ANNUAL REPORT concerning the financial year 1994 (95/C 303/01)

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

André J. MIDDELHOEK (President)

Constantinos ANDROUTSOPOULOS

Daniel STRASSER

Bernhard FRIEDMANN

Maurice THOSS

John WIGGINS

Giorgio CLEMENTE

Barry DESMOND

Patrick EVERARD

Armindo de Jesus de SOUSA RIBEIRO

Antoni CASTELLS

Jan O. KARLSSON

Hubert WEBER

Aunus Olavi SALMI

Joergen MOHR

TABLE OF CONTENTS

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Introduction 5

Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 21

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) 57

Chapter 3 - Common policy on fisheries and the sea 90

Chapter 4 - Regional sector 100

Chapter 5 - Social sector, stimulation of enterprises (SMEs) and training 131

Chapter 6 - The financial instruments for the environment: LIFE and its predecessors 161

Chapter 7 - The European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) 175

Chapter 8 - Financial instruments and banking activities 176

Chapter 9 - Research 187

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 201

Chapter 11 - Cooperation with developing countries and third countries (except for Central and East European countries) 229

Chapter 12 - European Development Funds 252

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND ORGANIZATIONS OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 296

Chapter 14 - Court of Auditors 313

ANNEXES

Annex I - Reports and opinions adopted by the Court of Auditors during the last five years 314

Annex II - Annex in respect of the abbreviations and symbols used in the report and background information on the general budget 323

THE COMMISSION'S REPLIES

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Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 45

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) 83

Chapter 3 - Common policy on fisheries and the sea 98

Chapter 4 - Regional sector 120

Chapter 5 - Social sector, stimulation of enterprises (SMEs) and training 147

Chapter 6 - The financial instruments for the environment: LIFE and its predecessors 170

Chapter 8 - Financial instruments and banking activities 184

Chapter 9 - Research 197

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 218

Chapter 11 - Cooperation with developing countries and third countries (except for Central and East European countries) 245

Chapter 12 - European Development Funds 274

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND ORGANIZATIONS OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 307

SUMMARY OF DIAGRAMS (D)

Page

D I. General budget 1994 - estimated revenue 10

D II. General budget 1994 - estimated expenditure - appropriations for payment 11

D III. General budget 1994 - appropriations for commitment 12

D IV. Appropriations for commitment available in 1994 and their utilization, by sector and by institution 13

D V. Appropriations for payment available in 1994 and their utilization, by sector and by institution 14

D VI. Financial perspective: breakdown of appropriations for commitment available from the 1994 budget and implementation; total appropriations for payment available from the 1994 budget and implementation 15

D VII. The consolidated revenue and expenditure account and the balance calculated for the 1994 financial year 16

D VIII. Payments made in 1994, by sector and by Member State 17

D IX. Evolution and utilization of appropriations for payment for the period 1990-94, by sector 18

D X. Utilization rates of appropriations for payment from 1990 to 1994, by sector 19

D XI. Annual payments during the period 1990-94 by sector and by institution 20

D XII. Estimated and actual revenue in 1994 54

D XIII. Actual own resources in 1994 55

D XIV. Actual own resources, by Member State (1990-94) 56

D XV. EAGGF-Guarantee - payments made in 1994, by market and by Member State 89

D XVI. The Structural Funds: commitments entered into and payments made in 1994, by Member State 159

D XVII. Structural aid - commitments entered into and payments made in 1994, by Member State and by objective 160

D XVIII. Aid to the countries of Central and Eastern Europe - the PHARE and TACIS programmes 227

D XIX. EC loans for the benefit of the countries of Central and Eastern Europe up until 31 December 1994 228

D XX. Basic information on the European Development Funds (EDFs) 285

D XXI. The sixth EDF - allocation, financing and distribution of aid, overall utilization 286

D XXII. The seventh EDF - allocation, financing and distribution of aid, overall utilization 287

D XXIII. The sixth EDF - aid by type and by recipient country 288

D XXIV. The sixth EDF - aid by sector and by recipient country 289

D XXV. The seventh EDF - aid by type and by recipient country 290

D XXVI. The seventh EDF - aid by sector and by recipient country 291

D XXVII. The sixth and seventh EDFs - utilization of aid by economic sector 292

D XXVIII. The seven EDFs - evolution of annual payments (1960-94) 293

INTRODUCTION

0.0. TABLE OF CONTENTS Paragraph reference

The general context of the 1994 annual report 0.1

Structure of the annual report 0.2 - 0.3

Principal findings of the 1994 audit 0.4 - 0.24

Benefits from improved financial management 0.25

Implications of the Statement of Assurance 0.26

Commission staff management 0.27 - 0.28

The Court of Auditors' role with regard to fraud 0.29 - 0.32

THE GENERAL CONTEXT OF THE 1994 ANNUAL REPORT

0.1. This report is being published as the first year of the new Commission draws to a close, a year of enlargement of the Community and of a 12% increase in the size of the budget. At its first meeting on 25 January 1995, the incoming Commission decided to initiate a reform of its internal management, with the necessary analysis and reflection in three phases (consolidation and rationalization of the existing system; reform of structures and rules; search for closer partnership with Member States), each to be followed by concrete proposals. The Court welcomes this financial management improvement programme and, while recognizing that a particular corporate culture cannot be changed overnight, finds the initial steps taken within the Commission's services encouraging. The third stage envisaged (implying measures to improve Member States' management of EC funds) may take longer to achieve significant progress, but it is equally vital. The examples of waste and mismanagement of EC funds that are to be found in numerous Court audit reports are ample evidence for the need for a concerted effort to complete the Commission's improvement programme and convert a rather lax 'spend the budget` approach into one which emphasizes value for money and rigorous financial and accounting management with clear attribution of responsibility for success and failure.

STRUCTURE OF THE ANNUAL REPORT

0.2. The financial year 1994 is the first for which the provisions of the Maastricht Treaty have significantly affected the content and presentation of the Court's annual reporting. The Treaty requires the Court to draw up a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. The statement and an accompanying special report are issued at the same time as, but separately from, the annual report so that all three documents can be taken into account in the discharge procedure for 1994 together with the other special reports made by the Court since the 1993 discharge procedure ().

0.3. As a result of the new arrangements for the Statement of Assurance, there is no longer any general chapter on financial audit of the Commission's revenue, operating expenditure and accounting and of the consolidated accounts in this annual report. Material which in previous years would have appeared in such a chapter now finds its place in the statement of assurance and the related special report.

PRINCIPAL FINDINGS OF THE 1994 AUDIT

0.4. Throughout this 1994 annual report the Court mentions examples of financial management weaknesses that are often closely similar to those mentioned in its previous reports, even though many of the examples are drawn from audits of specific measures which have not previously, or at least not recently, been audited by the Court. This is further evidence of the need for substantial change in what might be termed 'the financial management culture` which administers and controls the collection and utilization of budgetary resources, at Commission and Member State levels.

0.5. Evidence of the problems to which this financial management culture gives rise can be seen in budgetary planning far in excess of the Commission's real ability to plan and; in weak management of available funds (which are paid out without regard to the legislator's objectives and/or without sufficiently clear targets being specified for achievement through the expenditure in question, and often without sufficient attention to cost-effectiveness); and in failure to act quickly and vigorously to recover funds wrongly paid or overpaid.

0.6. There is a striking example of underspending in the Structural Funds, which results mainly from failure to anticipate difficulties in the first year of a reformed approach, despite such difficulties having occurred at the time of the last such reform six years previously.

0.7. The employment of funds without policy objectives being achieved is described in most of the chapters of the report. This situation arises both where - as in the areas of agricultural guarantee and development aid - it is the Commission's exclusive responsibility to specify the objectives of expenditure, and where - as in the case of the Structural Funds - the objectives have to be agreed between the Commission and the member governments sponsoring the programme. In Chapter 2 the inadequate results of the common market organization for fruit and vegetables are mentioned. Chapter 3 concludes that aid for tunny fishing has no clear justification. Chapter 4 shows that the Interreg programme has not significantly stimulated cross-border partnership in frontier areas, while Chapter 5 demonstrates that the results of European Social Fund actions in favour of small and medium-sized enterprises, where they can be measured at all, fall far short of the objectives.

0.8. With regard to development aid from both the budget (structural adjustment support programmes in four Arab countries) and the European Development Fund (regional cooperation), the Court concludes that objectives fixed were so vague or general that it is very difficult to make satisfactory comparisons between what has been done and what was intended. In various areas of expenditure on the Community budget, the Court has found that imprecise regulations (which are generally silent as regards requirements for accounting and financial management) have enabled Member States to interpret differently eligibility criteria which should be equally applicable to all. Such imprecision inhibits effective monitoring and audit of programmes by national authorities, the Commission and the Court.

0.9. Cases where management had failed to take timely and vigorous action with a view to the recovery of funds owing to the Community are reported in Chapters 1, 2, 4, 5, 6, 8 and 10. Failure to take such action may make it difficult or impossible subsequently to recover the amount due from the debtor.

0.10. This report, like its predecessors, draws attention to significant weaknesses in mechanisms for planning, approving, monitoring, controlling and evaluating Community actions. The audit of the common market organization for fresh and processed fruit and vegetables revealed that Member State inspection and approval of producer organizations, which play a major role in market management, were very weak and that many producer organizations, despite nearly 30 years of encouragement and assistance, had insufficient working capital for intervention purposes.

