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Decision in case 2024/2014/ANA on the European Commission’s dealing with audit and recovery concerning the UNCOSS project
Case 2024/2014/ANA - Opened on Friday | 09 January 2015 - Recommendation on Monday | 31 July 2017 - Decision on Thursday | 23 August 2018 - Institution concerned European Commission ( Maladministration found )
The complainant is the owner of a Croatian company, which was part of a consortium that carried out an EU-funded project. Based on the findings of an audit carried out after the project had concluded, the European Commission sought to recover funds totalling more than the amount the complainant had received. The complainant considered this to be unreasonable and unfair, and turned to the European Ombudsman.
The Ombudsman inquired into the complaint and found no maladministration with most of the audit findings, which concerned whether or not the contractual obligations had been respected.
However, the Ombudsman found that certain statements in the Commission’s audit reports were inappropriate and that the Commission should not have rejected the rate the complainant applied for the calculation of his personal staff costs. In addition, the Ombudsman found that it was clearly unfair of the Commission to seek to recover funds in excess of the amount the complainant had received under the project. The Ombudsman found that these actions amounted to maladministration.
Consequently, the Ombudsman recommended to the Commission that it: (1) acknowledge that statements made in the audit reports were inappropriate, and apologise to the complainant; (2) review its audit findings regarding the applicable rate for staff costs and revise the amount to be recovered accordingly; (3) further reduce the amount it is seeking to recover to reflect the fact that the Commission did not make a final payment under the project; and (4) waive the ‘liquidated damages’ it seeks to recover in their entirety.
The Commission reviewed its position regarding the Ombudsman’s first, third and fourth recommendations. The Commission’s acceptance of the third and fourth recommendations meant that the amount that it seeks to recover from the complainant was reduced by 313.506,55 Euros. At the same time, the Commission’s revised position on the first recommendation does not amount to an acknowledgement that certain statements made in the audit reports were inappropriate; nor does it amount to an apology. Moreover, the Commission rejected the Ombudsman’s second recommendation without bringing forward convincing arguments.
Taking all the circumstances into account, and having engaged extensively with the Commission in relation to its maladministration, the Ombudsman concluded that further engagement is unlikely to result in a more satisfactory outcome for the complainant. The Ombudsman therefore decided to close the case. The Ombudsman acknowledges that the Commission has moved considerably in this case and has satisfactorily addressed the substance of two of her findings of maladministration. However, the Commission has failed to respond satisfactorily to two other findings of maladministration.
The Ombudsman observes that EU institutions should aim to strike a proper balance between the rigid enforcement of financial rules and achieving outcomes which are proportionate and fair. The Ombudsman suggests that the Commission should reflect on these matters with a view to ensuring that, in the future, its actions in this regard are fair and proportionate and better reflect the values on which the EU is based.
Background to the complaint
1. The complainant is a retired professor of physics, who set up ACT d.o.o (hereafter, ‘ACT’), a company registered under Croatian law. ACT was a member of the consortium that carried out the Underwater Coastal Sea Surveyor (UNCOSS) project under the EU’s 7th Framework Programme for European Research and Technological Development (FP7). The aim of the UNCOSS project was to equip a Remotely Operated Vehicle (‘ROV’) with a neutron generator in order to scan coastal areas for bombs and explosives.
2. The project started on 1 December 2008 and was concluded within the agreed time-limit (by 31 July 2012), having met its intended objectives to the European Commission's satisfaction.
3. Following an audit by its services, the Commission issued a debit note for the recovery of €720 755.79. This amount was made up of (a) €641 246.53, which corresponded to the overall costs claimed, as well as a final payment for the project that was pending at the time, and (b) €79 509.27 of ‘liquidated damages’. The funds the European Commission sought to recover were more than the amount the complainant had received.
4. The complainant considered this to be unreasonable and unfair, and he turned to the European Ombudsman on 19 November 2014.
Issue of inquiry
5. The Ombudsman inquired into the complainant’s claim that the Commission acted unreasonably and unfairly in seeking to recover funds from ACT.
