The proposed architecture of the exceptional financing is based on three pillars:
- The Own Resources Decision authorises the full amount of the borrowing, to be used for exceptional expenditure and for loans to Member States. Those amounts are not entered into the Union budget. It also organises the repayment of the amounts used for expenditure under the future MFF. The repayment will be entered into the Union budget in the year it takes place (as of 2028, until 2058).
- The Recovery Instrument based on Article 122 TFEU identifies recovery measures and allocates the borrowed funds to various Union programmes to that effect.
- The Union programmes receive the resources and lay down the rules for their implementation.
The major innovation, the borrowing for spending, is compliant with the Treaties.
1) Under the current circumstances, borrowing is a justified means to attain the Union’s objectives
- The Union is allowed to provide itself with the means necessary to attain its objectives [Article 311, first paragraph TFEU]. A highly competitive social market economy, aiming at full employment, the promotion of economic, social and territorial cohesion and solidarity among Member States is an objective of the Union [Article 3(3) TEU].
- The financial means of the Union come predominantly, but not exclusively, from own resources [Article 311, second paragraph TFEU]. Therefore, the Union enjoys some discretion as to the choice of the means necessary, as long as it respects the financial rules of the Treaty.
- Borrowing constitutes such a means. Under the current circumstances, it is necessary. Tackling the exceptional consequences of the crisis requires large resources in short period of time, without increasing national debt in the short to medium term.
- Borrowing creates a financial liability for the Union. However, financial operations involving liability of the Union are not extraordinary. The Treaties do not prohibit the Union from taking liabilities. The Union is already now taking liabilities e.g. from loans for financial assistance to Member States and third countries or budgetary guarantees, inclusive for market operations (e.g. European Fund for Strategic Investments). Borrowing used for crisis spending would simply be a new type of a liability operation.
2) Borrowing must respect the principle of budgetary discipline. For that reason, provisions are needed in the Own Resources Decision
- According to the principle of budgetary discipline [Article 310(4) TFEU], the Union’s actions can be financed within the limits of the multiannual financial framework (MFF) and own resources. The Treaty also obliges the Union institutions to ensure that the Union can satisfy its financial obligations towards third parties [Article 323 TFEU].
- Therefore, liability from borrowing is only permissible if the Union is able to repay the debt including interest. This requires that the own resources ceiling be sufficiently high to ensure each year sufficient financial space for the full coverage of the Union’s liability. It also requires a mechanism ensuring availability of resources in all circumstances.
- The proposed amendment to the proposal for the new Own Resources Decision makes sure that these pre-requisites of budgetary discipline are fulfilled:
o A dedicated and temporary increase of the Own resources ceilings will create sufficient budgetary space. That space is available (i) for the contingent liabilities from loans to Member States and (ii) for the repayment of the debt from borrowed funds used for spending programmes in the future (2028 to 2058);
o An additional rule will allow the Union to call on resources from the Member States where, on a given year, the authorised appropriations entered in the budget are not sufficient for the Union to comply with its obligations resulting from borrowing.
- The Own Resources Decision will go one-step further. It will determine the maximum amount that may be borrowed and will set the parameters for its repayment, in particular the start date for repayment (2028) and the end date for repayment (2058). This can be done under the Own Resources decision for the following reasons:
o Those provisions are a corollary of the dedicated increase of the own resources ceiling. The size and the modalities of the repayment delimit the maximum amounts of future own resources revenue, which will be needed for that purpose. They may, therefore, be considered as an integral part of the establishment of the system of own resources [Article 311, third paragraph TFEU].
o When defining the amounts of the needed revenue in the own resources decision, it is normal for the legislator to take into account related expenditure. E.g. the UK rebates were calculated in function of the total allocated expenditure in favour of the UK.
o Moreover, the Own Resources Decision is of quasi-constitutional nature. It only enters into force after approval by all Member States in accordance with their national constitutional requirements. The authorisation of the borrowing will need the approval of all Member States, and, depending on national procedures, of their national parliaments. This provides for the necessary democratic legitimacy of that innovative proposal necessary to fulfil the Union’s objectives.
o At the same time, the approval by all Member States will constitute a clear commitment to bear the liability from the borrowing
3) Allocation of the funds to Union spending programmes, Article 122 TFEU
Article 122 TFEU allows for targeted derogations from standard rules in exceptional crisis situations. On that basis, the Recovery Instrument will provide for the financing, by reference to the authorisation to borrow provided by the own resources decision, and will assign those funds to the various spending programmes, as so-called “external assigned revenues”, for the purposes of recovery and resilience. [Article 21(5), Financial Regulation]
The borrowed funds will remain additional to the annual budget. They will not be part of the MFF and of the annual budgetary procedure.
