What about that financial correction?

In October last year (27.10), the Supreme Administrative Court adopted its first resolution in cases involving European funds. (ref. II GPS 2/14). The subject of this resolution was to resolve the burning issue of the nature of the so-called financial correction and the relationship between the correction and the decision to reimburse funds. For a good two years, a dissonance could be observed in the jurisprudence of administrative courts concerning whether a financial correction imposed in connection with irregularities in a project financed from European funds should have the form of a separate administrative decision, or whether it constitutes only an element of the facts of a decision on the reimbursement of funds. Significantly, this dissonance could also be observed in the case law of the Supreme Administrative Court itself, for on the one hand some NSA formations were in favour of a separate nature of the correction in relation to the decision on the reimbursement of funds. On the other hand, in some judgments, the Supreme Administrative Court denied financial corrections the attribute of administrative decisions, indicating that they constitute an element of the facts taken into account in the refund proceedings. The literature has presented positions denying financial corrections the character of administrative decisions and ordering them to be treated as another act or activity within the scope of administration within the meaning of Article 3 § 2(4) of the Act – Law on Proceedings before Administrative Courts (vide: Grzegorz Karwatowicz, 'Financial corrections for violation of public procurement law in EU projects’, Wrocław 2013, p. 95. A similar position was presented by Robert Suwaj in his gloss to the NSA judgment II GSK 1776/12, LEX no. 1361505). Personally, I also took a stand on this issue in, inter alia, the article ’Principles of the responsibility of beneficiaries for irregularities in the implementation of projects co-financed from European funds in the financial perspective 2007-2013’, presenting an opinion according to which a financial correction is included in the concept of reimbursement of funds and does not constitute a competitive mechanism of recovering amounts irregularly spent, separate from the reimbursement decision.

For the sake of completeness, it should be recalled that a financial correction is imposed by the Member State for individual or systemic irregularities detected in operations or operational programmes (Article 98 of Regulation 1083/2006. An irregularity is any infringement of a provision of Community law resulting from an act or omission by an economic operator which has, or would have, the effect of prejudicing the general budget of the European Union by charging an unjustified item of expenditure to the general budget (Article 2.7 of Regulation 1083/2006).
Public Finance Act 2009. („UFP„), on the other hand, in Article 207 provides that in the event that funds allocated for the implementation of programmes financed with the participation of European funds are: 1) used inconsistently with their intended use, 2) in breach of the procedures referred to in Article 184 of the UFP or 3) taken improperly or in an excessive amount – they are subject to repayment with interest, while this provision provides for issuing a decision on the repayment of funds in such a situation, which should be preceded by a prior request for their voluntary repayment.
The provision which has caused doubts among the adjudicating panels of administrative courts is Article 26 of the Act on the Principles of Development Policy („UZPPR„), which establishes a catalogue of tasks to be performed by the Managing Authority. Paragraph 1 point 15a of this provision indicates that the tasks of the Managing Authority include, inter alia, determining and imposing financial corrections referred to in Article 98 of Regulation 1083/2006. Reading the indicated editorial unit in conjunction with the provision of Art. 26 par. 1 point 15 of UZPPR, according to which the managing authority is also responsible for the recovery of recoverable amounts, including issuing decisions on the recovery of funds transferred for the implementation of programmes, projects or tasks, referred to in regulations on public finances, led some judges of administrative courts to the conclusion that both tasks, i.e. imposing corrections and deciding on the recovery of funds transferred for the implementation of programmes, projects or tasks, referred to in art. 98 of Regulation 1083/2006, should be considered as the responsibility of the managing authority.
The juxtaposition of the content of the above-mentioned editorial units of Art. 26 of the Public Procurement Act is the main argument in favour of the fact that a financial correction is of a separate nature from a decision on the reimbursement of funds, which justifies granting it the attribute of an administrative decision. Another, less important argument is the seemingly different prerequisites for imposing a correction indicated in Article 98 and Article 2(7) of Regulation 1083/2006 and the prerequisites for issuing a decision on the reimbursement of funds indicated in Article 207 of UFP. Where did this discrepancy come from? In order to answer the question as to whether indeed the financial correction can be treated as a stand-alone act, it is worth paying attention to the previous wording of the provisions of the ACPA and the justification of the act amending it. Namely, Article 26(1)(15a) was only added to the SRO as a result of the 2008 amendment to this Act. As it results from the justification of the amending act, the introduction of this editorial unit to Article 26 of the Public Procurement Act was an expression of the demands of the voivodeship self-governments, which regarded the previous catalogue of tasks of the managing authority as incomplete. At the same time, the previous wording of Article 26, paragraph 1, point 15 of the Public Procurement Act generally indicated that the tasks of the managing authority included recovering amounts unduly paid to beneficiaries. To complete the above argument, I would like to remind that a provision analogous to the discussed Article 26 of the ACPA (Article 9, paragraphs 8 and 9) was also included in the new Act on the rules for the implementation of programmes within the scope of the cohesion policy financed in the financial perspective 2014-2020, with the new Act treating the subject of corrections in a slightly broader way – the legislator devoted the whole Article 24 of the Act to the procedure of imposing corrections. In my opinion, there is no doubt that on the basis of the above-quoted provisions of the UZPPR, which define, and in a non-exhaustive way, the scope of tasks of the managing authority, one cannot reconstruct a competence norm authorising the issuance of an administrative decision.

