SPECIAL REPORT No 8/93 concerning the Common Organisation of the Market in raw tobacco together with the Commission's replies (94/C 65/01)

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1. INTRODUCTION

1.1. The Community support for tobacco growing and first processing was introduced by Council Regulation (EEC) No 727/70 (). In the first year of application Community expenditure amounted to some 5 Mio UA () and increased to about 362 Mio ECU in 1981. In 1982 Community expenditure doubled and followed a steeply increasing trend until in 1991 it reached its historical high of 1 329,6 Mio ECU. In 1992 expenditure fell back slightly to 1 232,9 Mio ECU but increased again in 1993 with a budget of 1 274 Mio ECU. This amounts on average to 3,5 Mio ECU of Community expenditure per day, with average support of about 6 000 ECU for each hectare. On this basis tobacco is by far the Community's most expensive crop.

1.2. With smoking coming under increasing public criticism because of its disastrous implications for public health and health-related social costs, this level of financial support looks out of place, especially when the Community itself finances a 'Europe against cancer` programme albeit with a modest annual budget of 1,5 Mio ECU for anti-smoking campaigns. Since 1993, regulations require a contribution from producers, deducted from the premium they receive, to finance research and information into the dangers of tobacco use. It is obvious that the massive support of tobacco production within the Common Agricultural Policy contradicts both the Community and international health policy and initiatives. For, while the Community imports some 70 % of its manufacturing requirements of baled tobacco, it exports about half this quantity, which represents some 50 % of the Community's high cost production of tobacco.

1.3. This report examines the evolution of Community spending on tobacco and its effect on tobacco production in the Community since the Court's last report on this matter in 1987 (). It also compares the Community system to the United States of America one which only involves some 30 Mio USD for administering a tobacco scheme which produces twice the Community's annual output.

1.4. The audit was carried out at the Commission and in the main producing Member States, Germany, Greece, Spain, France and Italy, at the central and regional administrations and at the premises of processors and growers. It also used information provided by third parties such as the World Health Organisation, the tobacco industry, the International Tobacco Grower's Association and the specialized press. The Court wishes to thank the United States Department of Agriculture and the General Accounting Office for its excellent collaboration.

1.5. The Court regrets that the Commission was not as forthcoming as it ought to have been in response to repeated requests from the Court for a copy of a report on an investigation ordered by the Commission into allegations of irregularities in the Commission's tobacco division. The Commission still maintains that investigations in the matter, which began in 1988, are not yet completed. An auditor of the Court was belatedly permitted by the Commission in April 1993 to read (but not to copy) a report after the Court's audit fieldwork had been finalised and that report contained information giving rise to suspicions of fraud. On the basis of that examination there was no evidence of action on the part of the Commission or a Member State to bring suspected wrongdoers to justice.

1.6. The Court has requested the Commission for a copy of a contract with a company, connected with a retired Commission official, which conducted that investigation and for details of the payments made thereunder but such information has not been given to the Court.

1.7. The Court also requested the Commission to furnish a copy of a report of an external expert on the classification of Italian Geudertheimer tobacco but the Commission, despite reminders, has refused to give a copy of the report to the Court.

1.8. To overcome, to some extent anyway, the obstacles created by the Commission's lack of cooperation, the Court has been obliged to expend additional manpower and time to obtain required information elsewhere. Because of the matters already known to the Court and to avoid any further delay, it is publishing this report at this stage. The Commission should make full disclosure to the Court of all material information and take, in cooperation with concerned Member States, all necessary remedial action.

1.9. The report contains observations on the management and control of the tobacco market which is carried out by both the Member States and the Commission's own services. Many of the Court's findings have considerable financial consequences. The Court therefore urges the Commission to take all necessary steps to seek reimbursements where due and to improve controls and general management without delay.

2. THE MARKET FOR RAW TOBACCO

The product

2.1. Tobacco originates from the sub-tropical regions of Central and South America. It exists in many varieties (the French Tobacco Research Institute in Bergerac watches over the genetic heritage of a thousand varieties and hybrids) and is adaptable to quite different climatic and soil conditions.

2.2. Tobacco seeds are sown in seed beds during late winter, with the small plants being transplanted to the fields in Spring. Tobacco growing is labour intensive, requiring careful soil preparation, weeding and for some varieties intensive irrigation. Quality is also dependent on the density of plants in the field. Furthermore, tobacco should ideally be grown in rotation, with periods of up to seven years between two cultivations on the same soil in order to avoid tobacco diseases.

2.3. Harvesting is spread over several weeks from the beginning to the end of summer. Some varieties (e.g. Virginia) are picked by leaf stage according to the ripening process, whilst others (e.g. Burley) are harvested by cutting the whole plant. Methods of harvesting tobacco also vary from region to region.

2.4. After harvesting, the leaf tobacco is cured by the growers before it is sold to the processors. The European Common Market Organisation (CMO) which covers only raw tobacco and not the end products involves 34 varieties which are classified by curing method into five groups:

(a)flue cured varieties are dried in ovens or barns where temperature, circulation and humidity of air are controlled via flues; the best known variety in this group is Virginia, the largest single type used in American blend cigarettes; because of their golden yellow colour they are also called Bright varieties;

(b)Burley and Maryland, also used in American blends are light air cured in barns and not fermented (exception: the Spanish fermented Burley); such varieties are also called blond or brown tobacco;

(c)Badischer Geudertheimer, Havanna and Paraguay are the best known dark air cured varieties; curing is similar to the light air curing but the tobacco is allowed to ferment up to several months; such black tobaccos are used in cigars and dark cigarettes;

(d)sun cured varieties not only include the commercially demanded Greek oriental varieties Basmas and Katerini but also the low demand tobaccos, Tsebelia and Mavra which are also grown in Greece;

(e)Kentucky (grown in Italy) and Nijkerk (grown in France) are the best known representatives of the fire cured varieties; they are dried in the smoke of open (oak) fires and are used in blends and for snuff.

2.5. After curing the tobacco is sold to about 300 first processing undertakings in the Community. First processing means any kind of treatment to turn the leaf tobacco into a stable conditioned product ready for storage and manufacturing. It entails the removal of tobacco debris and impurities, the sorting and mixing to leaf position, colour, texture and quality and baling. It may also include fermentation for some varieties and, if the tobacco manufacturer requires it, stripping, which removes the stalk and larger veins from the leaf.

The world market

2.6. According to the latest figures available at the Commission (see Table 1) the world production of raw tobacco amounts to 7,4 Mio tonnes, of which the Community produces 430 300 tonnes (about 5,8 %). The world's biggest tobacco producer is the Peoples' Republic of China with some 39 % of world production, followed by the United States of America with about 10 %.

2.7. Only about 21 % of world tobacco production is traded on the world market, with the Community's share being 37 % of total imports and 15 % of total exports. The world wide demand for raw and processed tobacco is dominated by four large multinational tobacco conglomerates from the United States and the United Kingdom (). This situation is, however, not obvious, as these companies act via a multitude of subsidiaries as buyers of leaf and processed tobacco all over the world.

2.8. In contrast to the domination of the market by the very limited number of buyers, the supply is characterized by a huge number of individual producers. In the EEC there are about 180 000 tobacco growers, whilst the USA has over 130 000 farm families directly engaged in tobacco cultivation. In developing countries, whose share of the world tobacco production has gone up from 53 % in the early 1960s to 75 % in the late 1980s, tobacco cultivation generates large-scale rural employment. China, has some 16 million growers and in Zimbabwe the tobacco industry is the largest employer of labour. Worldwide about 33 million people are engaged in tobacco growing ().

2.9. At the end of the 1980s world tobacco production was broadly in balance with supply. In 1990 consumption fell slightly short of production and is not forecast to overtake it until 1995. Indeed, according to the 'Economist Intelligence Unit` (), world production of leaf tobacco is forecast to rise on average by 1,1 % per year while consumption will rise by 1,4 %. However, to the extent that manufacturers continue to reduce their stocks as a proportion of their consumption, there will also be a slight increase in stocks held by processors.

2.10. Although about 61 % of all tobacco products in the world are still produced by state monopolies, these will lose importance, as the recent opening of markets in Turkey, the states of the CIS and the Far East by the multinational tobacco conglomerates shows (). The increasing internationalism of the Anglo-American tobacco industry and the subsequent advance of American type blends will increase the proportion of flue-cured tobacco (now 59 %) and light air-cured tobacco (now 11 %) in world production notwithstanding their comparatively high growing and curing costs.

2.11. Despite a decline in consumption in Western and Eastern Europe, the states of the CIS, Japan, North America and Australia, increasing total population in the rest of the world combined with the increase in urban population in developing countries will, on a worldwide basis, reverse the trend noted in the developed countries.

The EC-market

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2.12. In the Community, tobacco provides income for about 180 000 farmers cultivating approximately 200 000 hectares of this crop. Table 2 shows production by group of tobacco and Member State in 1992. The largest producer is now Greece, followed by Italy and Spain. They together account for 90 % of Community production.

2.13. Before the creation in 1970 of the CMO for the raw tobacco market, demand was balanced in Spain, Greece, France and Italy by the then existing State tobacco monopolies and the relative closure of the tobacco markets in these Member States. When the CMO for raw tobacco was introduced the monopolies over growing and processing but not over manufacture had to be dissolved () and the markets opened, not only for tobacco from other Member States but also from third countries, where prices are lower because of low wages. As transport of unprocessed tobacco over long distances is quite unusual because of its instability, world trade is nearly exclusively in baled tobacco. Customs duties on baled tobacco are consolidated in the General Agreement on Tariffs and Trade (GATT), so that tobacco enters the Community with only low duties or, according to the Lome convention, with no duties at all when coming from ACP-countries. Therefore the CMO provided Community producers with guarantees for their income equivalent to those afforded under the previous national marketing arrangements.

