REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL - Follow-up Report on the EP 1999 Discharge Resolution for the Commission [EP resolution (A5-0113/2001) on 1999 Discharge/General Budget]

TABLE OF CONTENTS

1. SUMMARY

2. European Parliament decision closing the accounts in respect of the implementation of the general budget of the European Union for the 1999 financial year

3. European Parliament resolution containing the observations which form an integral part of the decision concerning discharge in respect of the implementation of the general budget of the European Union for the 1999 financial year

3.1. Access to information

3.2. Statement of Assurance

3.3. Council

3.4. Member States

i Member States to ratify the Convention on Protection of Financial Interests

ii Member States singled out for criticism in ECA 1999 Annual Report

iii Member States figures on irregularities lower than ECA figures

iv Own resources

v EAGGF Guarantee section

vi Structural Funds

vii Irregularities in ESF

viii Member States auditors to be able to audit to final beneficiaries

ix DAS errors of EUR418m

3.5. Court of Auditors 25

3.6. Anti-Fraud Office 26

3.7. Commission 28

i Retroactivity and Proportionality - Fléchard

ii Flax

iii Adulteration of dairy products

iv Enlargement

v Food aid to Russia

vi Nuclear safety

vii "Screening" of Delegations

viii Sarajevo delegation

ix Jerusalem delegation

x Stockholm representation

xi Washington delegation

xii Europe Aid

xiii IRELA

xiv ACEAL

xv A-30 subsidies

xvi Policy - funds for rights organisations.

xvii International donor co-ordination (incl UN)

xviii NGOs

xix Development Aid

xx Energy sector

xxi Internal policies

xxii Agencies

xxiii JRC

xxiv Leonardo / BATs

xxv Drug abuse & sex tourism

xxvi Fellowships

3.8. Ten Point Plan

I Send to EP: DG's annual plans, A1s descriptions/appraisals, Leavers under Art. 50 & 51; Dismiss A1's

II Annual Declaration to be signed by DGs

III League table by DG

IV Follow-up of audits, evaluations and budgetary implementation

V Revolving door

VI Whistleblowing:

VII Disciplinary proceedings and sanctions

VIII Blak list

IX Recovery of losses

X Archiving

Annex 2

1. SUMMARY

I/ Context

1/Scope of the Follow-up Report

Article 276 of the Treaty determines the discharge procedure and stipulates that "The Commission shall take all appropriate steps to act on the observations in the decisions giving discharge and on other observations by the European Parliament relating to the execution of expenditure [...] At the request of the European Parliament or the Council, the Commission shall report on the measures taken in the light of these observations and comments and in particular on the instructions given to the departments which are responsible for the implementation of the budget." The Commission accordingly, at Parliament's request, produces two Follow-up Reports: one relating to the Council recommendation and the other to the resolution voted by the European Parliament. These reports are sent to all the other institutions.

2/Object of the follow-up report

In accordance with the Treaty, the object of this Follow-up Report is mainly to present the action taken by the Commission or that which it intends to take in response to the comments and recommendations contained in the discharge resolution voted by the European Parliament on 4 April 2000.

The Commission notes that the recommendations made are already well incorporated in its actions, whether they concern in-depth reform of management and control (summary section II) or correction of errors and irregularities under its general mission of protecting the financial interests of the European Union (summary section III). However, in some cases, the Commission is not able to satisfy all of Parliament's requirements (summary section IV) immediately. Finally, the Commission considers that the information transmitted to the discharge authority enables the European Parliament to exercise effective control of the work of the Commission (summary section V). Summary section VI provides a conclusion.

II/The follow-up in relation to reform of management and control instruments

The resolution voted by the European Parliament largely supports the Commission's own concerns as regards improvement of financial management and is broadly inspired by the same philosophy. In this context, the Commission notes that implementation of the reform meets the recommendations of the European Parliament, in particular with regard to the 10-point action plan. One of the cornerstones of the reform is the amendment of the Financial Regulation.

1/ 10-point action plan

The Commission considers that in this field, the discharge resolution provides encouragement and support for its reform policy.

This is the case for the increased responsibility of actors, which results in particular in a more precise definition of the objectives to be achieved by each DG (see detailed point 10.I): individual job descriptions, evaluation of officials, the annual work plan for each DG. The annual declaration and the annual report that Directors-General and Heads of Services will have to sign (see detailed point 10.II), which will provide a better gauge of the quality of the Commission's management, pursue the same objective. Although the Commission does not agree to establish a hierarchy of the performance of its various departments (see detailed point 10.III), owing to the diversity of the policies and management tools of the various DGs, the Commission considers that these new instruments will enable it to further identify both good practices and the policies which need further improvement.

Similarly, the reform of the Commission puts emphasis on management controls (including evaluation) and independent internal auditing of its activities (see detailed point 10.IV). In this respect, the Commission has strengthened its control and audit resources within each DG and with the creation of the Central Financial Service and the Internal Audit Service. The Commission also puts greater stress on evaluation, which will allow it to measure the quality of its management and to check whether the objectives set are actually achieved. The success of such a policy requires rational management of information within the Commission, which will be the subject of a specific work plan (see detailed point 10.X).

Thirdly, like the European Parliament, the Commission is anxious to guarantee the integrity and transparency of the institution. For this reason, it takes on, as far as it is able, the objectives set by the discharge authority on the ethics and integrity of public service and on the strengthening of its powers with regard to disciplinary matters (see detailed points 10.V, VI and VII).

The protection of the financial interests of the European Union is one of the Commission's priorities. The improvement of the instruments enabling it to recover sums wrongly paid is a constant concern and is integrated into the reform process (see detailed point 10.IX). The Commission has prepared several measures which will make it possible to strengthen and clarify the powers of each individual, give authorising officers more responsibility and secure the means of keeping a closer watch on amounts to be recovered. The means of preventing fraud are also developed (exclusion of suspect tenderers from calls for tenders, exchange of information with the Member States). Similarly, the creation of centralised databases on contracts and contractors will make it possible to check all the stages of contractual relations between the Commission and final beneficiaries (see detailed point 10.VIII).