0.11. In Greece, France and Italy payments were made for withdrawing from the market produce which did not meet the quality standards for Community aid. Controls on citrus processing in Italy and Greece and on tomato processing in Spain, Italy and Greece were so weak that there could be no assurance that aid paid was justified. There were overpayments of aid for nuts in Spain, while in Greece claims for aid for dried grapes were wrongly presented and not subject to any check independent of the beneficiaries. The yield levels set for eligibility for aid of dried grapes provide no incentive to quality improvement and facilitate irregular sales to the fresh fruit market. Control of aid per hectare without a land register and with a very large number of growers (who often omit to notify changes of ownership) is impossible.

0.12. The aid for processors of oranges, peaches and tomatoes is high when compared with the minimum prices paid to growers and the high level of support for orange processors has encouraged investment in capacity to process produce which is not competitive with imports. Moreover, the costly system of withdrawals and destruction of surpluses to relieve the market of excess production and ensure a minimum income for producers both encourages overproduction and pollutes the environment.

0.13. Audit of fisheries policy expenditure showed that the aid for tunny, paid in respect of ships registered in Spain, Portugal and France, was without any clear economic justification, and risked benefiting the canning industry rather than the fishermen. Moreover, the rules for the management of the aid took no account of the fact that many of the ships fish only in distant oceans and that their catch is rarely landed directly at EU ports.

0.14. In a significant number of the Regional Fund programmes' projects audited, irregularities found underline the extent to which, six years after a major reform, improvements are still needed to ensure the legality and regularity of Structural Funds operations. Member State declarations of expenditure should be better presented and controlled. The Commission needs to insist on more rigorous application of the funds regulations and the financial regulation; it should also define more clearly the criteria for eligibility for aid. Weaknesses in contract award procedures for public sector infrastructure increase the risk of irregularity, while the Commission could do more to check that environmental aspects are properly considered during both planning and execution of programmes.

0.15. For profitable investment projects the Commission ought to examine the possibility of replacing grant aid by loan finance so as to encourage final beneficiaries to behave more responsibly. The use of 'global` block grants to stimulate local economic development needs to be reconsidered; in particular there is not enough transparency about the role of intermediary organizations who can decide without any clear criteria which enterprises should receive assistance and whether that assistance should take the form of grants or loans.

0.16. The Social Fund chapter of this report again draws attention to the way in which the accounts by regarding advance payments as definitive expenditures overstate the real impact of expenditure on the underlying operations. It also mentions that whenever checks conclude that an action undertaken is ineligible for Community financing, the Member State can simply substitute some other action, often for retrospective financing, so that there are no effective sanctions against Member State authorities which fail to ensure that Community funds are used only for approved purposes and within the terms of previously agreed plans.

0.17. The LIFE programme and its predecessors call for careful project selection in pursuit of agreed EC environmental objectives, so as to ensure maximum impact from the limited funds available. In practice the innovative character which should distinguish many of the projects has not been demonstrated, and there has been insufficient coordination between and within the Commission and the Member States to ensure proper monitoring, control and the exploitation of the results. Member State authorities could play a greater role in the preparation and presentation of project proposals for financing, while better coordination between LIFE projects and numerous other environmental projects aided from other EC sources is clearly required.

0.18. In the 'Human capital and mobility programme` (part of the third framework programme for Community research) weaknesses in contract monitoring and supervision were observed, together with problems of coordination between Commission departments. The beneficial effect of the expenditure in terms of its objectives was difficult to assess.

0.19. The examination of aid to Central and Eastern Europe leads the Court to conclude that a more substantial part of the PHARE programme has to be devoted to helping to prepare beneficiary countries' administrations for entry to the Community (in line with the conclusions of the Essen summit). In 1994, PHARE largely and TACIS essentially continued to finance technical assistance and studies provided by private consultant firms, with limited concrete results, particularly in terms of investments. Coordination between Commission services (in Brussels and the beneficiary countries) and the other sources of external aid and the beneficiary countries themselves remains insufficient.

0.20. The Commission still has no autonomous evaluation system after six years of PHARE and four of TACIS. Although the Court noted positive results (such as the programme for restructuring and privatizing collective farms in Belarus and a successful food operation in the Caucasus), implementation remains slow and the management capacity of the Commission both in Brussels and on-the-spot in its delegations has to be strengthened to improve coordination, preparation and monitoring of programmes and supervision of consultants.

0.21. The Community support for the structural adjustment programmes in south and east Mediterranean countries needs to be better adapted to the particular economic and budgetary situations of those countries. Unnecessary constraints and conditions on use of funds (such as extensive documentary checks when the foreign exchange provided is only a very small proportion of imports acceptable for financing) should be avoided. The Commission should satisfy itself that each beneficiary country's budget strategy is consistent with the economic reform programme. Quantitative and qualitative targets for priority sectors (including objectives for specific projects or programmes) should be included in financing agreements and form the main focus of monitoring.

0.22. As objectives of regional cooperation under Lomé III were formulated in very general terms, proper comparison between objectives and results is impossible. Financial and accounting management is poor and Commission monitoring has been neglected in several regions. The regional character of projects is often not evident.

0.23. Malfunctions of the systems in the field of own resources, particularly concerning customs duties, are described in Chapter 1. In the context of the Community transit arrangements, a significant number of irregularities resulting in financial loss to the Community and Member States were noted. The Court has also observed that the controls implemented by the national customs authorities in the field of transit are deficient and that the Commission's coordinating role in this area is inadequate. Regarding mutual assistance between the Member States and the Commission in the detection and prevention of fraud, it is emphasized that both the monitoring by the Commission and by the Member States must be improved and that certain provisions of the Community customs regulations must be adapted in order to make them consistent with the existing Community or national legislation.

0.24. Regarding the VAT resource, Chapter 1 sets out the results of an initial evaluation of the VIES (VAT information exchange system) system, which has been introduced so as to make it possible to implement the transitional arrangements. Although the system's development and functioning are noteworthy, the data declared require a significant degree of correction. In addition, the need for a policy of effective sanctions to be introduced by the national administrations in the event that operators fail to observe the proper procedures was also noted.

BENEFITS FROM IMPROVED FINANCIAL MANAGEMENT

0.25. There is clearly considerable potential for improving the way Community finances are managed in all the main areas of activity mentioned above and thus ensuring that public money is being properly used to achieve, in an efficient and effective way, the objectives laid down by the legislator. It is, of course, not possible to quantify with any certainty the real benefits that could result from more efficient and better targeted financing. There are, however, throughout this report, mentions of specific audit findings which give some indication of the scale of potential benefits which more rigorous financial management and control could achieve, in terms of amounts which should be recovered, payments for activities which were not eligible for aid or expenditures which were not demonstrably useful in achieving policy objectives, even if they could not be considered as entirely irregular. Given the limited extent to which the Court, with the number of auditors at its disposal, can audit financial management in any one year, it is clear that there is great scope for improvement and that any costs incurred in securing such improvement would be recovered in a very short time.

IMPLICATIONS OF THE STATEMENT OF ASSURANCE

0.26. The Statement of Assurance for 1994, issued at the same time as this report is published, contains significant reservations concerning the reliability of the accounts (mainly about presentation and disclosure) and draws attention to many errors affecting the legality and regularity of the underlying transactions for payments. This result represents further evidence of inadequate financial administration, by both the Commission and Member State bodies, of a significant part of the Community budget, in a wide variety of areas. The application of the principle of subsidiarity does not, of course, imply any diminution of the Commission's responsibility for the proper execution of the budget. A serious, concerted effort by the Commission and Member State authorities is urgently needed in order to raise the quality of the performance of responsible management at all levels.

COMMISSION STAFF MANAGEMENT

0.27. Commission staff management problems are also an important factor in achieving sound financial management. Audits of agricultural market organizations have repeatedly shown that the number of staff allocated by the Commission to audit and monitoring expenditure is very seriously inadequate. This report mentions the rapid turnover of staff responsible for administration and control of the Social Fund and the high number of vacant posts in that area. Chapter 10 draws attention to the transfer during the course of a single year of two-thirds of the permanent staff of a Commission delegation and to long delays in replacing them. It also notes that key management functions which should be carried out by Community civil servants are being performed by contract staff or third parties. Chapter 11 points out that insufficient staff resources were allocated (both in delegations and in Brussels) to supervision of structural adjustment support programmes for Jordan and the Maghreb countries.

0.28. The Court considers that better qualified staff resources need to be allocated to the management and control of existing policies and to improving the financial management environment both within the Commission and in Member State bodies responsible for Community operations.

THE COURT OF AUDITORS' ROLE WITH REGARD TO FRAUD

0.29. The Essen European Council concluded that fraud, waste and mismanagement of Community resources needed to be tackled with the utmost vigour, and recalling that the Treaty on European Union had given new powers to the European Parliament, the Council, the Commission and the European Court of Auditors, called for concerted action by these institutions and the Member States.

0.30. The primary responsibility for prevention, detection and investigation of fraud lies with those who manage and supervise policy execution in the Commission and the Member States. They have to ensure the existence of adequate systems of internal control, including segregation of duties, proper authorization procedures and an effective internal audit function and ensure that intentional irregularities (whether fraud or gross negligence) are detected, investigated and sanctioned.