2.14. Producer interests in the EEC have been increasingly channelled through cooperatives which often also own first processing facilities. This, together with the safeguard of the CMO, limits the impact of the tobacco manufacturers' power on the growers' incomes.

The Common Market Organisation (CMO)

2.15. The CMO for raw tobacco as introduced in 1970 worked for about twelve years without major problems and changes, with the exception of measures introduced in 1978/79 aimed at controlling supplies. In 1981 the accession of Greece increased the Community's total tobacco production by some 40 % and introduced oriental varieties which had not been grown before in the Community of 9 Member States and for some of which a real market did not exist. The next enlargement of the Community to Spain and Portugal in 1986 increased the Community's production by a further 14 %. Both enlargements did not modify the CMO principles, but increased the Communities production of varieties for which demand was shrinking.

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2.16. The CMO goals include maintaining farmers' income, reducing unwanted surpluses by adapting production to varieties in demand and keeping production and population in less favoured farming areas. These goals became more and more difficult to reconcile. In order to maintain the high level of institutional prices (norm prices and intervention prices) set by the Council each year in a market without outside protection, the CMO had to protect the tobacco producers' outlets in the Community against cheaper tobacco imports. At the same time the CMO also had to secure the manufacturers' necessary supplies of full flavour varieties from the world market.

2.17. It is for this reason that the CMO was modelled on a deficiency payment system, whereby a premium was supposed to 'secure the norm price and ensure the sale of the tobacco produced in the Community`. The rate should be set at a level taking into account past and foreseeable outlets on the Community market as well as the influence of trends in prices for tobacco imported from third countries. Thus, to a certain extent the premium had to cover the difference between the lower world market prices of varieties in competition with home grown varieties and the higher EC norm prices. It should allow the first processor (or buyer) to pay the farmer at least the intervention price in the form of a fixed but quality related minimum price and to sell tobacco to the manufacturers at prices comparable to those prevailing on the world market.

2.18. Accompanying measures had to ensure that surpluses without an immediate market outlet could either be exported at world market price level or temporarily stored. So the CMO foresaw export refunds and intervention storage. In 1988 rapidly increasing budgetary expenditure led to the introduction of stabilizer measures in the form of maximum guaranteed quantities (MGQs) associated with limited reductions in premiums and prices triggered when these quantities were exceeded.

2.19. Finally, on the 14 October 1991 the Commission presented to the Council a proposal for the reform of the CMO for raw tobacco which the Council adopted on 30 June 1992 (). The reformed CMO still involves 34 varieties grouped in five classes according to the curing method and with three further classes for the Greek sun cured varieties Basmas, Katerini and Kaba Koulak (classic). The principle innovations in the new CMO are:

(a)norm prices are abolished and price setting is left to the market;

(b)premiums are no longer fixed for each variety, but are fixed on the basis of one for each group of varieties depending on the method of curing e.g. sun cured, flue cured etc.;

(c)premiums continue to be paid to the processor, but have now to be passed in full to the grower;

(d)premiums are paid for tobacco meeting certain minimum quality characteristics, if the moisture content differs from the level fixed for each variety, premiums are paid on the adjusted weight;

(e)the maximum guaranteed quantity of 390 000 tonnes is replaced by a maximum global guarantee threshold of 370 000 tonnes for the 1993 harvest and 350 000 tonnes for the following years;

(f)this global threshold is split by Member States into quotas which are distributed to first processors or to producers; no premium is paid for quantities which exceed the individual quotas;

(g)with the aim of concentrating supply and adapting it to the qualitative requirements of the market premiums can be increased by 10 % for production under contracts with producer organisations;

(h)intervention storage and export refunds are abolished;

(i)control agencies are to be established by the Member States;

(j)to facilitate the creation of inter-branch organisations () in the tobacco sector, in order that the various operators involved in production, processing and marketing can contribute, inter alia, to changes in economic behaviour and market balance;

(k)a conversion programme for four problem varieties;

(l)a research programme for varieties with lower tar content.

2.20. The following chapter records the results of the audit of the accounts and underlying transactions until 1992 which were still based on the CMO as it was before the reform. As outlined in Council Regulation (EEC) No 2075/92, transitional measures could be applied in 1993 obliging Member States inter alia to allocate processing quotas to processors and to reduce in two steps the Maximum Global Guarantee Threshold to 350 000 tonnes. The reformed CMO will therefore not be completely effective until 1994 and expenditure on export refunds and intervention storage will still have to be disbursed up to 1997 on tobacco harvested before 1993. Provision is also made for the premium and production limitation system to run until 1997 and then to be reviewed and possibly adapted in the light of experience.

3. EXAMINATION OF THE ACCOUNTS AND OF THE UNDERLYING TRANSACTIONS IN THE MEMBER STATES

3.1. Table 3 shows the budgetary expenditure incurred by measure between 1987 and 1992. In general the accounts from which these figures are drawn reflect expenditure managed and declared by Member States. Table 4 shows expenditure incurred by both measure and Member State.

3.2. There are certain features of the tobacco CMO which affect the way in which the expenditure is presented in the Commission's consolidated accounts i.e.:

(a)premiums paid in a particular year relate to harvests of that year and prior years; in its forecast on expenditure on tobacco () for the year ending 31 December 1993, the Commission estimated that 1 111,3 Mio ECU out of a total of 1 268 Mio ECU would concern premiums on the harvests of the two preceding years;

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(b)the payment of a premium may only take place once the leaf tobacco has been put under supervision, processed and sold to manufacturers or been exported, this may take several years; advances of the premium may be paid to processors during this period; however, advances of premiums paid in a particular year are presented as definitive expenditure although the tobacco concerned had not left supervision; for instance, in 1992 the Greek authorities made final payments of premiums for tobacco that had been placed under supervision in Greece between 1981 and 1986;

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(c)Commission Regulation (EEC) No 2822/88 () introduced immediate depreciation at the time of purchase at a rate of 65 % of the buying-in value after deduction of the premium; another 'special` depreciation is operated at the end of the financial year i.e. in October; this depreciation is based on estimates of stocks supplied by the Member States in August and takes into account appropriations available at the year end; the high level of depreciation in the years prior to 1991 led to substantial profits on sales of stocks in 1991 and 1992;

(d)expenditure shown year by year is not definitive until the clearance procedures for a particular year are closed, i.e. three years later; Table 5 contains the disallowances in favour of the Community budget decided by the Commission following the clearance of the accounts of 1987 to 1990;

(e)profits on sales of intervention stocks are set off in the accounts as negative expenditure, thus understating total expenditure on tobacco for a particular year; disallowances of expenditure following clearance audits are also set off as negative expenditure from total EAGGF expenditure thus understating EAGGF expenditure; both methods lead to an automatic re-employment of funds of previous financial years for the same purposes.

3.3. Following the Community accounting rules (), Member States split the amount paid for purchasing intervention tobacco into a notional premium part and an intervention part. The premium part is declared in the monthly declarations of expenditure as premium and is booked by the Commission as if it was a real premium paid for tobacco sold on the market. The difference between the notional premium payment and the purchase price of the tobacco constitutes the stock value at purchase. It does not disclose to the budget authority the true cost of tobacco not finding a market outlet.

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3.4. As in other markets, the aid (the premium) is fixed in ECU but paid in national currency by the Member States. Under the tobacco CMO, processors were eligible for an advance of premium when tobacco was taken under supervision, but the premium did not become definitively payable until the date that the tobacco left supervision after processing. This led to unjustified expenditure. Member States with a national currency that had depreciated between the date of the advance and the date that the premium became definitively payable would make a further payment in national currency which represented the difference between the premium converted to national currency at the original rate of exchange and the premium converted at the new rate of exchange.

3.5. Under the reformed CMO the problem has been resolved. The premium becomes due when the tobacco is delivered by the grower for processing, and the date for applying the conversion rate is fixed. However, the problem persists for harvests prior to 1993. The estimated budgetary cost of this additional payment has been some 50 Mio ECU per annum. The cost will continue for the next four years until the original CMO finally ends.

3.6. There is no financial justification for the practice. The Commission should have proposed changes to the original CMO to avoid this additional expenditure. Unless the regulation is amended there is likely to be an effect on the smooth operation of the reformed tobacco CMO. Processors will be encouraged to retain tobacco from harvests prior to 1993 in order to benefit from any devaluation. Furthermore, unjustified budgetary expenditure will be incurred. Examples of the effects of devaluation in particular Member States are given in paragraphs 3.34 - 3.36 and 3.84 - 3.85.

Premiums

3.7. Premiums are the most important category of Community expenditure for raw tobacco, representing about 90 % of all expenditure under the CMO. They are paid by the responsible national authorities to first buyers who either process or on whose behalf tobacco is processed under the condition that they have paid at least the intervention price (minimum price) to the grower. Premiums are paid on the quantity of raw tobacco put under official supervision at the processor's premises or remote collection points, at a standard moisture content and after the deduction of sub-standard tobacco and extraneous material.

3.8. As the ultimate right to the premium payment depends on processing the tobacco delivered, the final amount of the premium can only be determined when the processed tobacco 'leaves supervision`. This can be several years later but since 1991 the time allowed has been limited to 4 years (). Therefore storage of leaf and processed tobacco, together with receipts into and disposals out of stock, at the processors premises has to be supervised by the competent national authorities.

3.9. In order to enable the processor to pay growers the minimum price at the time that he buys the tobacco, the Community regulations foresee advance payments of the premium. They are subject to the existence of a 'European cultivation contract` (which is a purchase/sales contract) between the processor (first buyer) and the grower and to the lodging of a guarantee of 20 % of the amount of the premium by the processor. The grower is required to sell the entire production of the areas indicated in the contract.

