C-443/97

SPAIN V COMMISSION

OPINION OF ADVOCATE GENERAL LA PERGOLA delivered on 28 October 1999 *

I — Introduction to failure to fulfil the obligation, imposed on the Member States by Article 23 of the coordination regulation (see below, para- graph 5), to verify that the operations co- 1. By this reference for a preliminary financed by the Structural Funds arc prop- ruling, the Kingdom of Spain applied, erly carried out. The Commission indicated pursuant to Article 173 of the EC Treaty Article 24 of the said regulation as the legal (now, after amendment, Article 230 EC), basis for the adoption of the internal for the annulment of an act adopted by the guidelines. The Spanish Government, with European Commission (hereinafter 'the the Italian and Portuguese Governments Commission'), entitled 'Internal guidelines intervening in support, maintains that the concerning net financial corrections in the Commission is not competent to adopt this context of the application of Article 24 of act, which is also without adequate Council Regulation (EEC) No 4253/88' of grounds. 19 December 1988, laying down provi- sions for implementing Regulation (EEC) No 2052/88 as regards the coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and other existing financial instru- ments (hereinafter, respectively, 'the inter- nal guidelines' 1 and the 'coordination reg- II — Legal framework of the act in ques- tion ulation' 2).

— to verify on a regular basis that opera- tions financed by the Community have been properly carried out, 4. The Structural Funds provide assistance to reinforce economic and social cohesion, and, in particular, to reduce the discrepancy between the various regions and the back- wardness of those which are less favoured. — to prevent and to take action against As this assistance takes the form of co- irregularities, financing by the Community of individual projects chosen by the Member States, it is essential to check that the Funds contribute only to the financing of projects, initiatives or Operations' which satisfy the 'conditions of eligibility' for the subsidies in accor- — to recover any amounts lost as a result dance with the relevant Community provi- of an irregularity or negligence... . sions. According to Article 23(1) of the coordination regulation (see below, para- graph 5) the aforementioned controls — whose arrangements have been more closely regulated by Regulation No 2064/97 As soon as this regulation enters into force, (see below, paragraph 6) — should be the Commission shall draw up detailed carried out by the Member States, who arrangements for implementation of this are responsible for managing 80% of the paragraph...'. Community costs.

3 — OJ 1988 L 185, p. 9; the framework regulation was amended by Council Regulation (EEC) No 2081/93 of 20 July 1993 (OJ 1993 L 193, p. 5) and Council Regulation (EC) No 3193/94 of 19 December 1994, already referred Under Article 24 of the coordination reg- to. ulation, which is the provision on which

III — The content of the contested measure 2. Following this examination, the Com- mission may reduce or suspend assistance in respect of the operation or a measure concerned if the examination reveals an 7. The internal guidelines, to be used by the irregularity or a significant change affecting Commission's various departments which the nature or conditions for the implemen- are involved from time to time, specify the tation of the operation or measure for circumstances in which the Commission which the Commission's approval has not might carry out net financial corrections in been sought ...'. applying Article 24 of the coordination regulation. Generally, a decision of this kind will be adopted if, in the implementa- tion of the operations co-financed by the Community, the financial control operated in the Member States reveals significant 6. The Commission adopted two regula- failures or weaknesses. tions for the application of Article 23 of the coordination regulation, one of which is Regulation (EC) No 2064/97 of 15 Octo- ber 1997, establishing arrangements for the implementation of Council Regulation 8. In the internal guidelines, four categories of corrections arc identified: net corrections 4 — 'Partnership' is the consultation between the Commission, the Member State concerned and the competent authorities (points 3 and 4), financial corrections and bodies designated by that Member State. This partner- ship shall cover the preparation and financing, as well as the greater than the sum relating specifically ex ante appraisal, monitoring and ex post evaluation, of the various initiatives which are the subject of the operations of the Structural Funds; the Community operations shall be such as to complement or contribute to corresponding national operations (see Article 4(1) of the framework 5 — OJ 1997 1. 290, p. 1; Regulation No 2064/97 was amended regulation). by Commission Regulation (EC) No 2406/98 of 6 Novem- ber 1998 (OJ 1998 I. 298, p. 15).

