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EUROPEAN COMMISSION as LEGAL SERVICE Brussels, 19 November 2018 §.4(2018)6614885, Opinion of the Legal Service! NOTE TO MR MARC LEMAITRE DIRECTOR GENERAL, REGIO Impact of Article 61 of the new Financial Regulation (conflict of Subject: interests) on payments from the European Structural and Investment (ESI) Funds Ref: Ares(2018)5195421 Background With the above-referenced note you consult the Legal Service on the interpretation of Article 61 of the new Financial Regulation’, in particular in relation to the alleged conflict of interest of the Czech Prime Minister, Mr. Andrej Babi8.* According to the information provided in your note, Mr. Babi is, among other, the sole beneficiary” of two trusts, in which his shares in the company Agrofert and the group Agrofert were transferred. Agrofert group has in turn shares in around 200 ~ 300 other "This document contains legal advice and is only for the use of the services to which it is addressed. It ‘may not be transmitted outside the European Commission and its content may not be reproduced in documents to be sent outside the European Commission. It may be protected pursuant to Article 4 of Regulation (EC) No 1049/2001 of the European Parliament and of the Council and may only be disclosed under the procedures provided for in Commission Decision 2001/937/EC, ECSC, Euratom, 2 Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 ‘on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 23/2014, (BU) No 283/2014, and Decision No $41/2014/EU and repealing Regulation (EU, Euratom) No 96/2012, OJ L 193, 30.7.2018, p. 1-222 5 The argumentation developed in this note is applicable mutatis mutandis also in respect of the Czech Minister of Agriculture, Miroslav Toman, with some differences that will be pointed out, where applicable. term is the equivalent of “bénéficiaire" in the Quebec law from which the “In Czech “obmysleny* Czech law on trust funds is inspired. ‘Commission européenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIE - Tel. +32 22901114 ; jcal secWi>. ames 7 5 rocessing and chemil aaa companies operating in pee food Prd, ranging from approximately F companies have recei nds, million in 2013° to EUR 82 million in 2017. You essentially inquire whether a situation such as 0 interest according to Article 61 of the new Financial Regulation are to be taken to address such situation. . i ict of interest in the existence of a conflict of i i i. flict of interest exists also in mnder the EU agricultural fh as whether there is @ ies a conflict of stitute teeter ‘what measures and if $0, The scope of this note is limited to assessin relation fo ESI Funds. If it were to be assessed whether a con relation to other types of EU funding, e.g. direct payments w policy, further elements might need to be taken into account, suc! scope for exercising discretion and influence in relation to those funds. t. Legal Assessment Article 61 of the new Financial Regulation provides: Article 61 Conflict of interests J. Financial actors within the meaning of Chapter 4 of this Title and other persons, including national authorities at any level, involved in budget implementation under direct, indirect and shared management, including acts preparatory thereto, audit or control, shall not take any action which may Bring their own interests into conflict with those of the Union. They shall also take appropriate measures to prevent a conflict of interests from arising in the functions under their responsibility and to address situations which may objectively be perceived as a conflict of interests. 2. Where there is a risk of a conflict of interests involving a member of staff of a national authority, the person in question shall refer the matter to his or her hierarchical superior. Where such a risk exists for staff covered by the Staff Regulations, the person in question shall refer the matter to the relevant authorising officer by delegation. The relevant hierarchical superior or the authorising officer by delegation shall confirm in writing whether a conflict of interests is found to exist. Where a conflict of interests is found 0 exist, the appointing authority or the relevant national authority shall ensure that the person in question ceases all activity in the matter. The relevant authorising officer by delegation or the relevant national authority shall ensure that any further appropriate action is taken in accordance with the applicable law. 3, For the purposes of paragraph 1, a conflict of interests exists where the impartial and objective exercise of the functions of a financial actor or other person, as referred to in paragraph 1, is compromised for reasons involving family, emotional life, political or national affinity, economic interest or any other direct or indirect personal interest. * Mr. Babi entered politics in 2011 by founding the political movement “ANO”. In 2013, he was lected in the Chamber of Deputies of the Czech Parliament; he became a Minister of Finance as from January 2014 and Prime Minister as from December 2017. Article 61 is similar to Article 57° differences: of the former Financial Regulation’ with the following it explicitly level; ly applies to shared management and to national authorities at any ~ it also explicit ; ‘addres plcitly requires to prevent situations of the conflict of interest and to Sao tions which may objectively be perceived as a conflict of interests: to any direct or indirect personal interest instead of shared interest with the beneficiary. wis Fea evident whether all the above modifications are substantial changes of the former Article $7 or whether some of them only clarify the previous obligations. Nevertheless, explicit extension to shared management’ should be considered as a substantive change. Also, there is now a clear obligation to take appropriate measures to prevent or address a conflict of interest situation even if no action giving rise to conflict in the sense of the first sentence of Article 61(1) has ‘been taken. This obligation reinforces the preventive function of the obligations deriving from a conflict of interest situation. It should be noted here that if the conflict of interest materialises, e.g. a public officer uses his power in order to favour an economic operator owned by his family ‘member to the detriment of another operator, such behaviour would generally qualify as a wrongful, act under criminal or administrative law and could be sanctioned as such. The rules on conflict of interest are preventive in the sense that they aim to avoid that, in a first place, a public officer is in a situation where he/she could use power in favour of his/her interests, Or, if such situation arises, that it is promptly put to an end — before it could materialise in any wrongful act. ies to the situation of Mr Babi8, it follows 1 and 3 that it is necessary to establish, (i) £ persons targeted by Article 61(1), and f interest within the meaning of In order to establish whether Article 61 appli from the combined reading of its paragraphs whether Mr Babi§ falls within one of the groups © Gi) whether the situation he is in qualifies as a conflict o _—_ © Paragraphs 1 and 2 of Article 57 read: 1. Financial actors and other persons involved in budget implementation and management, including acts preparatory thereto, audit or control shall not take any action which may bring their own interests into conflict with those of the Union. Where such a risk exists, the person in question shall refrain from such action and shall refer the antento the authorising officer by delegation who shall confirm in writing whether a conflict of aeests exists, The person in question shall also inform his or her hierarchical superior. Where a conflict of interests is found (o exis, the person in question shal cease all activities inthe matter. The authorising officer by delegation shall personally take any further appropriate action. 2. For the purposes of paragraph 1, a conflict of interests exists where the impartial and objective exorcise of the functions of a financial actor or other person, as referred to in paragraph is compromised for reasons involving fanily, emotional life, political or national affinity, economic interest or any other shared interest with a recipient. 7 Regulation (EU, Euratom) No 96612012 ofthe European Parliament and of the Council of 25 October 3002 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) No 1605/2002, 05 L 298, 26.10.2012, p. 1-96 ® Article 57 has been interpreted as not applicable to shared management, see Legal Service reply “Legal basis for financial correction in case of conflict of interest of the fund manager of 2 financial instrament when selecting projects; interpretation of Article 57 of Regulation”, Ares(2015)2799918.