Court of auditors

In accordance with the provisions of the Treaties (Article 45c(4) of the ECSC Treaty, Article 248(4) of the EC Treaty and Article 160c(4) of the EAEC Treaty) and the Financial Regulation of 21 December 1997 (Article 88), as last amended by Council Regulation (EC, ECSC, Euratom) No 2673/1999 of 13 December 1999, as well as the corresponding provisions relating to the European Development Funds, the Court of Auditors of the European Communities, at a meeting on 11 and 12 October 2000, adopted its

ANNUAL REPORT

concerning the financial year 1999

(2000/C 342/01)

The report, together with the institutions' replies to the Court's observations, was transmitted to the authorities responsible for giving discharge and to the other institutions.

Jan O. KARLSSON

(President)

Bernhard FRIEDMANN

John WIGGINS

Giorgio CLEMENTE

Hubert WEBER

Aunus SALMI

Jørgen MOHR

Kalliopi NIKOLAOU

François COLLING

Maarten B. ENGWIRDA

Jean-François BERNICOT

Robert REYNDERS

Juan Manuel FABRA VALLÉS

Máire GEOGHEGAN-QUINN

Vítor Manuel da SILVA CALDEIRA

CONTENTS

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THE INSTITUTIONS' REPLIES

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GENERAL INTRODUCTION

0.1. This Annual Report follows the format used for the past two years with chapters dealing with revenue and each of the expenditure areas that fall under the headings of the financial perspectives. There is a separate chapter containing and explaining the Statement of Assurance. The Court's observations concerning the activities of the sixth, seventh and eighth European Development Funds are presented separately.

0.2. Since the last discharge procedure the Court has adopted 24 special reports, containing the results of audits which focus attention on a wide range of specific areas in which the Community's financial management can be improved. The findings in these reports are taken into account along with those in this Annual Report by the discharge authority. A full list of the reports and opinions adopted by the Court in each of the last five years appears in Annex II to this report.

0.3. 1999 was an important year for financial management in the Community. A crisis of confidence in the Commission's management which had developed over previous years came to a head with the two reports of the Committee of Independent Experts, after the first of which the Commission resigned. The new Commission which began work in September 1999 immediately set about a new reform programme. There are three related themes in the programme: reform of the way political priorities are set and resources allocated, important changes to personnel policy, and a radical overhaul of financial management and control. During 2000 the Commission has been developing the details of its proposals and starting the process of implementation.

0.4. Many of the important weaknesses which the reform programme is seeking to address are points which the Court in its reports over the years has emphasised on many occasions: the inadequacy of the Community's contractual arrangements, fundamental and structural weaknesses in internal control which diminish the responsibility of authorising officers, persistent shortages in resources for the management of some programmes, which led to a proliferation of sometimes irregular devices such as the so-called BATs(1) to try to fill the gaps. Insufficient priority was given in the past to taking the steps necessary to deal with the weaknesses quickly and effectively.

0.5. As highlighted by the Court on several occasions, a fundamental improvement in internal control will require a change in the balance of responsibilities of authorising officers, financial controllers and accounting officers, so that authorising officers in the operational directorates-general will carry full responsibility for the execution of the commitments and payments. In this context, the internal audit function should also be strengthened, as proposed by the Commission. The Commission's proposals in its White Paper take into account the observations of the Court in its Opinion No 4/97(2) on the Commission's proposed revision of the Financial Regulation. The priority which the Commission has attached to the reform, including the necessary modification to Article 24 of the Financial Regulation, and the creation and staffing of the internal audit service, is to be welcomed.

0.6. Another element of the reform that corresponds closely to a key priority identified by the Court is the increased focus to be placed on results and performance measurement, within a framework of resource allocation that is consistent with predetermined priorities and objectives that are clearly defined and measurable. In the general introduction to the Annual Report for 1998 the Court argued that the measure of success for the Commission should be the extent to which policy goals are attained with the minimum of cost, and stressed that the change of culture and practice that this would entail should be placed at the heart of the financial reform process. Again, the introduction of activity-based management (ABM) should assist the Commission to improve its setting of priorities in line with available financial and administrative resources, and avoid situations in which relatively small programmes absorb disproportionate amounts of effort from its staff.

0.7. In addition to adopting the general programme of administrative and financial reform, the Commission has announced reform programmes for certain budgetary areas, which also address concerns expressed over a number of years by the Court. The Commission's May 2000 proposals for improving the management of external aid programmes are based on an analysis of the weaknesses of the Commission's programmes which is very similar to that of the Court, as set out in various special and annual reports, notably chapter 5 of the Annual Report for 1997.

0.8. The wholesale revision of the Financial Regulation currently underway is necessary to provide an appropriate regulatory framework for the reform of financial management. In its Opinion No 4/97(3) and subsequently, the Court has made, among others, recommendations concerning the authorising officer's responsibilities, the introduction of the independent internal auditor(4), the requirement for accounts to be presented in accordance with international standards, and the introduction of borrowing for the purpose of investing in buildings for the use of the institutions. It has also recommended simplification of the provisions concerning the definition of commitments and the carry-over of appropriations, and a reduction in the exceptions to the basic principles of the Financial Regulation. The Court will continue to insist strongly on these recommendations, and will follow up carefully on all aspects of the revision of the Financial Regulation, while reserving its position on further possible improvements.

0.9. The Court encourages the Commission to proceed with the implementation of its proposals for reform as quickly as is feasible, bearing in mind that some of the reforms require changes in the Financial and Staff Regulations. At this stage, while the first steps are being taken, the reform programme has, for the most part, still to be implemented. It is only when structures and procedures are in place and actually functioning that it will be possible to assess whether the intended improvements in financial management are being obtained. Changing the management culture of an organisation such as the Commission is difficult, and will take time, but it is only with such changes that the reform proposals will work.

0.10. As the Court has said on many occasions, improvements in financial management by the Commission constitute but a part of what is needed to improve the overall management of Community funds. Member States are responsible for the day-to-day management of the bulk of the funds from the Community budget, in the areas of the common agricultural policy and the Structural Funds. This Annual Report and the special reports published since the last discharge continue to draw attention to serious and persistent weaknesses in Member States' management and control systems. Important initiatives have been taken to improve matters by strengthening the financial controls that the Member States themselves are required to maintain over Community-financed (or co-financed) operations(5). This Annual Report, however, shows that implementation of the new systems remains incomplete (see paragraph 2.41, paragraphs 3.69 to 3.74 and 3.78), and that the Commission needs to increase its pressure on the Member States to implement them fully.

0.11. By placing more emphasis in the Annual Report on following up the action taken in response to its previous audit observations, the Court is responding to the concerns of the discharge authority. Separately from any consideration of the Commission's reform proposals, this Annual Report shows that some progress has been made in some specific areas. Action has been taken by the Commission to remedy specific weaknesses in some projects and programmes (for example the programme of assistance to South Africa, reforms to the measures for the subsidised use of skimmed milk and skimmed-milk powder for animal feed, action on some own resources matters). In other areas, however, such as the reform of the wine market organisation and the taking of corrective action following the detection of errors or irregularities in the ERDF field, the response has been slow, or partial.

0.12. In its Statement of Assurance on the 1999 accounts, the Court again draws attention to problems with the Community's financial statements similar to those found in previous years. Weaknesses in accounting systems and procedures mean that the information presented is in some cases incorrect or incomplete. The problems in management and control systems covering operational expenditure, both at the Commission and in Member States, continue to give rise to a significant incidence of errors, mainly at the level of final beneficiaries. In view of the findings set out above the Court declines to provide assurance that the transactions underlying the financial statements are legal and regular, except in the case of own resources, the commitments and the institutions' staff expenditure. The Court, therefore, endorses the intentions of the Commission's plan for improving financial management, presented to the discharge authority in the context of the discharge for 1998. As pointed out in paragraph 8.59 of this report, if there is an effective and constant improvement in management and control procedures of the Commission and the authorities in the Member States, there should be an effect on the Court's audit findings and conclusions. However, no one can determine in advance the opinion of the independent external auditor, which has to be based on the facts established in the course of the audit.

0.13. Finally, attention is drawn to the danger of misinterpreting or misrepresenting the errors found by the Court as an indication of the level of fraud affecting the Community budget. The references in the Court's reports to payments whose amounts are wrong because of error and irregularity primarily concern problems of inadequate financial management and control. The bulk of the errors occur in the main expenditure programmes managed by the public authorities in the Member States and particularly concern such things as small overpayments to farmers and payments for expenditure by public authorities which is not eligible for EU co-financing. Only a small proportion of the breaches of the regulations found by the Court have justified further investigation by OLAF or the authorities with criminal jurisdiction in the Member States. The extent of fraud is the subject of an annual report of the Commission, collating data provided by the Commission and the Member States, on the protection of the Communities' financial interests.

0.14. Nevertheless, if the Court finds indications of deliberate fraud, it continues to work closely with OLAF in the protection of the Community's financial interests, in accordance with the agreements between the two bodies. In this context, the Court notes that the 1995 Convention on the protection of the Community's financial interests has still not been ratified by all the Member States, and that the parallel Convention dealing with corruption in connection with the EU budget has been ratified by only one Member State. This shows that, although Article 280 of the Treaty provides that the Member States have important responsibilities for combating fraud against the Community budget, they are not yet discharging these responsibilities in a fully satisfactory way. It is therefore necessary to explore all possible instruments, either within the existing Community legal framework or through appropriate amendments to the Treaty, to protect the Community's financial interest. Further, as the OLAF Supervisory Committee has recently emphasised, much remains to be done to improve cooperation between OLAF and the Member States in the investigation and prosecution of fraud and corruption involving the EU budget.

(1) The acronym for the French title of Technical Assistance Offices.