Such way to proceed for large amounts diverges from the standard practice for the establishment of the budget and financing of the Union [point 1, requirement of principal financing of Union policies from own resources]. It is justified as a temporary and exceptional solution in the context of the current crisis.
Is the mechanism compatible with the principle of budgetary balance?
The principle of budgetary balance [Article 310(1), 3rd sub-paragraph, TFEU] requires equilibrium between revenue and expenditure of the annual budget. The borrowed funds are exceptional and one-off amounts coming in addition to the annual budget as external assigned revenue (for the spending part), they do not form part neither of revenue nor of expenditure under the annual budget.
The borrowing does not mean that the Union engages in deficit spending in a manner comparable to a Member State. Budgetary deficit occurring in the Member States budgets relies on future income from revenue (taxes), which the Member State can impose as a sovereign.
The Union does not have that option. It has to rely on the own resources previously authorised in the own resources decision and can act only within such limits, in accordance with the principle of budgetary discipline. The borrowing will constitute an operation respecting those constraints because the Own Resources Decision will already guarantee the financial means needed for the repayment. In substance, the Member States agree to make financial resources available to the Union, but, having limited immediately available fiscal space, “defer” or “delay” the making available.The budgetary space thus created will allow the Union to engage into extraordinary and one-off borrowing operation, permitting the immediate adoption of the recovery measures.
Why do we need a Recovery Instrument based on Article 122 TFEU? Why could the resources not go directly from the own resources decision to the spending programmes?
- The Recovery Instrument is based on Article 122 TFEU, which allows for extraordinary measures in situations of crisis as an expression of solidarity among Member States.
- Recourse to that legal basis is necessary for derogating from standard Treaty rules, which would not allow the financing of such large amounts in addition to the Union’s budget and outside of the annual budgetary procedure. This is justified only in the circumstances of the current crisis.
Can the borrowed funds be considered “external assigned revenue” provided for by the Recovery Instrument in accordance with Article 122 TFEU, while the empowerment to borrow and the repayment of the borrowing are embedded in the own resources decision?
- The borrowing and use of the funds involve three steps:
o Empowerment to borrow, including the determination of the maximum amount;
o Receipt of the borrowed funds and their assignment to particular items of expenditure;
o Repayment of the borrowing in the future, including the determination of the end date.
- The Own Resources Decision provides the legal basis for the first and third steps, whereas the Recovery Instrument constitutes the legal basis for the second step, in accordance with Article 21(5) of the Financial Regulation.
- This architecture is the result of a policy choice, while respecting legal constraints.
- It is legally possible to determine the maximum amount of liability in the Own Resources Decision. Article 311(3) TFEU has two functions, which are closely interlinked: it determines the revenue attributed to the Union and it contains the Member States’ commitment to provide such revenue. The determination of the overall amount of funds that may be borrowed and of the modalities of repayment provides legal certainty concerning the revenue needed by the Union in the future and the obligations of the Member States to provide for it.
- However, the borrowed funds will not constitute own resources but a new category of ‘other revenue'[Article 311(2) TFEU]. Such revenue comes in addition to the Union’s budget and is intended to finance particular items of expenditure.
- Concerning the second step mentioned above, Article 122 TFEU constitutes the appropriate legal basis for receiving the borrowed funds and attributing them to particular items of expenditure. The choice of the legal basis for a Union act must be based on objective factors which are amenable to judicial review and which include, in particular, the aim and content of the measure. In the present case, the content is the provision of additional financing by derogation to certain rules; the objective is the recovery and resilience of the Union in an unprecedented crisis situation.
- To conclude, the three steps mentioned above are interlinked, but given the political and legal constraints, they may be regulated in two separate legal acts based on different legal bases.
The Own Resources Decision is an act establishing the revenue of the Union, the own resources. How can it constitute legal basis for expenditure (repayment of the borrowing)?
Article 310(3) TFEU provides that the “implementation of expenditure shown in the budget shall require the prior adoption of a legally binding Union act providing a legal basis for its action and for the implementation of the corresponding expenditure in accordance with the [financial] regulation”. The Own Resources Decision is a “legally binding Union act” as defined by Article 2(4) of the Financial Regulation. As long as it can validly authorise the borrowing and its repayment (see previous question), the necessary consequence is that it will constitute a basic act for the expenditure intrinsically linked to the borrowing, i.e. the instalments of the borrowing. Therefore, this aspect belongs to the ‘system of own resources of the Union’ [Article 311(3) TFEU].