3.10. Since 1990, Member States have also had the option of making the premium payment conditional on the existence of cultivation contracts between grower and first processor (buyer). Since 1991 this option has become obligatory (). Under Article 2b of Commission Regulation (EEC) No 1726/70 (1), contracts between growers and processors, as well as cultivation declarations by growers who process their own tobacco, usually via a grower cooperative, are required to be registered with the national authority responsible for control. Under the terms of Article 2c of the same Regulation, the national authorities have to carry out on-the-spot checks of 5 % of the areas grown with tobacco (), in order to verify the information in the cultivation contracts.

3.11. Every year, the Council Regulation fixing prices sets the production zones in which the cultivation of each variety is permitted. In addition, since 1988, under Article 7 a(1) of the basic Regulation () prices and premiums are only applicable for varieties which originate in a commune where they have been cultivated at least once in the last five years. Furthermore, the commune must be indicated in the cultivation contracts. From 1992, as a quality related measure the premium payment was limited to quantities corresponding to yields fixed by variety and zone ().

3.12. When tobacco is taken under official supervision by the competent national authority, a moisture test should be carried out. Commission Regulation (EEC) No 409/76 () requires the selection from each bale of a number of leaves proportional to its weight, and that the number of leaves be sufficient to be properly representative of the bale as a whole. The sample should include equal quantities of leaf from the outside of the bale, leaf from the centre and leaf from an intermediate position. The leaves selected must be mixed together and chopped up (cutting width of between 0,4 and 2 mm). The chopped leaves should then be mixed and a representative sample must be taken. The moisture content should be established according to either the Brabender or the Beaudesson scientific method. If such laboratory tests are not used, 5 % of the advance premium payments have to be withheld by the paying agency until the final payment is established. In order to avoid overpayment on tobacco that is too wet, or underpayment on tobacco that is too dry, an adjustment of the weight has to be made if the measured moisture differs by more than 1 % from the reference moisture content laid down in Annex IV of Commission Regulation (EEC) No 1727/70 (). Furthermore the portion of impurities and substandard tobacco must be determined and deducted.

3.13. The payment of premiums depends on the presentation by the processor to the paying agency of a formal proof that the tobacco has been taken under supervision. This proof consists of a premium certificate established by the control authorities in the Member States. The first part of this certificate is completed when tobacco is taken under supervision and the second part when the tobacco leaves supervision.

3.14. Although some checks (e.g. moisture checks) are prescribed in great detail, not all of the control procedures necessary to ensure correct payments are laid down by Community regulations. Member States, therefore, have adopted a variety of control methods to suit their own purposes.

3.15. Article 8 of Council Regulation (EEC) No 729/70 () on the financing of the Common Agricultural Policy stipulates that:

'The Member States... shall take the measures necessary to:

- satisfy themselves that transactions financed by the Fund are actually carried out and are executed correctly;

- prevent and deal with irregularities;

- recover sums lost as a result of irregularities or negligence.`Thus the national control systems for tobacco must contain a certain number of key-controls, whether or not they are fixed in specific Community regulations. The essential controls should consist of checking:

(a)the veracity of data contained in the cultivation contracts/declarations, e.g. area cultivated and yields;

(b)the eligibility of production zones and communes from which tobacco is taken under supervision;

(c)tobacco taken under supervision against details in the cultivation contracts;

(d)the variety and the quality of tobacco delivered;

(e)that the minimum price has been paid;

(f)that the security of stocks of raw and processed tobacco under supervision is assured;

(g)the processing and disposal of tobacco;

(h)the correctness of payment orders.

3.16. During processing the bales of raw tobacco supplied by farmers lose their identity, due to sorting, blending, stripping, etc. As the final premium payment is conditional on proof that the processed tobacco has left supervision, the national control systems have also to guarantee that the tobacco leaving supervision was obtained from tobacco taken under supervision in a given year. This is done by a comparison of the varieties, qualities and weight of tobacco leaving supervision with those of the tobacco taken under supervision. Therefore, tobacco leaving supervision has to be checked in the same way as tobacco coming under supervision. The Court believes that such a comparison is impossible.

3.17. Finally, Member States are required, under Council Regulation (EEC) No 4045/89 (), to carry out post payment checks, called scrutinies, which are based on the commercial documents of companies receiving more than 200 000 ECU per year from the EAGGF guarantee fund.

Germany

3.18. In Germany the Community tobacco scheme is controlled by the Federal Ministry of Finance via its customs directorate whose principal customs office in Hamburg (HZA-Hamburg Jonas) is the paying agency under the terms of Article 4 of Regulation (EEC) No 729/70 (). Twenty-one processors prepare the tobacco for later sale to manufacturers. The tobacco processed is mostly grown in Germany although some is imported from other Member States, principally Italy. Tobacco is taken under supervision at remote collection points by local customs officers. Customs staff also control the processors.

3.19. The registration of cultivation contracts is the responsibility of HZA Hamburg Jonas. However, the audit revealed that contracts were not registered, but simply filed by year and processor, and that premium certificates did not refer to contracts, thereby making it impossible to relate the certificates, on which advances had been paid, to their corresponding contracts. The following anomalies were observed:

(a)an advance premium of 2,6 Mio DM had been paid to the German buyer of Italian tobacco based on 15 premium certificates which did not contain any reference to a final contract and which the German paying agency could not, in any case, produce at the time of the audit (June 1991); at the processor's premises, where the tobacco had been fermented on behalf of the buyer, customs documents relating to these premium certificates were found which referred to the date of a contract, but no supplier was indicated; a contract was found however, which indicated that the lot had been supplied by an Italian grower cooperative; but at the Italian paying agency 'AIMA` the same contract reference number referred to other tobacco which had been contracted for by the same German processor with a different processor/dealer in Italy; the Italian investigating authorities were informed of the discrepancy by the auditors and the German authorities accepted a formal request from the Italian authorities to carry out an audit at the German buyer's premises; the German authorities informed the Court in July 1993 that no irregularities were identified in Germany; the Italian authorities should continue to follow up the irregularities discovered to a satisfactory conclusion;

(b)on a copy of another contract between the same buyer and an Italian dealer which is under investigation by the Guardia di Finanza, the tobacco variety was amended by hand from 'Forchheimer Havanna` to 'Badischer Geudertheimer`; the original of this contract examined at AIMA did not contain this amendment; however, as the Council had decreased the premium for Italian Badischer Geudertheimer to the level of Forchheimer Havanna the contract amendment had no financial consequences;

(c)three contracts were noted which failed to meet the requirements of Article 3(1) of Regulation (EEC) No 727/70 () which states that premium is payable to persons or companies who buy their tobacco directly from growers or their cooperatives and not via an intermediate dealer; the three contracts in question indicated that the tobacco was not directly purchased from the growers by the German processors; therefore no premium should have been paid.

3.20. The German authorities check the eligibility of communes from which tobacco is delivered for taking under supervision only as part of the post-payment checks under Regulation (EEC) No 4045/89 () and, under the terms of Article 2(c) of Regulation (EEC) No 1726/70 (), when the authorities carry out on-the-spot checks of the 5 % of the areas grown with tobacco (). France and Italy have introduced computer programmes which carry out checks on the eligibility of communes prior to payment, thereby enabling them to detect non-eligible supplies of tobacco before payment and thus avoid recovery procedures. Community funds are better safeguarded under such a system.

3.21. Checks when tobacco is taken under supervision are carried out by representatives of both the grower and buyer under the supervision of local customs officers. The moisture check is carried out by feeling and examining the tobacco leaves according to a procedure called 'haptische Methode`. Any tobacco which is considered to be too moist is rejected for further drying by the grower, all other tobacco is accepted and recorded as having the standard moisture content laid down by the regulations. The German authorities consider their moisture checks to be accurate within approximately 2 % but tests performed by the Court's auditors in the processor's own laboratory revealed that the tobacco just taken under supervision at 'standard moisture content` was between 3,7 and 7,6 % drier, resulting in an underpayment of the minimum price to the grower. As the payment of the minimum price is a stringent condition for receiving the premium, checks on moisture content should be improved and the payment of minimum prices should be checked before payment of the premium.

3.22. HZA-Hamburg Jonas carried out checks on premium certificates to ensure that minimum prices were paid. However, the checks were meaningless in respect of the variety Badischer Geudertheimer, which accounts for about one third of the German tobacco crop, because the qualities and consequently the prices indicated in the premium certificates could not be relied upon. All deliveries of this variety are recorded on the premium certificates as being class III quality, which has a lower price than class II. However, during visits by the Court's auditors to collection centres and processors' premises it was discovered that some of the tobacco was in fact class II. Therefore, for this tobacco there is no assurance that the minimum price had been paid.

3.23. There is indeed a general problem with verifying the minimum prices paid by processors for tobacco grown in Germany. The check is not carried out at the time the tobacco is taken under supervision but during the scrutiny audit under Regulation (EEC) No 4045/89 () one to two years after final payment and then not systematically. No check at all was made for small beneficiaries and, for tobacco imported from Italy, there was no confirmation that the minimum price was paid to the Italian growers. The German authorities had been notified of the problem by the Commission, the last time in 1990, yet the German system had not been modified at the time of the Court's audit, in November 1991, so as to ensure that the payment of the minimum price was checked prior to granting the premium.

3.24. According to Article 7(2) of Commission Regulation (EEC) No 1726/70 () the first claim from a processor for a payment of premium must be accompanied by a stock declaration. The German authorities only check these declarations when the processors are selected for scrutiny under Regulation (EEC) No 4045/89 (1). This is clearly unsatisfactory as a physical check of the stocks declared is no longer possible at that time.