(2) Opinion No 4/97 of the Court of Auditors on the proposal for a Council Regulation (Euratom, ECSC, EC) amending the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (OJ C 57, 23.2.1998), paragraphs 5.1 to 5.17.

(3) OJ C 57, 23.2.1998.

(4) Opinion No 1/2000 of the Court of Auditors on the proposal for a Council Regulation amending the Financial Regulation of 21 December 1977 and separating the internal audit function from the ex ante financial control function (fifth paragraph of Article 24 of the Financial Regulation) - adopted by the Court on 5 October 2000.

(5) The integrated administrative and control system (IACS) concerning agricultural expenditure, and Council Regulation (EC) No 2064/97 on financial control of the Structural Funds.

Report on the activities financed from the general budget

Chapter 1(1)

Own resources

1.0. CONTENTS

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INTRODUCTION

1.1. The Court's examination of the Community's traditional own resources concentrated on the establishment and recovery by the Commission and Member States of amounts due to the Community, as well as the implementation of Community regulations, particularly in the field of outward-processing customs arrangements.

1.2. With regard to the resources that derive from VAT and GNP, the Court's work dealt mainly with comparing tax and statistical data for the purposes of fighting fraud. Furthermore, the Court reviewed the actions taken in response to the criticisms it had previously made of the fact that a dual system of national accounting standards has been retained (ESA 79 and ESA 95).

1.3. Moreover, the Court submitted its observation on the Commission's control of the reliability and comparability of GNP in its Special Report No 17/2000(2).

IMPLEMENTATION OF THE BUDGET

1.4. Table 1.1 summarises Community revenue for the financial year 1999 and Graph 1.1 shows the following:

(a) revenue for the financial year 1999 increased by 2,8 % compared with financial year 1998 (84529,7 million euro), amounting to 86908,1 million euro, or 101,5 % of the revenue provided for in the final budget;

(b) net traditional own resources (that is, minus 1539,7 million euro of collection expenses) amounted to 13857,6 million euro, which represents 15,9 % of total actual revenue; these resources fell by 1,8 % compared with the financial year 1998, and can be broken down as follows:

- customs duties amounting to13006,5 million euro (gross), making up 84,5 % of gross traditional own resources (15397,3 million euro)(3),

- agricultural duties amounting to 1187,3 million euro (gross), making up 7,7 % of gross traditional own resources,

- sugar and isoglucose levies amounting to 1203,5 million euro (gross), making up 7,8 % of gross traditional own resources;

(c) own resources from VAT amounted to 31332,3 million euro(4), or 36,1 % of total actual revenue; actual revenue fell by 5,3 % compared with the financial year 1998 (33086,5 million euro);

(d) the GNP resource amounted to 37512,0 million euro(5) (of which 305,4 million euro of reserves),

Table 1.1 - Revenue for the financial years 1998 and 1999 - Analysis of budgetary implementation 1999

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Source:

1999 budget and 1998 and 1999 revenue and expenditure accounts.

or 43,2 % of total actual revenue; this resource increased by 7,1 % compared with the previous financial year (35026,1 million euro);

(e) the surplus available from the previous financial year (3022,2 million euro) and miscellaneous revenue (1288,1 million euro) represent 5,0 % of total actual revenue, or an increase of 94,2 % compared with the financial year 1998.

1.5. The Court has reviewed the information presented by the Commission in Volume I of the revenue and expenditure account. This volume provides a commentary on the year's revenue. In particular, it explains the variations between the amounts in the approved budgets and actual revenue. This review did not seek to provide assurance as to the reliability of these explanations. Rather, it sought to identify any significant variations for which explanations are not provided and to identify any explanations that might be considered misleading. In one case, the commentary does not give an explanation for a difference in Title 9 "Miscellaneous revenue", between the budget amount of 5,2 million euro and actual revenue of 31,4 million euro.

Table 1.2 - Estimated and actual own resources in 1999, by Member State

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NB:

It should be noted that the Member States, acting on behalf of the Communities, are responsible for the collection of the amounts due in respect of customs duties, agricultural duties and sugar and isoglucose levies.

Graph 1.1 - Community revenue (for details see Tables 1.1 and 1.2)

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(6)Source:

1998 and 1999 revenue and expenditure accounts.

SPECIFIC APPRAISAL IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

Traditional own resources

Applicable legislation

1.6. The specific legislation for traditional own resources includes:

(a) Council Decision 94/728/EC, Euratom of 31 October 1994(7) on the system of the European Communities' own resources, and Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989(8) implementing Council Decision 88/376/EEC, Euratom on the system of the Communities' own resources, as last amended by Council Regulation (Euratom, EC) No 1355/96 of 8 July 1996(9);

(b) Council Regulation (EEC) No 2913/92 of 12 October 1992(10) establishing the Community Customs Code and Commission Regulation (EEC) No 2454/93 of 2 July 1993(11) laying down provisions for the implementation of the Community Customs Code.

Scope of the audit

1.7. In the context of the Statement of Assurance (see Chapter 8), the audit of traditional own resources covers the customs and agricultural duties that are established and entered in the accounts (A accounts) of the Member States on the basis of the declarations submitted to the customs authorities for the release of goods for free circulation in the Community. The audit of the legality and regularity of the underlying transactions does not include imports which are not declared or which have escaped customs surveillance.

1.8. The Court takes into consideration separately the inherent risk represented by irregular imports and other risks to traditional own resources which may result in amounts due not being recorded in the accounts. In the context of its other tasks, it has carried out specific audits centred on the evaluation of procedures introduced by the Member States for collecting traditional own resources that are owed to the Community. The most recent audits were concerned with the management of the securities and guarantees provided for in the Community Customs Code to protect the collection of traditional own resources(12). As part of its work programme for the protection of the financial interests of the Community, the Commission prepares each year a report in which it takes stock of the irregularities and frauds that have been observed by the Member States during their own investigations. In its latest report(13), the Commission shows a figure of 1096 million euro, corresponding to the cumulative amount of the traditional own resources at stake in cases of irregularity and fraud reported by the Member States for the years 1995 to 1998.

1.9. In addition to the amounts entered as revenue in the revenue and expenditure account, the notes to the balance sheet show a provision for the first time for the total amount receivable from Member States for own resources which have not yet been collected but have been entered in separate accounts (the B accounts) (see paragraph 8.6). The outstanding amount shown on these accounts as at 31 December 1999 was 1951,9 million euro.

1.10. The Court also examined the procedures in Member States for the entry in the accounts and aggregation of traditional own resources.

Audit findings

1.11. In the course of the Court's audit, it was found that established entitlements amounting to 3,0 million euro were made available to the Commission with significant delays. When amounts are made available late, Member States are liable to pay default interest under Article 11 of Council Regulation (EEC, Euratom) No 1552/89 (cited in paragraph 1.6 above).

1.12. As has been the case for several years(14), there were problems both with the reliability and with the nature of the separate accounts (the B accounts). Under Article 6(2) of Council Regulation (EEC, Euratom) No 1552/89, Member States enter in the B accounts established entitlements which have not yet been recovered and for which no security has been provided, and may also enter in the B accounts established entitlements for which security has been provided but which have been challenged and might upon settlement of the disputes which have arisen be subject to change.

1.13. At the end of 1999 the net total amount standing on the B accounts, at 1951,9 million euro, was 212,5 million euro (+ 12,2 %) higher than the figure at the end of 1998 (1739,4 million euro). This increase represented new entries amounting to 514,4 million euro (23 % less than the new entries in 1998), reduced by recoveries during the financial year of 216,2 million euro and cancellations or write-offs amounting to 85,7 million euro. The resulting net increase remains in the usual range.

1.14. The Court's audits showed that despite the attention that has been drawn to the problem, in some Member States the procedures for compiling the B accounts are not yet fully reliable. Certain established entitlements that should have been entered in the A accounts and made available were wrongly entered in the B accounts, and there were also late or duplicated entries in the B accounts. However, the amounts noted were not material to the revenue and expenditure account as a whole.

1.15. As regards the nature of the B accounts, the Regulation leads to a mixture of established entitlements being entered without distinction according to the circumstances in which they arose and the probability of ultimate recovery. Some entries in the B accounts are amounts, technically unsecured, which are not in dispute and will generally be promptly paid; others relate to bankrupt or untraceable debtors and others are the subject of long-running legal procedures. There have also been differences between Member States' interpretations of the Regulation (see Special Report No 8/99(15)). The Court welcomes the Commission's response that it does not hesitate to take the requisite measures when the rules are not obeyed, and underlines the need for the Commission to ensure that correct and uniform practices are followed in all Member States.

1.16. The statements sent quarterly by the Member States to the Commission do not analyse the B account balance brought forward by age or otherwise, and so do not provide an adequate base for the Commission to use for presenting a realistic value to the Community of the amounts due (see paragraph 8.6). For the period 1990 to 1999 as a whole, only 30 % of the amounts originally entered in the B accounts have been recovered. The balance includes some long-standing entries for which full recovery must now be regarded as very doubtful, although the considerable differences between Member States' legal systems prevent generalisation. As such it is not possible to assume that the previous recovery rate applies to the current outstanding balance. The Commission should require more detailed analysis by the Member States of the balances on the B accounts. This would serve as a basis for showing in the financial statements the amounts estimated to be recovered, and to improve management of the debt. Such treatment would be preferable to the procedure in 1999 of making 100 % provision.

Result of the audit

1.17. The checks carried out gave satisfactory overall results concerning the reliability of the accounts and the legality and regularity of the underlying transactions entered in the accounts of the Member States (see paragraph 1.7). The errors found during examination of the underlying transactions did not materially affect the accuracy of the revenue in the revenue and expenditure account. In one Member State, several cases of errors and inconsistencies in the customs declarations, which ought to have been detected by customs control procedures, were found at a single customs office. These cases require investigation and appropriate action by the national authorities and by the Commission as regards traditional own resources not made available or made available late.