Lastly, following the so-called Fléchard case: the Commission will adopt guidelines on the implementation of the proportionality principle concerning debt waivers.

2/ Other reforms

The Commission considers that the discharge resolution supports its action in several other fields, significant examples of which are:

* the European Parliament devoted a large section of its resolution to external actions. In this field, and in addition to other measures carried out in the framework of Commission-wide reform, the Commission undertook reforms aimed inter alia at clarifying internal responsibilities, improving the quality of programming, phasing out the Technical Assistance Offices and closing old and dormant commitments wherever possible. The Commission is open to pursue a constructive and forward-looking dialogue with Parliament on possible further measures to improve the quality and speed of aid delivery. In general terms efforts are being made to rationalise the use of human resources, such as the process of devolution to the delegations or the creation of EuropAid, which are central elements of the management of external aid reform. On more specific points, such as financial relations with the UN, the Commission is re-negotiating the EC-UN framework agreement, which should make it possible to improve the audit and reporting arrangements for EU-financed operations implemented by UN agencies. Similarly, in the field of nuclear safety in the CEECs the Commission took measures as from September 2000 in order to simplify and rationalise its involvement.

* Financial corrections for Structural Funds is an important item of reform. Two regulations [1] adopted in March 2001 organise the respective responsibilities of the Member States and of the Commission in this field. They were inspired by the methodology governing the clearance of the agricultural accounts.

[1] Regulations Nos 438/2001 and 448/2001.

III/ Protection of the financial interests of the European Union

The discharge resolution deals with individual cases involving possible undue or irregular payments or practices. Some of these cases were communicated to the discharge authority by the Court of Auditors but also by the Commission itself, as part of its transparency effort with regard to the budgetary authority. Information provided by the Commission enabled Parliament, for instance, to draw conclusions and make recommendations on the management problems detected. However, as the Commission had as a rule been informed of these cases, appropriate measures had already been decided in most of them. As part of its broader mission of protecting the European Union's financial interests, the Commission endeavours to correct any irregular situation as soon as possible.

Several significant examples can be quoted:

* Concerning the common agricultural policy, the Commission, in accordance with the wishes of the European Parliament, has strengthened measures to cope with several problems:

- In view of the persistent weaknesses of Italy and Spain as regards the additional milk levy, the Commission brought infringement proceedings against these Member States and decided to reduce advances for four Member States. As a result of this action combined with the extra powers on sanctions, which the Commission enjoys following the recent revision of the quota implementing regulation, improvements have gradually been seen in these Member States.

- At the Commission's insistence the Danish agency responsible for export refunds tackled the many outstanding cases of guarantees not released. This made it possible to reduce the number of these outstanding cases by a factor of 10. A specific audit on this matter will be carried out.

- Concerning the cultivation of flax and adulteration of dairy products, OLAF has conducted investigations covering Spain and Italy. Other enquiries are ongoing and the Commission is examining what financial measures should be taken in the clearance-of-accounts procedure.

* Concerning the Structural Funds, the Commission took important measures on ESF payments in the Netherlands and in Spain. In these two cases, procedures under Article 24 [2] of the coordination Regulation were initiated.

[2] Regulation (EEC) No 4253/88: Reduction, suspension and withdrawal of assistance.

* Concerning external actions, the Commission has undertaken to monitor closely and follow up the audits which were conducted, in particular with regard to the representation in Stockholm where disciplinary proceedings were initiated. In one case, disciplinary proceedings were initiated. For another case, the delegation in Washington, the file has been passed to OLAF. Monitoring has led to financial action, such as the issuing of a recovery order (the official title is "debit note") with regard to IRELA or to the opening of an OLAF investigation (for example for ACEAL).

* Concerning the DAS errors detected by the Court of Auditors, the Commission looks at each one to determine the most suitable actions to be taken. The Commission's follow-up action is exhaustive.

Whenever possible and appropriate, the Commission recovers amounts wrongly paid.

The agricultural sector regulations ensure that errors are normally automatically picked up via the ex-post controls. In the case of structural funds (another area of large expenditure, along with agriculture) it is not necessary to recover amounts for ineligible expenditure as offsets against current eligible expenditure can be made.

However, it is not always possible to recover amounts initially identified. Further investigation may reveal no error, or new material facts may come to light, or there may be a difference in interpretation of the rules. The Commission will take legal action where it feels its claim is justified.

The Commission has taken an initiative to further clarify the difference between an irregularity and a fraud with its proposal for a directive of the European Parliament and of the Council on the criminal law protection of the Community's financial interests. The proposal contains a definition of fraud and what constitutes serious fraud. EC Regulation No 2988/95 contains in its Article 1(2) a definition of what constitutes an irregularity.

IV/ Recommendations that cannot be fully implemented

There are no major disagreements between the Commission and the European Parliament.

However, sometimes there is a conflict between a request and the respect of an individual's human rights.

In other cases, Parliament's demands come up against specific difficulties making it impossible to introduce the measures planned. In general, the obstacles are of a legal nature. Some examples can be found in the 10-point action plan where the Commission cannot always go as far as the discharge authority demands. The Commission will keep the appraisals of individual officials internal. Concerning the dismissal of A1 officials, the Commission's power is governed by the provisions of the Staff Regulations, which do, however, allow considerable sanctions. In the process of administrative reform, proceedings dealing with professional incompetence are being developed. The respect of existing legal obligations also limits the information which OLAF can provide to the discharge authority.

Finally, sometimes, technical or material reasons prevent the Commission from meeting Parliament's request. This is especially the case concerning the error rate for the DAS. The Commission is not in a position to communicate an error rate for the general budget, let alone by sector.

