Case T-549/08

Grand Duchy of Luxembourg

v

European Commission

(ESF – Suspension of financial aid – Fight against discrimination and inequality in the employment market – Serious failings in management or control systems which could lead to systemic irregularities – Article 39(2)(c) of Regulation (EC) No 1260/1999 – Legitimate expectations)

Summary of the Judgment

1.      Economic and social cohesion – Structural assistance – Community financing – Obligation on Member States to set up management and control systems

(Council Regulation No 1260/1999, Arts 38(1) and 39(2)(c) and (3); Commission Regulation No 438/2001, Arts 3(a), 7 and 9(4))

2.      Economic and social cohesion – Structural assistance – Community financing – Decision to suspend assistance initially granted

(Council Regulation No 1260/1999)

1.      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 European Social Fund (ESF).

Thus, 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 those Funds, the obligation on the part of the Member States to set up management and control systems referred to in Article 38(1) of Regulation No 1260/1999 laying down general provisions on the Structural Funds, the detailed rules for which are set out in Articles 2 to 8 of Regulation No 438/2001, is crucial. 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.

In this regard, 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 devolving on those authorities creates a significant risk of coordination, or even merging, of those checks, and is therefore such as to give rise to doubt concerning their reliability. Although Article 9(4) of Regulation No 438/2001 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, as required under Article 3(a) of that regulation.

Furthermore, at both the stage of first-level verification by the managing authority and that of certification by the paying authority, which constitute guarantees of sound financial management, the national authorities must, before the event, satisfy themselves fully that the expenditure in question was in fact incurred and was duly incurred. It is not sufficient for the national authorities to carry out verification after the event and then make financial corrections, if necessary.

With regard to the audit trail which is the subject of Article 7 of Regulation No 438/2001, a mere reference to the application documents relating to assistance in the context of a programme financed by the ESF cannot, on its own, provide all the specific information required by Article 7(2) and (3) of that regulation.

The Commission can therefore properly conclude that there are serious failings in the management and control systems which could lead to systemic irregularities, and can therefore suspend the interim payments for the assistance in question, in the case where it establishes, in the context of a programme financed by the ESF, that there has been a joint performance of the duties of management and payment, an absence or insufficiency of the first-level verifications and, with regard to the audit trail, a failure to maintain and keep, at the appropriate management level, all of the specific information required by Article 7(2) and (3) of Regulation No 438/2001.

(see paras 45-47, 52, 54, 57-61)

2.      A breach of the protection of legitimate expectations may not be relied upon by a person who has committed a manifest infringement of the rules in force.

The principle of the protection of legitimate expectations cannot prevent the suspension of Community funding where the conditions laid down for the grant of the funding have manifestly not been fulfilled. In a situation where there are serious failings in the management or control systems which could lead to systemic irregularities, such irregularities, just as in cases of manifest failure to comply with the Community rules governing the grant of Community funding or with the provisions of a decision granting funding, must be described as manifest infringements of the legislation in force.

The possible existence of irregularities which have not been investigated or brought to light previously can under no circumstances give rise to legitimate expectations. Consequently, there is nothing to prevent the Commission from drawing financial conclusions after it has detected faults in the course of a specific investigation. The national authorities, which are responsible in the first instance for the financial monitoring of assistance, cannot escape liability by pointing to the fact that the Commission found no irregularities during an earlier investigation. In any event, audit reports prepared by the Commission’s services in connection with setting up operations financed by Structural Funds are not, in principle, such as to give rise to legitimate expectations that the management and control systems to be set up by the Member States comply with the requirements. Such reports are generally prepared by means of sampling on the basis of information, which is representative but not exhaustive, relating to the assistance, and the reports are limited to the situation observed at the date on which the audit was carried out. In addition, those reports reflect only the professional opinion of the officials responsible for the control operations on the spot and not the opinion of the Commission, which is manifested only at a later date following a procedure closely involving the Member State concerned.

(see paras 73-77, 79)