0.31. The Court, as external auditor, has to review critically the arrangements made by management. It has always done this to an appreciable extent and Court annual or special reports have consistently drawn attention to weaknesses in legislation, in accounting and in financial management systems and indicated the risks involved as well as concrete cases involved. Although the Court, like other audit institutions, does not have the power to investigate crime (a task for the police and judicial authorities) but it plays its part by paying due attention to the prevention and deterrence of irregularities in general (whether intentional or not) and stimulating effective action by the appropriate authorities when audit indicates that some fraud may have possibly occurred or circumstances have arisen which are particularly favourable to the potential fraudster.

0.32. The Court has responded to the Essen Council's conclusions by reviewing those aspects of its audit methodology that relate most closely to the area of fraud. It has adopted specific objectives for the critical examination of legislation and associated management and control systems, the systematic identification of high risk areas (including the possible involvement in irregularities of people working within or directly for the EC institutions) and the development and implementation of general procedures for appropriate audit testing in high risk areas. In performing this task, the Court will remain in touch with all the bodies concerned.

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PART I Observations on the Commission's revenue and operating appropriations and on the European Development Funds

CHAPTER 1 (*) Own resources

1.0. TABLE OF CONTENTS Paragraph reference

General introduction 1.1

Implementation of the budget 1.2 - 1.3

Financial management 1.4 - 1.11

Financial management in the Member States 1.4 - 1.11

Mutual assistance in the context of combating customs fraud 1.12 - 1.44

Introduction 1.12 - 1.13

The use of mutual assistance 1.14 - 1.16

The monitoring of recoveries by the Commission 1.17 - 1.19

Monitoring of recoveries by the Member States 1.20 - 1.29

Need to adapt the Community customs regulations 1.30 - 1.38

No supervision of national recovery instruments by the Commission 1.39 - 1.40

Conclusion concerning mutual assistance in the context of combating customs fraud 1.41 - 1.44

The Community transit system 1.45 - 1.89

Introduction 1.45 - 1.49

Recorded delays in assigning a customs-approved treatment or use to goods brought into the customs territory of the European Union 1.50 - 1.53

External transit system 1.54 - 1.68

Simplified procedure for external transit operations 1.69

Risks associated with the assignment of a customs-approved treatment or use to goods presented to customs (external transit system) 1.70 - 1.78

Computerization of the Community transit system 1.79 - 1.80

Examples of dysfunction 1.81 - 1.85

Conclusions concerning Community external transit 1.86 - 1.89

VAT on intra-Community trade 1.90 - 1.111

Introduction 1.90 - 1.91

VAT revenue 1.92 - 1.94

The VIES 1.95 - 1.103

Use of recorded data and development of control strategies 1.104 - 1.105

Commission supervision of the new transitional arrangement 1.106 - 1.108

Conclusion concerning VAT on intra-Community trade 1.109 - 1.111

Gross national product 1.112 - 1.131

Introduction 1.112 - 1.113

GNP estimates 1.114 - 1.116

Statistical GNP 1.117 - 1.127

Conclusion regarding the GNP 1.128 - 1.131

GENERAL INTRODUCTION

1.1. The first part of this chapter discusses the budgetary out-turn for own resources and the results of the Commission and Member States' review of their management of them; this is followed by observations concerning mutual assistance in the fight against customs fraud and the implementation of the Community transit system. As regards VAT, there then follows an initial assessment of the VIES (value-added tax information exchange system), based on an enquiry carried out in cooperation with the national audit institutions. The final part of the chapter discusses the gross national product (GNP), with particular reference to forecasting and establishing it.

IMPLEMENTATION OF THE BUDGET

1.2. As can be seen from Table 1.1:

(a) actual revenue in 1994 amounted to 66 002,1 Mio ECU, which is 96,2% of the revenue specified in the final budget; there was no significant increase in actual revenue compared with 1993, when it amounted to 65 672,7 Mio ECU;

(b) traditional own resources, net of collection costs, amounted to 13 252,2 Mio ECU, or 20,1% of actual revenue. The gross equivalent is 14 724,6 Mio ECU. The traditional own resources in question comprise:

(i) customs duties of 12 420,0 Mio ECU gross, which is equivalent to 84,3% of traditional own resources;

(ii) agricultural levies of 922,5 Mio ECU gross, or 6,3% of gross traditional own resources;

(iii) sugar and isoglucose levies of 1 382,1 Mio ECU gross, or 9,4% of the gross figure for traditional own resources.

The initial forecasts of customs duties and agricultural levies were overestimated by 12,9% and 10,9% respectively;

(c) the VAT own resource (after inclusion of balances and adjustments) amounted to 33 217,9 Mio ECU, or 50,4% of actual revenue;

(d) the GNP resource (after inclusion of balances and adjustments) amounted to 17 674,5 Mio ECU (including reserves of 292,0 Mio ECU), which is the equivalent of 26,8% of actual revenue.

1.3. Supplementary and amending budget No 2 for 1994 includes a new Article 302 - Estimated surplus for the financial year 1994 - against which is entered an amount of 1 500 Mio ECU (the real surplus, which is shown in the consolidated revenue and expenditure account for 1994, is 6 540 Mio ECU). This entry complies neither with Article 7 of Council Decision 88/376/EEC, Euratom of 24 June 1988 (), nor with Articles 6 and 32 of the Financial Regulation. The heading, in fact, represents appropriations which will not be utilized (800 Mio ECU not implemented for the European Agricultural Guidance and Guarantee Fund (EAGGF Guarantee Section), 400 Mio ECU of appropriations not implemented and carried forward and 300 Mio ECU earmarked for structural measures but not utilized). Reducing the total appropriations entered in the budget by 1 500 Mio ECU, rather than creating the new Article referred to above, might have been the regular solution to the problem.

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FINANCIAL MANAGEMENT

Financial management in the Member States

Accounting procedures

1.4. Under Article 6(2) of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989, the own resources that are to be made available to the Community are established entitlements that have been recovered or for which security has been provided. These entitlements are entered in the accounts known as 'the A accounts`. Where established entitlements are not entered in the A accounts in accordance with Article 6(2) of Regulation 1552/89 they must be entered in a separate system of accounts known as 'the B accounts`. The accounts in question are for entitlements that have not been recovered and for which no security has been provided. At Member States' discretion, these accounts may also include entitlements for which security has been provided, but which have been challenged.

1.5. The Court carried out audits in eight Member States (DK, D, F, GR, IRL, I, NL, UK). Under the national rules in Denmark, the basis on which revenue from customs and levies is made available is the date of entry in the accounts. In principle, they must be entered within five working days after the date on which the declaration is accepted. In the course of audits in two customs regions this deadline was found not to have been respected in approximately 30% of cases. As a result, approximately 10% of established amounts were made available late, when the delay occurred at the end of the month. In response to the Court's observations, the Danish central departments undertook to comply with the deadlines for entering amounts that are specified in the Community regulations.

1.6. It was found that in some cases there was a risk of interruption in the rate of recoveries. Under the period entry system in the United Kingdom, for example, there were substantial delays in the procedures for reconciling importers' declarations to the accounting departments with their declarations to the department responsible for managing the system. Thus, as of October 1994, only declarations made up to May 1994 had been cross-checked. In May 1995 the British authorities informed the Court that they had taken steps to eliminate any further delays.

1.7. The object of the separate accounts () (B accounts - see paragraph 1.4) is to enable the Member States and the Commission to monitor more closely action taken by Member States to recover own resources, especially where the resources concerned are exposed to the risk of fraud or irregularity.

1.8. In two Member States (GR, UK), it was necessary to adjust the balances on various offices' B accounts in 1994. Furthermore the B accounts were practically unaudited and, in some offices (UK), were far from full and complete, in that they included only amounts in excess of 10 000 ECU. At the beginning of 1995 the British authorities pointed out to the offices concerned the necessity of improved bookkeeping for the B accounts.

1.9. At the end of the first quarter of 1993, in Hamburg, there was a transfer of 26 Mio DM from the A accounts to the B accounts under the heading of agricultural levies, because the importer had contested the classification of the goods. Examination of the file showed that the Hamburg customs authorities had suspended the recovery procedures in March 1994, but there was nothing to show whether a guarantee had been requested in order to cover the sums in dispute. The Community Customs Code () (Article 244) permits the guarantee to be waived only if payment of it would be likely to cause serious economic or social difficulties, owing to the debtor's circumstances. In this particular case, however, it was noted that the authorities responsible had not made any enquiries to check whether the debtor was, in fact, experiencing serious economic or social difficulties.

Control procedures

1.10. In general all the Member States apply control procedures, usually based on an analysis of the levels of risk encountered, in order to validate customs declarations. In some countries analytical tests are carried out via a computer system in order to cross-check the details entered in declarations. Member States' use of control software and risk-analysis systems should be stepped up, in line with the guidelines issued by the Commission.

1.11. In addition to the controls on individual declarations, internal control procedures are in existence in the countries visited by the Court. In Ireland, most of the internal control activities concerning traditional own resources were suspended temporarily from November 1994, because of staff reallocations following a tax amnesty, and were not resumed until March 1995.