VAT/GNP own resources

Applicable legislation

1.18. The specific legislation for the VAT and GNP own resources includes:

(a) Council Decision 94/728/EC, Euratom of 31 October 1994(16) on the system of the European Communities' own resources, and Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989(17) implementing Council Decision 88/376/EEC, Euratom on the system of the Communities' own resources, as last amended by Council Regulation (Euratom, EC) No 1355/96 of 8 July 1996(18);

(b) Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989(19) on the definitive uniform arrangements for the collection of own resources accruing from value added tax;

(c) Council Directive 89/130/EEC, Euratom of 13 February 1989(20) on the harmonisation of the compilation of gross national product at market prices.

Scope of the audit

1.19. The VAT and GNP resources are determined by use of statistical data in the establishment of their assessment bases, which does not allow an audit, in the accounting sense, of the underlying data. In this connection, and on the basis of the VAT and GNP data used by the Commission, the Court's audit concentrated on the verification of the accuracy of the calculation of the contributions from each Member State during the various stages, from the initial budget to the final clearance, for the financial years concerned.

Audit findings

1.20. Member States are required to send assessment bases for years n - 1 and earlier to the Commission before 31 July in the case of VAT(21) and 1 October in the case of GNP(22).

1.21. The late transmission in 1999 by several Member States of valid assessment bases, particularly GNP, reduced the time available for checking. The extent and nature of the checks performed by the Commission on the GNP data were not adequately documented(23).

Result of the audit

1.22. Taking into account the limitation to the scope of the audit, the Court obtained a reasonable assurance with regard to the reliability of the system for collecting the VAT and GNP resources set up by the Commission.

FOLLOW-UP TO PREVIOUS OBSERVATIONS

Traditional own resources

1.23. The Court examined the action taken by the Commission in the financial and regulatory spheres in response to the most significant observations made in the Annual Reports concerning the financial years 1994 to 1997, and in Special Report No 13/98 concerning the use of risk analysis techniques in customs control and the clearance of goods(24). The Court's evaluation of the remedial action taken in response to its observations is based on information available at the Commission.

Follow-up at financial management level

1.24. In its Annual Report concerning the financial year 1994, the Court referred to the traditional own resources that some Member States had not established or made available to the Commission, as they should have done in accordance with the regulations. These observations resulted in the establishment of arrears interest of 0,4 million euro, which was completely recovered. The checks carried out by the Commission, following the Court's observations on systematic delays in discharging the transit regime, led to the establishment of arrears interest of 2,4 million euro, of which only 0,1 million euro was recovered. The financial follow-up of two of the five cases mentioned in the 1994 Annual Report that were being dealt with in the mutual assistance framework was still under way at the time of the inquiry.

1.25. The Court's observations in its Annual Report concerning the financial year 1995 dealt with the application of the inward-processing arrangements, the customs warehousing procedure, and customs union agreements. On the basis of these observations, the Commission recovered 3,6 million euro in arrears interest and 26530 euro of principal. The Court had also observed a case of incorrect application of the Customs Union Agreement with Turkey during the period 1973 to 1995, consisting of the export to this country with ATR certificates of produce deriving from the inward-processing arrangements which had not been first released for free circulation. The Commission had taken the view that Community legislation did not allow retrospective recovery of the duties corresponding to the release for free circulation of the produce in question, but it had undertaken to ask the Member States to invalidate the duly delivered ATR certificates and to inform the Turkish authorities. The Court observes that the Commission approached the Member States in March 1997 and asked them to re-examine certificates issued during the period 1 March 1994 to 18 March 1995 only and that, according to information in the possession of the Commission, no Member State invalidated any ATR certificates.

1.26. The Court's Annual Report concerning the financial year 1996 contained observations on the Commission's and Member States' financial management, free zones, and inward-processing arrangements. These observations were followed up appropriately, as were those concerning the establishment and post-clearance recovery of traditional own resources.

1.27. The Annual Report concerning the financial year 1997 contained observations with no direct financial implications which concerned the use of risk-analysis techniques, as well as financial auditing observations on amounts of own resources not made available or made available late. The latter observations were adequately followed up; the Commission recovered the principal of 15,3 million euro and 1,3 million euro of arrears interest.

Follow-up at Community regulations level

1.28. The Court examined what the Commission had done to follow up the changes to the Community regulations envisaged in its replies to the Court's observations in its Annual Reports concerning the financial years 1994 to 1997. In its replies, the Commission proposed changes to various regulations, in particular, those covering the transit regime, inward-processing arrangements, preferential tariff treatments, the management of irrecoverable claims, establishment and post-clearance recovery procedures and mutual assistance procedures as part of the fight against customs fraud.

1.29. During the period under review an amendment was made to Regulation (EEC, Euratom) No 1552/89(25) aiming to harmonise the financial information forwarded to the Commission by the Member States; another proposal to amend this Regulation, relating to the conditions for writing-off traditional own resources, was still being examined at the time of the enquiry(26).

1.30. The observations on mutual assistance and post-clearance recovery contained in the Annual Report concerning the financial year 1994 should, in particular, have resulted in an improvement in the provisions in the customs code relating to the period of time-barring and to the guarantee of customs debt. At the time of the Court's audit, these adjustments were still being discussed(27).

1.31. In the Community transit field, the Commission has not yet been able to implement the Court's proposal that the provisions of the code relating to the global guarantee should be strengthened. The current provisions continue to allow goods to be placed under the transit procedure, despite the fact that the global guarantee has become insufficient as a result of the volume of previous uncleared operations.

VAT/GNP own resources

Introduction

1.32. The GNP is the reference aggregate for calculating the fourth resource used to finance the Community budget. In this context, in 1999, a new edition of the European System of Accounts (ESA 95) replaced the second edition of the European System of Integrated Economic Accounts (ESA 79)(28). In its application ESA 95 takes more account of recent economic changes and the statistical progress made in recent years. For this reason, the GNP estimated according to ESA 95 is a more reliable and comparable indicator of Member States' ability to contribute to the budget. This new version is applicable to "all Community acts that refer to the ESA or its definitions". However, "for budgetary and own resources purposes and, by way of derogation, ESA 79 is in force"(29).

1.33. On three occasions(30), the Court has observed and criticised the use of two systems of national accounting (ESA 79 and ESA 95).

1.34. In its Annual Report on the financial year 1997 and its Special Report No 6/98 concerning the assessment of the system of resources based on VAT and GNP(31), the Court deplored the fact that two accounting systems were being used, arguing that a tool that was efficient and available for use was not being used. The Court observed that ESA 79 did not reflect the Member States' ability to contribute to the budget as well as ESA 95. Finally, the Court emphasised that, since ESA 95 was being used in other European Union policy areas, there was a risk of confusion in the choice of system of accounting standards.

1.35. In its Opinion 8/99 on a Council proposal for a decision concerning the European Union's system of own resources(32), the Court noted the impact on own resources of only using ESA 95 and replacing the concept of GNP by that of gross national income (GNI). The Court reminded the Council that the criteria for financing the Union must provide a better reflection of the Member States' ability to contribute to the budget.

The costs of the current dual system of accounting standards

1.36. As the Court has emphasised in previous observations(33), with the agreement of the Commission(34) (which proposed using ESA 95 only in order to have a more reliable and comparable indicator of the Member States' ability to contribute to the budget), the current system is unsatisfactory.

1.37. Retaining ESA 79 means that the accounts, which are currently established using ESA 95, are converted by backwards extrapolation for the purposes of the own resources only(35). This dual accounting represents an extra cost, for both the Member States' national statistical institutes and for the Commission's internal control.

1.38. Moreover, the process of converting data from ESA 95 to ESA 79 carries a potential risk of error. With regard to assessment base estimates, the growth rates calculated according to ESA 95 are applied, by approximation, to the assessment bases forecast according to ESA 79.

1.39. Finally, by not using ESA 95 for calculating the own resources, the Union is depriving itself of an indicator of Member States' ability to contribute to the budget which is of a better quality than ESA 79.

Decision on own resources

1.40. At its meeting on 8 May 2000, the Council (Ecofin) adopted a joint position on a draft decision(36) with a view to using ESA 95 as the only reference for national accounting and, consequently, for calculating the own resources of the Community budget.

1.41. Once it is finally adopted, this decision will have to be ratified by the Member States.

Conclusion

1.42. The Court notes that the recent proposals for decisions take a similar approach to its previous observations. The draft decision ensures that only ESA 95 will be used in the context of national accounting (see paragraph 1.40). Implementing this change will avoid needless costs and make the system more satisfactory (see paragraphs 1.37 to 1.39).

OBSERVATIONS ON THE OUTWARD-PROCESSING ARRANGEMENT

1.43. The outward-processing relief arrangement is a customs procedure(37) with economic impact used as an instrument of the Community commercial policy for facilitating trade, whereby goods may be temporarily exported from the customs territory of the Community and the products manufactured from such goods (compensating products) may be subsequently reimported with full or partial relief from import duties.

1.44. Outward-processing trade represents a diminishing percentage (2,2 % in 1997) of all Community imports, essentially because much of this trade is no longer dutiable under preferential trade arrangements with traditional outward-processing trading partners, such as traders in countries in central and eastern Europe. In most instances, traders use outward-processing as a safeguard against difficulties in obtaining certificates of origin in the countries where outward-processing takes place. In 1995, the Commission estimated that duty relief under the outward-processing procedure had reduced traditional own resources by 556 million euro.

1.45. Outward-processing trade is concentrated geographically and by sector (textiles, electrical goods and electronics, aerospace, machinery, footwear, motor vehicles, optical and photographic, and furniture). In 1997, one Member State(38) accounted for 48 % and six other Member States(39) for a further 44 % of reimports under the outward-processing procedure.

