Arguments of the parties
40 The Grand Duchy of Luxembourg submits that the Commission infringed Article 39(2)(c) of Regulation No 1260/1999 by suspending the assistance at issue although the conditions required by that provision had not been fulfilled. The finding that there were serious failings which could lead to systemic irregularities is manifestly erroneous. Even assuming that irregularities had been found, they would have been minor and not systemic.
41 First, regarding the organisation of the managing authority and the paying authority, neither Article 3 of Regulation No 438/2001 nor any other provision of that regulation prevents those two authorities from belonging to the same body. That is the situation envisaged by Article 9(4) of the same regulation and there is nothing to prevent the managing authority and the paying authority from carrying out their verifications jointly. In requiring such a degree of functional separation, the Commission erred in law. In the reply, the Grand Duchy of Luxembourg adds that, although the auditors of the two authorities carry out the verification at the same time in relation to the same final beneficiary, that does not give rise to a risk of complicity between the auditor and the person subject to the audit because of the different ethical rules applying within the Luxembourg civil service.
42 Second, with regard to the verification at first level by the managing authority and the certification of expenditure by the paying authority, the Grand Duchy of Luxembourg submits that the certification of expenditure en cascade, that is to say, the choice made by the national managing authority to declare expenditure as to which doubt exists, but which has not been legally classified as ineligible at the date of the declaration, conforms with Article 4 of Regulation No 438/2001. Likewise, the Grand Duchy of Luxembourg claims that the exclusion of only the doubtful item from so-called ‘partly ineligible’ expenditure and not the full amount of the expenditure does not contravene that provision. This leaves the national authorities with a margin of discretion with regard to the functioning of their management and control systems, provided that those systems provide for procedures for verifying the delivery of co-financed products and services and for verifying that the declared expenditure was actually incurred, and ensure compliance with the conditions laid down in the respective decisions of the Commission. According to the Grand Duchy of Luxembourg, the working document of 21 December 2005 on sound practice concerning the management verifications to be made by the Member States on projects co-financed by the Structural Funds and by the Cohesion Fund, upon which the Commission relies in support of its interpretation, did not command observance at the time when the programmes were being carried out. In short, because of the subsequent checks carried out by the Luxembourg authorities, the European Union’s financial interests were safeguarded.
43 Third, the Grand Duchy of Luxembourg considers that the findings of the audit report of 29 November 2007 concerning the audit trail, which are repeated at paragraphs 30 to 32 of the contested decisions and according to which the files kept by the managing authority are incomplete and do not include certain essential information for proving the eligibility and legality of expenditure, are incorrect. This point was referred to by the Luxembourg authorities in their observations of 16 January 2008, which pointed out that it was perfectly possible to find all the information relating to the detailed budget and the results to be achieved in the application document for each project financed. Finally, in the rejoinder, the Grand Duchy of Luxembourg stresses that the information which is allegedly missing was never requested by the Commission from the national authorities.
44 The Commission disputes all the arguments of the Grand Duchy of Luxembourg. It points out that, contrary to the Grand Duchy of Luxembourg’s submission, in the present case it is not a question of minor irregularities, but a number of serious failings concerning the organisation, the first-level verifications by the managing authority, the certification of statements of expenditure by the paying authority and the audit trail, which are key elements of the management and control systems, and each of those failings would have justified the suspension of interim payments.
Findings of the Court
45 First of all, it must be observed that it is clear from the case-law that the rule that only expenditure incurred by the national authorities in conformity with the Community rules is to be charged to the Community budget applies equally to the grant of financial assistance under the ESF (Case C-199/03 Ireland v Commission [2005] ECR I-8027, paragraph 26).
46 Under Article 39(2)(c) of Regulation No 1260/1999, the Commission is to suspend interim payments if, after completing the necessary verifications, it concludes that there are serious failings in the management or control systems which could lead to systemic irregularities. Article 39(3) of the same regulation states that the Commission may then, if necessary, make the financial corrections required by cancelling all or part of the Fund’s contribution to the assistance concerned.
47 In accordance with the requirement of sound financial management underlying the use of the Structural Funds and having regard to the responsibilities of the national authorities in using the Funds, the obligation of the Member States to set up the management and control systems referred to in Article 38(1) of Regulation No 1260/1999, the detailed rules for which are set out in Articles 2 to 8 of Regulation No 438/2001, is crucial.
48 In the present case, it is necessary to determine whether the Commission was right to suspend the interim payments relating to the EQUAL programme to the Grand Duchy of Luxembourg in view of the failings which it identified and which are connected with, first, the organisation of the managing authority and the paying authority, second, with the verification at first level by the managing authority and the certification of expenditure statements by the paying authority and, third, the audit trail.
49 First, regarding the organisation of the managing authority and the paying authority, the Commission states, at paragraph 3.1.1.5 of the audit report of 29 November 2007, that ‘it appeared that the persons responsible for carrying out the verifications provided for in Article 4 [of Regulation No 438/2001] and those provided for in Article 9 [of the same regulation] for the purpose of certifying expenditure carried out those functions jointly’.