MUTUAL ASSISTANCE IN THE CONTEXT OF COMBATING CUSTOMS FRAUD

Introduction

1.12. Council Regulation (EEC) No 1468/81 of 19 May 1981 (), as amended by Council Regulation (EEC) No 945/87 of 30 March 1987 (), establishes the procedures for mutual assistance between the customs authorities of the Member States and for cooperation between them and the European Commission in order to ensure that customs regulations are correctly applied.

1.13. The Court reviewed the problems which the Commission had encountered in coordinating and following up enquiries at Community level as well as problems that had arisen in the carrying-out of enquiries by the Member States, within the mutual assistance framework (), with the aim of detecting and preventing customs fraud.

The use of mutual assistance

1.14. Under Regulation (EEC) No 1468/81, the Member States provide direct mutual assistance, either spontaneously or by request, by supplying any information or documents that are considered useful for the detection and prevention of fraud.

1.15. The competent authorities of each Member State and the Commission also exchange relevant information concerning goods that have been or are suspected to be the subject of illicit transactions. The information exchange also includes details of methods and processes used or suspected of having been used fraudulently, as well as any weaknesses or shortcomings in the legislation.

1.16. The number of cases involving customs fraud and irregularities (either suspected or established) that have been the subject of exchanges of information under Regulation (EEC) No 1468/81 between the Commission and the Member States has risen from 33 in 1988 to a grand total of 534 in 1994 (114 new cases in 1994). On the basis of statistical information and customs data, the Commission estimated that the total amount of traditional own resources at stake in these cases was more than 600 Mio ECU as of 31 December 1994, including some 275 Mio ECU for 1994 alone - the equivalent of around 2% of the net traditional own resources collected at the Union's frontiers with non-member countries each year (13 252,2 Mio ECU in 1994) ().

The monitoring of recoveries by the Commission

1.17. In order to monitor the recoveries effected by Member States, the Commission maintains a central record (), on the IRENE database (), of all the cases of fraud and irregularities involving own resources of more than 10 000 ECU in amount notified to it by Member States by means of 'fraud forms` under Article 6(3) of Regulation (EEC) No 1552/89. In principle, the cases in question are cases that have been detected, or cases where the Member States have established amounts which they must try to recover and make available to the Commission. With a view to subsequent monitoring of recoveries, the Commission also systematically records in IRENE cases that are currently under investigation within the mutual assistance framework, insofar as they have financial repercussions. In January 1995 the total number of records on the IRENE system was about 5 000, some 100 of which concerned mutual assistance cases (under Regulation (EEC) No 1468/81). Eleven of the latter were selected by the Court for an on-the-spot audit of files at the Commission.

1.18. The Commission has set up a pilot project of sample tests. The sample was constructed in accordance with risk analysis criteria, with the aim of testing the effectiveness of the national systems for recovering evaded customs duties. The Commission selected five mutual assistance files to form the first batch processed in 1994: bovine animals from former eastern bloc countries, milk powder, tuna from the Seychelles, shrimps/prawns from the Faeroe Islands and Turkish television sets. The sample covers evasion of approximately 80 Mio ECU of duties.

1.19. The recoveries are to be monitored by sending queries to Member States on a case-by-case basis at regular intervals. The Member States are confronted with the problem of reconciling data relating to disputes with the data in the A and B accounts (see paragraph 1.4). The time taken for them to reply varied between one and five months. Table 1.2 shows the position at 31 December 1994 for recoveries relating to the five mutual assistance files selected by the Commission.

Monitoring of recoveries by the Member States

1.20. Article 2 of Regulation (EEC) No 1552/89 states that Member States must establish the traditional own resources as soon as the debtor is known and the amount of the entitlement can be calculated (see paragraph 1.16). Examination of the mutual assistance files showed that Member States do not always apply this rule (see paragraphs 1.25 to 1.29). As of 31 December 1994, the Commission had not taken action for infringement against Member States that had not applied the provisions of this Article scrupulously.

1.21. The systems of preferences which apply to developing countries and other beneficiaries proved to be particularly susceptible to fraud and irregularities. The Commission acts as coordinator of the action taken by Member States and, in particular, arranges Community administrative and investigative visits to third countries. The visits are carried out 'in coordination and close cooperation with the competent authorities of the Member States` (). In principle the conclusions reached are binding on all the parties.

>TABLE>

1.22. The regulations (system of generalized preferences - SGP) provide that if, in cases of reasonable doubt, no reply has been received from the third country in question within a maximum of 10 months, or if the reply does not contain sufficient information to allow the authenticity of the certificate of origin or the actual origin of the products to be determined, entitlement to the preference scheme is to be refused ex post facto, except in the case of force majeure or in exceptional circumstances (). When the 10-month deadline expires, the Member States must accordingly recover the duties on the imports in question ex post facto, if necessary, by calling in the guarantees in final discharge of the duties, provided that the imports were effected in the three years which preceded the date of issue of the recovery order, and without prejudice to an extension of the deadline in the event of fraud.

1.23. One case audited by the Court concerned imports of tuna from Thailand, which had been declared as bonito tuna. It illustrates the lack of cooperation encountered by the Commission, in collaboration with the Member States, when it took steps to confirm or refute the validity of certificates of origin. This case is one of a sample of cases selected by the Commission for more detailed follow-up. A Community delegation (Commission, D, UK) carried out an on-the-spot inspection in September 1991 and established that the product (70 000 tonnes) imported into the Community between 1989 and 1991 under cover of SGP certificates of origin as 'preserved bonito (Sarda spp.)` could not have been manufactured from fish of that species in view of its availability of fish in Thai waters and in the waters fished by Thai vessels. It was not possible to determine the exact nature of the product at the time of importation into the Community as the necessary scientific evidence was not available at the time. However, all the available data concerning fish species normally found in the area in question (including information supplied by the competent Thai authorities) indicate that the product must have been preserved tuna (not covered by the SGP and subject to 24% duty) and not bonito (Sarda spp.) (covered by the SGP and eligible for the preferential rate of 18%).

1.24. The Community delegation asked the Thai authorities to confirm that more than 5 000 certificates of origin were invalid and to withdraw them. The Thai authorities' reply (supplied exactly 10 months later - at the end of the maximum time limit allowed) confirmed that 800 certificates were invalid. Not until 15 months after the request and following an oral warning from the Commission, threatening to exclude Thailand from the SGP, did the Thai authorities announce that they were unable to prove the validity of the other certificates.

1.25. The importer Member States concerned (DK, D, NL and UK) stated in May 1993 that, for various reasons, they had not initiated recovery vis-à-vis the third countries until the end of 1992 - more than one year after the findings of the audit visit. In the United Kingdom, traditional own resources estimated by the Court, on the basis of the data available at the Commission, to amount to more than 1,0 Mio ECU, have become irrecoverable because any action is now time-barred. In January 1995 the Commission was still unable to set a figure on the losses incurred in the other Member States up to 31 December 1994.

1.26. In the case of imports of tuna from the Seychelles, the irregularity lay in the inclusion of non-originating tuna in preserved fish exported to the Community. It is estimated that own resources of 1,5 Mio ECU were evaded in this way. The results of the audit carried out on-the-spot in December 1992 by the Community delegation were notified to the importer Member States (B, F, IRL, NL and UK) in May 1993 with a request that they should effect recovery.

1.27. In Belgium no action for recovery was taken until December 1993. At the same time the British authorities informed the Commission that they had suspended any recovery, on the grounds of the approach being made to the Commission by the Seychelles government (), and Ireland's attitude was the same. In France, the country most affected by the imports, recovery had still not begun in July 1994.

1.28. The case of imports of Turkish television sets illustrates the slowness of the decision process at Commission level. The Commission warned the Member States concerned (all Member States, with the exception of Ireland and Luxembourg) of suspected irregularities as long ago as 1988. The irregularity lay in the fact that the television sets contained imported components on which the Turkish authorities had charged neither Turkish customs duties nor a compensatory levy corresponding to the Community rates of duty when the finished products were exported to the Community. As a result, the products were not in free circulation in Turkey when they entered the Community customs territory and were not eligible for preferential treatment under the Agreement. The total amount of duty evaded was estimated at 45 Mio ECU. Owing to the lack of cooperation on the part of the Turkish authorities, who delayed the arrival of a Community audit visit for two years, the Turkish authorities did not recognize the irregularity until February 1993. Evidence of the situation with regard to the goods was not obtained until October/November, during a Community audit visit.

1.29. The Member States then effectively introduced a requirement for guarantees on their subsequent imports of Turkish television sets. Ex post facto recovery of the customs duties that were not affected by limitation was, however, delayed by a further one and a half years because of differences between the Commission and the Member States concerning the recoveries. The Commission did not, in fact, close the file until 25 November 1994, when it invited the Member States to effect recovery. Some 30 Mio ECU on import transactions between 1987 and 1991 was lost when they became time-barred. Approximately 15 Mio ECU, for imports between 1992 and 1994, was still outstanding at the time of the Court's enquiry (December 1994).

Need to adapt the Community customs regulations

1.30. The review of the mutual assistance files and the recovery problems which they revealed showed that the Community regulations, in certain areas, needed to be amended, so as to protect the own resources more effectively. The comments that need to be made on this subject concern, in particular, time-barring, the taking of security after goods have been discharged, guarantees in the context of the Community transit procedures and the length of time for which the documents needed to verify certificates of origin should be kept.