1.46. In its Annual Report concerning the 1990 financial year, the Court came to an analogous conclusion to that in paragraph 1.56. The Community regulations on the outward-processing arrangements have not been amended.

Economic conditions

1.47. Article 148(c) of the Customs Code states that an "authorisation shall be granted only where authorisation to use the outward-processing procedure is not liable seriously to harm the essential interests of Community processors (economic conditions)".

1.48. The Court's enquiries, both in 1990 and 1999, established that there are wide differences in the way in which Member State authorities treat the basic requirement to examine economic conditions. Two Member States(40) had already by 1990 given up requiring their officials to take into account the economic conditions when considering an application. Three Member States(41) consider an increase in value to be sufficient as justification. Three other Member States(42) require control without specifying any criteria. Four Member States(43) centralise applications for authorisations in interministerial administrative procedures. In one Member State(44), the procedure for authorising outward-processing involves officials at directorate-general level with representatives from eight ministries and from the private sector.

1.49. During the audit, the Court did not come across any cases where a Community processor claimed that his interests had been seriously damaged because of an authorisation for outward-processing. Neither has the Court found any cases where an application was refused.

1.50. In September 1998, delegates from national customs administrations concluded, in a Matthaeus seminar organised by the Commission, that prior examination of economic conditions was no longer justified for outward-processing.

Authorisation procedure

1.51. Two Member States(45) accounting for more than half of reimports under outward-processing arrangements have simplified their authorisation procedures to a minimum by issuing authorisations on an "ongoing" basis for unlimited quantities and unlimited periods. Another Member State(46) applies an authorisation procedure that has the same effect. These procedures have been in place for many years.

Calculation of the customs-duty relief

1.52. In 1991, the Court concluded that the method used for calculating the duty should be simplified, as the differential method applied at that time was the main source of errors. In January 1998, during a Commission evaluation of the Court's 1991 report, the question of changing the method of calculation was raised again. To date no changes have been made to the calculation method. The differential method could be replaced by a calculation method based on the value added to compensating goods.

Vulnerability of outward-processing relief to fraud and irregularity

1.53. The Member States' customs authorities do not regard outward-processing as a customs procedure with major or substantial risk of fraud. According to a Commission report, this view is supported by extensive experience in international trade. However, the Court's enquiry established that the system is error-prone. The relief system presents some specific risks (e.g. the need to know the precise quantity and value of every item of Community material in the reimported compensating goods). Most errors were discovered as a result of post-importation auditing of traders' records.

1.54. The Commission's Annual Report for 1998(47) summarising the communications by the Member States on their inspection activities in the field of traditional own resources (Annex 7) contains detailed information about the vulnerability of customs procedures to fraud and irregularity. Outward-processing relief accounted for 309 cases (1220411 euro) out of a total of 125654 cases recorded (376959482 euro). In relative size, fraud and irregularities committed under the outward-processing procedure represented 0,3 %, the same as in 1997, but down from 1,76 % in 1996.

1.55. During the period 1996 to 1999, eight Member States reported 70 cases of irregularity concerning the outward-processing regime, representing a total amount of 5646109 euro. The Court analysed these cases to obtain an appreciation of the precise nature of the irregularities. It reached the conclusion that most of them concern the differential method for calculating duty, mentioned in paragraph 1.52. In addition, many irregularities concern the export of textile products that do not originate in the Community or the incorporation of this type of product into processed products.

Conclusion

1.56. The Court supports the Commission's proposals to modernise the customs procedures with economic impact. Specifically for outward-processing, the Court considers that:

- generally speaking, economic conditions need no longer be considered (see paragraphs 1.47 to 1.50),

- authorisations should not be granted in cases where the compensating products can benefit from preferential treatment (see paragraph 1.44),

- the prior authorisation procedure should be curtailed to an absolute minimum, so that the authorisation for relief is issued at the reimportation stage (see paragraph 1.51),

- the calculation procedure should be simplified (see paragraph 1.52).

COMPARISON OF DATA FOR THE PURPOSES OF FIGHTING FRAUD

VAT fraud and risk analysis

1.57. VAT fraud(48) consists either of underreported sales or overstated production costs (intermediate costs) or, even, a combination of the two. The choice of the one or the other type depends on the sector of the economy in which the taxable person is operating and on the opportunities it offers.

1.58. Non-registered traders (the underground economy) are a special case of all-out fraud, since their activities are not declared to the tax authorities.

1.59. In the VAT field, some elements cause a heightened risk of fraud:

(a) the large number of economic operators;

(b) the complexity of the rules and the existence of special arrangements;

(c) the exchange of goods and services, net of tax, between taxable persons established in different Member States;

(d) the differing rates of VAT from one Member State to another;

(e) the speed with which fraud mechanisms work;

(f) the fragmentation of the single market into 15 separate administrative areas and insufficient cooperation between the Member States;

(g) the limited resources available for controls.

1.60. Analyses of the phenomenon of fraud, including the one carried out by the Commission at the beginning of the year 2000(49), have shown that VAT only appears to be intrinsically "self-policing", supposedly on the basis of the conflicting interests of the taxable persons(50): in fact, numerous mechanisms have been discovered which allow this principle to be got around.

1.61. On account, in particular, of the limited resources available to them, it is in the interest of the tax administrations of the Member States to target their controls according to the risk of fraud associated with particular operators. Controls can be targeted most advantageously on the basis of an appropriate risk analysis which makes use of both the information made available as a result of controls and information from other sources.

1.62. One of the instruments used to identify sectors at risk consists of comparing tax data (declarations by taxable persons of various taxes) with statistical data from different sources.

The use of statistics

1.63. In general, the procedures for comparing statistical data and tax data are limited to a comparison of the added value entered in the VAT declarations with the analogous aggregates estimated in the national accounting statistics.

1.64. A comparison of this kind has the disadvantage, however, of highlighting only one type of fraud mentioned in paragraph 1.57, i.e. reducing sales declared. As the comparison is based on the added value, only the production of goods and services is taken into account and their use in the economic process is not considered. A detailed analysis of fraud, however, would also involve a close examination of the phenomenon of the overreporting of production costs by taxable persons. In order to carry out such an examination, direct scrutiny of the constituent elements of the added value and of intermediate consumption is necessary.

The comparison of intermediate consumption

1.65. The Court obtained information on a methodology developed by a Member State in order to compare tax sources with statistical sources, both with regard to the production of goods and their intended use in the economic process.

1.66. The statistical data(51) contain an estimate of all trade between producers of goods and services, upstream of their utilisation by the final users (households in the majority of cases). This allows a direct estimate of the intermediate consumption that is involved in the production process.

1.67. Where data of the same type but derived from tax declarations are available, any overreporting of intermediate consumption declared can be revealed, broken down by economic sector. One can also use this opportunity to identify the underreporting of sales.

1.68. At the same time, it is in the comparison of data originating from different sources - from statistical and tax sources - that the true difficulty to be resolved lies. The underlying concepts need to be made homogeneous.

1.69. At the Court's initiative, this method was applied in another country. This second experiment confirmed the validity of the methodological approach and proved convincing at the practical level even where amendments proved necessary because of the special features of the data available.

The results obtained

1.70. The audits showed that, for the two countries concerned, the production costs declared to the tax authorities were greater than those derived from the national accounting statistics. Appreciable discrepancies were discovered(52). This revealed the existence of a special type of fraud which attempts to reduce the VAT assessment basis by unduly increasing input costs.

1.71. As pointed out in paragraph 1.64, the use of added value alone undermines the comparisons, as any problems with the estimates upstream of these data (turnover and intermediate costs) are not taken into account.

Conclusion

1.72. The application of the methodology used in these two Member States should be extended to the other countries, provided the necessary amendments and improvements are made. Subject to cooperation between the tax authorities and statistical offices, an exercise of this kind can be carried out on the basis of existing data and, consequently, with no extra administrative burden for the taxable persons (see paragraph 1.69).

1.73. Improved knowledge of the situation which this would engender, in respect of the underreporting of sales and the overreporting of intermediate costs, by economic sector, might well lead to improvements to the risk analysis procedure and provide the correctives to the controls needed in order to improve their effectiveness (see paragraph 1.70). This would also answer the concerns expressed by the Commission in respect of the serious deficiencies affecting control strategies at national level(53). It is for the Commission and the Member States, in the light of their various responsibilities concerning the evaluation of national VAT systems and of controls in respect of the production of statistics, to take the appropriate initiatives.

(1) The Commission's replies are on page 25.

(2) Shortly to be published in the Official Journal. Available now on the Court's Internet site.

(3) Net traditional own resources (13857,6 million euro) + collection costs (1539,7 million euro) = gross traditional own resources (15397,3 million euro).

(4) Own resources from VAT (31332,3 million euro) = own resources from VAT of the financial year (31381,6 million euro) + balances and adjustments from previous financial years (- 49,3 million euro).

(5) The GNP resource (37512,0 million euro) = the GNP resource of the financial year (37011,7 million euro) + balances and adjustments from previous financial years (500,3 million euro).

(6) After deduction of 10 % for collection expenses incurred by the Member States.

(7) OJ L 293, 12.11.1994, p. 9.

(8) OJ L 155, 7.6.1989, p. 1, as codified by Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000, which took effect on 31 May 2000.

(9) OJ L 175, 13.7.1996, p. 3.

(10) OJ L 302, 19.10.1992, p. 1.

(11) OJ L 253, 11.10.1993, p. 1.

(12) Special Report No 8/99 (OJ C 70, 10.3.2000).

(13) Protecting the Communities' financial interests and the fight against fraud - Annual Report 1998, COM(1999) 590 final.