The Commission shares the discharge authority's views concerning the principles and objectives set out by the resolution. But with regard to the new disciplinary board arrangements, the Commission will stick to its proposal in the White Paper.

V/ Policy of information for the discharge authority

During the discharge procedure, the Commission fully complied with the Treaty obligations and provided Parliament with a large volume of detailed information which allowed Parliament to act as the discharge authority.

The Commission has improved its reporting tools. Parliament receives weekly budget implementation figures. It will receive information concerning the audits of the Commission via the IAS annual report and the Annual Report of OLAF. The development of audit, evaluation, control and reporting tools will enable the Commission to supply more detailed information.

The respect of confidentiality, and correct transmission procedures remains crucial. The 1999 discharge procedure showed that the Framework agreement provides an effective and satisfactory framework for cooperation between Commission and Parliament.

VI/ Conclusion

Finally, the Commission would stress that much has been done during the limited time between the vote on the discharge and the publication of this report. Nevertheless, it is evident that meeting some of Parliament's demands will take significantly longer: reforms, enquiries, changes in management systems have to be studied and prepared carefully if they are to have maximum positive effects for the coming years. This applies, for example, to changes in the existing contractual clauses in the field of research policy, the reallocation of staff in the external action sector or, more generally, the full implementation of the Commission's reform process. Nevertheless, the Commission would repeat that its follow-up of the discharge does not end with the publication of this report, as improvement of management of EU funds needs a continuous effort.

The discharge procedure is seen by the Commission as an important component in the process of improving its financial management. This is why it has paid close attention to Parliament's recommendations. This document shows that there is a broad measure of agreement on the main principles and objectives and even on the measures which have to be taken to meet them. They have already produced positive results and the reform process will continue in this direction.

* * *

2. European Parliament decision closing the accounts in respect of the implementation of the general budget of the European Union for the 1999 financial year

The European Parliament,

1. to 4. (description of the accounts/resources/expenditures/balance sheet)

5. Is concerned that the failure to draw up comprehensive financial statements indicates a lack of adequate data checks, management supervision and budget procedures; calls on the Commission to introduce an effective accounting system to allow anomalies to be discovered in good time; asks the Commission to introduce procedures to enable each Directorate-General and delegation to draw up interim aggregate financial statements every six months; notes that, under the reform programme, the system will be fully operational by 2003;

Commission's reply to Point 5:

The Commission has begun putting in place a new system for the regular data checks. A first trial was conducted with the closure of the 2000 accounts.

The quality of data extraction for the preparation of the 2000 revenue and expenditure account was far better than in past years. The Commission performed various checks on the data of the individual volumes of the revenue and expenditure account in order to ensure that they were accurate and coherent.

The Commission has given high priority to improving its monitoring systems on budget implementation. The Commission currently produces for the budgetary and discharge authority:

* weekly budget implementation tables on the basis of authorising officers' returns in electronic form, giving continuously the most up-to-date situation on budget implementation for budget decision-making;

* monthly and quarterly accounting records of implementation published on the Europa website. The quarterly returns also give a summary analysis of the main features of the implementation, compared with the previous year;

* a monthly Early Warning System for agricultural expenditure.

* the Budget Implementation Plan for 2001, which has been developed with the objective of becoming an improved management tool for monitoring the implementation of the budget;

* the Annual Financial Management Report, which provides a detailed analysis of budget implementation and has a focus on budget output, showing what has been achieved compared with the plan and assumptions when the budget was approved.

* the Annual Financial Report, which provides an overview of Community financing, with a focus on what is achieved with EU budgetary expenditure. The report also highlights particular priority actions.

The production of full financial statements by each DG will be examined as part of Action 82 (declaration by Directors-General in their annual activity report) of the White Paper on Reform.

6. Recalls that the Court of Auditors, in the context of its Statement of Assurance, is of the opinion that the accounts reflect reliably the Communities' revenue and expenditure and the financial statement at the end of the year, but as in previous years, has voiced reservations regarding the effect of a number of errors and weaknesses on the consolidated revenue and expenditure account, including:

(a) a net understatement of fixed assets of around EUR 240 million, as buildings of the European Parliament and European Court of Justice are not included and inconsistencies in the treatment of depreciation between, and even within, different Commission Directorates-General,

(b) an understatement of short-term amounts receivable from Member States, in the area of own resources and EAGGF-Guarantee debtors,

(c) a material understatement of sundry debtors, essentially sums paid to various intermediate bodies but not yet transferred to final recipients,

(d) the inaccurate and inadequate presentation of information on advances and payments on account at 31 December 1999, as a result of incorrect recording by the authorising officers and technical problems linked to the introduction of SINCOM2,

(e) the understatement of commitments by some EUR 2 600 million,

(f) the overstatement of commitments still to be settled by some EUR 940 million, since they are maintained in the accounts although they no longer represent an obligation to make further payments owing to poor monitoring by various Commission departments,

(g) the overstatement of potential receivable amounts;

Commission's reply to Point 6:

(a) The two buildings in question were included on the assets side of the balance sheet at 31/12/2000. Before that they were referred to in the annex to the balance sheet.

In order to harmonise the valuation rules and the accounting procedures, on 29 December 2000 the Commission adopted Regulation (EC) 2909/2000 on the accounting treatment of non-financial fixed assets applicable to all the European institutions and it has also produced an accounting and consolidation manual. (The financial statements of the individual institutions are now produced in a harmonised manner.)

When the 2000 financial year was closed, all the institutions made entries for depreciation.

(b) As regards traditional own resources, the Commission would point out that it is not currently in a position to give a more accurate figure for short-term amounts receivable because of the uncertainty about whether they will be recovered.

Pursuant to the accounting principle of prudence, the Commission entered for 1999 a 100% provision for doubtful debts; it did not apply a probable recovery rate for lack of information.

For 2000, in order to give a more realistic estimate of short-term amounts receivable, the value adjustment was calculated on the basis of recovery statistics for earlier years and put at 63%.

