table in Annex XI when the MS has opted for recovery. For the recovery option the information to be provided is different from the case of withdrawals. The amount (the public contribution) effectively recovered must be given. The Commission will calculate the EU contribution recovered (and removed from the expenditure claim) at the co-financing rate for the priority axis. It is this figure (EUR 12.600), and not the amount of EU funds recovered based on for cofinancing rate for the individual operation (EUR 9.000), that the Commission will record as corrected.

Examples of completion of new (amended) form Scenario 2: Reimbursement of Funds calculated with reference to total eligible expenditure 1. Total amount of eligible expenditure paid by beneficiary € 100.000 2. Co-financing rate of priority axis applied to total eligible expenditure 70% 3. Co-financing rate applied by MS at level of operation to total eligible expenditure (assume no national public contribution) 30% 4. Amount of total expenditure affected by irregularity € 20.000 5. Amount of EU funds affected by irregularity € 14.000 6. Amount of public (in this case only EU) contribution to operation affected by irregularity € 6.000 Now an example of reimbursement with reference to total eligible expenditure

Total amount of expenditure paid by beneficiaries withdrawn Scenario 2 (Reimbursement of Funds calculated with reference to total eligible expenditure) Option A (withdrawal) Priority axis Withdrawals Total amount of expenditure paid by beneficiaries withdrawn Corresponding public contribution withdrawn Total amount of expenditure withdrawn relating to irregularities reported under Art.28 (1) Amount of corresponding public contribution withdrawn relating to irregularities reported under Art.28 (1) 1 20.000 ─ 2 3 4 … Total This shows how to fill in the table in Annex XI when the MS has opted for withdrawal The figure for the public contribution withdrawn should not be filled in when the basis for co-financing is total eligible expenditure.

Public contribution recovered Scenario 2 (Reimbursement of Funds calculated with reference to total eligible expenditure) Option B (recovery) Priority axis Recoveries Public contribution recovered Total amount of expenditure paid by beneficiaries Amount of public contribution recovered relating to irregularities reported under Art.28 (1) Total amount of expenditure relating to irregularities reported under Art.28(1)(1) 1 6.000 20.000 2 3 4 … Total This shows how to fill in the table in Annex XI when the MS has opted for recovery Note that the Commission will calculate the recovered amount of the EU contribution on the basis of the co-financing rate for the priority axis. The line is from (1) the actual amount of public contribution recovered, to (2) the corresponding total amount of expenditure, to (3) the amount of the EU contribution paid on the basis of the cofinancing rate for the priority axis applied to the total amount of expenditure.

The statements are to be sent from 2010 3. Annual reporting of financial corrections 2007-13 – including proposed amendments (3) The statement of pending recoveries asks for similar information to that for recoveries, i.e. the actual amount of public contribution to be recovered The statements are to be sent from 2010 To include list of irrecoverable amounts (see previous presentation on amendments to Commission regulation with regard to irregularity reporting) The statement of pending recoveries (only to be completed where the recovery option is chosen) follows the statement of recoveries. The annual statements are now only required from 2010. They will include a statement of irrecoverable amounts.

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