50 From that finding the Commission concluded, in recital 18 of Decision C(2008) 5730, that ‘the organisation of the managing authority and the paying authority [could] not be regarded as appropriate and did not meet the requirements of Article 3 of Regulation No 438/2001 (clear definition, clear allocation and adequate separation of functions; guarantee that functions are carried out satisfactorily)’. The Grand Duchy of Luxembourg claims in substance that, contrary to the conclusion reached by the Commission, the joint checks by the managing authority and the paying authority respectively in relation to the assistance which is the subject of Decision C(2008) 5730 (‘the EQUAL assistance’) are not contrary to Regulation No 438/2001.
51 On that point, it must be observed that Article 3(a) of Regulation No 438/2001 provides that ‘the management and control systems of managing and paying authorities and intermediate bodies shall, subject to proportionality in relation to the volume of assistance administered, provide for a clear definition, a clear allocation and, as necessary to ensure sound financial practice, an adequate separation of functions within the organisation concerned’.
52 Although, as the Grand Duchy of Luxembourg pointed out, Article 9(4) of the regulation does not prevent the managing authority and the paying authority from belonging to the same body, there must still be a ‘clear allocation’ and an ‘adequate separation’ of functions within the organisation concerned.
53 In the present case, it is clear from the reasoning of Decision C(2008) 5730 on that point that it is not so much the irregularities in the checks carried out by those authorities as their lack of reliability that was highlighted by the Commission. In the Commission’s opinion, the joint performance of the duties of management and payment gives rise to a degree of doubt as to the impartiality of the persons responsible for the checks in view of the proximity and the ‘complicity’ that such joint duties entail. In particular, recital 17 of Decision C(2008) 5730 states that ‘the verifications provided for by Article 4 of Regulation No 438/2001 and the checks provided for by Article 9 of the same Regulation cannot … be carried out jointly in view of the risk of distorting the judgment of the authority responsible for certifying demands for payment’.
54 That conclusion must be endorsed. As the managing authority and the paying authority are required, by the legislation applying to assistance financed by the ESF, to carry out different checks at different stages, the simultaneous performance of the functions of those authorities creates a significant risk of coordination, or even the merging, of those checks and is therefore such as to give rise to doubt concerning their reliability.
55 Therefore, without the need to refer to the information in the working document on sound practice concerning the paying authority’s duty of certification, presented by the Commission services to the Member States and cited by the Commission, the Commission was right in finding that the organisation of the Luxembourg managing and paying authorities contravened Article 3 of Regulation No 438/2001.
56 Second, with regard to the failings in the first-level verifications by the managing authority and the certification of expenditure by the paying authority, the Grand Duchy of Luxembourg contends, in substance, that the Commission, in criticising the system of first-level verification and certification in relation to the EQUAL assistance, disregarded the fact that no ineligible expenditure was taken into account in the subsequent checks and that, ultimately, the financial interests of the Community were safeguarded.
57 However, it must be pointed out that, in the audit report of 29 November 2007, the Commission found that there were certain items of expenditure in relation to which not only had the managing authority failed to carry out a first-level verification, or carried out an inadequate verification, contrary to Article 34 of Regulation No 1260/1999 and Article 4 of Regulation No 438/2001, but also the paying authority had not certified that expenditure in accordance with Article 38(1)(d) of Regulation No 1260/1999 and Article 9 of Regulation No 438/2001. In certain cases those authorities declared expenditure with regard to which they were doubtful. More precisely, the managing authority had carried out incomplete verifications of declared expenditure. Moreover, the irregularities which may have been found in first-level verification were not systematically taken into account by the paying authority at the stage of certifying the statements of expenditure.
58 Such shortcomings are serious failings in the management and control systems which may lead to systemic irregularities. At both the stage of first-level verification by the managing authority and that of certification by the paying authority, which are guarantees of sound financial management, the national authorities must, before the event, completely satisfy themselves that the expenditure in question was incurred and was duly incurred. Contrary to the Grand Duchy of Luxembourg’s argument, it is not sufficient for the national authorities to carry out verification after the event and then make financial corrections if necessary.
59 Third, those considerations also apply to the following of the audit trail which is the subject of Article 7 of Regulation No 438/2001. In that respect the Grand Duchy of Luxembourg has not shown that mere reference to the application documents relating to the EQUAL assistance could on its own provide all the specific information required by Article 7(2) and (3) of the regulation.
60 On that point, it must be stressed that Annex I to Regulation No 438/2001, entitled ‘Indicative description of information requirements for a sufficient audit trail’, gives very specific details with regard to the obligations of national authorities. It states clearly that they must maintain and keep accounting records at the appropriate management level and a body of information for each co-financed operation.
61 Therefore the Commission rightly found that there were serious failings in the management and control systems which could lead to systemic irregularities and, consequently, the Commission suspended the interim payments for the EQUAL assistance. In that connection, it must be observed that the obligation of applicants and beneficiaries of Community funding to ensure that they provide the Commission with sufficiently specific information for the management and control system put in place to ascertain whether the conditions for the grant of funding are fulfilled to be able to function correctly is inherent in the system of ESF assistance and is essential for it to function properly (see, by analogy, judgment of 6 June 2007 in Joined Cases T-251/05 and T-425/05 Mediocurso v Commission, not published in the ECR, paragraph 67, and the case-law cited).
62 Therefore the present plea cannot succeed.