In order to improve the valuation of own resources receivable, the Commission has presented a proposal for the amendment of Regulation (EEC/Euratom) 1552/89 with a view to tightening up the procedure for Member States to write off irrecoverable amounts.

The same difficulty exists for estimating EAGGF debts, as hitherto there were no regulations requiring Member States to provide information about recovery possibilities. For 1999 for instance, a 100% value adjustment for doubtful debts was likewise entered on the assets side of the balance sheet as a deduction from receivables. For 2000 the value adjustment for doubtful debts was estimated on the basis of the information supplied by the Member States and that emerging from controls carried out.

From 2001 onwards a Commission Decision (EC 2761/99) requires Member States to inform the Commission every six months of the amount of debts for which the likelihood of collection is virtually nil (even if legal procedures for recovery are still in progress). It will then be possible to make a more accurate estimate of receivables.

(c) In order to improve the information available about financial intermediaries, the Commission conducted a survey in Directorates-General in 2000 to produce lists of all fund administrators. As a result the amount of budget advances paid to public or private intermediaries shown on the assets side of the balance sheet is more comprehensive than in past years.

This survey of financial intermediaries will be conducted each year.

(d) In its proposal for the recasting of the Financial Regulation the Commission has clarified the concepts used for types of payment.

(e) These are mainly commitments from the Structural Funds. The reason for the EUR2 600 million understatement is that 1999 was the last year of the 1994-99 programming period for structural operations. Mainly because of delays in the reprogramming by Member States, the Commission did not have sufficient time to make the commitments at the end of 1999 and therefore carried the appropriations forward in order to comply with the amounts set at the Edinburgh Summit.

This was thus clearly a one-off problem.

(f) The Commission keeps a close eye on outstanding commitments by means of a permanent surveillance programme in all DGs to ensure that the amount stated corresponds to current legal obligations. On 20 November 2000 it presented to the budgetary authority a report entitled "Strategy on outstanding commitments".

It should, however, be stressed that some commitments must be kept for a number of years because of legal constraints (legal proceedings, etc.).

In order to improve the information on this subject the Commission shows in the off-balance-sheet commitments the position concerning outstanding commitments and it comments on developments.

(g) Decision C(2000) 1992 of 14 July 2000 laying down the format of the tables for the transmission of EAGGF Guarantee data distinguishes between amounts to be recovered as a result of irregularities and fraud (Regulation (EEC) No 595/91) and other receivables. This information will help in eliminating double entries and hence the overstatement of potential receivable amounts. Although the decision is not applicable until 1 January 2001, some Member States sent in the information for 2000. Only for those Member States was it possible to avoid double entries in the 2000 financial statements.

7. Approves the closure of the accounts for the implementation of the general budget for the 1999 financial year;

3. European Parliament resolution containing the observations which form an integral part of the decision concerning discharge in respect of the implementation of the general budget of the European Union for the 1999 financial year

3.1. Access to information

1. Regrets that, even after the conclusion of the Framework Agreement, the Commission has not forwarded certain information and documents requested by the discharge authority; again reaffirms paragraph 26(b) of its resolution of 19 January 2000 containing the comments which form an integral part of the decision giving discharge to the Commission for the implementation of the general budget of the European Union for the 1997 financial year, in which Parliament points out that it has to have at least as much access to Commission documents as the Court of Auditors; recalls that Parliament has respected the Framework Agreement when requesting information from the Commission despite the fact that the rules:

i. are open to very broad interpretation, in particular as to whether a document is deemed confidential,

ii. may cause undue delays, for example the transmission of documents on 16 February 2001 following the questionnaire of 5 December 2000;

therefore calls, in the light of this experience, for the revision of the Framework Agreement, this process to be governed by the following principles;

(a) confirmation of the right of any Member of Parliament to demand and receive confidential information, too, where necessary, from the Commission pursuant to Article 197 EC,

(b) unreserved application of the provisions of Annex VII to the Rules of Procedure on the consideration of confidential documents, which includes the right of any committee member to consider the confidential documents,

(c) forwarding of complete original documents without prior alterations or obliterated text;

Commission's reply to Point 1:

The 1999 Discharge procedure was the first to which the Framework Agreement, concluded on 5 July 2000 was applied. The Commission sought to apply the agreement fully and loyally throughout that procedure. Article 4 of Annex III to the Framework Agreement contains the specific procedure to be followed for its possible revision. An action concerning the Agreement is currently pending before the European Court of Justice. In the Commission's view, the Framework Agreement has proved to be an effective mechanism, one benefit being that it allows Parliament to receive confidential and other information.

2. Reminds the Commission of Article 80 of the Financial Regulation, pursuant to which the analysis of the financial management must supply details as to whether the principles of sound management laid down in Article 2 of the Financial Regulation have actually been complied with; regrets that that document, which is fundamental to budgetary control, contained no more than highly incomplete information for 1999 and was available in one language only; calls on the Commission to submit a complete analysis for 2000 which covers all budget headings and is available in all official languages;

Commission's reply to Point 2:

The analysis of financial management for the year 2000 complies with the principles set out in Article 2 of the Financial Regulation: by presenting a comparison, for all important budget lines, between expected and actual financial and output implementation, it satisfies the requirement that 'quantified objectives must be identified and the progress of their realisation monitored'. However given that the Budget now contains some 1200 lines, and in conformity with the principle of cost-effectiveness, the Commission does not consider it appropriate to report extensively on each and every budget line irrespective of importance. Instead, and following the Court of Auditors' remarks that the scope of the comments should reflect the relative importance of the budget lines being reported on, the Commission has for the year-2000 financial management report selected for detailed review those lines with appropriations exceeding EUR30 million and/or of particular importance or interest. The emphasis has been on preparing a document which is manageable in terms of the workload and volumes of data involved. Given the timeframe and the large size of the document (more than 400 pages of detailed analysis) it is necessary to produce it in one version only.