The Ombudsman's recommendations
6. The Ombudsman found no maladministration regarding most of the audit findings, which concerned whether or not the contractual obligations had been respected.
7. However, the Ombudsman identified certain instances of maladministration and made corresponding recommendations. When making the recommendations to the Commission, the Ombudsman took into account the arguments and views put forward by the parties.
8. Specifically, the Ombudsman found that certain statements in the Commission’s audit reports did not conform to the requirements of good administrative practice, because of the language used, and amounted to maladministration. Therefore, the Ombudsman recommended (recommendation no 1) that the Commission acknowledge that certain statements in its audit reports were inappropriate and apologise to the complainant on that account.
9. In the second place, the Ombudsman considered that, although it was unclear whether the complainant qualified as an SME owner not receiving a salary, a Commission department had advised him that he could apply the rates to his staff costs as an SME owner not receiving a salary (so-called ‘Marie Curie’ rates). All the circumstances taken into account, the complainant, who acted in good faith, should not be penalised for acting on the advice given by the Commission. Thus, it was not good administrative practice for the Commission to deem the complainant’s application of Marie Curie rates for staff costs as ineligible. In order to resolve the matter, the Ombudsman recommended (recommendation no 2) that the Commission should review the audit findings on the staff costs, notably regarding the application of ‘Marie Curie’ rates, and adjust the amount to be recovered accordingly.
10. Moreover, when the recovery order was issued, the final payment under the UNCOSS project had not been made to the complainant. The Commission thus sought to recover an amount that had not been paid to the complainant. This was wrong. Therefore, the Ombudsman recommended (recommendation no 3) that the Commission should further reduce the amount it is seeking to recover to reflect the fact that it did not make the final payment otherwise due to the complainant.
11. The grant agreement provides that in “exceptional cases, the Commission may refrain from claiming liquidated damages”. The Ombudsman expressed the view that this provision should apply in this case for the following reasons: (1) the amount claimed for recovery by the Commission exceeded the amount of funding the complainant received for a project that was concluded successfully and on time; (2) the complainant’s firm had been liquidated; and (3) OLAF found no fraud or other irregularities of the kind suggested in the Commission’s final audit report. Therefore, in the interest of fairness, the Ombudsman recommended (recommendation no 4) that the Commission should waive the ‘liquidated damages’ it sought to recover in their entirety.
12. The Commission sent its reply to the Ombudsman’s recommendations on 7 December 2017. In that reply, the Commission rejected all of the Ombudsman’s recommendations.
13. After a careful examination of the Commission’s reply to the recommendations, the Ombudsman’s inquiry team considered that there were some important factual errors in that reply and contacted the Commission asking for clarification. In the informal exchanges that followed, the Commission acknowledged the problem. In light of this development, the Ombudsman decided that the Commission should send her a further reply. The Commission sent its further reply on 4 June 2018 and the complainant sent his comments on that reply on 29 June 2018.
14. In its further reply, the Commission reviewed its position regarding the first, third and fourth recommendation.
15. Specifically, regarding the first recommendation, the Commission said that the audit procedure could have been better explained to the complainant prior to the audit. The Commission acknowledged the inconvenience that the treatment of the case might have effectively caused, and promised to apologise to the complainant for this.
16. Regarding the third recommendation, the Commission acknowledged that it committed an administrative oversight when making the initial calculation of the amount to be recovered. Specifically, when the debit note was issued, the Commission relied on the information from the audit report and therefore based its calculations on the amounts claimed by the beneficiary and not on the amounts actually received, as that information could not be obtained until the processing of the final payment, on the basis of the information provided by the coordinator of the project. Based on the amounts actually received by the complainant, the debit note should have been for EUR 407,249.24, without the application of liquidated damages (see the Commission’s reply to the fourth recommendation below), instead of EUR 720,755.79. Thus, the Commission accepted the Ombudsman’s recommendation and promised to revise the calculation of the debit note accordingly.
17. Regarding the fourth recommendation, the Commission stated that in the light of its further observations in response to the third recommendation, the amount of the liquidated damages, which are normally calculated as a percentage of the financial contribution unduly received, would also need to be re-adjusted. However, the Commission stated that in view of the exceptional circumstances of this case, it agreed with the Ombudsman not to apply the liquidated damages at all.