Do the borrowed amounts constitute own resources?
- The amounts are one-off additional reinforcement of Union’s actions, as ‘other revenue’ expressly provided for by Article 311(2) TFEU. Own resources are regular income of the Union.
- The amounts need to be repaid by the Union, while own resources are a final revenue that is not repaid.
The borrowing can be authorised based on the third paragraph of Article 311TFEU. The determination of the maximum Union’s liability and the modalities of repayment are intrinsically linked to the determination of the additional own resources ceilings.
Commission proposes draft mandate for negotiations on Gibraltar
The European Commission has today adopted a Recommendation for a Council decision authorising the opening of negotiations for an EU-UK agreement on Gibraltar. The Commission also presented its proposal for negotiating guidelines.
It is now for the Council to adopt this draft mandate, after which the Commission can begin formal negotiations with the United Kingdom.
Vice-President Maroš Šefčovič, the EU’s co-chair of the Joint Committee and Partnership Council, said: “By putting forward this draft mandate, we are honouring the political commitment we made to Spain to start the negotiations of a separate agreement between the EU and the UK on Gibraltar. This is a detailed mandate, which aims to have a positive impact for those living and working on either side of the border between Spain and Gibraltar, while protecting the integrity of the Schengen Area and the Single Market.”
Gibraltar was not included in the scope of the EU-UK Trade and Cooperation Agreement agreed between the EU and UK at the end of 2020. The Commission committed to begin the negotiation of a separate agreement on Gibraltar, should Spain request so. That is why the Commission is now recommending that the Council authorises the launch of specific negotiations on Gibraltar.
Today’s Recommendation builds upon the political understanding reached between Spain and the UK on 31 December last year. It is without prejudice to the issues of sovereignty and jurisdiction, and focuses on cooperation in the region.
The proposed negotiating directives put forward solutions to remove physical checks and controls on persons and goods at the land border between Spain and Gibraltar, while ensuring the integrity of the Schengen area and the Single Market. The proposals include rules establishing responsibility for asylum, returns, visas, residence permits, and operational police cooperation and information exchange.
Other measures are included in different areas, such as land and air transport, the rights of cross border workers, the environment, financial support, and establishing a level playing field. It envisages a robust governance mechanism, including a review of the implementation of the agreement after four years, the possibility for both parties to terminate the agreement at any time and the possibility of unilateral suspension of the application of the agreement under certain circumstances.
Spain, as the neighbouring Schengen Member State and as the Member State to be entrusted with the application and implementation of certain provisions of the future agreement, will be particularly affected by the agreement. The Commission will therefore maintain close contacts with the Spanish authorities throughout the negotiations and afterwards, taking their views duly into account.
With regard to external border control, in circumstances requiring increased technical and operational support, any Member State, including Spain, may request Frontex assistance in implementing its obligations. The Commission acknowledges that Spain has already expressed its full intention to ask Frontex for assistance.
The UK-EU Trade and Cooperation Agreement excluded Gibraltar from its territorial scope (Article 774(3)). On 31 December 2020, the Commission received a note of the proposed framework for a UK-EU legal instrument setting out Gibraltar’s future relationship with the EU. The relevant services in the Commission have examined this in close consultation with Spain. Building upon the proposed framework and in line with Union rules and interests, the Commission has today adopted a Recommendation for a Council decision authorising the opening of negotiations for an EU-UK agreement on Gibraltar and presented its proposal for negotiating guidelines.
Commission overhauls anti-money laundering and countering the financing of terrorism rules
The European Commission has today presented an ambitious package of legislative proposals to strengthen the EU’s anti-money laundering and countering terrorism financing (AML/CFT) rules. The package also includes the proposal for the creation of a new EU authority to fight money laundering. This package is part of the Commission’s commitment to protect EU citizens and the EU’s financial system from money laundering and terrorist financing. The aim of this package is to improve the detection of suspicious transactions and activities, and to close loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system. As recalled in the EU’s Security Union Strategy for 2020-2025, enhancing the EU’s framework for anti-money laundering and countering terrorist financing will also help to protect Europeans from terrorism and organised crime.