3.2. Statement of Assurance

3. Questions the utility of the global Statement of Assurance for 1999 so long as the figures are not given; notes that the Court of Auditors, which expends considerable resources of both the auditor and auditee, has not published substantive and formal error rates in recent years, which would allow Parliament to gauge the success or otherwise of the Commission's management of the Union budget:

(i) recalls that the overall substantive error rate of the Union budget was reported as 4.0% in 1994, 5.9% in 1995 and 5.4% in 1996 and not published for subsequent years;

(ii) notes, however, that the figures for the agriculture sector, provided for the first time by the competent Commissioner, responsible for the expenditure of EUR 39.5 billion or 47% of the budget, amounted to 2.52% in 1995, 3.78% in 1996, 1.94% in 1997, 3.29% for 1998 and 3.06% for 1999 and was markedly lower than the global error rate;

(iii) notes that funds managed by other Directorates-General, particularly those jointly managed with Member States, suffer, as a whole, from much greater error rates; calls for all remaining Commissioners to inform Parliament of annual error rates, in their respective areas of responsibility, since 1994 and in the future;

(iv) Welcomes the Court's willingness to undertake sectoral appraisals as an initial step towards more transparent and accurate assessments of budget utilisation rates but insists that the Court modify its approach in the direction of quantifying the error rate and specifying its results from DAS audits on both a geographical and a sectoral basis; if necessary, recommends that the Court identify the additional human and financial resources required to provide such data;

(v) calls on the Court of Auditors to transform the DAS into an instrument enabling the Discharge and Budgetary authorities to compare and monitor progress in financial management;

(vi) restates paragraph 1(a) of its resolution of 13 April 2000 on the postponement of discharge to the Commission in respect of implementation of the general budget of the European Union for the financial year 1998 that the Commission should cut the error rate of more than five percent by a considerable rate; calls for this reduction to be made in conjunction with Member States, on the basis of a method to be discussed by the Court of Auditors, the Discharge Authority and the Commission; urges the Commission to ensure that it achieves a positive statement of assurance for budget year 2003 at the latest;

Commission's reply to Point 3:

(iii) The Statement of Assurance (DAS) is the preserve of the Court of Auditors. As part of a process of continual improvement in the presentation of the DAS, the Court of Auditors decided some years ago that a descriptive DAS was the most effective method of communication. The DAS description is a global statement for the Commission's activities; the relevant provision of the EC Treaty, Article 248, does not provide for a detailed breakdown by DG. Therefore, for the four DAS statements made by the Court each year, on the reliability of the accounts and legality and regularity of revenue, commitments and payments the Commission is not able to give errors rates, nor details by DG. The DAS for payments (alone) was negative.

(vi) The Commission has stated that it 'is committed to do all in its power to improve the DAS as quickly as possible' and reaffirms this commitment. The means of achieving a consistent and long term improvement in the DAS is via improvement to the Commission's and Member States' control systems and ensuring the appropriate resources for the tasks. The reform of the Commission that was set in motion in the first half of 2000 is addressing these two areas. For example, the financial functions in operational DGs have been strengthened. The Central Finance Service is in place and so substantially are audit functions in the DGs, the Internal Audit Service, and the revision of the Financial Regulation is progressing.

3.3. Council

4. (the Council:)

3.4. Member States

5. Recalls that more than 80 % of the Union budget is administered by the Member States:

(i) calls for Member States which have not yet ratified the 1995 Convention on the Protection of Financial Interests, namely Belgium, Ireland and Luxembourg, to do so as soon as possible;

(ii) notes that, in its answers of 26 January 2001 to the questionnaire from the discharge authority, the Court of Auditors indicates that in its Annual report following Member States are singled out for criticism;

>TABLE POSITION>

(iii) is surprised that figures of irregularities and fraud given by Member States are, as a whole, much lower than error rates drawn up by the Court of Auditors under the sectoral declaration of assurance; observes that the figures provided by Member States may give a distorted picture owing to differences in definitions and methods used by the Court of Auditors and Member States; invites the discharge authority to investigate this matter;

(iv) Own resources section:

(a) recalls that Member States reported irregularities and fraud of EUR 266.1 million, i.e. 1.92% of the Own Resources budget of EUR 13.8 billion (Regulation (EEC, Euratom) No 1552/1989); notes that of a total of EUR 214.8 million reported as irregularities by Member States, 48.7% were identified by the United Kingdom and of a total of EUR 51.3 million reported as fraud by Member States, 76.8% were identified by Germany;

(b) points out that four Member States, namely Ireland, Luxembourg, Portugal and the United Kingdom have not reported any cases of fraud in the collection of traditional own resources;

(c) calls on the Commission to explore the feasibility of bringing forward a financial corrections procedure for Own Resources adapted from the EAGGF-Guarantee clearance of accounts system;

Commission's reply to Point 5. (iv):

(a) & (b) As the Commission has noted before, the notion of fraud is not consistently interpreted by the various competent authorities in Member States - largely because the convention providing for a consistent interpretation has not yet been ratified by them all. In some Member States, a violation of a Community regulation can only be considered fraud after the definitive court judgment, whilst in others operational services make this classification themselves during their inquiries.

(c) Prior to tabling a modification of Regulation 1552/89 (now 1150/2000) in 1997, the Commission examined various ways to make the "write-off" procedure (Art. 17(2) of Regulation 1150/2000) more transparent and effective. In the framework of that analysis, the possibility of a "clearance" system was also looked at. It was concluded that such an approach would be cumbersome for traditional own resources, because unlike the EAGGF situation, the total number and magnitude of the underlying transactions are an unknown. The Commission therefore proposed a more straightforward solution under which Member States would be obliged to report to the Commission all cases above EUR10,000 for which recovery had been unsuccessful during the previous 5 years. Where a Member State had failed to demonstrate due diligence in the recovery process, it would be held financially responsible. This proposal (COM (97) 343 final) is still under scrutiny by the Council.