18. Regarding the second recommendation, the Commission maintained the position expressed in its opinion of 7 December 2017. There, the Commission argued that 'Marie Curie' rates are allowed for owners of SMEs who do not receive a salary. Since the complainant was receiving a salary from his company, which also paid all the necessary taxes and social security to the Croatian authorities, the Commission could not accept the application of 'Marie Curie' rates. According to the Commission, even if the complainant had acted in good faith, the Commission could not ignore the legal and contractual rules governing the contract in question. Furthermore, the Commission argued that the complainant cannot rely on the doctrine of legitimate expectations as the relevant conditions, required by the case law of the Court of Justice of the EU, are not met in this case.
19. In his comments, the complainant strongly criticised the Commission’s handling of this case, stating that the Commission neither complied fully with the Ombudsman’s findings nor took sufficient account of OLAF’s finding that there had been no irregularity of the kind implied in the Commission’s audit report.
20. In particular, regarding the Commission’s reply to the first recommendation, the complainant said that the issue is not one of whether the audit procedure had been explained properly to him; the issue, rather, is that the Commission should acknowledge that the audit report contained false statements and inappropriate remarks. In his view, the Commission should apologise and withdraw these statements.
21. Regarding the Commission’s reply to the second recommendation, the complainant argued that the Commission’s erroneous assessment is not in line with Croatian law which clearly provides that the amounts received by ACT were an “author’s fee” and not a salary.
22. Regarding the Commission’s reply to the third and fourth recommendations, the complainant stated that waiving the right to ask for liquidated damages was not enough, and he maintained his criticism of the manner in which the Commission had conducted the audit.
The Ombudsman's assessment after the recommendations
23. The complainant is right to point out that the Commission’s further reply does not amount to an apology. The principles of good administrative behaviour apply to all contacts with citizens, whether formal, informal, preliminary or final, and EU institutions must refrain from making any insulting or denigrating comments towards citizens at all times and in all cases. Therefore, without it being necessary to reproduce here all of the auditors’ statements, the Ombudsman considers them to be objectively offensive. The Ombudsman therefore does not agree that such statements can be justified by the preliminary nature of the draft audit report. Given that the Commission’s revised position on the first recommendation does not amount to an acknowledgement that certain statements made in the audit reports were inappropriate, and to constitute an apology to the complainant, the Ombudsman must confirm her finding of maladministration in this instance.
24. The assessment of whether the payment arrangements between the complainant and his company qualified as a salary is difficult to make and therefore to some extent uncertain. Faced with this uncertainty, the complainant sought advice from the Commission (the FP7 service) which had drafted the applicable rules and could be expected to have expert knowledge of them.
25. The Ombudsman is not in a position to pronounce on whether or not the complainant, at the time, was an SME owner receiving a salary. However, the responsible Commission department, whose advice the complainant sought, seems to have accepted this possibility at the time and advised the complainant accordingly. The Commission has not made clear why one should not be able to trust the advice given by its own services. If grant beneficiaries cannot rely on the advice they receive about EU-funded programmes from the relevant parts of the Commission, this clearly would undermine public trust in the administration and the functioning of EU funding programmes. The Commission’s position, that in effect citizens should not trust the advice received from its departments, is in this case incomprehensible and untenable.
26. Therefore, the Ombudsman considers that the Commission’s arguments for refusing to accept ‘Marie Curie’ rates are not convincing, taking into account the facts of the case and an analysis of those facts in light of the principles of good administration. Thus, the Ombudsman must confirm the earlier finding of maladministration in this instance.