(14) Annual Report concerning the financial year 1998, paragraph 1.10; Statement of Assurance concerning activities financed from the general budget for the financial year 1997, paragraphs 8.13 and 8.14 (OJ C 349, 17.11.1998); Statement of Assurance concerning activities financed from the general budget for the financial year 1996, paragraphs 19.6 and 19.7 (OJ C 348, 18.11.1997).

(15) Special Report No 8/99 (OJ C 70, 10.3.2000), paragraphs 51 to 53.

(16) OJ L 293, 12.11.1994, p. 9.

(17) OJ L 155, 7.6.1989, p. 1, as codified by Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000, which took effect on 31 May 2000.

(18) OJ L 175, 13.7.1996, p. 3.

(19) OJ L 155, 7.6.1989, p. 9.

(20) OJ L 49, 21.2.1989, p. 26.

(21) Articles 7 and 9 of Regulation (EEC, Euratom) No 1553/89.

(22) Article 3(2) of Directive 89/130/EEC, Euratom.

(23) Special Report No 17/2000 on the Commission's control of the reliability and comparability of the Member States' GNP data, paragraph 57. To be published shortly in the Official Journal and available now on the Court's Internet Site.

(24) OJ C 375, 3.12.1998.

(25) Regulation (Euratom, EC) No 1355/96 (OJ L 175, 13.7.1996) amending Regulation (EEC, Euratom) No 1552/89 (OJ L 155, 7.6.1989).

(26) Document COM(1998) 209 final.

(27) Proposal for a European Parliament and Council Regulation (EC) amending Council Regulation (EEC) No 2913/92 establishing the Community Customs Code, COM(1998) 226 final, of 8 June 1998.

(28) Article 1(2) of Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national and regional accounts in the Community (OJ L 310, 30.11.1996).

(29) Article 8(1) of Regulation (EC) No 2223/96.

(30) Annual Report on the financial year 1997 (OJ C 349, 17.11.1998).

Special Report No 6/98 concerning the Court's assessment of the system of resources based on VAT and GNP (OJ C 241, 31.7.1998).

Opinion No 8/99 on a Council proposal for a decision concerning the European Union's system of own resources (OJ C 310, 28.10.1999).

(31) Paragraphs 3.17, 3.20 and 3.21 of Special Report No 6/98.

(32) Paragraph 9 of Opinion No 8/99.

(33) See paragraph 1.34.

(34) The Commission's replies to Special Report No 6/98, paragraphs 3.17 to 3.22. The Commission's replies to the Annual Report on the financial year 1997, paragraph 1.26.

(35) Commission Decision 97/178/EC, Euratom of 10 February 1997 on the definition of a methodology for a transition between the European System of National and Regional Accounts in the Community (ESA 95) and the European System of Integrated Economic Accounts (ESA second edition) (OJ L 75, 15.3.1997).

(36) Council Decision concerning the European Community's system of own resources.

(37) Council Regulation (EEC) No 2913/92, Articles 146 to 160 (OJ L 302, 19.10.1992), and Commission Regulation (EEC) No 2454/93, Articles 748 to 787 (OJ L 252, 11.10.1993).

(38) Germany.

(39) Belgium, Luxembourg, France, Italy, the Netherlands and the United Kingdom.

(40) The Netherlands and the United Kingdom.

(41) Germany, Finland, Austria.

(42) Spain, France, Portugal.

(43) Belgium, Greece, Ireland, Portugal.

(44) Italy.

(45) Germany, the Netherlands.

(46) United Kingdom.

(47) COM(2000) 107 final, 29 February 2000.

(48) VAT fraud is only one part of a more general loss of tax revenue. The key financial matters of direct taxes and social security contributions and, in particular, excise duty are much more important than VAT alone. However, as the constituent elements of these different assessment bases are common to them all, the accounting "consistency" at the level of the taxable persons affects all these taxes simultaneously.

(49) See, in particular, the report from the Commission to the Council and to the European Parliament, third report on the application of Article 14 of Regulation (EEC) No 218/92 and fourth report under Article 12 of Regulation (EEC, Euratom) No 1553/89, COM (2000) 28 final, 28.1.2000.

(50) Theoretically, it is in the interest of each taxable person to ask for a receipt for his purchases, without which he cannot claim for a deduction of the VAT paid upstream.

(51) This concerns in particular the input-output framework. It describes in detail production activities and operations on products, putting resources and uses together under one heading. For a more detailed description see the definitions in ESA 95, in particular chapter 9 (OJ L 310, 30.11.1996, pp. 264 to 286).

(52) The differences vary from 10 to 20 %. The finding refers to a comparison carried out at the aggregated macroeconomic level, for the private sector (apart from the financial sector and agriculture).

(53) Report by the Commission to the Council and to the European Parliament, established in application of Article 14 of Regulation (EEC) No 218/92 and Article 12 of Regulation (EEC, Euratom) No 1553/89, COM(2000) 28 final, 28 January 2000.

Commission's replies

INTRODUCTION

1.2. The Commission is very interested in any initiative concerned with combating VAT fraud and it is particularly keen on the actions listed in its reply to paragraphs 1.57 to 1.62. It should be borne in mind, however, that under Regulation (EEC, Euratom) No 1553/89, a Member State's VAT base is calculated solely from the revenue collected by that Member State.

IMPLEMENTATION OF THE BUDGET

1.5. Experience shows that it is particularly difficult to make forecasts for Title 9 (Miscellaneous revenue), as this is the sum of small amounts handled by a large number of authorising officers. For the same reason, the Commission believes that more detailed remarks would not necessarily improve the information already available.

SPECIFIC APPRAISAL IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

Traditional own resources

Audit findings

1.11. The Commission acts on all cases where own resources are made available late. Whenever the Commission's own inspections or the Court's audits find that a payment has been made late, a request for default interest is sent to the Member State as quickly as possible.

1.12. The Commission can confirm that the separate accounts contain errors which may either be one-off or structural in nature. For the past four years the separate account has been one of the main subjects of the inspections carried out in all the Member States and this line will continue in the future. Whenever an anomaly is detected, the Commission takes the necessary action against the Member State, including infringement proceedings where necessary.

1.14. The Commission is aware of the difficulties connected with the centralisation of data in the separate account in some Member States. The Commission would stress that this centralisation is based on a large number of accounting ledgers kept at local level (customs offices) which are not computerised in all the Member States. The Commission regularly checks the entries in the separate account during its inspections, and corrections are made whenever anomalies are found.

1.15. As regards the harmonisation of the rules applying to the separate account, the aim of the Commission's inspections is to check that the account is kept in accordance with Community legislation. Anomalies found are followed up by appropriate action to secure the necessary accounting adjustments and, where appropriate, changes in the national rules to bring them into line with Community law. For example, infringement proceedings are being prepared against Germany which is refusing to accede to the Commission's requests. A review by Commission staff of 282 recent requests by Germany to write off amounts also revealed that 56 % of the cases were entered in the accounts incorrectly.

1.16. Although it considers that making a 100 % provision is an acceptable solution given the information available, the Commission will, when preparing the 2000 accounts, apply a method for calculating the balance sheet provision for the amounts of own resources entered in the separate accounts which takes account of the recovery figures in past years.

Result of the audit

1.17. The Commission will take the necessary action on the anomalies detected by the Court of Auditors in a customs office once it has finished analysing the matter.

VAT/GNP own resources

Audit findings

1.21. It is true that some Member States supplied their annual GNP data after the deadline and this reduced the time available for checking. This meant that the GNP figures could not be supplied to the GNP Committee and to DG Budget earlier. Eurostat has taken steps to ensure that such delays do not recur. However, these delays in no way affected the quality of the checks performed on the data.

The Commission's scrutiny is not limited to just the annual GNP questionnaire but also covers the verification of the inventories and the results of control missions. The need for improved documentation is acknowledged in the Commission's reply to Special Report No 17/2000.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Traditional own resources

Follow-up at financial management level

1.24. The cases of fraud and irregularities in the mutual assistance framework mentioned in the Court's 1994 annual report which are still outstanding involve complex matters in which recovery action will be initiated where appropriate as soon as the administrative and judicial proceedings are complete.

The difference between the amounts of arrears interest demanded and the amounts actually paid is mainly accounted for by the fact that the Netherlands, which owed NLG 5323 395,06, has declined responsibility. After sending a letter of formal notice in 1998 the Commission issued a reasoned opinion on 2 February 2000. As the Netherlands reply confirms its refusal to pay, the Commission is now considering court action.

1.25. The Commission confirms that where there is no request by the exporter for goods to be released for free circulation, Community law does not allow the administration to recover the customs duties simply because an ATR certificate was wrongly issued. The only step that could be taken was therefore to invalidate the certificates so that the import duties could then be collected by Turkey. The Commission therefore maintains that there was no loss of traditional own resources.

The request that the Commission sent to the Member States on 18 March 1997 following the Court's report to check the validity of certificates issued was restricted to the period after March 1994 because of the three-year limitation which applies both in the Community and in Turkey.

Follow-up at Community regulations level

1.30. The improvement of the provisions relating to time-barring are still being discussed (codecision procedure). As regards the guarantee to be demanded in a post-clearance recovery procedure when the goods have already been placed on the market, the matter can be considered resolved in practice for operators who provide a standing guarantee for all their debts under the deferred payment procedure. The Member States were not in favour of a general requirement that operators subject to post-clearance recovery should provide a guarantee.

1.31. To remedy the problems detected, the Commission is acting via the reform of legislative provisions and by the establishment of the new computerised transit system, which will allow effective monitoring of guarantees by computerised management.

VAT/GNP own resources

Introduction

The costs of the current dual system of accounting standards

1.32 to 1.39. Article 8(1) of Regulation (EC) No 2223/96 on the European system of national and regional accounts in the Community (ESA95) does indeed prescribe the use of the second edition ESA (ESA79) for the purposes of the budget and Community own resources as long as Decision 94/728/EC, Euratom own resources is in force.

