CLIENT ALERT – HUNGARY: EU member states reached an agreement with Hungary on the suspension of EU funds

compromis hongrie

As a reminder, on 30 November 2022, the European Commission published a Communication to the Council and a proposal to the Council in which it recommended freezing:

  • on the one hand, 5.8 billion euros of the post-Covid-19 recovery plan, representing 70% of the 7.2 billion euros envelope earmarked for Hungary, and
  • on the other hand, 7.5 billion euros of cohesion funds, representing 65% of EU funds allocated to Hungary under three operational programs under EU’s cohesion policy, i.e. app. 20% of the overall cohesion envelope for Hungary for the 2021-2027 period,

as long as the Hungarian government does not take steps to improve the rule of law. The European Commission considered that Hungary had not made sufficient progress in its reforms to improve the rule of law and therefore recommended the freezing of 13,3 billion euros in funds for Hungary.

Without the approval from the UE executive of its coronavirus recovery plan by the end of the year, Hungary would have irretrievably lost the amount of 5.8 billion euros funds.

The ambassadors of the 27 EU Member States met on 12 December 2022 and reached agreement on four issues: the aid package for Ukraine, the minimum tax rate of 15% for multinational companies and two files concerning Hungary: the recovery plan and the reduction of the frozen cohesion funds.

Firstly, the member states decided to approve Hungary’s recovery plan, i.e. 5.8 billion euros in grants. With this decision, these funds are therefore not lost, but they remain frozen.

Secondly, the member stated decided to reduce the frozen amount of cohesion funds. While the Commission recommended, under the rule of law the conditionality mechanism, the freezing of 7.5 billion of cohesion funds, the member states reduced this sum to 6.3 billion euros (i.e. 55% of funds frozen instead of the 65% recommended by the Commission). Hungary has in response lifted its veto on the proposed minimum tax and its blocking of the 18-billion-euro aid package for Ukraine from the EU budget.

However, to get these 12,1 billion euros (in recovery grants and in cohesion funds), Hungary will still have to fulfill 27 so-called ‘supermilestones’, including 17 commitments to redress the rule of law and institutional reforms aimed at strengthening the independence of the judiciary.

1. The conditionality procedure activated against Hungary

In order to prevent member states that violate the rule of law and democracy from benefiting from European funds, the European Union has introduced a system that makes the disbursement of European funds conditional on respect for the European values. The Regulation on conditionality was adopted by the Parliament and the Council on 16 December 2020 and entered into force in January 2021.

According to this Regulation, the European Commission initiates the conditionality procedure when it considers that breaches of the principles of the rule of law in a Member State undermine or present a serious risk of undermining the sound financial management of the Union budget or the protection of the Union’s financial interests. After a phase of consultation and exchange of views between the Member State concerned and the Commission, the Commission proposes appropriate and proportionate measures to the Council. The Council will then take a final decision on the proposed measures.

The conditionality mechanism was activated for the first time in April 2022 against Hungary, due to systematic irregularities in public procurement, as well as deficiencies in the system of prosecution and the fight against corruption.

In September 2022, the European Commission, in a written notification setting out the precise facts and grounds on which its findings are based, gave Hungary a deadline of 19 November to put in place reforms to strengthen the rule of law, the framework for the fight against corruption and the independence of the judiciary, as well as to improve competition in public procurement.

2. The measures implemented by Hungary

In its exchange of views with the Commission, Hungary committed itself to introducing 17 remedial measures, such as i) reinforcing prevention, detection and correction of illegalities and irregularities in the use of Union funds through a newly established integrity authority; ii) establishing an anti-corruption task force; iii) introducing a special procedure for specific offences related to the exercise of public authority or the management of public property; iv) reducing the share of tender procedures with single bids.

Hungary adopted several pieces of legislation between the end of September and the beginning of October 2022. One of the central remedial measures proposed by Hungary is the establishment of the Integrity Authority (in Hungarian: “Integritás Hatóság”).

According to the new law entered into force on 11 October 2022, the Integrity Authority is an autonomous body of the public administration, independent in the performance of its tasks, subject only to the law and acting independently of any other body. It acts in accordance with its mandate in all cases where it considers that a body with responsibilities and powers in relation to the use or control of EU funds has not taken the necessary measures to prevent, detect and correct fraud, conflicts of interest, corruption and other irregularities or offences prejudicial to the sound financial management of the Union budget or the protection of the financial interests of the EU, or where there is a serious risk that this will occur.