Time-barring

1.31. Under Article 221(3) of the Community Customs Code, the general rule is that a customs debt ceases to be enforceable three years after the date on which it was incurred. There is no possibility of a longer period, unless the customs authorities of the Member States have been unable to determine the exact amount of duties legally due because of an act that could give rise to criminal court proceedings, and in so far as national law permits.

1.32. The Community Customs Code makes provision neither for an extension of the period of time-barring nor for entry of an estimate of the duties in the accounts. In the Court's opinion such a possibility ought to be available, particularly in cases where an enquiry is started with respect to transactions which are suspected to be irregular or fraudulent, and, at the latest at the time when the suspicion proves to be well-founded.

1.33. In several Member States, national law provides for the possibility of extending the period beyond which a customs debt is time-barred. It does not exist in the United Kingdom or Denmark. Furthermore, the United Kingdom extends the time limit only if the case concerned has actually given rise to criminal proceedings. These practical variations can result in inequality of treatment and trade-flow diversions, which are incompatible with the principles of the internal market.

Absence of guarantee at the time of ex post facto checks

1.34. Article 248(1) of the Regulation implementing the Customs Code provides that the lodging of security may be required 'where the customs authorities consider that the checks which they have undertaken may enable an amount of customs duties higher than that resulting from the particulars made in the declaration to be assessed` ().

1.35. The above provision applies only at the time when the clearance formalities are being carried out. The customs regulations make no provision for the possibility of requiring security to be lodged in cases where the goods have been discharged, but, in the opinion of the customs authorities, ex post facto checks that have been, or are to be, carried out are likely to result in an increase in the amount of duty. In consequence, recovery may ultimately prove to be impossible because the debtor is insolvent, which can happen at any time during the investigation.

Transit securities insufficient

1.36. A comprehensive guarantee document allows the holder to carry out an unlimited number of transit operations by road simultaneously. If transit rules are contravened, the comprehensive guarantee often proves to be insufficient to cover the risks. Customs investigation procedures may, in fact, last for several months, sometimes as long as three years, without reaching a conclusion or being wound up. At present, however, no further guarantee is required between the time at which the presumption of irregularity is established and the time when the duties owed are recovered. In consequence, there is a shortfall, or even absence, of real security on new operations carried out under cover of a comprehensive guarantee, part, or even all, of which has already been committed on account of one or more earlier operations which have not been discharged.

1.37. Moreover, there are special rules concerning guarantees for products that are deemed to present an enhanced risk on account of the customs duties at stake when they are placed under the transit system. There are three different lists of enhanced-risk products in the Regulation: the list of goods which give rise to an increase in the flat-rate guarantee, the list of products which give rise to an increase in the comprehensive guarantee () and the list of goods to which the guarantee waiver does not apply. Owing to the fact that the customs regulations contain three different lists concerning the level of guarantee required (see Table 1.3) there is a risk that the level of guarantee for the same product may vary considerably, depending on the guarantee method chosen by the trader, and that in the case of fraud or irregularity it may have negative implications for the Community's finances.

Period for which documents must be kept

1.38. Under certain systems of preferences, a country which issues a certificate of origin is required to keep a copy of the certificate and the relevant export documents for at least two years, for the purpose of subsequent checks. This period of two years is not consistent with the three-year limitation. It is, in fact, possible to submit to the customs office of import a certificate of origin issued several months earlier (e.g. 10 months () in the case of the African, Caribbean and Pacific (ACP) countries and for the countries which qualify for the system of generalized preferences(SGP)). In view of this 10-month period, the conservation period should be three years and 10 months.

No supervision of national recovery instruments by the Commission

1.39. In established cases of irregularity or fraud, the outcome of recovery action is closely related to the number and nature of the national legal instruments available to each Member State and, more especially, the possibility of suspending or interrupting the period of time-barring, establishing an estimated amount, imposing a time limit of more than three years, preventing the barring of a debt that has already been established or requiring a security if there is justified doubt based on ex post facto checks.

1.40. The Commission still does not have a list of such legal instruments, for each Member State. It is, therefore, difficult for the Commission to evaluate the extent to which a Member State is meeting its recovery obligations before initiating any necessary infringement proceedings.

Conclusion concerning mutual assistance in the context of combating customs fraud

1.41. Enquiries by Member States under the mutual assistance framework concerning customs fraud and irregularities cannot really be considered to be successful unless the amounts in question are actually recovered within a reasonable period of time.

1.42. The follow-up with regard to recoveries was found to be inadequate. The Commission is not able to obtain quick and accurate information on the progress achieved by Member States in connection with the recoveries for which they are responsible. The IRENE database is a very useful documentational tool, but, in the case of recoveries, it is incomplete. For it to function more effectively the financial information which it contains would need to be updated systematically and at regular intervals, in collaboration with the Member States.

1.43. Customs duties are collected in the Member States in accordance with national legislation. The Commission should therefore check systematically whether it answers the requirements of the Community regulations. Moreover, in the case of the Community regulations and the preference agreements (and arrangements) concluded with third countries, it is up to the Commission to propose the textual improvements that are essential in order to provide increased protection against fraud and evasion for the Union's traditional own resources.

1.44. Under Article 209a of the EC Treaty, which aims to protect the Community's financial interests against fraud, the Commission is to establish close and regular cooperation with national customs administrations. In the context of their cooperation with the Commission, the latter do, in fact, play a vital role in combating the fraud and evasion of regulations that are detrimental to the financial interests of the European Union.

THE COMMUNITY TRANSIT SYSTEM

Introduction

1.45. The Community transit system makes a distinction between internal transit and external transit. The internal transit system allows the movement of Community goods, without any change in their customs status, between two points in the customs territory of the European Union, via the territory of a third country. The external transit system allows, firstly, the movement of non-Community goods within the territory of the European Union without their being subject to import duties or commercial policy measures, and, secondly, the movement within the territory of the European Union of Community goods subject to measures whereby they must be exported to third countries after the completion of customs formalities. It is thus possible, under the external transit system, for non-Community goods to enter the territory of the European Union and either to cross it to a final destination in a third country or to be carried to a final destination in a Member State, where they are released for free circulation or transferred to other customs arrangements. The aim of the external transit procedure is, inter alia, to ensure that import duties are collected if a customs debt arises in connection with third-country goods placed under this system. Similarly, in the context of the CAP, the system is used in order to ensure that refunds are paid only when the qualifying goods have been transferred to approved arrangements (export).

1.46. With effect from 1 January 1993, goods are now carried under the Community transit system within the European Union, without any checks at internal frontiers, until they reach their final destination, where they are placed under other customs arrangements - usually free circulation - following payment of import duties and charges. Customs duties and agricultural levies on transit goods are collected either when the goods have reached their final destination and been placed under customs arrangements which include collection of duties and other charges, or, if they have not been discharged within the time limits specified in the regulations, when they are recovered.

1.47. In its communication on fraud in the transit procedure (), the Commission estimated the number of Community transit operations at around 18 million. The majority are carried out in accordance with the current Community rules; nevertheless, some 1 000 000 transit operations are not discharged regularly and are the subject of an enquiry. The Commission estimated at the end of 1994 that since 1990 duties to a value of 750 Mio ECU had been evaded under the transit procedure. Of that total, 320 Mio ECU corresponded to traditional own resources and 430 Mio ECU to VAT and excise duties, representing a net loss of around 300 Mio ECU to the Community budget. The number of recoveries effected after a request for information on the discharge of the transit operation (see paragraphs 1.56 to 1.61) has increased since 1990, as has the number of cases of irregularities and fraud perpetrated under the transit procedure. The Commission estimates that they represent a potential financial loss to the Community and the Member States of some 200 Mio ECU annually.

1.48. Following the establishment of the internal market, the transit system continues to be one of the cornerstones of the Customs Union. Care must be taken to ensure that the system continues to function efficiently. Some shortcomings have become apparent in recent years, however, especially in the case of transit controls (see paragraphs 1.55 to 1.61, 1.64 to 1.67 and 1.82 to 1.85). Member States do not give adequate priority to this area. As a result of these shortcomings, the transit system has become more vulnerable to fraud. For that reason very careful attention must be given to the large-scale problems of fraud that may arise within this system. As the Commission pointed out in the communication on fraud in the transit procedure, fraudulent transit operations mainly concern goods which are subject to high rates of duty or are highly profitable in terms of the level of protection afforded by Community policies. This type of fraud operates mainly in the following ways:

(i) goods are not presented at the customs office of destination and are released for circulation within the Community without payment of the duties and charges due (see paragraph 1.82);

(ii) the presentation of the goods at the office of destination is counterfeited, for example by means of stolen or forged stamps.

1.49. The Court carried out enquiries in six Member States (D, GR, F, I, NL, UK) in 1994, to examine the functioning of the customs transit procedure () and, more especially, the discharge procedure, the recovery procedure followed in cases of irregularities, and the customs procedures followed before goods are assigned to this procedure.

Recorded delays in assigning a customs-approved treatment or use to goods brought into the customs territory of the European Union

1.50. Goods introduced into the customs territory of the European Union are subject to customs supervision from the time of entry () and must be presented to customs by the importer, carrier or forwarding agent. A summary declaration covering the goods presented to customs must be lodged with customs not later than the first working day after the day on which they are presented (). When the goods have been declared, they must be assigned a customs-approved treatment or use, within 45 days in the case of goods carried by sea, or 20 days in all other cases (). Until that is done, they have the status of goods in temporary storage (). Goods in temporary storage must be stored in places approved by the customs authorities under the conditions laid down by them (). If the requisite formalities are not observed, the customs authorities must take all necessary measures without delay. This may include selling the goods ().