The Commission notes the Court's remark that this is not a satisfactory solution, firstly because ESA95 is a better indicator of the Member States' ability to contribute to the budget and secondly because it means that two accounting systems are being used simultaneously (ESA95 and ESA79).

The Commission agrees entirely with the Court and fully supports its position; it did, indeed, in a declaration in the Council minutes, specifically state in connection with Article 8(1) that it regretted that this provision would mean continuing to base the measurement of GNP for budgetary and own resources purposes on the national accounts deriving from application of the ESA second edition for as long as Decision 94/728 EC, Euratom on the own resources system remained in force, whereas application of ESA95 would be more exhaustive and reliable.

OBSERVATIONS ON THE OUTWARD PROCESSING ARRANGEMENT

1.46. In 1998 the Commission presented a proposal for amending the Customs Code. The codecision procedure on this proposal is still in progress.

Economic conditions

1.47 to 1.50. No instance of a request for authorisation being rejected on the grounds of economic conditions has been reported to the Commission in recent years, which would confirm the findings of the Court's audit (see paragraph 1.49). The very wording of Article 148(c) of the Code shows, and administrative practice confirms, that Community interests are protected by a safeguard clause.

This safeguard clause approach, a conclusion confirmed at a Matthaeus seminar, was incorporated in the draft reform of the Code's implementing provisions relating to customs procedures with economic impact. It can therefore be said that substantial harmonisation of the Member States' practices is coming about.

Authorisation procedure

1.51. In 1996 the Commission carried out on-the-spot checks in Germany, Italy, the Netherlands and the United Kingdom which covered the outward processing arrangement. These checks brought to light a number of minor anomalies, concerning the rules in particular.

The draft reform of customs procedures with economic impact provides for a maximum period of validity for authorisations of three years. The possibilities for operators to use the outward processing arrangement without prior authorisation will be much more extensive.

Calculation of the customs duty relief

Vulnerability of outward processing relief to fraud and irregularity

1.52 to 1.55. The partial exemption available under the outward processing arrangement is calculated by the differential method. At present the only exception that the Code allows to the differential method is for repair work where partial exemption is determined by taking into account the value added in the third country.

The draft reform of customs procedures with economic impact providing for the introduction of calculating duty on the basis of the value added will first require the approval by the Council and Parliament of the Commission's 1998 proposal for the amendment of the Customs Code, which is currently being given a second reading under the codecision procedure.

The Commission is aware of the risks of error connected with the outward processing arrangement. However, as the budgetary implications are not very significant, the Commission, on the basis of a risk analysis, has targeted its inspections at areas which are much more sensitive from the point of view of the Community budget, but without completely forgetting the arrangement, which was one of the inspection topics for four on-the-spot inspections in 1996.

The risks of fraud and irregularities found to be inherent in the outward processing arrangement concern the differential method because of the complexity of the calculations. Calculating duty on the basis of value added should simplify the arrangement. The number of irregularities involving textiles under the outward processing arrangement, albeit tiny in relation to the total number of irregularities detected, is accounted for by the fact that the arrangement is mainly used for these products.

Conclusion

1.56. The Commission would point out that:

- the economic conditions are examined on the basis of the safeguard clause approach,

- as the uncertainties of the preferential arrangements for operators are well known, there would appear to be good reasons why they should seek a fall-back solution by asking for the outward processing arrangement,

- the reform of the Customs Code will reduce the use of the prior authorisation procedure,

- the reform will simplify the method of calculation.

COMPARISON OF DATA FOR THE PURPOSES OF FIGHTING FRAUD

VAT fraud and risk analysis

1.57 to 1.62. The Commission recently raised the issue of VAT fraud in its report based on Article 14 of Regulation (EEC) No 218/92 and on Article 12 of Regulation (EEC, Euratom) No 1553/89(1). This report, together with the work done by the Council's ad hoc tax fraud group, clearly shows that the maintenance of the transitional VAT system must be accompanied by tighter controls and administrative cooperation. The Commission has therefore announced that its priority will be to propose a strengthening of existing Community legal instruments on administrative cooperation and mutual assistance(2).

The report also recommends that Member States develop risk-analysis systems so that they can use the limited resources of the tax authorities to better effect. In its own area of competence the Commission supports any initiative taken by the Member States in this field, one means being financing under the Fiscalis programme for exchanges of officials and seminars on risk analysis.

The Commission would point out that the most serious form of VAT fraud concerns criminal organisations which exploit the weaknesses of the transitional VAT system for intra-Community transactions by means of a structured series of cross-border criminal operations within the European Community on which the VAT due is not paid or for which VAT credit balances are wrongly created.

1.59. The Commission believes that the elements cited by the Court do indeed increase the risk of fraud. It also believes that another such element is the absence of a clear legal basis for international coordination of VAT investigations by OLAF/Commission.

The use of statistics

The comparison of intermediate consumption

1.63 to 1.69. Risk analysis is a systematic decision-making process based on the following elements: first collection and structured analysis of information, second structured identification of risks, and third structured analysis of identified risks. The aim is to target controls on individual operators presenting the highest risk. In the field of VAT it is based essentially on microeconomic data.

The Commission is not in a position to judge the merits of the method presented by the Court. It would, however, be very wary about applying this method as an additional instrument for refining risk analysis on VAT as the studies conducted to date have not produced definitive results.

Conclusion

1.72 and 1.73. The Commission is prepared to consider the merits of the method presented in the Court of Auditors' report. Its plan is, in collaboration with the two Member States in question, to discuss the matter with the representatives of all the Member States in the Advisory Committee on Own Resources, the body responsible in this area. If it were to be found that the trials conducted in these two Member States could be reproduced and provide a method that was of use to other national authorities, the Commission would have no hesitation in encouraging these authorities to add it to the other instruments referred to in the reply to paragraphs 1.57 to 1.62.

(1) COM(2000) 28 final of 28 January 2000.

(2) Communication from the Commission to the Council and the European Parliament: A strategy to improve the operation of the VAT system within the context of the internal market. COM(2000)348 final of 7 June 2000.

Chapter 2(1)

The common agricultural policy

2.0. CONTENTS

>TABLE>

INTRODUCTION

2.1. This chapter concerns the expenditure of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF-Guarantee) and the expenditure charged to chapter B2 - 51 (other operations in the agricultural sector).

2.2. Almost all of this expenditure is handled by paying agencies in the Member States. Every month the Commission advances an amount based on the payments declared in the previous month. The payments are booked monthly to the expenditure accounts, but subject to any corrections that may be necessary when the accounts are cleared at the end of the financial year.

2.3. This chapter consists of four parts:

(a) the implementation of the budget for the financial year 1999;

(b) the specific appraisal of the field of agriculture in the context of the Statement of Assurance for the financial year 1999;

(c) the clearance of the accounts;

(d) the follow-up to some special reports.

2.4. The Court has also published other observations, in the form of special reports and opinions, on the common agricultural policy. A list of these publications is included in an annex.

IMPLEMENTATION OF THE BUDGET

Initial budget

2.5. For the financial year 1999 the initial appropriations under subsection B1 of the budget for the European Agricultural Guidance and Guarantee Fund - Guarantee Section (EAGGF-Guarantee) amounted to 40940 million euro (including 205 million euro of provisional appropriations and the monetary reserve(2) of 500 million euro) (see Table 2.1), i.e. 50,5 % of total operating appropriations for payment from the budget. These appropriations were equivalent to 90,6 % of the ceiling provided in the financial perspective (45188 million euro), i.e. in the agricultural guideline.

Final appropriations

2.6. During the financial year these initial appropriations were amended by two supplementary and amending budgets (SABs)(3). These amendments led to a reduction of 402 million euro (0,9 %). The final appropriations therefore amounted to 40038 million euro (excluding the monetary reserve) (see Table 2.1). Total movements - i.e. the sum of the transfers (see paragraphs 2.20 and 2.21) and the SABs - came to 4142 million euro, i.e. 10,2 % of the initial appropriations (as against 5,2 % in 1998, see the Annual Report for 1998, paragraph 2.4).

Amount of expenditure

2.7. Expenditure amounted to 39541 million euro (+ 2 % in comparison with 1998), i.e. 98 % of the appropriations available (see Table 2.1) and 87 % of the agricultural guideline. Plant products accounted for 67,6 % of the expenditure, animal products 23,9 %, ancillary expenditure 1,9 % and accompanying measures 6,6 %. Broken down by type, expenditure was mainly divided between direct aid (74,09 %), refunds (14,09 %), structural measures (6,94 %) and intervention measures (3,6 %). Structural measures and, to a lesser extent, refunds showed an upward trend, while direct aid and intervention measures fell slightly (see Graph 2.1).

Provisional appropriations

2.8. The provisional appropriations initially earmarked for the EAGGF-Guarantee (205 million euro) were not used in accordance with their primary objective; they were allocated in SABs No 4/99 and No 5/99 to budget headings outside subsection B1 (to finance aid for the CEECs and for Kosovo). This is why some budget headings, for lack of these provisional appropriations, subsequently had to be increased(4) by transfers amounting to 169 million euro.

Calls on the monetary reserve

2.9. In view of the unfavourable change in dollar/euro parities(5), 219 million euro of additional expenditure was entered in the accounts. As stipulated in Article 12(1) of Council Decision 94/729/EC on budgetary discipline, the monetary reserve was not used, as the appropriations available under the headings concerned were sufficient to cover the expenditure. Nevertheless, strict application of the budgetary principle of specification(6) should have prevented the appropriations available being used for currency adjustments.