(v) EAGGF Guarantee section:

(a) recalls that Member States reported irregularities and fraud of EUR 232.1 million, i.e. 0.59% of the EAGGF Guarantee budget of EUR 39.5 billion (Regulation (EEC) No 595/1991); notes that of a total of EUR 116.5 million reported as irregularities by Member States, 70% were identified by Germany, Spain and Italy and of a total of EUR 115.5 million reported as fraud by Member States, 78% were identified by Germany, France and Italy;

(b) points out that two Member States, namely, Greece and Finland, have not reported any cases of fraud in the area of the CAP;

(c) regrets that one Member State, Denmark, had, at 1 February 2001, built up an unacceptably high level of DKK 2.2 billion (approximately EUR 300 million) as export refund guarantees, a level that seems too high and of which DKK 6 million (approximately EUR 800 000) was deposited by companies five years ago; urges the Commission, along with the Court of Auditors, to audit the handling of export refunds by the Danish Directorate for Food, Fisheries and Agro Business;

(d) regrets that Italy has been paying the super-levy for the breaching of milk quotas, on behalf of its farmers, thereby distorting competition across the Union; attaches great importance to the establishment of an appropriate legal basis allowing penalisation of Member States with inadequate management of the milk quota system; urges the Commission to investigate thoroughly the allegations that skimmed-milk powder subsidised by the Community may be being reprocessed as fresh milk;

(e) regrets that Greece has not set up a vineyard register, despite a legal obligation to do so since 1992; deplores the Commission's persistent failure to set up an effective specialised control body in the wine sector, in spite of repeated requests by both the Court and Parliament; asks that conditions attached to the granting of supplementary human resources for the Commission, in the context of the 2002 budget, include specific and verifiable measures for the operation of the body in question;

(f) calls for the Commission to extend the clearance period for which financial recoveries can be made from the current 24 months to 36 months, review the membership of the Conciliation Body and bring forward a proposal for a legal base enabling the Commission to apply increasing financial corrections to Member States for repeated weaknesses in control systems, including for delays in the introduction of IACS;

Commission's reply to Point 5. (v) c.:

The Commission has audited the management of advances and guarantees by the Danish Directorate for Food, Fisheries and Agro-business (EFFD) as part of a European-wide enquiry on this subject.

Advances for export refunds are only paid if an acceptable guarantee is lodged. This guarantee is cleared after the delivery of suitable documentation. In cases of differentiated refunds the exporter has up to 12 months to deliver proof of arrival and placing in free circulation in the third country, although such proof can be delivered up to 18 months after the date of export with a loss of 15% of the export refund. This period can be extended in well-justified cases. Exports to Russia are currently subject to additional requirements and exporters have up to two years to deliver the necessary proof of arrival.

It is therefore not surprising that, in a major exporting country like Denmark, a considerable amount of guarantees are held by the EFFD at any time. However, the Commission has confirmed that the backlog of uncleared guarantees had built up to an unacceptable level. This entails additional costs for exporters and potential risks to the EAGGF if recoveries are made late or not at all.

Under pressure from the Commission, in May 2000 EFFD set up an action plan to deal with the backlog, which consisted of 22 000 cases from before 1 March 1999 with guarantees of 740m DKK. By 30 April 2001 this had been reduced to 2400 cases with guarantees of 99m DKK and, by 13 June, to 70m DKK. The plan is to eliminate the backlog by the end of 2001.

While certain recoveries have been made later than necessary, the Commission did not find any evidence that EFFD has failed to make recoveries required under the legislation. The Commission welcomes the steps already taken by EFFD to deal with this problem.

The Commission will carry out a follow-up audit to ensure that the commitments of EFFD are in fact respected and to check that the problem is finally resolved.

Commission's reply to Point 5 (v) d:

Concerning milk quota

The Commission has opened infringement proceedings (still pending) against Italy (reasoned opinion 97/2228) for incorrect application of the milk quota regime and failure to collect the levy as well as against Spain (reasoned opinion 97/2227). The problems in Italy had been pointed out by the report of an Italian Committee of Enquiry. The Commission has been thorough and persistent in its actions and will continue to pursue recovery whilst recognising the delays caused by Member States, Regions and individuals exercising their rights of defence.

The Commission agrees that the milk quota regime has not yet been fully implemented in Italy insofar as problems remain with collection of the supplementary levy. However, it is necessary to differentiate between the reasons for non-collection in Italy which mainly comprise levy appealed to the national courts, incorrect compensation between delivery and direct sales quotas, and further amounts of uncollected levy. The latter two reasons for non-collection of the levy are why infringement proceedings against Italy remain open (reasoned opinion 97/2228). Nevertheless, while the situation regarding levy collection remains unsatisfactory in Italy, the Commission recognises that major improvements have been made. Italy has implemented relatively effective control measures retroactively from the 1995/96 marketing year. However, a serious problem remains as regards the non-collection of the levy.

The Commission has made great efforts to enforce the payment of the levy. The present legislation allows the Commission to reduce the advances when the levy is not paid within the time limit. For the majority of Member States, no financial correction or only a small correction is necessary in the clearance of accounts decisions. Up to 1999, reduction of advances were necessary for four Member States - Greece, Spain, Italy and UK, and in the case of UK for small amounts, which proves that the regime is correctly applied in the EU.

However, changes to the quota legislation to reinforce the powers of both the Commission and the Member States with regard to sanctions have been proposed and introduced in the course of the recent revision of the quota implementing regulation (within the limits of powers conferred on the Commission by Council Regulation 3950/92 which does not permit the Community budget to be the recipient of amounts collected (such as financial sanctions) other than supplementary levy (and the interest for late payment of levy) in the event of the overshoot of the national quotas). The new regulation is likely to be adopted and published by the end of July.