Greece

3.25. In Greece the tobacco scheme is managed by the Greek tobacco board (EOK), a public body which authorised the cultivation of tobacco, before the accession of Greece to the Community. It has its head office in Athens and has various regional offices in the tobacco growing areas. It inspects growers' crops from sowing and planting to harvesting. It also controls tobacco processing, which takes place in 122 processing plants, nearly all of them situated in the north of the country. EOK employs a large number of agronomists and inspectors in order to perform its service tasks and to meet its control functions.

3.26. EOK also checks claims and authorizes payment of the premium. The payments themselves are made by the paying agency DIDAGEP, a directorate of the Ministry of Agriculture.

3.27. EOK is a self-financing body. Part of its income is provided by a 2 % levy on the value of purchases of leaf tobacco imposed each year on processors (). The total amount of levy received during the period 1987 to 1991 exceeded 56 Mio ECU (7 700 Mio DR) and represented 38 % of EOK's total income.

3.28. The problems of carrying out checks on areas cultivated are exacerbated by the fact that no land registers exist in the tobacco growing regions in Greece. Therefore, it is not possible in contracts to separately identify each plot of land by using cadastral references.

3.29. The Greek authorities do not check that premiums are only granted for varieties of tobacco from eligible communes. This has led to particular problems for the production of Virginia in the regions of Agrinion and Thessaloniki. In 1989, when Agrinion accounted for 2 875 tonnes, (30 % of total Greek Virginia production of 9 480 tonnes), 13 of the 29 communes growing Virginia were not eligible for premiums. In 1990 the figure rose to 24 out of 54 communes. In Thessaloniki 8 out of the 25 communes receiving premiums in 1989 and 8 out of the 32 communes in 1990, were not eligible for premium. Yet, in both cases premiums were paid without checks being made.

3.30. It is evident that premium payments have been incorrectly disbursed on tobacco coming from non-eligible communes. The Greek authorities did not carry out the checks laid down in the regulations for all varieties planted since 1989. Notwithstanding being reminded by the Court of their obligation, the authorities failed to carry out the necessary checks. However, the Court estimates that the quantity involved may be about 1 000 tonnes of Virginia in both 1989 and 1990 and smaller quantities in the following years (as communes become automatically eligible in the year following the first harvest of a new variety). As there are likely to be similar irregular payments in respect of other tobacco varieties, the total amount incorrectly paid is likely to be substantial - probably in excess of 4 Mio ECU.

3.31. The premium certificate is not established according to the rules. Its first part is only established at the end of the harvest, and not, as required by the regulation, when tobacco is actually taken under control. Instead 'sub-premium certificates` are prepared for lots of tobacco delivered from the various village collection centres to the processor. EOK officials admitted that tobacco may even be processed before it was included in a 'sub-premium certificate`.

3.32. In such circumstances, no reliance can be placed on the data contained in the final premium certificate, as checks on leaf tobacco cannot be carried out after it has been processed and proper supervision cannot be exercised if tobacco is processed before it has been entered into the premium certificate. EOK has undertaken to improve procedures.

3.33. Control of first processors and exporters is based on records kept by inspectors in official registers which are outside the traders' bookkeeping systems. There is no check between these and the books of account and the financial records of the undertakings to ensure both the authenticity and the accuracy of the transactions entered in the registers. In the absence of such reconciliation the veracity of the data on which payments are based cannot be confirmed.

3.34. Although the procedures for checking tobacco leaving supervision were generally satisfactory, it was noted that the moment at which tobacco left supervision was sometimes delayed leading to higher Community expenditure. When the four year time limit has nearly expired, Greek exporters place their baled tobacco under customs export warehousing control pending export to third countries and claim an advance of export refund. The Greek authorities do not, however, release the tobacco from supervision under the premium scheme when the tobacco is put under customs control. It only leaves supervision when the tobacco is actually exported (up to 6 months later). The advance of premium is cleared and the balance paid, based on the date of third country export, using the representative (green) rate for the Drachma applying on the date of export. In this way processors have received additional payments of premium which reflect the devaluation of the green Drachma against the ECU during the period the tobacco remained under customs warehousing control.

3.35. This is an incorrect application of the regulations. While eligibility for premiums is dependent on export (or delivery to manufacture) the Court considers that this is satisfactorily met when the tobacco is placed under customs export control and an advance of refund made. The final amount of premium and any balance due should be calculated and paid based on this date. An example of the additional cost involved is the 36 469 893 DR paid to one processor in respect of tobacco put under customs warehousing control on 20 and 21 December 1990. The tobacco was exported to third countries on 18 and 19 June 1991, immediately after a green rate change on 17 June 1991, resulting in an additional amount of 76 951 ECU being charged to the budget.

3.36. Table 6 shows an example of the comparative costs of declaring to the Commission the premium expenditure when the tobacco is put under customs control against declaring it when it is exported. EOK has provided the Court with details of eight further transactions where this procedure was followed. The approximate undue cost to the Community budget was 140 000 ECU.

3.37. Before the Court's audit took place, an EOK official had direct access to the Ministry's computer system and input data for the payment of premiums directly, using a terminal at DIDAGEP. The risk that incorrect payments could be generated was not compensated for by other checks. DIDAGEP's subsequent check on the authorization of payments was unsatisfactory in so far as it was carried out on data recorded on the outside of envelopes provided by EOK, such as beneficiaries' names and payment order numbers, which were compared to a payment list also furnished by EOK. The envelopes themselves containing the supporting documents for each payment were not opened. Under such a system the regularity and legality of payments could not be assured. The procedure has changed now and access to the computer system is denied to non-Ministry personnel. Supporting documentation should always be examined and payment orders should be marked with the word 'paid`. In addition, to prevent the re-use of supporting documents to create duplicate payments, these documents should also be marked 'paid` at the time of payment.

3.38. The Greek authorities have not carried out audits at processors and exporters of tobacco under the terms of Regulation (EEC) No 4045/89 (), despite the fact that significant amounts have been paid to first processors and exporters of tobacco. In 1990 and in 1991 between 45 and 49 undertakings out of a total of 71 receiving aid should have been audited at least once every two years.

3.39. The Greek authorities have said that the inspection directorate is understaffed and not yet adequately trained. However, the failure to apply the above-mentioned regulation is not acceptable and leaves Community payments at risk.

Spain

Table 6 - Comparative cost to the Community budget

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3.40. Processing takes place in Spain at eight processing plants. In recent years processing and management of national production has undergone reorganisation. Until 1986 cultivation and first processing of tobacco was monopolized by the state body Servicio Nacional de Cultivo y Fermentación del Tabaco (SNCFT). Since accession to the Community, controls over the cultivation of tobacco were relaxed and the processing arm of SNCFT was dispersed as CETARSA (Compañia Española de Tabaco en Rama S.A.). The manufacturing of Spanish cigarettes, however, is still carried out by the nationalized company 'TABACALERA`. Although other independent tobacco processors have entered the market, CETARSA continues to play a major role in the processing of tobacco and is the sole significant processor of the dark fermented Burley variety (Burley F).

3.41. From 1986 to 1991 ANT (Agencia Nacional del Tabaco) was the paying agency and control body for the tobacco market. However, in April 1991, control and payment functions for this market were taken over by SENPA, the main Spanish paying agency.

3.42. The eighth recital of the preamble to the basic Regulation () sets out, inter alia, the aim that freedom of contract should be preserved, (i.e. that producers should be free to contract to sell their tobacco to whomsoever they please). The audit of the Spanish tobacco market, and of the legal relationships between TABACALERA, CETARSA and the national authorities gave rise to the following observations:

(a)The Spanish Royal Decree No 573/87 established that:

(i)TABACALERA would have a minority share in CETARSA (article 5.1.b); this share is currently around 20 %;

(ii)the President of CETARSA is appointed following a joint proposal of the Ministry of Economy and Finance and the Ministry of Agriculture, Fishery and Food; in addition, representatives of the Ministry of Agriculture would be members of the Board of Directors of CETARSA;

(b)representatives of the Ministry of Agriculture are also members of the Board of Directors of TABACALERA, one of them was the director of ANT.

3.43. Under these arrangements, the Ministry of Agriculture, (responsible for the control of the market) also has a commercial interest in the market (via CETARSA and TABACALERA). In 1989 the connection was even closer as a high executive of CETARSA was appointed as a director of ANT.

3.44. The Spanish authorities and the Commission should review this arrangement to see whether it meets the requirements of the common organisation of the market.

3.45. Although there is a system of registering contracts in Spain, ANT/SENPA did not carry out any checks to ensure that contracts were genuine and valid. The following anomalies were observed:

(a)the existence of duplicate contracts for tobacco with different processors for the same variety;

(b)the existence of contracts between the same growers but different processors, where the same tobacco would be supplied as Burley E to one processor and as Burley F to the other processor.

3.46. These anomalies led to unrealistic overestimates of the quantities to be supplied which resulted in a breakdown of the control procedure. In fact, in 1991/92 82 631 tonnes were contracted, though only half of this amount was actually supplied.

3.47. The problem of carrying out checks on areas cultivated is exacerbated by the fact that there are no up-to-date land registers in Spain. Therefore, it is not possible to separately identify each plot of land in contracts by using cadastral references.

3.48. The Spanish authorities have, since the audit, addressed this problem by commencing checks on contracts, including the quantities contracted for and the field locations, introducing a computerized system of registration of contracts and holding information meetings with growers. As a consequence, the number of contracts registered in Spain in 1992/93 dropped to 5 000 compared to 8 000 in 1991/92 (37 %) and the quantity contracted fell by 35 % from 82 631 to 55 000 tonnes. The Commission should examine the situation prior to 1992 and ensure that, where necessary, recoveries are made.