Entering of revenue in the expenditure budget

2.10. According to the principle of universality(7), revenue may not be assigned to particular items of expenditure and no offsetting adjustments may be made between revenue and expenditure. Nevertheless, negative amounts totalling 3057,7 million euro (as against 2498 in 1998, see the Annual Report for 1998, paragraph 2.11) still appear in the EAGGF-Guarantee accounts(8). The overall total for items showing negative balances was 1473,1 million euro, whereas the budget was based on estimated revenue of only 647 million euro (+ 127 %).

Table 2.1 - EAGGF-Guarantee 1999

>TABLE>

Source:

1999 revenue and expenditure account.

Graph 2.1 - Change in EAGGF expenditure, broken down by nature of expenditure (1988 - 1999)

>PIC FILE= "C_2000342EN.003201.EPS">

(9)(10)(11)The other measures (Food aid) and other expenditure excluding accompanying measures are not included in the above chart. Because of the scale chosen, changes would not show.

Source:

Commission accounts.

2.11. Of this 1473,1 million euro, the balance from previous financial years accounted for 606 million euro (41,2 %) and the additional levies due on account of milk quota overruns came to 497 million euro (33,7 %). However, no estimate of revenue had been entered in the budget in respect of the latter item. It should be noted that, from the point of view of the principle of annuality, more than 40 % of these levies should have been entered in the accounts in 1998.

2.12. Revenue also came from profits which were made on the sale of stocks of agricultural products, mainly because of excessive depreciation (corresponding to the difference between the buying price and the estimated price on disposal). Revenue in respect of five categories of stocks had been estimated at 143 million euro. However, the actual return amounted to 286 million euro(12), i.e. double that amount.

2.13. Finally, almost 83 million euro of the 1473,1 million euro concerned 19 budget items against which the total revenue estimates entered amounted to only 6 million euro.

Reductions in advance payments

2.14. One of the main features of the financial year 1999 is the scale of the reductions in advance payments imposed on various Member States, due, on the one hand, to shortcomings in the application of the integrated system and in the implementation of controls (Greece: 108 million euro; Portugal 5 million euro), and, on the other hand, to the absence of the additional levy payments on milk quota overruns (Greece 2 million euro; Spain: 5,5 million euro; Italy 104,7 million euro for the 1998/1999 campaign and 224,9 million euro for the 1997/1998 campaign, and the United Kingdom 0,5 million euro).

2.15. Italy's late submission of its data on the additional levy payable on milk quota overruns for 1999 resulted in 134 million euro being booked to the financial year 2000. As the amount relates to the financial year 1999, its inclusion in the 2000 budget accounts breaches the rule of annuality. Similarly, 224 million euro relating to the financial year 1998 was received and accounted for in the current financial year.

Carry-overs from the preceding financial year: the supply of food aid to Russia

2.16. In order to supply food aid to Russia, 400 million euro in unused appropriations was transferred to the "Food programmes" chapter of the 1998 budget by means of an SAB adopted in December 1998. Given the impossibility of implementing such a programme at the time (see the Annual Report for 1998, paragraph 2.16), these appropriations were the subject of a request for a non-automatic carry-over to the financial year 1999. In view of the time this procedure requires and the urgency of implementing the programme, the Commission immediately transferred 8 million euro(13) from the "School milk" item to the "Food aid for Russia" item. Of the 400 million euro, 336 million euro was spent and the balance was allowed to lapse. In the end it would have been more appropriate to include the appropriations directly in the 1999 budget by means of an amending letter.

2.17. The foodstuffs supplied came from European Union stocks and this, according to the Commission's estimates(14), was supposed to contribute to a reduction in storage costs and the cost of refunds for pigmeat. In reality, storage costs did not decline overall and the appropriations for export refunds for pigmeat had to be increased by an additional 61 million euro (+ 29 %). The Commission should determine the reasons for these increases. A possible explanation could be the delays and the reduction in deliveries to Russia, which left more stocks in storage. Even though the foodstuffs were not delivered until after 15 October 1999, 80,5 million euro was charged to the financial year as food aid expenditure. This expenditure ought to have been booked under depreciation of stocks, as, by the end of the financial year, these foodstuffs were still in the warehouse.

2.18. As the Court observed in 1991 and 1992(15), food aid for Russia, by its very nature, falls under "External actions" rather than "Agricultural expenditure". There is no justification for financing this programme through EAGGF-Guarantee, especially as this type of aid to a third country is traditionally charged to Title B 7.2, "Humanitarian and food aid".

Management of the budget

2.19. The Court reviewed the information presented in the revenue and expenditure account relating to the management of the budget for the financial year and, in particular, the explanations concerning the differences between the budget initially approved and the appropriations used.

2.20. The Commission justifies numerous transfers (see paragraph 2.6) on the grounds that it was obliged to increase budget headings relating to refunds because of the low level of world prices. In addition, the number of transfers is influenced by the variable quality of the Member States' estimates. The estimates could be improved by imposing stricter deadlines on the Member States for the submission of the estimates and by setting up a more rigorous system to monitor estimates. With regard to direct aid, it should be possible to demand earlier notification of the payment forecasts. Some transfers were made in order to cover additional expenditure caused by delays, either in payments or in implementation, in respect of the programmes involving co-financing by the Member States(16). The Commission should monitor the delays which have arisen in preceding years more closely in order to be able to make the necessary adjustments to the appropriations for the current year(17).

2.21. In a number of cases (involving a total of 41,6 million euro(18), withdrawals made from some budgetary items had to be offset by means of subsequent replenishments. They can be seen to be transfers made purely for reasons of convenience(19). Other withdrawals also indicate that amendments to the regulations or to certain factors which affected the previous year were not taken into account. The Commission should have made provision for the payments to be limited for 1999 in the case of permanent abandonment premiums in respect of areas under vines and premiums for tobacco (where there were withdrawals totalling 69 million euro(20). The Commission should endeavour to tighten up the management of transfers.

2.22. Some stocks of agricultural products are subject to further depreciation at the year end. As in 1998, and for similar reasons(21), the depreciation was overvalued (80 million euro, see paragraph 8.9). Overvaluation is contrary to the fundamental principles of budget management, because the excess depreciation from one financial year increases the availability of appropriations in the year in which the stocks are sold (see paragraph 2.12). The Commission should therefore review its depreciation procedures.

Computer systems

2.23. In the Annual Reports for the financial years 1997 and 1998(22), the Court criticised the computer system used for the management of agricultural expenditure (AGREX) and recommended the installation of a new system. The Commission has made no appreciable progress on this matter (see also paragraphs 8.41 to 8.56).

Conclusion

2.24. Expenditure under subsection B1 amounted to 39541 million euro, i.e. 98 % of the final appropriations (excluding the monetary reserve) (see paragraph 2.7). The transfers, which, together with the SABs, amounted to 4141 million euro (i.e. more than 10 % of the initial appropriations) (see paragraph 2.6), have enabled a high rate of utilisation of most of the budget headings and reflect the variations in the quality of the estimates both of revenue (see paragraphs 2.10 to 2.13) and of expenditure (see paragraphs 2.20 and 2.21). The Commission, in cooperation with the Member States, should make an effort to improve the quality of these estimates. Finally, the practice of entering negative expenditure must be reviewed, in the context of the revision of the Financial Regulation in particular (see paragraph 2.10).

SPECIFIC APPRAISAL IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

Introduction

2.25. The payments relating to the appropriations for 1999 under subsection B1 of the budget (39541 million euro, see Table 2.1) were the subject of a sample-based examination, in the context of the Statement of Assurance, concerning the reliability of the accounts and the legality and regularity of the underlying transactions. Each transaction selected was examined at the paying agency, the local authority responsible and the final beneficiary. The observations concerning the substantive and formal errors found in the course of these checks are presented in paragraphs 2.26 et seq. Observations on the reliability of the accounts, on the other hand, can be found in paragraphs 8.1 to 8.19.

Legality and regularity of the underlying transactions

Substantive errors

2.26. Substantive errors are those errors which affect the value of the transaction selected. The error rate is high and their impact on overall expenditure is still considerable. However, more than two thirds of these errors occurred at final beneficiary level and the majority of them involved often minor overdeclarations of either surface area, in respect of plant products or accompanying measures (Germany, Denmark, Spain, France, Italy, Portugal, the United Kingdom), or of the number of head of livestock for animal premiums (Ireland, Portugal, the United Kingdom). Some of the errors involve undue payments for storage costs (ineligible expenditure, Finland) and the special beef premium (insufficient proof of slaughter, Germany).

2.27. With regard to the errors at the level of local management, in Greece some regional Unions of Cooperatives(23) made deductions from the amount of aid to be paid, from per hectare aid and from aid for the production of olive oil and for the production of tobacco(24). At the central level, Community aid paid to the producers of olive oil, tobacco and cotton is also subject to a deduction of 3 %, which provisions a compulsory insurance fund (the ELGA). A deduction of 1 % is levied on olive oil production aid and paid to the National Confederation of Olive Oil Producers. In addition, in Spain, expenditure which was not eligible for Community co-financing was included in an operating fund for a fruit and vegetable producers' organisation. Lastly, Italy, once again(25), allowed some farmers exemption from payment of the supplementary levy that was due because milk quotas had been exceeded (238,7 million euro, see paragraphs 2.14 - 104,7 million euro and 2.15 - 134 million euro), which gave them a competitive advantage.

Systematic errors

2.28. These errors do not directly concern the transactions in the sample but affect all or part of a category of expenditure.

2.29. As pointed out in paragraph 2.27, Greece imposed an automatic deduction of 3 % from the amount of Community aid paid to producers of olive oil, tobacco and cotton to provision an insurance fund. These levies, which are not authorised by any Community text, totalled 49,4 million euro. At the local management level (commune of Sapes, Greece), the automatic deduction of 2 % from arable crop aid represented an undue deduction of 0,27 million euro for the benefit of the local Union of Cooperatives. Finally, the levy of 2,2 % applied by the Messara Union of Cooperatives (Prefecture of Iraklio, Greece) to olive oil production aid represents an undue levy of 0,16 million euro.