Concerning skimmed-milk powder

Any serious allegations that skimmed milk powder has been reprocessed into fresh milk to the detriment of the Community budget will be investigated.

Commission's reply to Point 5 (v) (e):

The Commission can merely confirm that Greece is indeed late in setting up a vineyard register. It should, however, be borne in mind that as a result of the successive extensions accorded by the Council the final date for completion was only 31 December 2000. At that date Greece had not made any significant progress. While taking the view that Greece continues to be under the obligation to set up the register even beyond the final date in the regulation which allowed Community co-financing, the Commission is especially disturbed by this delay as the new reform of the wine sector, which has been in force since August 2000, makes the register the central instrument for surveying and controlling wine-making

potential. The Commission views the absence of a vineyard register with great concern and appropriate actions will be taken in the context of the clearance of accounts procedure.

Concerning the Specialised Control Body, it is correct that the Commission could not man the Body with the posts initially proposed by Parliament in 1996, based on the Court's remarks. Given the number of posts available and the relative importance of the wine sector in budgetary terms, priority was given to core clearance of accounts including expenditure of the wine sector. This was also a consequence of Parliament's demand to allocate 15 additional posts to clearance of accounts in general (which was done in recent years), which is also in charge of the Specialised Control Body. That figure of 15 included one post for the Specialised Control Body for wine. It is also underlined that this Body was created by Regulation 2048/89 as a result of fraud cases (not only implying finance but also health risks) which seriously disrupted the wine sector both in 1985 and in 1986. For the last couple of years, the Commission has no evidence of an exceptional high risk for the wine sector which would justify an over-proportional allocation of audit resources to this sector.

As regards the establishment of a specific control team for the wine sector, it should first be pointed out that the clearance-of-accounts department assumes its expenditure control function, including in its work and mission programme enquiries which involve tasks assigned to the specific control team. From autumn 2001 onwards, specific enquiries will be launched with the assistance of national experts whose involvement and coordination are provided for in the work programme. The Commission will not be asking for additional human resources for this area given that these limited resources could be more effectively used elsewhere.

Commission's reply to Point 5 (v) f.:

The Commission views this proposal positively and is evaluating it in the light of the experience gained with the current 24 month period. The results of this review could lead to a proposal to amend the existing Regulation. The new composition of the conciliation body was determined by Commission decision with effect from 1 August 2001. Of the five members, three already belonged to the body as highly qualified experts on EAGGF Guarantee matters, and the two new ones are highly qualified experts in financial auditing, as is allowed by Decision 2000/649/EC of 12 October 2000. A Commission notice concerning these appointments was published in the Official Journal of 17 July 2001 (2001/C 201/02).

The Commission is considering the possibility of increasing financial corrections where there are repeated shortcomings.

(vi) Structural Funds section:

(a) recalls that Member States reported irregularities and fraud of EUR 120.6 million, i.e. 0.39% of the Structural Funds budget of EUR 30.6 billion (Regulations (EC) No 1681/1994 and 1831/1994); notes that of a total of EUR 97.3 million reported as irregularities by Member States, 64% were identified by Italy and the United Kingdom and of a total of EUR 23.2 million reported as fraud by Member States, 99% were identified by Germany, Italy and the United Kingdom;

(b) points out that nine Member States, namely, Belgium, Denmark, France, Luxembourg, the Netherlands, Austria, Portugal, Finland and Sweden, have not reported any cases of fraud in the area of Structural Funds;

(c) takes note of the substantial improvements brought about by the new Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds; counts on the Commission to make sure that that regulation is applied in full and, in particular, to make the necessary financial corrections where Member States are responsible for irregularities; calls on the Commission to ensure that the decommitting procedure laid down in that Regulation is fully implemented; calls on the Commission to introduce a clearance of accounts procedure for Structural Funds;

Commission's reply to Point 5. (vi) (a), (b) & (c):

On 2 March 2001 the Commission issued Regulations Nos 438 and 448/2001 which specify further the provisions of the basic regulation concerning management and control systems and financial corrections. It has commenced audits of Member States' systems to ensure that they meet the standards required by the new regulations. Under Regulation No 448 the Commission will be kept informed about financial corrections made by the Member States and is determined to make corrections itself where necessary, especially for systemic irregularities, when it will apply flat rates and extrapolation. It adopted internal guidelines for corrections at flat rates at the same time as Regulation 438.

The Commission has explained to Member States in good time through the Structural Fund committees how the provisions governing decommitment in year n+2 will be implemented. Concerning the EAGGF Guarantee Section clearance of accounts procedure, the Commission considers that the new management and control systems and financial corrections regulations, together with the financial correction guidelines, have already transposed into the Structural Fund rules those parts of the Guarantee clearance procedure rules that are compatible with the Structural Funds.

The Member States are obliged under the sectoral regulations to notify the Commission of cases of fraud and irregularity affecting the Community budget. They are, moreover, under the obligation (Article 280 of the Amsterdam Treaty) to take the same measures to counter fraud affecting the financial interests of the Community as they take to counter fraud affecting their own financial interests. The Commission services take every opportunity of reminding the Member States of their reporting obligations in this regard, in particular in the framework of the Advisory Committee for the coordination of fraud prevention, whose role it is intended to enhance to strengthen cooperation both between the Member States and between the latter and the Commission. With regard to the statistics in the area of structural measures, the tendency in the year 1999 was for an increase in both the number of cases of fraud and other irregularities and the amounts concerned. This reflects the increased efforts made by the Member States in terms of formal notifications. The considerable variations between Member States in cases reported is striking. The Commission continuously calls on the Member States to improve their awareness of the various types of fraud and irregularities so that more consistent results may be achieved.