3.49. In the marketing years 1987/88 to 1889/90 premiums were paid on a total of 96 582 kg of Havanna E tobacco cultivated in the Campezo region of the Basque country, although the region was not listed in the regulation as one of the approved zones for this variety. It is clear that ANT was aware of the problem in January 1991 following a request for information from a private, multinational processor. However, it did not take action to recover the premiums incorrectly paid. Indeed, on 4 February 1991 the director of ANT advised the processor to take Havanna from the ineligible zone under supervision 'just in case the Commission approved the zone for that marketing year` (i.e. 1990/91). The very next day he notified CETARSA to the contrary, namely to stop taking such tobacco under supervision. This letter also stated that ANT would require retrospective recognition of the zone, but again, no such request was made to the Commission nor recognition granted. Yet no steps were taken to recover the aid wrongly paid until the Court raised the matter with SENPA following the audit. SENPA has required the repayment of 29 Mio PTA (0,23 Mio ECU).

3.50. The growing of certain varieties has expanded, for example the switch from Burley F to Burley E and the increase in the cultivation of some tobaccos in non-traditional areas. As the rule concerning eligible communes had not been complied with, the Spanish authorities were asked by the Court's auditors, during the audit, when they intended to introduce such checks and, more importantly, to carry out a review of past payments to ensure that the five year rule had been met. Although a check has now been introduced, a review of previous contracts, to provide assurance that the regulation was complied with and payments justified, has not been carried out. The Spanish authorities maintain that the five year period could only commence from the date of accession, and therefore argue that they should only apply the regulation from 1991 onwards rather than from 1988 when it came into force. The Court believes that this is a misinterpretation of the regulation, which has led to substantial overpayments of premium which are as yet unquantifiable due to the position of the Spanish authorities.

3.51. The Court's audit confirmed the Commission's clearance auditors findings, that there is no identifiable premium certificate as required by the regulations. Instead a file of loose documents is used covering the purchases of a given variety of tobacco by a particular processor. This file comprises nine separate books and documents. Apart from the fact that such a system does not comply with the Community's regulations, it is also cumbersome and ill-adapted to control purposes. Although in January 1991 the Spanish authorities were requested by the Commission to conform with Community regulations, the situation still persisted at the Court's visit in February 1992.

3.52. In Granada, SENPA inspectors did not have copies of the contracts between growers and the companies that they were checking in order to establish the variety and quantity to be taken under supervision. Under these circumstances it was quite possible that deliveries without contracts or deliveries substantially over the contracted quantities have occurred. Following the Court's audit such checks have now been generally introduced.

3.53. Growers, who had a contract for Burley F tobacco with the processor CETARSA, were selected for an audit visit by the Court. It was found that most of these growers delivered tobacco which they claimed was Burley E under contracts concluded by a cooperative with another private processor. The reason for this was that they had not accepted the price offered by CETARSA and had decided to deliver all or some of the tobacco already contracted with CETARSA to the other processor offering better prices. They did this either in their own name or using a relative's name for the cooperative contract. Some of the growers were not even members of the cooperative. The verbal promise to join the cooperative in the future was enough to permit the delivery through its cooperative contract.

3.54. As a result the total quantity of tobacco delivered by the cooperative to the first processor greatly exceeded the quantity contracted by it, which, in 1991 amounted to 265 000 kg of Burley E. The total quantity of Burley E delivered until 27 January 1992 (when the Court's audit was carried out) amounted to 418 393 kg, an increase of 58 %.

3.55. The Spanish authorities have carried out an examination at the Court's request and have decided to recover payments of aid in respect of:

(a)non-members of the cooperative;

(b)tobacco delivered in excess of the quantity which may be produced on the area declared by the cooperative.

To date 2 037 330 PTA (15 800 ECU) have been recovered. However, the Court considers that premiums paid on all tobacco delivered in excess of the contracted quantity should be recovered.

3.56. Another contract between a grower cooperative and a processor for 1991/92 bore little relationship to the quantities supplied, as 4 000 tonnes were contracted for but, by the end of the delivery period, only about 900 tonnes had been supplied. During the audit, the cooperative president admitted that the contract had been of a speculative nature. Although such speculative contracts can be used as vehicles to introduce ineligible tobacco, the Spanish authorities considered that such a contract was within the terms of the regulations as the quantity delivered was less than the amount specified in the contract. Such an interpretation, if correct, would negate the use of contracts as a market regulatory tool. There should always be a close relationship between the contracted quantity and the quantity really to be supplied.

3.57. The main tobacco grown in Spain is Burley. The Community regulations recognize two distinct varieties, Burley E which is mechanically processed and Burley F which is fermented as part of the processing procedures. When raw, the tobaccos are interchangeable but, after processing, fermented Burley is identifiable as it is much darker. It is used to manufacture dark cigarettes. Until 1993 the two types of tobacco had different norm prices and premiums, which inevitably led to control problems. The higher premiums for Burley E compared to Burley F provided an incentive for irregularities. The risk of false declaration was increased by the fact that the Spanish authorities accepted the grower's verbal declaration of the variety he delivered without checking against the contract. This led to the irregularities mentioned above.

3.58. Both the procedures carried out by ANT centrally and the physical checks carried out by the ANT inspectors in the regions were in many cases unsatisfactory. In 1991 following suspicions of irregularities, ANT decided to provisionally suspend the payment of premium advances and opened an enquiry. Because of the lack of cadastral records and the lack of supervision on the spot no effective control of the cultivation contracts was possible; after 7 months of investigations ANT did not arrive at any results, no fraud was detected and no premiums were recovered. Following the assumption of responsibility for control by SENPA, procedures have been improved and recoveries of aid made.

3.59. In 1988-89 a processing company in Spain purchased some 1 750 tonnes of Burley E tobacco, which, although taken under official control as Burley E was subsequently fermented as Burley F. Nevertheless ANT paid the higher premium for Burley E. The matter was raised with SENPA who, following a review, have requested the repayment of 375 Mio PTA (about 2,8 Mio ECU).

3.60. As it is impossible to establish a clear physical difference between Burley E and Burley F raw tobacco the distinction in the regulations between the two varieties should be removed. Although ANT/SENPA had proposed to the Commission that both Burley E and Burley F should have the same premium, no action has yet been taken. Under the market reform the premium for 1993 has been set at the same level for both varieties but the varietal distinction still remains.

3.61. In Granada only 5 % of bales were sampled for moisture checks. The leaves from the bales were not mixed as required by the regulations and were roughly chopped using a kitchen machine which did not provide the correct sample size. Thus, the samples were not taken as foreseen by the regulations with a consequent risk of inaccurate test results.

3.62. The Spanish authorities adjust the weight for moisture content without applying the 1 % tolerance, to ensure that the growers cannot benefit by adding water to the raw tobacco leaves before weighing. However, the formula used to adjust the weight is mathematically incorrect, as the percentage difference between the actual moisture content and the standard moisture content is simply added to or deducted from the actual weight, for example:

Actual weight 100 000 kg

Actual moisture content 21 %

Standard moisture content 19 %

Difference 2 %

'Weight` at standard moisture content = 98 000 kg.

To reflect reality the correct formula for calculating the weight at standard moisture content is:

100 000 × (100 - 21): (100 - 19) = 97 531 kg

3.63. In the above example the Spanish authorities would have paid premium on 98 000 kg instead of 97 531 kg, resulting in an overpayment of premium. However, if the leaf tobacco is drier than the standard moisture content, this calculation would under-compensate for the weight correction with implications for the minimum price to be paid to the grower. Until a correct standard formula is applied there can be no assurance of the correctness of payments.

3.64. In view of the poor checks on moisture content and the confusion between the two Burley varieties in Spain, the Court took 34 samples of tobacco from tobacco stores and growers in Spain. 14 of them were accepted by the storekeeper as representative of the tobacco taken under supervision. The rest of the samples were taken by the Court's auditors from evidently very bad quality tobaccos in stores in Granada and Caceres. The samples were analyzed by an institute which is independent both from the Spanish authorities and from the processors. The institute was asked to indicate whether the notional variety and quality of the tobacco could be confirmed. The analyses indicated that from the 34 samples:

(a)six were too wet when taken under supervision, so that the tobacco had deteriorated in quality during storage;

(b)two samples were so bad that they were not eligible for premium, either as Burley E or as Burley F;

(c)one sample of tobacco taken under supervision as Virginia could not be identified as such;

(d)one sample was of such a poor quality that the tobacco did not even burn due to a high salt concentration in the soil where it was grown.

3.65. This calls into question the eligibility of these tobaccos for premium although taken under supervision by ANT inspectors. In addition the institute considered that five samples of Burley taken under supervision at one processing plant as Burley E were quite similar to three others taken under supervision by another processor as Burley F (see paragraph 3.57). Also chemical analysis did not show significant differences.

3.66. In August 1989, December 1990 and May 1991 fire destroyed tobacco in the warehouses of one processor. Advances had been paid on the tobacco taken under supervision but they had not been recovered by ANT. The matter was raised with SENPA by the Court's auditors as force majeure did not appear to apply, particularly as national legislation required processors to take out insurance covering fire risks. SENPA has recovered the amount of 679 Mio PTA (about 5,2 Mio ECU) advanced. It now requires insurance companies to submit any reports on damage claims to them and for SENPA to be the first beneficiary under the policy. This is a procedure which should be adopted by all Member States.