In the resolution, the SAC unequivocally stated that the determination and imposition of a financial correction does not require an administrative decision. This position fully deserves approval. I would not like to elaborate on the reasoning behind this position, so I will only briefly summarise the extensive argumentation of the Supreme Administrative Court. In a nutshell, the NSA referred first to the interpretation of EU law, i.e. the provisions of Regulation 1083/2006, indicating that it does not specify the manner in which a correction should be imposed, leaving this issue to be regulated by national law pursuant to the principle of procedural autonomy of Member States. He went on to point out that the essence of a financial correction and a recovery decision boils down to the same denominator, i.e. the recovery of funds unduly paid as a result of an irregularity, and since this is the case, it is unreasonable to take two administrative decisions on the same matter. Let the sentence from the justification of the NSA resolution serve as a summary of the above part.
„A financial correction is, in fact, the stage of pursuing the recovery of the amount determined by the correction, preceding the administrative proceedings in this matter initiated pursuant to Article 207(9) of UFP. In administrative proceedings for the reimbursement of wrongly collected receivables, the determinations concerning the correction made in the course of control proceedings are not binding on the body deciding on the reimbursement. They are part of the facts of the case. Consequently, the correction is also subject to the control of the court examining the complaint against the decision obliging to pay back, as part of the assessment of factual findings being the basis for the decision on repayment”
The above view clearly leads, in my opinion, to the conclusion that an institution which is a party to a contract on co-financing of a civil law nature may not arbitrarily change the amount of granted co-financing by means of a specific act, such as a correction (which was very often the case under the previous perspective), but it should do it within the framework of a procedure of reimbursement of funds – ensuring both a fair examination of the factual state of the case, proper protection guarantees for the beneficiary, as well as appropriate control of such a decision both by an appeal body and – possibly – by an administrative court.

In practice, it happens that upon finding irregularities, the institution does not initiate any administrative proceedings on the reimbursement of funds, but decides to use the collateral established by the beneficiary, e.g. a bill of exchange, which allows the institution to satisfy very quickly and at the same time does not generate as much work as preparing a decision. Such a situation occurs when the project provides for advance payments (in accordance with § 6 (1) of the Regulation of the Minister of Regional Development on the conditions and procedures for granting and settling advance payments and the scope and deadlines for submitting applications for payment under programmes financed with European funds, an advance payment is paid to the beneficiary after establishing and submitting a security for proper performance of obligations under the co-financing agreement). Therefore, the question remains whether the solution in which one beneficiary challenges the decision on the reimbursement of funds through administrative proceedings, while the other challenges the legitimacy of the reimbursement on the grounds of civil proceedings, is correct. At the same time it is impossible not to mention pathological, but unfortunately occurring cases of forcing the beneficiary to annex the agreement and thus making corrections by the method of accomplished facts. It is rare that a beneficiary decides to reject an „unobjectionable” proposal in the situation when he/she is still waiting for subsequent tranches of co-financing and faces numerous inspections by a number of institutions. Moreover, some beneficiaries are implementing or intend to implement a larger number of projects. It is therefore not surprising that sometimes the overriding aim is to maintain good relations with the granting institution. There are also cases of the institution simply 'holding’ funds until the matter is clarified….