Third and fourth recommendations
27. The Commission has carried out a fresh review of the file and complied fully with the Ombudsman’s recommendations.
Concluding remarks on this case
28. The Commission reviewed its position regarding the Ombudsman’s first, third and fourth recommendations. The Commission’s acceptance of the third and fourth recommendations meant that the amount that it seeks to recover from the complainant has been now reduced by 313.506,55 Euros. At the same time, the Commission’s revised position on the first recommendation does not amount to an acknowledgement that certain statements made in the audit reports were inappropriate nor has it apologised to the complainant. Moreover, the Commission has rejected the Ombudsman’s second recommendation without bringing forward convincing arguments. Taking all the circumstances into account, and having engaged extensively with the Commission in relation to its maladministration in this case, the Ombudsman considers that further engagement is unlikely to result in a more satisfactory outcome for the complainant. The public interest will not be served by such further engagement. Thus, while maintaining her findings of maladministration, the Ombudsman acknowledges that the Commission has satisfactorily addressed the essence of certain of the complainant’s concerns and therefore closes the case.
Concluding remarks - general
29. This case highlights the fact that participating in EU-funded projects can be a daunting exercise for small companies, including single owner companies. The rules are generally quite complex and it is often not possible for companies to receive authoritative advice on the rules (see the advice given to the complainant by the FP7 service on the application of ‘Marie Curie’ rates). One would expect EU institutions to take that into account when dealing with matters concerning compliance with the rules. However, the rules appear to be enforced with great zeal and rigidity. This rigid enforcement is done in the name of safeguarding the EU budget and fraud prevention. Often, the actual threat to the EU budget is not at all clear—a mere reference to the abstract interest of combatting fraud seems enough to justify the most rigid application of the rules even though the errors committed may be minor. The Ombudsman is concerned that in some instances small companies have to persist for years to have their legitimate claims honoured or go bankrupt in the process. Understandably, such companies, their owners and employees will often form a permanent, negative view of the EU and its administration.
30. In matters like this, the Commission must be very attentive not to let its actions be determined solely by the technicalities of the grant agreement. Instead, it must also examine what is fair and just in the circumstances of an individual agreement. A view held by public sector ombudsmen generally is that no legal rule should be applied in so inflexible a manner as to cause a serious injustice or unfairness. It should be repeated here that the particular case at issue is one in which the owner of a small company was asked to return more money than he had received for the (successful and in time) performance of the contract. This is an inequitable outcome which shows that the Commission has failed to strike the right balance between the strict application of rules governing grant agreements and the need for EU authorities to act in accordance with the demands of justice and fairness.
31. Therefore the Ombudsman, in full awareness of the difficulties facing the Commission in its role of defending the EU’s financial interests, considers it important to suggest to the Commission that it reflect on how best to ensure that the right balance is struck between the rigid enforcement of the financial rules and achieving outcomes which are proportionate and fair.
Based on the inquiry, the Ombudsman closes this case with the following conclusions:
The Commission has fully accepted the Ombudsman’s third and fourth recommendations. However, the findings of maladministration identified by the Ombudsman in her first and second recommendations have not been responded to satisfactorily.
The complainant and the European Commission will be informed of this decision.
Suggestion for improvement
The Commission should reflect on how best to ensure that the right balance is struck between the rigid enforcement of the financial rules and achieving outcomes which are proportionate and fair.
 The Commission is entitled to seek ‘liquidated damages’ in cases where, by overstating amounts claimed, a beneficiary receives an unjustified financial contribution under EU funding programmes.
 The Ombudsman’s recommendations in this case are available at: https://www.ombudsman.europa.eu/en/cases/recommendation.faces/en/82024/html.bookmark
 Small and Medium Enterprise.
 As the Commission did in a similar case, see Decision of the European Ombudsman closing the inquiry into complaint 1962/2013/JN against the European Commission, at paragraph 20, available at: http://www.ombudsman.europa.eu/cases/decision.faces/en/58814/html.bookmark
 Article 3(1) of the European Code of Good Administrative Behaviour provides: “This Code contains the general principles of good administrative behaviour which apply to all relations of the institutions and their administrations with the public...” (emphasis added).
 See above footnote 5 which quotes paragraph 21 of the Ombudsman’s recommendations summarising the complainant’s arguments as to why the Commission’s statements were offensive.
 This comment reflects the Ombudsman’s experience in dealing with some other complaints relating to payment disputes in EU-funded projects.
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