to the irregularity or irregularities discov- by the Commission, unless the Commission ered (point 5; hereinafter 'greater correc- has good reason to take the view that the tions'), flat-rate corrections (points 6 and irregularity is systemic, that is due to a 7) and provisional net corrections systemic weakness of financial control and (point 9). Normally, once an irregularity as such likely to be found in a series of is found concerning a particular operation, similar cases (the example is given of a the financial correction takes the form of systematic failure to comply with a specific the reallocation of the funds to another eligibility rule). Any such instance would operation. However, according to the inter- suggest the existence of a more general risk nal guidelines, depending on how serious of abuse of funds and could justify a greater the irregularity is for which the Member financial correction. In considering such a State concerned is responsible, this correc- measure the Commission would take into tion may take the form of a 'net correction', account the level of the national adminis- or purely and simply a reduction, thus trative system responsible for the weakness, excluding any possibility of reallocation. in addition to the likely extent of abuse. In any case, it is stated that a net correction, whatever it is, cannot exceed the amount of the 'form of assistance' concerned 6 (for example, an operational programme, in itself including various 'operations'; see point 8 of the internal guidelines). 9. In particular, a net correction could be applied in the case of 'significant' failure to meet the obligations of control stated in Article 23(1) of the coordination regula- tion, which consist of verifying on a regular basis that the operations financed by the Community have been properly carried out, preventing and taking action against 11. "When it is not possible to determine in irregularities, and recovering any amounts sufficient detail the extent of the irregular- lost as a result of an irregularity or ity or irregularities, despite the information negligence. In order to establish the 'sig- provided by the Member State concerned, nificant' nature of such a failure, the the Commission shall proceed with the Commission shall examine whether the application of flat-rate corrections, based irregularity or irregularities can be attribu- on a reasoned judgment of the likelihood table to a significant weakness affecting the and extent of the misapplication. Flat-rate competent authorities of the Member State corrections would also be adopted if the concerned, relating in particular to the irregularities discovered have no specific institution of prudent financial manage- financial value, as in the case where a ment and control procedures and systems. Member State persistently fails to ensure that proper publicity is given for the Community financial contributions to

IV — Objection of inadmissibility

V — Arguments of the parlies 13. First, the Commission raised an objec- tion of inadmissibility with regard to the submission, in so far as it takes the view that as the act in question does not impose 16. Concerning the Commission's alleged additional obligations on the Member lack of competence, the Spanish Govern- States in respect of those already stated in ment and those intervening in its support Article 23 of the coordination regulation, it does not alter their pre-existing situation, nor does it produce legal effects. 8 — See Case C-366/88 France v Commission [1990] ECR I-3571, paragraphs 11 and 12; Case C - 3 0 3 / 9 1 1 France v Commission [1991] ECR I - 5 3 1 5 , paragraphs 10 and 11; Case C-325/91 France v Commission [1993] ECR I-3283, paragraph 11; Case C-57/95 France v Commission [1997 7 — OJ 1994 L 152, p. 39. ECR I-1627, paragraphs 9 and 10.

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9 — This provision states 'measures financed by the Structural Funds or receiving assistance from the EIB or from another existing financial instrument shall be in conformity with the 17. The Commission, for its part, takes the provisions of the Treaties, with the instruments adopted view that, even if the regulations on the pursuant thereto and with Community policies, including those concerning the rules on competition, the award of Structural Funds do not provide a defini- public contracts and environmental protection and the application of the principle of equal opportunities for men tion of the concept of 'irregularity' as stated and women.' in Articles 23 and 24 of the coordination 10 — See order for reference in Case C-325/94 P An Taisce and WWF UK v Commission [1996] ECR I-3727, in which the regulation, this cannot be understood appeal against the judgment of the Court of First Instance restrictively, by which a failure to meet in Case T-461/93 An Taisce and WWF UK v Commission [1994] ECR II-733 is rejected as inadmissible and unfoun- the obligations stated in Article 23 would ded. constitute an irregularity under the terms of 11 — By which the Community finances the refunds on exports to third countries and operations to regularise the agricul- Article 24. To support this argument, the tural markets.

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State concerned, in tlie management and intended, it could not state that this failure control system of the EAGGF Funds, was concerned the 'nature' or 'conditions for repeatedly sanctioned. 12 implementation' of the operation or mea- sure in question.

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concerned failed to comply with directives resources, the operation must in all cases to protect the environment; it is therefore adhere to the general principle of 'sound clear that the irregularity which in that case financial management' (see Article 205 of was allegedly 'committed by the State the Treaty) including the obligation to concerned' — these are the words of the guarantee that Community resources are Court ·— concerned the nature or condi- used in accordance with the provisions tions for implementation only of a specific concerning the controls to be applied in measure, and had nothing to do with the implementation of these Funds. The failure to carry out controls of the type Commission adds that, because of the need described in Article 23(1) of the coordina- for sound financial management for all tion regulation. 15 cases where the Community budget is committed, there is a certain analogy between some provisions of the legal fra- mework on the Structural Funds and others relating to the EAGGF-guarantee. 16 The regulations relating to these two types of Community aid which are assumed to be similar include, I believe, specific provi- sions concerning the obligations of control by Member States: Article 23(1) of the coordination regulation and, for the 20. Thirdly, to avoid the difficulties of the EAGGF-guarantee, Article 8(1) of Council text raised by the Spanish Government and Regulation (EEC) No 729/70 of 21 April the Italian and Portuguese Governments, 1970 on the financing of the common the Commission refers to the case-law of agricultural policy (hereinafter 'Regulation the Court concerning the powers of the No 729/70'), 17 an act to which the Com- Commission under the terms of the mission refers several times during the EAGGF-guarantee. The Commission takes the view that, as both the Structural Funds and the EAGGF-guarantee are realised through the use of Community budget