In conclusion, I would like to draw your attention to one sentence from the justification of the commented resolution, which is of considerable importance for the system of fund implementation and project implementation in the new perspective. Namely, NSA stated:
„depending on at which stage of contract implementation irregularities were identified, the reimbursement of funds earmarked for co-financing regulated in Article 207 of UFP can have two forms: reimbursement of a specific, already paid amount of co-financing and reduction of the next payment to the beneficiary by the amount to be reimbursed (Article 207, paragraph 2 of UFP). Accordingly, the call preceding the issuance of a decision on reimbursement, referred to in Article 207(8) of this Act, may also consist in a call for consent to reduce subsequent payments. Understood in this way, reimbursement includes both an obligation on the beneficiary to 'return’ funds already collected and depriving the beneficiary of the right to funds not yet paid, as specified in the funding agreement. This allows us to conclude that the provisions of Article 207 of UFP may be applied in all cases in which the corrections provided for in Article 26, paragraph 1, point 15a of UZP are made, regardless of at what stage of project co-financing the correction was made.”
The quoted fragment of the justification of the NSA resolution confirms, in my opinion, the defect of the legal framework of the fund implementation system to which I drew attention in one of my previous posts: „What does the new perspective hide? – EU funding in the 2014-2020 financial perspective”. consisting in unjustified differentiation of the legal situation of beneficiaries depending on the stage at which the irregularity was detected. The Act on the rules for the implementation of programmes in the area of cohesion policy financed in the 2014-2020 financial perspective, in the event that an irregularity is detected prior to the approval of a payment application, does not provide for the issuance of an administrative decision involving a reduction in future payments, or even the determination and imposition of a financial correction, but simply a reduction in the value of eligible expenditure included in the payment application submitted by the beneficiary (Article 24(9)(1) of the Act). This means no less and no more that a beneficiary to whom future payments have been reduced, apart from raising objections under Article 25 of the Act (in conjunction with Article 24(10) thereof), has no legal remedies to prevent the reduction of payments. Such a solution, however, not only contradicts the wording of Article 207 of UFP, the wording of which clearly implies that the decision on reimbursement of funds is taken both when the funds have already been paid and when this has not yet occurred, but, as it turns out, it also fails to gain acceptance of the Supreme Administrative Court.

In my opinion, there are no grounds to differentiate the legal situation of beneficiaries depending on the stage at which the irregularity was detected and to grant broad legal protection to some (see: legal remedies against decisions on the return of funds provided for in the UFP and judicial review of these decisions), while denying this right to others, putting them, as it were, in a dead-end situation by arbitrarily depriving them of part of the subsidy. It has to be reminded that often non-payment of funds in a specified amount (reduction) significantly hinders and sometimes even prevents further implementation of a project, which is financed in significant part from refunds or advances, thus leading to thwarting the public purpose to the achievement of which a given project is supposed to contribute. Making it impossible in such a situation to control the decision of the body making the reduction should be considered harmful also in terms of the effectiveness of the system of distributing European funds. Of course, it is also not the case that the beneficiary will be completely deprived of the possibility to challenge the reduction, because if he/she concludes a contract for co-financing of a civil law nature, he/she may argue against the reduction under the provisions of civil law, referring to improper performance of the contract, however, in such a situation it may turn out that it will be an idle polemic, because in the meantime the lack of funds may cause that the implementation of the project loses its sense, and thus the dispute will be pointless.