3.67. In order to maintain effective control over tobacco receipts, processing and disposals it is necessary for at least one member of the control staff to be present in each processing plant. The auditors visited a processing plant without prior notice and noted that tobacco was being delivered in the absence of officials. The following day two officials arrived during the morning but left four hours later in order to catch a bus back to their office having explained that the official car had not been serviceable for three months. This attendance calls into question the completeness and effectiveness of the controls carried out during that period.

3.68. The auditors spent a number of days at the same processor's premises. During that period tobacco refuse was frequently burnt in a pit in front of the premises. The destruction was not subject to official supervision or documentary control, leading to the possibility that the tobacco refuse could be reintroduced with other tobacco bales and thus that premium could be claimed on it and paid.

3.69. SENPA has since said that it aims to have adequate staff coverage to ensure that the processing plants, stocks and processing activities can be properly inspected and controlled during all times that the plants are open.

France

3.70. There are only three processors of tobacco in France one of which is situated in the French overseas department of Reunion. Two-thirds of all production concerns the dark air cured variety, Paraguay, which is used in the production of traditional French cigarettes. The remaining production consists of mainly Burley and Virginia with small quantities of Nijkerk and Misionero - the latter grown in Reunion. Tobacco is delivered to the processors via regional collection centres. The paying agency for tobacco is ONIFLHOR (Office national interprofessionnel des fruits légumes et horticulture), which has six regional inspectors charged with the control of growers, collection centres and processors. Most of the tobacco processed is sold on the market with only two sales into intervention in recent years (1988/89) of Burley and Paraguay.

3.71. At the time of the audit the six inspectors working for ONIFLHOR were on loan from SEITA, the main processor and national monopoly for manufacturing tobacco. Although they were paid by ONIFLHOR, this situation was unsatisfactory, because the controllers could find themselves with a conflict of interests.

3.72. ONIFLHOR inspectors monitor yields throughout the different regions, but while quantities (which make up one part of the yield calculation) are systematically checked in the field, areas (which make up the other part of the yield calculation) are not. Thus, there is no assurance that all of the tobacco delivered under a specific cultivation contract has really been produced on the areas indicated in the contract.

3.73. The six inspectors have responsibility for inspecting tobacco in the field, advising growers and processors, taking tobacco under supervision, establishing the premium certificate and releasing tobacco from supervision. It is evident, therefore, that they cannot be present at all the operations taking tobacco under supervision and releasing it therefrom. Until full coverage can be introduced the attendance of inspectors at collection points when tobacco is taken under supervision should be planned on a proper sample basis.

3.74. There is, however, no detailed plan governing on-the-spot visits performed by the inspectors although the general aim is to be out making visits, three days a week. The choice of where, what, when and how controls should be performed is left to the judgement of the local inspectors. Checks on the buying operations of processors were carried out without a specific sample plan. Furthermore there was no centrally approved list of minimum checks to be carried out.

3.75. As inspectors do not attend all buying operations of the processors, the premium certificates are not established when tobacco is taken under control. They are drawn up once a week and are based on data furnished by the processor but which has not been independently checked by the inspectors.

3.76. French leaf tobacco is mostly purchased with a moisture content below the EC standard moisture content. This means that an additional amount of premium will often be owed to the processor when the weight is adjusted at the end of the marketing year. While the processor will receive any additional benefits arising from such an adjustment, he does not pass it on to the growers themselves. There is thus a risk that the actual price paid to the growers may be less than the minimum price. While the French authorities have confirmed this to the Court, at the time of the audit the risk was small because the prices paid were significantly higher than the minimum prices.

3.77. At the two main processing centres visited the entire testing procedure is carried out by employees of the processors and ONIFLHOR does not carry out independent checks on the moisture content. Furthermore, the samples taken were sent for analysis in unsealed plastic bags being merely closed with a rubber band. There was no security to prevent the contents from being changed between the point of sample taking and the testing laboratory.

3.78. Tobacco which has come under supervision was not adjusted for the weight of impurities removed (foreign bodies and low grade tobacco) in the payment of the premium. Processors were thus paid a premium on the weight of impurities included in the tobacco purchased. While the quantities of impurities removed during processing may be small, proper assessment and adjustments should be made according to the regulations. The French authorities have agreed to introduce appropriate checks.

3.79. When tobacco is purchased, the minimum prices of the different qualities of tobacco are displayed at the purchasing centres on a board. There is, however, no guarantee that each grower was paid these minimum prices. The ONIFLHOR inspectors check that overall the minimum price has been paid for each tobacco grade but do not check that each grower has received the minimum price or that the amount was actually paid, for example by checks on bank payments and processors accounts.

3.80. One of the processors had tobacco taken under supervision at outlying purchasing centres which was transported to the processing centre in lorries which were not properly sealed. While numbered seals were used to lock the back doors of the trucks, access could be gained through the plastic tarpaulins at the side, which were only secured with rope or rubber. Indeed, during the Court's visit the processor's staff unloaded the trucks from the sides without breaking the seal. It is thus possible for tobacco to be substituted while the official seals remain intact.

3.81. The tobacco is re-weighed at the processing centre but it is the weight established at the purchasing centre which determines the quantity eligible for the premium, provided the weight difference is within 1 %. Small quantities of tobacco can therefore be removed undetected, as the reweighing will often take place in the absence of an inspector.

3.82. Tobacco is sent from a given processing centre to undergo stripping at another plant. There are no controls over the weights and quality of tobacco being transferred, nor are the lorries sealed despite the fact that this tobacco is still, formally, under supervision. The inspectors merely check movements against a stock movement list. Inspectors should independently check weights, transport documents and invoices at the time of delivery and require adequate written advance warning of all deliveries.

3.83. Inspectors are advised by telephone of deliveries only shortly before the despatch is due to take place. When checking, the inspectors do not refer to transport documents, or invoices but only to the delivery notes, nor are independent checks made on the weights of boxes of tobacco and the moisture content. Instead, information provided by the processor is used as the basis for the control.

3.84. At one of the processors, the formal exit from control is made when all tobacco of a certain variety for a certain harvest year has been sold or exported. The green ECU rate applied for the calculation of the final premium is that of the day when the last part of the tobacco has been sold or exported. In the past, up to six years have elapsed between the date that the first consignment of tobacco from a given harvest year left supervision and the date that the last of the tobacco left supervision.

3.85. The depreciation of the French franc during this period has meant that additional expenditure was charged to the Community budget. There is no justification for this. The green rate should be that applicable at the time that each consignment of tobacco leaves control. The total amount overpaid can only be ascertained by recalculating each premium certificate. An example is the amount involved for Paraguay from the 1982 harvest which, although it had all left the processing premises by 1983, was not finally cleared from supervision until 1988 leading to an overpayment of 3 140 673 FF (about 0,45 Mio ECU).

3.86. Some assurance concerning payments made, despite the weaknesses identified in the normal control procedures could have been provided by the checks carried out under Regulation (EEC) No 4045/89 by the responsible control body (ACOFA). However, the scrutinies carried out were, in general, unsatisfactory in that they only related to selected premium transactions rather than a detailed examination of the underlying financial records and accounts.

3.87. The scrutiny of EAGGF payments carried out by ACOFA at the processor's premises are based on documentation such as goods inward notes in the case of purchases and delivery notes in the case of sales within the Community, and shipping documents and customs proof of export and subsequent arrival where sales occur outside the Community. Stock records and, to a limited extent, production registers are also examined. Financial records should also be examined but no checks were performed on the receipt and payment registers and the related bank statements in order to prove the validity of recorded transactions.

3.88. As the scrutinies only repeated checks previously made by the ONIFLHOR control section they had little value under the scrutiny regulation. Furthermore, no examination was made of export refund transactions. In general, the scrutinies carried out were poorly documented. In view of the amounts paid to the two main processors of about 150 Mio FF (about 21,4 Mio ECU) in both 1989 and 1990 for one undertaking and 355 Mio FF (about 50,2 Mio ECU) and 315 Mio FF (about 45,4 Mio ECU) for the other, the scrutinies performed by ACOFA under the regulation were not satisfactory.

Italy

3.89. Italy, which has some 130 processors, is the most important country for tobacco growing in the EC, as it not only supplies its own processing industry but also consigns raw tobacco to other Member States for processing. In addition, Italian processors purchase Greek tobacco for processing in Italy. The Italian paying agency AIMA is responsible for all controls necessary to implement the CMO and this is carried out through offices sited in the tobacco growing regions.

3.90. The audit in Italy can be divided into two distinct phases. The first phase examined the control system applied by AIMA until January 1992. A number of serious weaknesses were found.

3.91. Contracts are registered in each region. The contract files examined at the regional office at Benevento contained contracts with undated or unsigned declarations of cultivation and the omission of the harvest year. One contract was stamped as received on 29.6.90 although the contract itself was dated 2 July 1990.

3.92. These omissions and errors indicate a laxness in AIMA controls. AIMA officials have said that their inspection of documents was limited and that they saw their task as formally registering documents (i.e. stamping and numbering them). Following the audit AIMA has undertaken to ensure that checks are improved. All contracts and supporting documents will now be examined to check their validity etc. before registration.

3.93. The physical checks carried out by AIMA inspectors were also found to have major weaknesses, which stemmed from inadequate staffing of the regional tobacco offices for carrying out proper control duties:

(a)there was no control programme or plan detailing the checks to be made;

(b)there was no risk evaluation of processors;

(c)there was no special review of cooperatives in view of the particular risks that they pose (arms-length sales do not occur);

(d)inspectors did not write a report of each control visit that they made;

(e)no summary statistics were maintained by inspectors evaluating differences in weight, moisture and quality detected by them;

(f)processing premises were not secure, access was available to stocks when no official was present, premises were not sealed;

(g)there was no attempt to identify tobacco taken under control, by marking individual bales of leaf tobacco and keeping records of their delivery into processing and re-warehousing after processing;

(h)AIMA delegated to the president of the grower cooperatives the duty to ensure that the minimum price had been received, no official check was carried out.