1.51. In practice, the 20-day deadline imposed for goods carried by air is not always respected. In Germany (Frankfurt Airport), the customs authorities entered import duties in the accounts on the basis of the summary declaration, but the goods were not assigned a customs treatment or use according to the appropriate procedure. Thus, the duties to be levied on imports of hundreds of batches of goods were recovered only a year, or even a year and a half, after the date on which the goods entered the territory of the Union. Similar delays were noted in Italy (up to 18 months at Malpensa) and the United Kingdom (up to eight months at Heathrow).

1.52. In the case of goods carried by sea, the 45-day deadline was systematically exceeded at Genoa. At Naples some 3 000 containers of goods in temporary storage were not even in a customs-approved store. Instead the containers were held in a container park which the customs had refused to approve, because they were unable to guarantee adequate supervision. Supervision of goods entering and leaving the container park was totally inadequate. The last reconciliation of warehouse lists and carriers' waybills by the customs authorities went back to March 1993 and concerned the year 1988.

1.53. Delays in reconciling entries and exits to and from temporary storage were also noted in the United Kingdom (up to a year at Felixstowe). It is not possible to evaluate the implication of the above observations for the collection of own resources, for the reasons set out in paragraph 1.68.

External transit system

Application of the external transit system

1.54. In its Annual Report concerning the financial year 1987, the Court highlighted the negative effect on own resources of delays or failure to respond to an enquiry notice (). In its communication of 29 March 1995 on fraud in the transit procedure, the Commission again expressed its concern that '... the transit systems... are again in crisis`, '... the quality of these controls has fallen progressively over the last few years...` and 'enquiry procedures regarding outstanding movements are not initiated at a sufficiently early stage, and are not pursued with sufficient priority and vigour. Legislation and administrative provisions are not always applied by Member States in such a way that good management is guaranteed. The consequence is that failure in any part of the system jeopardizes the whole.`

1.55. In the six Member States that were visited, the Court again found that, as a result of failure to observe deadlines at every level of the customs authorities, collection of the own resources in question was delayed, in some cases by as much as three years.

1.56. In the Netherlands, available statistics for transit operations passing through the port of Rotterdam (some 600 000 operations per year) showed that, in some 3% of cases, operations had still not been discharged approximately six months after the transit declaration was registered, even though offices of departure are required to make enquiries after four months. For that reason, when some procedures (e.g. requests for assistance) are being applied, the deadlines set take into account the actual delays recorded by offices of departure () (e.g. two months) which is contrary to the current regulations.

1.57. In Germany, on the basis of a sample drawn from two different customs offices, the Court found that approximately 85% of recoveries were from the consignees of goods which had not been presented to the customs office of destination (), contrary to the customs regulations. Furthermore, one of the customs offices visited justified the systematic suspension of replies to enquiry notices for at least nine months on the grounds of staff shortages. At other offices enquiry notices were shelved for a year or more, if the party to whom the notice was addressed (e.g. the office of destination, principal (), etc.) did not reply to the first one. At another customs office, 16 219 enquiry notices were still outstanding, of which 9 439 were almost two years old. Around 10% of the notices were being dealt with by the authorities. In some cases the delays in forwarding documents between customs offices were so great that the deadlines specified by the Community rules could no longer be respected without an effort to catch up in view of the accumulated backlog.

1.58. In Greece, the Court noted that replies to several thousand enquiry notices on the destination of goods carried under the transit system had been pending for more than 10 months. Some offices applied their own rules in the matter of deadlines, contrary to the Community rules and the national customs authorities' instructions. A not insignificant percentage of goods carried under the transit system were so-called 'sensitive` goods (tobacco, alcohol).

1.59. In France, there were fewer enquiry notices, but that did not prevent waits of more than a year for replies to some notices, essentially because enquiries were not set in motion until four to six months after the notice had been received. As regards the length of time before offices of destination set enquiries in motion, in its reply to the observations forwarded to it after the audit the Member State in question undertook to adopt appropriate measures for improving the situation.

1.60. In Italy (Naples) there were found to be delays of eight or nine months at the different stages of both the mutual assistance and the recovery procedures.

1.61. In the United Kingdom, hundreds of enquiry notices that had been forwarded to the central office by offices of departure remained unanswered for up to seven months, or had been awaiting distribution to offices of destination for more than seven months.

Recovery of own resources

1.62. Under the present Community or national provisions, in the event of irregularity, responsibility for recovering duties and other charges on goods in transit rests with the Member State where the office of departure or the office of entry into the Community is situated (), unless it can be established that an offence or irregularity was committed in another Member State, in which case the latter must effect recovery. If the transit document remains undischarged, the office of departure must inform the principal () as soon as possible and, in any case, not more than 11 months after the goods entered the transit system. If, within three months, the principal is unable to prove the regularity of the transit operation or to furnish proof of the place where the irregularity was committed, the office of departure must take steps to recover the duties that would have been due at the time of importation.

1.63. In the case of goods that have been placed under the road transit system, the principal must provide a guarantee to ensure payment of any customs debt or other relevant charges (). The guarantor is released from his obligations 12 months after the date of registration of the transit declaration (T1 document) unless, within that 12-month period, the customs authorities of the Member State of departure advise him that the transit document has not been discharged. In addition, the guarantor is released from his obligations if he has not been informed of the amount for which he is liable within three years of the date of registration of the transit operation. The guarantee may take the form of an individual guarantee, a flat-rate guarantee or a comprehensive guarantee.

1.64. In Germany, some customs offices have eliminated the stages of the procedure which seek to recover the amount from the principal. Recovery is essentially directed towards obtaining payment at the end of the three-year guarantee period without any sustained attempt to recover it from the principal or other parties (importers, consignees) at the end of the first year following the admission of the goods to the transit system. In this way the recoveries against hundreds of undischarged transit operations remain outstanding for up to three years after the time when the goods entered the transit system. In one of the customs offices visited (D), the Court found that in 5% of the cases examined guarantors had not received advice of the non-discharge of transit operations before the end of the three-year period. Consequently, they had been released from their obligations, even though the transit documents had not been cleared.

1.65. In Italy (Malpensa), recoveries are effected with delays of up to four months after receipt of the reply from the office of destination.

1.66. In the Netherlands (Schiphol) data are transferred from one computer system to another at six-monthly intervals. During each transfer, around a hundred undischarged transit operations (112 operations for the first six months of 1994) are rejected because of uncorrected errors that were made when the basic information concerning the transit operations was entered. It is still not clear how many such operations are rejected and ultimately not discharged.

1.67. In Greece, the Community transit procedures are applied only in cases where goods are in transit to another Member State of the European Union. In all other cases, often contrary to the Community rules, the Greek customs apply a different transit procedure which does not require any guarantee. Several hundred transit operations that were effected under the alternative transit procedures have not been discharged, thus jeopardizing the collection of the corresponding own resources. During an on-the-spot visit (November 1994) the Court was not given access to the files on operations that were carried out under the Community transit system concerning goods that had left the port of Salonica for destinations in neighbouring countries to the north of Greece. Examination of the files which the Greek national authorities forwarded to the Court in April 1995 at the latter's request showed that, starting in November 1994 (the date of the Court's visit), the Salonica office of departure had initiated the procedures for obtaining information on undischarged transit declarations for 1993 and 1994.

Quality of the data supplied on transit declarations (T1 document)

1.68. When the information needed for the assessment of import duties cannot be obtained from the principal or other debtor, the search for the information by which to determine the customs debt is often hampered by a practical problem - it is not possible to obtain sufficiently precise details of the goods from the information given on the transit declaration. Firstly the number of boxes that must be completed on the transit declaration is kept strictly to the minimum and, secondly, carriers and forwarding agents do not take enough care to provide the small amount of information that is required. For example, the combined nomenclature (CN) code is often omitted from declarations. Lack of precision in the name or description of the office of destination is often the cause of delays in searches concerning consignments of goods in transit through the major European ports (Rotterdam, Hamburg, Felixstowe, Le Havre) where more than one customs office is responsible for supervision. As a consequence of the lack of precision in the description of the office of destination, 35% of the requests for assistance received by one customs office that was visited in Hamburg did not concern that office.

Simplified procedure for external transit operations

1.69. Most transit operations which involve air or sea transport are carried out without any guarantee, under the simplified procedures provided for in the Community customs regulations. There are two possible levels of simplification. At the first, the goods carried under the internal or external transit system must be detailed on separate manifests (transport documents) for each transit category (simplified procedure I). At the second, which was designed to facilitate frequent large-scale operations, subject to certain conditions, authorized operators (airlines or shipping companies) may move goods without any checks being made by customs offices at the time of the operation (). The Court examined the latter: the simplified procedures which may be used, at their request, by large airlines and shipping company operators.