2.30. In Sweden, the cost of drawing up cartographic plans in 1998 had to be paid for by the producers before they could submit any applications for arable aid. This practice amounts to charging national administrative costs against Community aid in contravention of Community provisions. In this way Sweden recovered 3,5 million euro.

2.31. Finally, in Austria, within the framework of the "Öpul" environmental programme co-financed by the Community, the interest due on the amounts to be recovered was not calculated and recovered.

Formal errors

2.32. The formal errors noted have no effect on the value of the transactions examined. They stem from a failure to observe the terms of the regulations and are often the result of shortcomings in the management systems. The rate of these errors (not taking into account multiple errors affecting one and the same transaction) is also high. Eight out of 10 of these errors occur at local or central management level in the Member States.

2.33. As far as the management of payments at the Commission is concerned, an analysis of the monthly payment orders showed that in 11 out of 12 months (representing a total of 37521 million euro, i.e. 94,4 % of payments) these payment orders were authorised outside the deadlines laid down in the regulations(26). The commitment of November 1998 (15101 million euro), which was entered on 19 August 1999 whereas the time limit, according to the regulations, was 20 February, represents an extreme example.

2.34. At the Member State level, the main formal errors found were caused by shortcomings in the carrying-out of the regulation checks. In France and Finland, for instance, the minimum percentage of area aid applications to be covered by on-the-spot checks was not always increased when the number of errors revealed by the initial examination of the files was too high. This is contrary to the provisions of Commission Regulation (EEC) No 3887/92(27). Lastly, it was not always possible to ascertain that the minimum number of controls required by the regulations in the case of sugar export refunds had been complied with.

2.35. Other formal errors resulted from failure to comply with the provisions relating to the keeping of compulsory records. In Greece, for instance, there is still no olive oil register and the wine register is incomplete. Other cases showed that the records relating to olive oil production (Spain), milk production and livestock (Portugal) were on occasion incomplete.

The regulations

2.36. The absence of precise criteria in the regulations may give rise to differing interpretations in the Member States and thus to unequal treatment of the beneficiaries of aid.

2.37. For instance, Commission Regulation (EEC) No 3887/92 leaves it up to the Member States to determine the method used to measure areas of agricultural land and set accepted standards governing their utilisation. This Regulation has been supplemented with recommendations for its application(28). These provisions give the local authorities a great deal of room for manoeuvre. The result is that there may be variations in the technical tolerances associated with the measuring of land, even when conditions are identical. Likewise, local practices - which determine, for example, whether a hedge is eligible or not for per hectare aid - are just as variable since they, too, are determined by the local authorities and there are no well-defined criteria. This leads to unequal treatment of the farmers in the various Member States. The Commission should review these provisions and thus reduce the room for manoeuvre left to the local authorities.

2.38. Within the framework of the Swedish environmental programme, 50 % of the costs of courses, internships and demonstration projects - organised by the National Forestry Agency - is financed by the budget of the European Union (3,3 million euro in 1999). The cost of the projects includes direct costs and a part of the general costs charged by the regional agency, which is responsible for the projects. However, an on-the-spot inspection (at the Umeå regional agency) revealed that the method used to apportion the general costs led to the allocation of a higher share of the general costs to the projects co-financed by the Union than to the projects financed by Sweden alone. The regional agency seeks to justify the higher share allocated to the EU with the argument that the co-financed projects required more management energy and time. Neither Council Regulation (EEC) No 2078/92(29) nor its implementing provisions(30) specify the nature of the costs, or the method of allocating them to the projects. This is why the Commission should send the necessary practical instructions on this point to the Member States.

2.39. Within the framework of this same Regulation (EEC) No 2078/92 the region of Lombardy (Italy) pays aid, co-financed by the Community (6 million euro in 1999), to farmers who have undertaken to reduce fertiliser use by at least 20 %. In the absence of an objective historical reference for the original level of fertiliser use (a requirement that is not clearly formulated in the Regulation) there is no guarantee that this objective can be achieved. Moreover, exclusively applying administrative checks on the quantities of plant-protection products bought or in stock - without seeking corroboration by means of chemical tests on the leaves of trees on the 22000 or so holdings affected - does not serve to guarantee that the few products that are permitted will be used in smaller quantities and, therefore, does not guarantee that the aid has been duly paid.

2.40. The registration of sheep and goats is regulated by Council Directive 92/102/EEC. This stipulates (Article 4(1)(b)) that any keeper of sheep and goats shall keep a register that must contain "an up-to-date statement of the number of live female sheep and goats which are over 12 months of age or which have given birth, present on the holding"(31). The Irish authorities (102,8 million euro in premiums for ewes and female goats was paid to Ireland in 1999) applied a restrictive interpretation to this Article. The register used in Ireland does not therefore provide a permanent inventory of the animals present and supplies an adequate inventory only for the retention period. It does not permit satisfactory controls to be carried out outside this period. The Commission should take the necessary steps to ensure that the standards applicable to the registration of sheep and goats are the highest possible in all Member States.

Conclusion

2.41. As regards the legality and regularity of the underlying transactions, the Court notes that for the financial year 1999 there is no sign of any significant improvement. This should encourage the Member States and the Commission to heighten the impact of controls, in particular by:

(a) completing the implementation of the integrated administration and control system (IACS), which could be an important factor in improving the controls;

(b) instituting measures that have a comparable effect for the common market organisations that are not yet subject to the IACS.

CLEARANCE OF ACCOUNTS

Introduction

2.42. In the course of 1999 the Commission took seven clearance-of-accounts Decisions (see Table 2.2), two in respect of 1995, the second Financial Decision for 1997, the first Financial Decision for 1998 and three Conformity Decisions. All these Decisions have been examined by the Court. In addition to the above Decisions, the Court also audited those Decisions taken in 2000 that specifically relate to the financial years 1995, 1998 and 1999: the second Financial Decision in respect of 1998, the Financial Decision for 1999 and two further Decisions regarding 1995.

Clearance of accounts under the system prevailing until 1996

Clearance of accounts 1995

Financial analysis

2.43. The expenses declared for the EAGGF year 1995 were cleared in four Decisions taken between February 1999 and July 2000 (see Table 2.2). This delay was primarily due to the need to await the outcome of conciliation cases before deciding on the corrections to be applied. In the mean time the expenditure concerned was disjoined.

Table 2.2 - Clearance Decisions

>TABLE>

2.44. The corrections in respect of 1995 amount to some 592 million euro (see Table 2.3), almost twice as much as in 1994 (308 million euro). This increase is mainly due to large corrections for arable crops and animal premiums, where weaknesses were found in the application of the integrated administration and control system(32), and for olive oil. Of the 592 million euro, some 140 million euro in respect of these three sectors relates to corrections for 1994 and earlier (of which 90 million euro had been disjoined in the decision for clearance of accounts 1994, see the Annual Report for 1998(33).

Clearance procedure

Mission reports and notification of the findings

2.45. A situation similar to 1994 was found in respect of 1995. With the exception of the arable crop sector, the mission reports and notification of findings were subject to long delays. For instance, in the meat sector, the notification of findings was produced on average 10 months after the mission. In the cases reviewed for public storage and milk, the delay between the mission and the notification of corrections was more than 24 months. This is one of the reasons why the first decision was not taken until February 1999, more than 36 months after the 1995 EAGGF year end.

Conciliation Body

2.46. In the context of clearance of accounts 1994, Italy lodged an appeal to the Conciliation Body on the proposed correction for beef and veal (98/IT/098). The Conciliation Body's conclusion was that no reconciliation between the two parties was possible and the Commission's position was maintained. Nevertheless, the Italian authorities decided to lodge an appeal on the proposed financial correction for 1995 (98/IT/125), even though this correction was based on the same findings as for 1994. Similarly, Greece submitted cases 97/GR/077 and 98/GR/110 in successive years concerning fruit and vegetables, despite losing the appeal in respect of the earlier year. This suggests a possible misuse of the conciliation procedures on the part of the Member States.

Data provided by Member States

2.47. Some Member States had problems providing the Commission with accurate inspection statistics even several years after the on-the-spot controls had taken

Table 2.3 - Summary of the Commission's clearance Decisions for 1995

>TABLE>

Exchange rate of currencies for Member State in euro: value of euro on 1.1.1999.

Exchange rate of currencies for Member State outside euro (DKK, GRD, SEK, GBP): value of euro on 11.1.1999:

DKK 7,4433

GRD 323,4

SEK 9,0985

GBP 0,7044

For the amounts disallowed the amounts in euro are taken from the tables in Annex V to the summary reports.

Expenditure cleared (5) = (1) + (2) + (3) + (4).

Amounts to be recovered or paid by the EU (8) = [(6) + (2) + (3) -(7)] -(5).

Source:

Commission Decisions: 1999/187/EC of 3 February 1999,

1999/596/EC of 28 July 1999,

2000/197/EC of 1 March 2000,

2000/448/EC of 5 July 2000 and Annex V to the summary reports of 12.1.1999, 7.6.1999 and 9.11.1999..

place. In Spain, the first inspection statistics for 1995 were delivered in March 1997, revised in June and again in March 1998. This results in clearance delays. The Commission should set a deadline for the submission of such data, should base any corrections on the information available at that date, and should impose penalties on Member States which do not provide all this information on time.

Individual corrections

Integrated administration and control system

2.48. The integrated administration and control system was to be introduced in 1993 but was not due to be fully operational until January 1996 (it was later postponed until 1 January 1997). The Clearance Unit undertook a number of missions to assess progress in respect of arable crops and animal pre