The Authority has different functions:

  • The Authority has a role of analysis and proposal: it carries out an integrity risk assessment, produces an annual integrity analysis report and issues recommendations.
  • It has a function of investigation and control: it can investigate, initiate an irregularity procedure with the competent authority, request the competent authority to initiate a procedure (the Authority cannot go to court directly, but it can require the competent authority to act) and bring actions for failure to act before the courts.
  • In the context of public procurement procedures, it has the powers of an administrative authority, it carries out official controls of public procurements implemented or planned to be implemented with EU funds, and it may impose information obligations. It keeps a register of legal persons, sole proprietorships and individual contractors excluded from public procurement procedures because of certain criminal offences.
  • The Authority has a duty to report to other competent authorities, including the European Anti-Fraud Office and the European Prosecutor’s Office, any suspicion of fraud, conflict of interest, corruption or any other illegal or irregular situation.

The Authority shall act on its own initiative or based on a notification or complaint submitted and using any information available to it. The law provides that where an offence or irregularity within the scope of the Authority is detected, any person may (anonymously) submit a complaint to the Authority.

The Authority is headed by a director and has two vice-presidents (appointed together as the Authority’s management board). The management board reports annually to the Parliament on its activities. Its report is transmitted to the European Commission.

The Integrity Authority Act also established a new Anti-Corruption Task Force, a body with analysis, proposal, advisory and decision-making functions, working alongside but independent of the Integrity Authority.

3. The Commission’s evaluation

In its Communication, the Commission considers that many reforms have been implemented in a way that fulfils the commitments set by Hungary, such as the establishment of the anti-corruption task force, the strengthening of audit and control mechanisms or the reduction of tender procedures with single bids financed by EU funds.

Nevertheless, Hungary has not sufficiently implemented some key aspects of the 17 remedial measures by the 19 November 2022 deadline.

The Commission’s remarks on the Integrity Authority concern, among others, the following points:

  • the lack of a clear rule stipulating that the Integrity Authority will retain its powers after a project has been withdrawn from EU funding: The last sentence of Section 3 of the Integrity Authority Act, concerning the performance of the Authority’s duties, states that “should a project be removed from European Union financing, this shall not lead to depriving the Authority from its powers if the fraud, conflict of interest, corruption and other illegalities or irregularities affect or seriously risk affecting the sound financial management of the European Union budget or the protection of the financial interests of the European Union”. Depending on how it is interpreted, this provision as such should not deprive the Integrity Authority of its powers if a project is withdrawn from Union funding. In the Commission’s view, however, the interpretation and application of this provision will depend on decisions by the Hungarian authorities, and it is also possible that such a provision is interpreted in a way that allows the deprivation of the Integrity Authority of its powers as soon as it starts to examine certain public procurement procedures.
  • The Authority does not have the possibility to appeal directly to the courts and therefore there are doubts about the effectiveness of judicial review of cases in which the contracting authority does not follow the recommendation of the Integrity Authority.
  • Shortcomings in the procedure for the removal of members of the Integrity Authority: the procedure for dismissing board members is short, only thirty days between the application and the judicial decision at first instance. Such time limit would make it difficult for the board member concerned to organize his or her defense effectively and for the competent court to ensure the exchange of briefs, to hold hearings and to protect the rights of the defense and of the proceedings.
  • The limited scope related to lack of inclusion of all ‘high-risk officials’ in the scope of the Integrity Authority’s verification powers in relation to asset declarations.
  • The process for selecting members of the Integrity Authority: the second vice-president of the board of directors was appointed when other candidates scored higher in the selection process.

In addition, the Commission noted that the promised measures concerning special offenses related to the exercise of public authority or the management of public property have not been (or have only been partially) implemented.

Finally, the Commission notes that the Hungarian government’s commitment to introduce, by 30 March 2023, a system of asset declarations filed electronically in a digital format, to be stored in a public database that will be searchable without a fee or the need to register, is not yet reflected in the regulatory framework. According to Hungary, the rules on the system will be elaborated and adopted later on, by 31 March 2023.

4. Hungary’s position

The compromise concluded on 12 December was called a “good result” by Hungarian prime minister Viktor Orbán. The Hungarian government said it was ready to convince the EU of its willingness to fight corruption in order to get the rest of these EU funds next year. “We will put in place the additional measures required and, in 2023, we have no doubt that we will succeed in convincing the Commission (…) that it is not necessary to suspend the funds” told Tibor Navracsics, the minister responsible for the use of European funds.

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