Risks associated with the assignment of a customs-approved treatment or use to goods presented to customs (external transit system)

1.70. In the United Kingdom (Felixstowe and Ipswich), there was some confusion as to the responsibilities of the various customs offices as regards checks on operators using this simplified procedure at seaports. The checks that are carried out are not, as provided in the Community regulations, based on a perceived risk analysis. More particularly, in cases where use of the simplified procedure had been authorized, the issue of the authorization was not followed up within a relatively short interval by a check to ascertain whether the system employed was functioning satisfactorily. Where checks necessitated a search for further information, the search was not completed or was unsuccessful.

1.71. In Germany (Frankfurt), hand-written corrections concerning the origin of goods had often been added to manifests and transport documents and it was not possible for the Court to identify the author of the additions. In some cases the details of origin specified under separate headings of the same transport document were contradictory. Yet, it is the details of origin given on this document that give rise to the collection of Community own resources where appropriate.

1.72. In Italy (Malpensa), the Court verified the origin of goods in 10 consignments selected from a batch of 20. There were eight consignments in which the origin of the goods was stated as the Community, even though the goods had originated in third countries.

1.73. In Greece (Athens International Airport), goods moved under the simplified procedure applied by 11 airlines were checked by customs according to the traditional procedures. On the other hand, the origin of goods carried by courier services was not verified if the goods were thought to be of Community origin. An error on the part of the airport of departure could thus have negative implications for the Community's own resources.

1.74. In the United Kingdom (Heathrow), although ex post facto checks partly concentrated on imports only, they revealed errors which necessitated modification. However, the customs authorities have not followed up the observations which resulted from the checks.

1.75. In the Netherlands (Rotterdam), the Court found a number of cases where the item concerning the Community origin of goods carried by sea from Spanish or Portuguese ports under the simplified procedure contradicted the details that appeared on the transit documents forwarded separately by post. If the posted documents arrived when the goods were no longer under customs supervision, the own resources due were not collected when the goods entered the customs territory and the transit documents were not discharged.

1.76. The Court found that, in general, in the Member States visited (see paragraph 1.49), the customs authorities omitted to supervise and check transit operations carried out under the simplified procedure. In general, ex post facto checks were carried out without any preliminary risk analysis; the frequency of the checks and the coverage of the operations to be verified did not achieve the objectives specified in the national control programmes which the Community legislation requires national authorities to prepare.

1.77. In response to the observations concerning ex post facto customs checks published by the Court in its Annual Report concerning the 1993 financial year, the Commission replied that the effectiveness of checks depended on the adoption of methods based on risk analysis and that the implementing rules for the Customs Code already included such a method for the verification of air and sea transit operations.

1.78. In the Court's opinion, the checks to which the Commission referred offer, at most, a theoretical example. In the above context of mandatory checks on transit procedures, the application of these procedures in the Member States visited leaves something to be desired.

Computerization of the Community transit system

1.79. In its 1987 Annual Report, the Court recommended the programmed computerization of transit operations at Community level from 1998 onwards. The Commission acknowledged the importance of this suggestion at the time and computerization finally became one of the priorities in the Commission's work programme for combating fraud in 1994 ().

1.80. As a result of this computerization, fraud and irregularities committed in the context of the transit system will show up more quickly, insofar as hitherto national authorities' disregard for deadlines, discharge procedures and requests for mutual assistance have made it difficult to detect and take appropriate action against cases of fraud or irregularity. Whilst the Court must emphasize that the establishment of such a network is absolutely essential, it is nevertheless of the opinion that merely computerizing the data to be supplied under the transit system is unlikely to resolve all the problems encountered in the procedures for obtaining information from traders (principals, consignees, etc.), or improve the recovery procedure deadlines.

Examples of dysfunction

1.81. The transit system's vulnerability to fraud and the necessity of improving the implementation of Community rules are illustrated by the examples described in the following paragraphs. These specimen cases provide pertinent illustrations of the problems encountered at the level of recoveries and administrative deadlines when transit documents are not discharged within the specified time limits.

1.82. In 1992 and 1993 the German customs authorities discovered four substantial cases of fraud in connection with the transport of cigarettes of non-Community origin. The cigarettes had been placed under the Community external transit system or were covered by TIR carnets (). The transit operations in question were never discharged and were carried out, on the one hand, under cover of 119 TIR carnets departure Hamburg (HZA Hamburg-Ericus), destination Barcelona, and, on the other, under the Community external transit system (two operations), departure Hamburg (HZA Hamburg-Waltershof) and destination Poland, the office of destination being Frankfurt-on-the-Oder. In every case, the goods were not presented to customs at the offices of destination and it was not possible to trace them. Contrary to the Community rules, the transit operations had not been discharged. The competent customs office (Hamburg) must, therefore, recover the duties due on importation either from the principal or from the security. The customs authorities' files on these transit operations showed that at the time of the on-the-spot visit in July 1994, a total of 38,3 Mio ECU () by way of customs duties remained to be recovered.

1.83. Around 70 Community external transit declarations for the transport of 1 420 tonnes of bananas that entered through the free port of Hamburg and were registered in November 1993 at the office of departure (ZA Zweibrueckenstrasse) for various destinations (Community or other) had still not been discharged as of 20 July 1994. The files in question were examined and showed that the competent office of departure (HZA Hamburg-Ericus) had sought information about the further progress of the operation from the principal concerned, but had not sent a request for assistance to the customs office of destination. The amount of duties for collection is estimated at 1 469 562 ECU ().

1.84. In October 1994, the Salonica office (office of destination) had still not initiated the follow-up of the requests for assistance issued by various offices of departure, between April and June 1994, i.e. some seven months after the start of the transit operation. These Community external transit operations were registered in 1993 and involved the following 'sensitive` products: 14 consignments (12 352 cases) of spirits destined for Bulgaria and Albania, comprising 10 consignments of whisky which had received export refunds on the basis of the cereals content, two consignments (1 958 cartons) of cigarettes, one consignment (840 cartons) of butter and one consignment (488 bales) of tobacco.

1.85. On 12 March 1991 a consignment of 25 tonnes of pasta of Argentinian origin was registered by a customs office at Genoa (Ponte Eritrea) as a Community external transit operation with Naples as the destination. More than three years later, on 23 June 1994, the Genoa office took steps to effect recovery from the principal.

Conclusions concerning Community external transit

1.86. In the Court's opinion, the recovery procedures must be reformed by restoring the focus to the principal's responsibility, in order to improve discipline in that area and to apply the rules more strictly, so that where an irregularity is established recovery of the own resources in question may be concluded not later than six months after the registration of the transit declaration.

1.87. The provisions laid down within the transit system framework must be strictly enforced and any infringement of this principle must be punished with effective penalties. The present regulations do provide for penalties (), but they are practically never applied. The Community regulations are laid down and implemented through the Member States' own national legislation, and the Commission must ensure that the penalties for which the Community regulations provide are scrupulously applied in all the Member States according to harmonized rules.

1.88. In its communication of 29 March 1995 on fraud in the transit procedure (), the Commission gives an account of the measures that have already been adopted (Section 5 of the communication), as well as the steps which it proposes to take to combat fraud in the transit procedure (Section 6.3.2 of the communication), including, in particular, a start on the computerization of the Community transit system, which the Court has recommended speeding up. Furthermore, the Court wishes to emphasize the need for the Commission to take steps so that:

(a) the Member States put into effect in a consistent and harmonized manner the Community provisions concerning the respective responsibilities of offices of departure and offices of destination;

(b) the accumulated delays in discharging declarations, which threaten the security and reliability of the system and lead to delays in the collection of the Community's own resources, are eliminated;

(c) cases of irregularity are detected as soon as possible, so that the the duties owing are recovered more quickly;

(d) Member States impose penalties in every case where transit rules are infringed, especially when goods are not presented to customs at the office of destination;

(e) Member States implement the specified controls, and especially the ex post facto checks that are neglected at present in the context of the simplified procedure; the Commission receives periodic reports on the checks made by Member States and the findings obtained during them; at the same time it must be possible to retrace the checks that have actually been carried out at any time during subsequent verification by Community institutions.

1.89. Insofar as the Member States retain 10% of traditional own resources they collect to cover their collection costs, they thereby implicitly undertake to provide a quality service which, to a very large extent, must protect the Community financial interests that are at stake. Improvement is needed in this area, in order to bring the quality of the service up to standard and restore the transit system to the level of reliability and the confidence level that are essential for the protection of the European Union's financial interests and the expansion of trade within it.

VAT ON INTRA-COMMUNITY TRADE

Introduction

1.90. The establishment of the Community internal market opened up an area without internal frontiers, in which the free movement of goods, people, services and capital is guaranteed. The abolition of fiscal frontiers means that VAT on intra-Community acquisitions is collected in the Member State of origin, instead of the State of destination. Pending the introduction of the definitive system, transitional arrangements were introduced for the period between 1 January 1993 and 31 December 1996. Under the latter system, the VAT is still levied in the country of destination, but the associated customs formalities and frontier checks between Member States have been abolished and replaced by fiscal declaration procedures applicable to each of them.

1.91. An information exchange system, known as VIES (VAT information exchange system), has been set up in order to make it possible to apply the transitional arrangements and thus offset the risk of fraud which the abolition of fiscal frontiers has entailed.

VAT revenue

1.92. Audits were based on audit visits to five Member States (DK, F, I, NL, UK) and a questionnaire that was sent to the remaining seven.