Today’s measures greatly enhance the existing EU framework by taking into account new and emerging challenges linked to technological innovation. These include virtual currencies, more integrated financial flows in the Single Market and the global nature of terrorist organisations. These proposals will help to create a much more consistent framework to ease compliance for operators subject to AML/CFT rules, especially for those active cross-border.
Today’s package consists of four legislative proposals:
- A Regulation establishing a new EU AML/CFT Authority;
- A Regulation on AML/CFT, containing directly-applicable rules, including in the areas of Customer Due Diligence and Beneficial Ownership;
- A sixth Directive on AML/CFT (“AMLD6”), replacing the existing Directive 2015/849/EU (the fourth AML directive as amended by the fifth AML directive), containing provisions that will be transposed into national law, such as rules on national supervisors and Financial Intelligence Units in Member States;
- A revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU).
Members of the College said:
Valdis Dombrovskis, Executive Vice-President for an Economy that works for people, said: “Every fresh money laundering scandal is one scandal too many – and a wake-up call that our work to close the gaps in our financial system is not yet done. We have made huge strides in recent years and our EU AML rules are now among the toughest in the world. But they now need to be applied consistently and closely supervised to make sure they really bite. This is why we are today taking these bold steps to close the door on money laundering and stop criminals from lining their pockets with ill-gotten gains.”
Mairead McGuinness, Commissioner responsible for financial services, financial stability and Capital Markets Union said: “Money laundering poses aclear and present threat to citizens, democratic institutions, and the financial system. The scale of the problem cannot be underestimated and the loopholes that criminals can exploit need to be closed. Today’s package significantly ramps up our efforts to stop dirty money being washed through the financial system. We are increasing coordination and cooperation between authorities in member states, and creating a new EU AML authority. These measures will help us protect the integrity of the financial system and the single market.”
A new EU AML Authority (AMLA)
At the heart of today’s legislative package is the creation of a new EU Authority which will transform AML/CFT supervision in the EU and enhance cooperation among Financial Intelligence Units (FIUs). The new EU-level Anti-Money Laundering Authority (AMLA) will be the central authority coordinating national authorities to ensure the private sector correctly and consistently applies EU rules. AMLA will also support FIUs to improve their analytical capacity around illicit flows and make financial intelligence a key source for law enforcement agencies.
In particular, AMLA will:
- establish a single integrated system of AML/CFT supervision across the EU, based on common supervisory methods and convergence of high supervisory standards;
- directly supervise some of the riskiest financial institutions that operate in a large number of Member States or require immediate action to address imminent risks;
- monitor and coordinate national supervisors responsible for other financial entities, as well as coordinate supervisors of non-financial entities;
- support cooperation among national Financial Intelligence Units and facilitate coordination and joint analyses between them, to better detect illicit financial flows of a cross-border nature.
A Single EU Rulebook for AML/CFT
The Single EU Rulebook for AML/CFT will harmonise AML/CFT rules across the EU, including, for example, more detailed rules on Customer Due Diligence, Beneficial Ownership and the powers and task of supervisors and Financial Intelligence Units (FIUs). Existing national registers of bank accounts will be connected, providing faster access for FIUs to information on bank accounts and safe deposit boxes. The Commission will also provide law enforcement authorities with access to this system, speeding up financial investigations and the recovery of criminal assets in cross-border cases. Access to financial information will be subject to robust safeguards in Directive (EU) 2019/1153 on exchange of financial information.
Full application of the EU AML/CFT rules to the crypto sector
At present, only certain categories of crypto-asset service providers are included in the scope of EU AML/CFT rules. The proposed reform will extend these rules to the entire crypto sector, obliging all service providers to conduct due diligence on their customers. Today’s amendments will ensure full traceability of crypto-asset transfers, such as Bitcoin, and will allow for prevention and detection of their possible use for money laundering or terrorism financing. In addition, anonymous crypto asset wallets will be prohibited, fully applying EU AML/CFT rules to the crypto sector.
EU-wide limit of €10,000 on large cash payments
Large cash payments are an easy way for criminals to launder money, since it is very difficult to detect transactions. That is why the Commission has today proposed an EU-wide limit of €10,000 on large cash payments. This EU-wide limit is high enough not to put into question the euro as legal tender and recognises the vital role of cash. Limits already exist in about two-thirds of Member States, but amounts vary. National limits under €10,000 can remain in place. Limiting large cash payments makes it harder for criminals to launder dirty money. In addition, providing anonymous crypto-asset wallets will be prohibited, just as anonymous bank accounts are already prohibited by EU AML/CFT rules.