3.94. In addition, AIMA did not make systematic visits on the spot to the tobacco fields as part of their checks nor did they inspect reports made by the processor's own agronomists concerning field visits or indeed discuss the varieties grown with them. At the time of the audit the Guardia di Finanza was investigating many hundreds of declarations of cultivation as part of an enquiry into alleged false deliveries of tobacco to a processor in Campania. The fact that the checks carried out by AIMA were not able to identify false declarations of cultivation and the submission of irregular declarations at an earlier stage shows that their checks needed to be strengthened. AIMA has notified the Court since the audit visit that all regional offices now carry out on-the-spot checks of cultivated areas and actual yields.

3.95. Furthermore, the AIMA inspectors did not take samples themselves when tobacco was placed under supervision but allowed processors to select them and put them to one side for the inspector to examine later.

3.96. The control was made even weaker by the fact that AIMA did not lay down minimum percentage checks to be carried out. Inspectors were left to their own devices as to if, when and with what frequency they would attend processing plants to make checks. Furthermore, in order to carry out their duties they would telephone the processor and request that a car be provided to carry them from the office to the premises. Any chance of unannounced checks was thereby removed. Indeed the whole basis for the control rested on the cooperation of the organisation being checked. Given the allegations of misdescription of tobacco in Italy, and Campania in particular, this arrangement was clearly inappropriate.

3.97. Following critical remarks by the Court's auditors during the audit the Italian authorities revised their controls and from February 1992 contracted a large part of the physical checks to a private control company (SITRIS). This now means that either an inspector of SITRIS or an official of AIMA is present in a processing plant whenever it is working. The control system operated by SITRIS was examined during the second phase of the audit at one processing plant and a number of weaknesses were identified:

(a)one of the duties of SITRIS is to ensure that each grower delivering tobacco has a valid contract or cultivation declaration. However, no checks were made to ensure that the quantity of tobacco delivered did not exceed the quantity contracted for;

(b)the quantity of leaves tested was not representative of the consignment. Furthermore, the leaves were kept in unsealed plastic bags and stored in unlocked places, leaving the samples without any protection against substitution;

(c)the samples of tobacco were cut by hand with a knife, and the cutting width was up to 1,5-1,7 cm. Tests carried out by the auditors showed that the incorrect cutting-width has a significant influence on moisture content determined;

(d)the Brabender oven used for carrying out moisture tests was freely accessible during the day and distant from the hall where the inspector was taking tobacco under supervision; in spite of the inspector's evident lack of control over the testing machinery, the correct setting of the oven had never been independently checked by SITRIS or by AIMA;

(e)when calculating the correction for moisture content SITRIS and AIMA use a similarly incorrect formula as SENPA in Spain; this has been drawn to AIMA's attention but they have declined to introduce the mathematically correct formula;

(f)according to the internal instructions of SITRIS the grading is left exclusively to the two representatives of the processor and the grower; in one purchasing centre the inspector made his own evaluation but it was not taken into account and was destroyed by him after the grading had taken place.

3.98. Where the processor/first buyer is a cooperative, minimum prices were not checked. The Italian authorities believe that inside these associations the tobacco is 'transferred` from the members to the cooperative, not sold and therefore no price was established. However, several grower members of cooperatives were encountered during the audit who claimed not to have received the minimum price. AIMA has now agreed to carry out price checks at cooperatives.

3.99. In one processor's warehouse in Puglia containing raw tobacco under supervision, sacks of raw tobacco were labelled 'Jugoslavia` and 'Turkey`. The inspector said that in his opinion some Italian growers had re-used old hessian sacks, but he had no explanation as to why these sacks were labelled in this way. Thus acceptance of third country tobacco under supervision could not be ruled out. As bales were neither numbered nor identifiable by growers name, variety, origin and lot, there was no possibility of further investigation.

3.100. Control of first processors and exporters is based on records kept by the AIMA or SITRIS inspectors in official registers outside the bookkeeping system of the traders. There is no check between these and the books of account and the financial records of the undertakings to ensure the authenticity and accuracy of the transactions entered in the registers. Therefore, as in Greece, no assurance can be given about the reality of the data on which payments are based. Such controls are very important. Premiums have been paid in Italy on fraudulent transactions concerning non-existent tobacco. Regular checks to ensure that purchases are genuinely linked to payment and banking records are in the Court's view essential.

3.101. In the processing plants visited by the Court's auditors in Aprilia and Lecce, the security of stocks of processed tobacco is still not assured:

(a)the individual tobacco bales are neither numbered nor labelled with particulars of origin, variety and lot; they are thus not identifiable, which makes checking of physical stocks and their reconciliation with book stocks impossible and stock accounts unreliable;

(b)movements of tobacco between stores and the processing lines are not independently registered by inspectors; they rely completely on information provided by the processor.

3.102. Tobacco production in Italy had been characterised by the rapid expansion of dark air-cured varieties in the 1980's. Initially the development was manifested by an increase in the production of Forchheimer Havanna and latterly by a switch to Badischer Geudertheimer - changes in cultivation caused by the attractiveness of the different premiums rather than market demand. In 1988 the premium for Forchheimer Havanna fell to 1,909 ECU/Kg whereas that for Badischer Geudertheimer was 2,534 ECU/Kg. Significantly, the rates were not published in the regulation fixing norm prices and premiums for that marketing year () until 19 July 1988, long after the growers would have had to make a decision on the variety to cultivate. This indicated that some of the switch from Forchheimer Havanna to Badischer Geudertheimer may have been due to a 're-christening` of the variety already being grown rather than a genuine change to a different variety.

3.103. In view of this and the weaknesses found in the control system operated by AIMA during the relevant period, the second phase of the audit examined, inter alia, the basic documents underlying the payment of premium to one cooperative processor. In particular the contracts and declarations of cultivation for growing Badischer Geudertheimer in 1988 were examined, together with supporting commercial documents such as:

(a)delivery notes for young plants ('Buono di Consegna`) established when the plants are delivered from nurseries in February;

(b)supply notes attached to invoices ('Bolla di accompagnamento`) established in September when the plants are invoiced;

(c)invoices for plants;

(d)delivery records of tobacco delivered for processing;

(e)stock book ('Movimenti Cronologici di Magazzino`).

3.104. In general, it was found that plants were described as 'Havanna` or 'Piantine Havanna` on the delivery notes (Buono di Consegna), established in February, but were invoiced in September, as 'B.G.` or 'B. Geudertheimer` on the annexed supply note (Bolla di Accompagnamento). However, most of the deliveries did not identify the variety of young plants being delivered.

3.105. There were no Bolla di Accompagnamento for young Havanna plants and no young Havanna plants were invoiced during 1988. The processor's stock book indicated the following:

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3.106. Twenty-one of the declarations of cultivation where tobacco was supplied directly by growers to the cooperative had been accepted and registered by AIMA without containing any details of the variety to be grown and without the declaration being dated. In addition, three declarations of cultivation had originally had the variety Havanna entered but this had been altered to Geudertheimer.

3.107. A number of declarations of cultivation relating to the 1990 harvest, which had also been accepted by AIMA, lacked a number of items of information required by the regulations such as: the variety, the harvest year, the density and the maximum production per hectare. In addition, several declarations were undated.

3.108. There were also other irregularities in relation to supplies by grower cooperatives. The largest number concerned one particular grower cooperative and are shown below:

>TABLE>

Thus over 80 % of the declarations were irregular, yet they had been accepted by AIMA without query.

3.109. This grower cooperative and eight growers were visited during the audit by the Court, in the presence of the Guardia di Finanza, in order to establish the circumstances leading to the changed variety in the 1988 declarations of cultivation for Badischer Geudertheimer. The growers were selected on the basis that they had either delivered tobacco to the grower cooperative and the variety on the declaration of cultivation had been changed from Havanna to Geudertheimer or, they had a contract with the processor for Geudertheimer but the delivery note for young plants showed 'Havanna`.

3.110. Seven of the eight growers said that they had grown Forchheimer Havanna rather than the Geudertheimer indicated on the declarations of cultivation. There is no firm evidence to indicate who was responsible for the apparent irregularities but the changes took place without the knowledge of the growers.

3.111. The alterations in the declarations of cultivation were also discussed with representatives of the processor, who explained that growers had changed the variety that they grew because the premium for Forchheimer Havanna had fallen to 1,909 ECU/kg whereas that for Badischer Geudertheimer remained at 2,53 ECU/kg. However, when it was pointed out that the new premium rates were not published until 19 July 1988, long after planting would have taken place, they could not explain the growers' apparent foresight.

3.112. The Italian authorities have pointed out that the growers themselves may be mistaken in the variety that they grew particularly as the name Havanna is used by some growers to describe dark varieties generally. They said that an examination of the leaves themselves would be required in order to establish the true variety - something that is of course impossible now. They further suggested that the difference between the description of the young plants on the delivery note by the nurseryman supplying the plants on behalf of the processor (as Havanna) and the invoice of the processor much later, was because the processor knew the true identity of the young plants. If this assertion is true it would mean that the processor knew better than both the growers and the nurseryman what was grown, which is somewhat doubtful.

3.113. Samples of tobacco leaves taken under supervision by one processor as Badischer Geudertheimer during 1992 were analyzed by several experts on the Court's behalf. It was confirmed that the tobacco had no resemblance to Badischer Geudertheimer as grown in France or in Germany. However, it was recognized as a common variety of Italian dark tobacco with strong similarities to Havanna as far as form, size, texture and colour of the leaves were concerned.