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corrections. Such an argument, however, broadly rests upon an 'interpretative pro- cess' based on analogy, by transposing statements by the Court relating to the EAGGF-guarantee to the scope of the Structural Funds. The analogy in our case 21. In my opinion, the arguments to which would not be interpretative, but would be a I have referred, far from corroborating the process of creating new rules based on the position of the Commission, undermine its presumption that there is a weakness in the

gence . . .'. to confirm this). Clearly, therefore, the 1 9 — T h a t case-law, which belongs to a broadly consolidated line of that College (sec also Case C-232/96 France v Commission considers that here there is a Commission [I998] ECR I-5699, paragraphs 43-45, 53 and 57; Case C-235/97 France v Commission [ 1 9 9 8 ) ECR weakness in the rules, which it wishes to I - 7 5 5 5 , in particular p a r a g r a p h s 3 8 - 4 5 , and para- deal with by analogy, by transposing the graphs 20-41 of the Opinion of Advocate Cenerai Alber; Case C-54/95 Germany v Commission [1999] I - 3 5 , rules on the EAGGF-guarantee to this case, paragraphs 4-18 and 94-100; Case C-240/97 Spam v Commission [1999] ECR 1-6571, paragraphs 33-39) estab- using the internal guidelines. lished that, by the application of Articles 2 and 3 of Regulation N o 729/70, the EAGGE-guarantee would only finance the refunds granted and assistance provided in accordance with the Community regulations on the joint organisation of agricultural markets. The Court assumes from this that the Commission has the task of rejecting every claim to charge to the EAGGF-guarantee, and therefore to the Community budget, any expenditure affected by irregularities (see, for example, Case 11/76 Netherlands v Commission [1979] ECR 245, paragraph 8; Joined Cases 15/76 and 16/76 France v Commission 11979] ECR 3 2 1 , paragraphs 10-17; Case C-197/90 Italy v Commission, paragraph 39; and Case C-50/94 Greece v Commission, paragraph 6).

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sion is not only giving its interpretation of sponding to Articles 23 and 24 of the Article 24 of the coordination regulation; coordination regulation), entitled 'Finan- that is, it has not anticipated the applica- cial corrections', states specifically for the tion of net corrections for irregularities as first time the power of the Commission to laid down by, or which the interpreter may make these corrections if it concludes, after deduce from, the aforementioned provi- completing the necessary verifications, sion. On the contrary, using the EAGGF- among other things, that 'a Member State guarantee system as inspiration, the Com- has not complied with its obligations [of mission has adopted an act by which the control as laid down]' or that 'there are possibility is introduced for the first time of serious failings in the management or charging net corrections to the Member control systems which could lead to sys- States — a 'sanction' in itself and as stated temic irregularities.' The Commission in Article 24 — for different irregularities replied by stating that it is merely a to those which concern 'the nature or codification or explanation of the present conditions for i m p l e m e n t a t i o n ' of an legal framework relating to the Structural operation or measure benefiting from aid Funds. In my opinion, however, the word- from the Structural Funds, which are the ing of Article 39 does not allow acceptance only kinds indicated in the rule stating of the argument put forward by the Com- these sanctions. mission. It is in that provision that the weakness is dealt with which, with respect to the EAGGF-guarantee, characterises the legal framework of the Structural Funds.

challenged — whilst it does not impose cil ... shall adopt the provisions necessary new obligations on the Member States 23 — for ensuring coordination between the introduces financial 'sanctions' for irregu- different Structural Funds ...'. Therefore larities committed by the Member States in it was the Council — through Regulation cases which are different to those stated in No 1260/99 — which added to the frame- Article 24. The internal guidelines, there- work of cases where the Commission has fore, by extending the scope of this provi- the power to apply financial corrections for sion, constitute an act intended to produce irregularities committed by the Member its own legal effects. This is sufficient to States. The intervention of the Council conclude that it can be the subject of an confirms that it has the power to extend action for annulment. the application of the financial corrections to different situations from those stated in Article 24 of the coordination regulation. Finally, it should be added that, unlike the framework regulation and the coordination regulation, Regulation No 1260/99 finally provides for the power of the Commission to adopt the procedures for the application of Article 39 (see Article 53), which also covers financial corrections for irregulari- ties in the management and control systems of Member States. Given the clear distribu- tion of duties I have described, the Com- 25. The question of the Commission's mission did not have the power to adopt alleged lack of competence to adopt the the act being challenged. The internal act in question remains to be settled. Apart guidelines should therefore be annulled. from Articles 23 and 24 of the coordina- tion regulation, the Commission has not indicated any specific provision giving it this power. 24 Furthermore, as the Spanish Government correctly observed, Arti- cle 7(2) of the framework regulation gives the Council, and not the Commission, the power to adopt the 'harmonised rules for strengthening checks on structural opera- tions'. The aforementioned provision also refers to Article 3(5) of the same regula- tion, that is the legal basis of the coordina- tion regulation, which states 'The Coun-