Money laundering is a global phenomenon that requires strong international cooperation. The Commission already works closely with its international partners to combat the circulation of dirty money around the globe. The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, issues recommendations to countries. A country that is listed by FATF will also be listed by the EU. There will be two EU lists, a “black-list” and a “grey-list, reflecting the FATF listing. Following the listing, the EU will apply measures proportionate to the risks posed by the country. The EU will also be able to list countries which are not listed by FATF, but which pose a threat to the EU’s financial system based on an autonomous assessment.
The diversity of the tools that the Commission and AMLA can use will allow the EU to keep pace with a fast-moving and complex international environment with rapidly evolving risks.
The legislative package will now be discussed by the European Parliament and Council. The Commission looks forward to a speedy legislative process. The future AML Authority should be operational in 2024 and will start its work of direct supervision slightly later, once the Directive has been transposed and the new regulatory framework starts to apply.
The complex issue of tackling dirty money flows is not new. The fight against money laundering and terrorist financing is vital for financial stability and security in Europe. Legislative gaps in one Member State have an impact on the EU as a whole. That is why EU rules must be implemented and supervised efficiently and consistently to combat crime and protect our financial system. Ensuring the efficiency and consistency of the EU AML framework is of the utmost importance. Today’s legislative package implements the commitments in our Action Plan for a comprehensive Union policy on preventing money laundering and terrorism financing which was adopted by the Commission on 7 May 2020.
The EU framework against money laundering also includes the regulation on the mutual recognition of freezing and confiscation orders, the directive on combating money laundering by criminal law, the directive laying down rules on the use of financial and other information to combat serious crimes, the European Public Prosecutor’s Office, and the European system of financial supervision.
New EU guidance helps companies to combat forced labour in supply chains
The Commission and the European External Action Service (EEAS) have published today a Guidance on due diligence to help EU companies to address the risk of forced labour in their operations and supply chains, in line with international standards. The Guidance will enhance companies’ capacity to eradicate forced labour from their value chains by providing concrete, practical advice on how to identify, prevent, mitigate and address its risk.
Executive Vice-President and Commissioner for Trade Valdis Dombrovskis said: “There is no room in the world for forced labour. The Commission is committed to wiping this blight out as part of our broader work to defend human rights. This is why we put strengthening the resilience and sustainability of EU supply chains at the core of our recent trade strategy. Businesses are key to making this happen, because they can make all the difference by acting responsibly. With today’s Guidance, we are supporting EU companies in these efforts. We will ramp up our due diligence work with our upcoming legislation on Sustainable Corporate Governance.”
High Representative/Vice-President Josep Borrell said: “Forced labour is not only a serious violation of human rights but also a leading cause of poverty and an obstacle to economic development. The European Union is a global leader on responsible business conduct and business and human rights. The Guidance we publish today translates our commitment into concrete action. It will help EU companies to ensure their activities do not contribute to forced labour practices in any sector, region or country.”
The Guidance explains the practical aspects of due diligence and provides an overview of EU and international instruments on responsible business conduct that are relevant for combatting forced labour. The EU has already put in place mandatory standards in some sectors and actively promotes the effective implementation of international standards on responsible business conduct.
Promoting responsible and sustainable value chains is one of the pillars of the recent EU trade strategy. The Guidance delivers on the strategy by helping EU businesses already take the appropriate measures, bridging the time until legislation on Sustainable Corporate Governance is in place. This upcoming legislation should introduce a mandatory due diligence duty requiring EU companies to identify, prevent, mitigate and account for sustainability impacts in their operations and supply chains. Subject to the upcoming impact assessment, this will include effective action and enforcement mechanisms to ensure that forced labour does not find a place in the value chains of EU companies.
EU trade policy already contributes to the abolishment of forced labour through its various instruments. EU trade agreements are unique in including binding commitments to ratify and effectively implement all fundamental ILO Conventions, including those on forced labour. Those conventions include an obligation to suppress the use of forced or compulsory labour in all its forms. This commitment extends to the countries benefitting from the special incentive arrangement for sustainable development and good governance (GSP+) under the EU’s General Scheme of Preferences (GSP). All 71 beneficiary countries of the General Scheme of Preferences are obliged to not commit serious and systematic violations of the principles of the fundamental ILO Conventions.
The Guidance also delivers on a number of the priorities of the EU Action Plan on Human Rights and Democracy 2020-2024 in the area of business and human rights. Those priorities include the eradication of forced labour and the promotion of internationally recognised due diligence standards.
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