1.93. Table 1.4 shows the variations in VAT revenue collected, by Member State, for the period 1989 to 1993, in absolute values and as a percentage of GNP at current prices. It can be seen from the table that:

(a) in general there was a steady, parallel rise in VAT and GNP during the period before 1993;

(b) although GNP has continued to rise in all the Member States, the variation in revenue between 1992 and 1993 shows that for five Member States (DK, E, F, NL and P) revenue decreased by between 1,5% and 10,3%; for the other seven Member States (B, D, GR, IRL, I, L and UK) revenue rose by between 0,3% and 10,3%.

1.94. In 1993 VAT revenue for the Union as a whole was 359 600 Mio ECU, which was slightly lower than 1992 ( P0,1%), although Community GNP continued to increase (+0,8%).

The VIES

1.95. The main objective of the VIES is to inform the tax authorities of each Member State of the intra-Community supplies of goods declared by traders in their respective countries, so that the tax levied on the intra-Community acquisitions can be verified. Each Member State is accordingly required to establish an effective system for the storage and electronic transmission of the data collected from intra-Community suppliers in that country concerning the general level of their trade with other Member States. The computer system is essentially constructed around two databases managed by each Member State: one for traders, the other for intra-Community supplies. All the databases are linked on a network.

1.96. Under Article 6(4) of Council Regulation (EEC) No 218/92 of 27 January 1992, persons involved in the intra-Community supply of goods or services are authorized to obtain confirmation of the validity of the identity number of the other party to the transaction. Each Member State therefore has a database ('the trader database`) containing the register of its taxpayers, with a VAT identity number, which can be accessed by the competent authorities of the other Member States, via the VIES network.

1.97. The information on the summary statements is recorded in the VIES by the authorities. It must be forwarded automatically to the other Member States within three months of the end of the quarter to which the data refer. In practice, Member States respect the deadline laid down by the Regulation. At most, there have been delays of a few working days.

1.98. Regarding the databases of intra-Community supplies, the quality of the information which they contain is relative. The procedures for recording data and carrying out initial validation differ from Member State to Member State and accurancy and completeness are not always guaranteed. Caution is needed as regards the up-to-dateness of the data as between 10% and 20% of records are entered after the statutory transmission date.

1.99. The procedures for the recording and initial validation of the data vary according to the Member State. Although the information that was recorded complied with the regulations, it was not identical in all Member States. For example, in Germany there was no obligation to indicate triangular traffic. In Denmark, Ireland, the United Kingdom and the Netherlands there are special annual arrangements for certain categories of trader (e.g. small businesses), whereby the value of the supplies is not specified and thus cannot be sent to the other Member States.

Traders' compliance with procedures and data input management

1.100. Under Article 4 of Regulation (EEC) No 218/92, Member States must ensure that the databases are up-to-date, complete and accurate.

1.101. The information on the accuracy of the various items of data declared in the summary statements is not very reliable. In 1993, the Court reviewed the information supplied by the Commission for all the Member States. This review showed that the Member States estimated that more than 10% of the data forwarded by traders was inaccurate initially, and around 5% of it was still inaccurate at the beginning of June 1994.

>TABLE>

1.102. The correction procedures vary according to the Member State. The available information showed that the number of items requiring correction rose from 265 514 at the end of June 1993 to 608 387 at 6 June 1994. France and the Netherlands were not taken into account, because there was no information concerning the data awaiting correction. A single Member State (UK) accounted for almost 50% of the 608 387 corrections to be made. Procedures for verifying the completeness and accuracy of declarations of the value of supplies varied from one Member State to another. Some Member States (GR, NL, DK) validated data before sending it to other Member States.

1.103. A general agreement was initially concluded among the national authorities concerned, to the effect that the tax authorities ought to adopt a conciliatory approach if traders did not follow the procedures. The tax authorities usually sent letters pointing out the probability of a fine. As of June 1994, no fines had actually been imposed in the majority of Member States, although thousands of traders had been at fault on several occasions. It would be advisable to introduce an effective policy on penalties.

Use of recorded data and development of control strategies

1.104. In one Member State (NL) where there was comprehensive validation, 85% of the national VAT declarations recorded intra-Community acquisitions but, even allowing for approximation, the amount specified differed from the amount declared for intra-Community supplies by foreign suppliers. The system made it possible to detect other irregularities and omissions in Member States such as, for example, France and the Netherlands.

1.105. Through VIES, it is possible for the authorities in one Member State to request information on a trader or specific transaction for purposes of comparison with the data which they hold. Member States' use of the results of such comparisons is very variable. At the time of the audit (April 1994), local offices in some Member States (D and NL) were still not in a position to make such requests. The number of requests has risen considerably and, thanks to this instrument, it has been possible to detect cases of fraud, as in the United Kingdom, for example, where it was possible to correct VAT to the value of 200 000 UKL.

Commission supervision of the new transitional arrangements

1.106. On 23 November 1994, the Commission submitted a report on the operation of the transitional arrangements for charging VAT on intra-Community trade pursuant to Article 28 of Council Directive 77/388/EEC of 17 May 1977. The Commission's assessment was that, overall, the system was operational and answered the requirements of traders, consumers and Member States. The main difficulties which remained concerned the harmonization of certain arrangements, the function of the tax representative, the special arrangements and the unreliability of Intrastat, (a system of statistical information concerning intra-Community trade).

1.107. In the case of tax controls, the report stated that this area was primarily the responsibility of the Member States and that it was for them to make the best use of the information available, supplemented, if necessary, by any other appropriate statistical or economic information. It also highlighted the need for increased administrative cooperation between Member States.

1.108. The Commission was to present, before July 1994, general guidelines with a view to determining the extent of Member States' commitments as regards special requests for further information (Regulation (EEC) No 218/92, Articles 5 and 7). As of 31 March 1995, the guidelines had still not been drawn up.

Conclusion regarding VAT on intra-Community trade

1.109. The technical aspects of the introduction of VIES have been carried out satisfactorily. The databases exist and are operational. The new procedures appear to have been readily accepted by taxpayers. The results as such are positive and without them it would not even be possible to go on to the stage of making full use of the system. It is in the Member States' interest to ensure that VAT revenue is collected efficiently and they are making increasing use of VIES for that purpose.

1.110. As regards the trader databases, the system is functioning, but the level of utilization varies, according to the Member State. VIES is used in very different ways by the various Member States: systematic cross-checking of data, updating of information with a view to individual checks, risk analysis and analysis of intra-Community trade.

1.111. So far there has been no indication that the change-over to the new arrangements has had a negative impact on Member States' VAT revenue. The Commission should still monitor the trend of VAT revenue carefully, however, in order to detect any problems that might be associated with the change-over from the present arrangements to the definitive arrangements.

GROSS NATIONAL PRODUCT

Introduction

1.112. In 1994, the volume of GNP-based resources amounted to 19 796,4 Mio ECU (see Table 1.1), comprising 19 725,5 Mio ECU entered in the budget by way of the GNP resource and 70,9 Mio ECU that was entered as the United Kingdom rebate. In 1989 the volume was 3 906,1 Mio ECU. As a proportion, the budgetary volume accounted for by the GNP resource represented 8,7% of the total revenue entered in the Community budget for 1989; in 1994 it rose to 29,0%. The role of Member States' aggregate GNP as a parameter for determining the total own resources of the European Union has been described in previous annual reports ().

1.113. The Court continued its systems audit of the GNP in 1994. It analysed the procedure for establishing the GNP forecasts, as well as the differences between forecasts and statistical observations. In the field of the statistical GNP, it examined the forwarding of GNP data by the Member States, as well as management and validation pursuant to Articles 6 and 7 of Council Directive 89/130/EEC, Euratom of 13 February 1989 () and Article 19 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 ().

GNP estimates

Forecasting

1.114. As a follow-up to its observations () on the absence of rules for establishing GNP forecasts, the Court carried out a review of the procedure by which the forecasts are established. In the course of this procedure, the independent forecasts of the Commission and the Member States are examined by the Advisory Committee on the Communities' Own Resources. The Commission takes maximum account of the opinions of the Committee in order to establish the final estimates.

Differences between forecasts and statistical observations

1.115. Table 1.5 shows the differences between statistical observations and the definitive GNP estimates, for the period 1989 to 1993. It gave rise to the following observations:

(a) in the case of the European Union the 5,6% underestimation found in 1989 diminished in subsequent years (-4,8% in 1990, -1,4% in 1991); it was then reversed, to producing an over-estimation of 0,3 in 1992 and 3,4% in 1993; this can be explained by the fact that forecasts tend to be undervalued during periods of economic expansion and overvalued at times of recession;

(b) for four Member States (GR, IRL, L, P) there was systematic and, at times, substantial underestimation throughout the period between 1989 and 1993. Although there was a tendency towards improvement in the case of Ireland, Luxembourg and Portugal for the years 1992 and 1993, the level of difference has remained unchanged in the case of Greece; thus, for the Member States in question, the balances and adjustments to the relevant balances paid in 1994 because of this underestimation were 32,6 Mio ECU (GR), 10,6 Mio ECU (IRL), 4,0 Mio ECU (L) and 32,1 Mio ECU (P), which is 14,6% (GR), 9,6% (IRL), 10,2% (L) and 12,8% (P) of their GNP resources payments for 1994;

(c) in consequence, even if the bias is corre