3.114. It is clear that the problem was exacerbated by the failure of AIMA to reject altered contracts or contracts where no variety was shown, particularly during a sensitive year when Geudertheimer had a higher level of aid. Where contracts or declarations of cultivation are changed they should be rejected unless the changes are countersigned by both parties to the contract. Furthermore, in future, some contracts which have been altered should be selected for checks at the farm.

3.115. In 1990, there was a further problem of a change of variety. Estimates for the 1990 harvest were communicated in November 1990 by the Ministry of Agriculture to the Commission. They were based on contracts registered and indicated an increase in the production of Paraguay from 2 064 t in 1989 to 10 600 t in 1990. However, the actual harvest in 1990 for Paraguay amounted to 4 661 tonnes only.

3.116. A letter issued on 28 December 1990 by the Director of AIMA explained that several of the regional offices had notified AIMA Rome that, for the 1990 harvest, growers had in error used seeds and plants of a variety different from the one that they contracted for. The letter authorized that the variety shown in the 1990 contracts could be changed to the variety that the grower claimed actually to have grown. It was, however, a condition of the authorization that the premium for the new variety was lower than the initial one.

3.117. It appears that growers had signed contracts for the higher premium Paraguay, but had grown Hybrids of Badischer Geudertheimer (or Havanna or some other variety) instead. The decrease of 6 000 t in the quantity of Paraguay actually harvested means that some 1 500 (more than half) of the growers of Paraguay that year had used seeds or plants of a variety other than those contracted. Such a wide-spread change is difficult to believe particularly as the nurseryman visited by the auditors had said that the demand for Paraguay seeds and plants was high. AIMA has explained that there was a shortage of Paraguay seed and it specifically checked that tobacco presented as Paraguay was in fact that variety. Italian Paraguay is not normally in high demand and its popularity with growers must have been increased by the higher premium available. However, the speculation in this variety was limited, as processed (baled) Paraguay is not eligible for intervention whereas Badischer Geudertheimer is, thus explaining the change back to Geudertheimer.

Intervention storage

3.118. Table 7 shows end of year stocks between 1987 and 1992. As intervention in the tobacco market has taken place regularly in Greece and Italy almost all stocks were situated in these Member States and consisted mainly of dark varieties like Havanna or hybrids of Badischer Geudertheimer grown in Italy. Intervention has been rarely resorted to in Germany and France and not at all in Spain.

3.119. Tobacco, which does not find a purchaser on the market, can be offered for intervention and the competent agencies in Member States concerned have to buy it into public storage providing no premium has been paid or advanced. The regulations give two options:

(a)either the tobacco is offered directly by the grower as leaf tobacco to the intervention agency and is then processed on behalf of the agency which pays the quality related intervention price to the grower; for historical reasons this option is applied in Greece;

(b)or, as in the other Member States, only processed (baled) tobacco is offered by processors for intervention; in this case the agency pays the processor the derived intervention price laid down in the regulations which takes into account the processing costs.

3.120. From 1990 onwards the Council restricted intervention purchases of leaf tobacco to that grown under a cultivation contract and to cases where the contractual buyer went bankrupt under the condition that the tobacco is placed under supervision before the 15 May following harvest. Intervention in baled tobacco is limited to tobacco for which derived intervention prices are fixed. In both cases the tobacco should not be offered for intervention later than two years after harvest ().

Choice of the intervention centre

3.121. According to Council Regulation (EEC) No 1467/70 () Article 2, any offer of baled tobacco for intervention shall be made to the intervention agency for a storage centre chosen from the three centres nearest to the place where that tobacco is stored having undergone first processing and market preparation.

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3.122. However, tobacco was found in Italy which had travelled about 2 100 km before being put in intervention storage. It was grown in Tuscany, sent to Campania for first processing and returned to Tuscany where it was stored as baled tobacco under supervision. Afterwards, with the permission of the Italian authorities, it was moved again to premises of the same processor in Campania and then offered for intervention and stored at the intervention centre of 'Pignataro Maggiore` in Campania with whose storekeeper the offerer had close business relationships.

3.123. In another case, tobacco was in a store north of Rome when the intervention offer was lodged. Subsequently, with the agreement of the Italian authorities it was transported to an intervention centre in Campania where the storekeeper was a member of the same commercial group as the offerer.

3.124. Tsebelia tobacco was purchased in Greece, transported to and processed in Italy, stored and then sold by the processor into intervention where it continued to be stored in his premises. At the time of the audit he was tendering to repurchase the tobacco.

3.125. Such procedures have no commercial sense at all. They only prove how beneficial the intervention system is when the tobacco is kept under the control of the same or closely related beneficiaries. In such circumstances there is no incentive for the processor to find a market for the tobacco he has purchased and processed.

Intervention documentation

3.126. Tobacco is offered for intervention in Italy in small bales (about 35-40 kg) and big bales or cartons of about 200 kg. When documenting the control work performed AIMA distinguishes between these two types, but does not retain any documentation concerning the control work for tobacco in small bales. Consequently there is no evidence of the checks executed and no basis for evaluation.

3.127. If tobacco is offered in big bales or cartons, a report is completed by the AIMA inspectors which indicates inter alia:

(a)that a minimum of 25 % of the cartons were examined;

(b)the identification number of each carton;

(c)the gross weight, tare and net weight of each carton;

(d)the quality classification of each carton.

3.128. However, boxes are weighed in groups rather than individually and an average weight calculated. The tobacco in all the cartons is a blend of different qualities and the inspectors examine the whole lot and fix the overall percentage of each grade found. Cartons are then selected and a grade of tobacco allocated to each one to reflect the overall make-up of the lot. Therefore the quality classification allocated to a particular carton does not correspond to the real quality of the tobacco in that carton.

3.129. As a result the documentation held by AIMA does not reflect the facts nor the control work actually carried out. The lack of any documentation in the case of small bales and the poor quality documentation kept in the case of big bales mean that checks cannot be made by third parties and results cannot be recalculated. Furthermore, there is no means to ensure that tobacco has not been removed or substituted while in intervention storage. This is a real risk as intervention tobacco is frequently stored in the same premises as other baled tobacco.

Security of the tobacco in intervention

3.130. Cartons containing intervention tobacco should be marked by the intervention agency identifying it to be EC intervention tobacco. In Italy at one intervention store the stamp used to mark the cartons was held by the private storekeeper for his unsupervised use, furthermore, some of the cartons were not stamped.

3.131. In July 1991, intervention tobacco stored in Pignataro Maggiore was subsequently transferred to storage facilities in Sparanise owned by the same warehouse- keeper. The transfer was checked by AIMA on the basis of documents only, comprising:

(a)a monthly stocktaking, end July 1991, at Pignataro Maggiore;

(b)delivery notes indicating the number of boxes, variety and harvest year;

(c)a monthly stocktaking, end August 1991, at Sparanise.

No physical checks were executed and neither the boxes nor their precise contents were identified.

3.132. In Greece, on 23 September 1988, 1 016,7 tonnes of Burley from the 1986 harvest were destroyed by fire while in intervention storage at a private trader's warehouse. While the building was insured the tobacco was not because EOK considered that the insurance premiums were too high. Although EOK did not take the necessary steps to safeguard the tobacco, it argued that 'force majeure` was applicable. The Greek paying agency (DIDAGEP) accepted this argument and limited its action to notifying the loss of the tobacco to the Commission.

3.133. Under such circumstances DIDAGEP and the Commission should have rejected the 'force majeure` argument and established the value of the tobacco lost at the time of the fire, which should have been repaid to the Commission. As an indication of the lost value, similar Burley tobacco from the 1986 harvest was sold from intervention by tender in 1992 for 1,011 ECU/kg. On this basis the value of the tobacco destroyed was 1,03 Mio ECU.

Export refunds

3.134. Although the Community imports large quantities of tobacco (528 000 tonnes in 1991) it also exports about half of its own production (210 000 tonnes in 1991) to third countries. About 61 % of the exports concern sun cured and dark air cured tobaccos. Italy furnishes 45 % and Greece 36 % of all Community exports.

3.135. In order to enable traders to export Community grown tobacco export refunds are paid to cover the difference between the higher Community (market) prices and the lower prices prevailing on the world markets. To be eligible for export refunds the tobacco has to be of fair, sound and merchantable quality. Furthermore, the entitlement to an export refund is only acquired when the exporter has provided satisfactory evidence that customs formalities for export have been accomplished and the tobacco has been released on the market in the third country of destination. Some varieties to some destinations, however, do not receive any refund.

Low value exports

3.136. Although there were some exports of Virginia, Burley, Badischer Geudertheimer and Oriental varieties from Italy, France, Germany and Greece respectively at 'reasonable` commercial prices, there were also large exports from Italy of dark varieties at symbolic prices such as 25 LIT per kilo, as shown in Table 8.

3.137. Most of the tobacco exported had been stripped and this tobacco had received a premium and an export refund amounting in most cases to between 2,2 and 2,6 ECU/kg. Moreover, the premium is increased by a further 38,9 % to take account of the additional production costs for stripping. For all the exports mentioned in Table 8 this additional payment alone exceeded the export value of the tobacco sold. For this outlay the grower would have received a minimum price for low grade tobacco of approximately 0,7 to 1,4 ECU/kg, the remainder would have been used to support the processing and export of almost valueless tobacco.

3.138. During 1991 a Greek processor exported 1 820 tonnes of Tsebelia tobacco of the 1989 crop to Bulgaria for the extremely low sales value of USD 18 203, i.e. 1 cent per kilo. The documents provided by the trader to the Greek authorities as proof of arrival for these exports were similar to the Annex II certificates referred to in Commission Regulat