Regarding the distinction between what constitutes fraud as distinct from an irregularity, the Commission has taken an initiative to fill in the void in this area in 2001 with its proposal for a directive of the European Parliament and of the Council on the criminal law protection of the Community's financial interests. The proposal contains elements from the 1995 Convention on protection of financial interests including in its Article 3 a definition of fraud and what constitutes serious fraud. The Commission took the initiative to make this proposal under Article 280 of the Treaty on European Union as it seemed unlikely given the current state of affairs that the Convention and its associated protocols would be ratified by all the Member States, an essential precondition for their being applied throughout the European Union, in the foreseeable future. Article 1(2) of Regulation (EC) No 2988/95 contains a definition of what constitutes an irregularity.

(d) regards the trend in the amount of outstanding commitments both in the area of structural measures and TEN projects as unacceptable; calls for the submission of an emergency reduction programme coordinated between the Member States and the Commission, in particular for pre-1994 outstanding commitments in the area of structural measures; calls for no extensions requested by Member States to be granted to payment deadlines;

Commission's reply to Point 5. (vi) (d):

Structural Measures

Each Structural Fund has an action plan for the reduction of the RAL, involving monitoring of all pre-1994 commitments that should be closed at the end of 2001 with the exception of legal cases pending. In accordance with the regulation, if payment claims from the Member States have not been registered, the corresponding commitments will be cancelled.

In absolute terms, the RAL has been increasing over the period 1994-1999 reflecting the doubling of the budget over this period.

The RAL for the Structural Funds has remained broadly flat in the last 3 years taking into account the fluctuation in the budget. The ratio of the RAL at the end of the period to appropriations for the period has been: 121% for 1998, 136% for 1999 and 126% for 2000 thereby showing no significant change.

In view of these figures, which concern multiannual actions in areas connected with infrastructure investments, conversion and modernisation of the productive sector, training, etc., the Commission would repeat its opinion that the volume of the RAL is normal. The pre-1994 RAL for the FEDER was too high and intensive action was therefore taken. As a result it has fallen from around EUR1.7 billion in 1999 to EUR674 million in June 2001. Work continues on reducing it.

The Commission is working with the Member States to clear these programmes in the course of 2001. The new regulation is intended to close old commitments so the changed legal base will result in reduced RALs in the future.

The reduction and closure takes time even when selected for intensive action. Decisions for action need to be based on good supporting documentation and must comply with the regulations; it may lead to legal action which takes time, but may be necessary in order to protect the financial interests of the EU.

TEN

In order to reduce the amount of outstanding commitments (RAL), measures to reinforce the management of the TEN projects have been drawn up; for example projects which have not started within 2 years will now be cancelled (Article 10 of the new TENs Regulation 1655/99).

Although the RAL increased from end-1999 to end-2000 (EUR940m to EUR1078m) these measures along with increased operational vigilance should result in an effective net reduction from 2001.

(vii) urges the Member States to comply with the eligibility criteria laid down in the new regulations, so as to avoid any recurrence of the irregularities that are highlighted each year and asks to be kept informed of the action taken by the Commission on the irregularities in European Social Fund operations in Member States, especially:

- Netherlands: Rijnmond-Drechtsteden and Gelderland;

- Spain: Catalonia;

- Denmark: Kolding, recalling that the national authorities did not report the case to the Anti-Fraud Office;

Commission's reply to Point 5. (vii):

In her letter to Mr Blak (0541 of 28 March 2001), Ms Diamantopoulou reported on the action taken by Commission staff on the Rijnmond-Drechtsteden and Gelderland and Catalonia cases.

* On the Rijnmond-Drechtsteden and Gelderland case, the Commission departments concerned organised a meeting on 22 June 2001 with the Dutch authorities in order to take a position on the recovery of the amounts wrongly paid in connection with utilisation of ESF appropriations in the Netherlands. As the Dutch Minister for Social Affairs was not prepared to accept the repayment plan proposed by the Commission (i.e. repayment of 1994-96 amounts before summer 2001 and 1998 and 1999/2000 amounts after completion of the controls), the Commission has applied the procedure laid down by the Coordination Regulation (Article 24 of Regulation (EEC) No 4253/88: reduction, suspension and withdrawal of assistance). The Commission informed the Dutch authorities of this at the meeting.

* In the Catalonia case an Article 24 procedure has been in progress since December 2000 to suspend all the ESF funds assigned to the two promoters concerned.

* Denmark: Kolding - The requirement to report irregularities to OLAF was discussed at the annual co-ordination meeting with the Danish control bodies on 21 February 2001. A formal report from the Danish authorities was subsequently sent to OLAF on 19 July 2001. The case is still being investigated by the Danish police authorities. The Commission is following it closely and no further payments relating to this project will be made pending the outcome of the judicial proceedings in Denmark.

(viii) calls on Member States who have not yet done so to give their national Court of Auditors full powers to audit the use of EU-funds down to the final recipient level; welcomes the reports produced by the Dutch Court of Auditors which have led to steps being taken by the Dutch Government;

(ix) notes that when examining transactions in order to draw up the declaration of assurance the Court of Auditors identified irregular payments worth EUR 418 million; invites the Commission to recover funds incorrectly paid to Member States and to propose a simplification of the infringement procedure, which allows a lump sum or penalty payment to be paid by the Member State, following a judgement by the Court of Justice, if the Commission considers that the Member State concerned has failed to fulfil an obligation under the Treaty (Article 228);

Commission's reply to Point 5. (ix):

Detection of irregularities and recovery of funds is achieved via specific and appropriate legislation for the different sectors of activity where the Commission acts. The actions that have been taken by different sectors are detailed below:

Agriculture: Guarantee - The Commission takes into account the results of the DAS in the EAGGF Guarantee clearance of accounts. As for EAGGF - Guidance - all the DAS cases have been verified and the recovery is in progress or the undue amounts have been received, or in particularly serious cases the Commission has launched infringement procedures against the Member States in question.

Regional Development: As regards the European Regional Development Fund, the Commission services are following up all cases of substantive errors on payments identified by the Court. Further inquiries with the Member States are in some cases still ongoing. These will allow the Commission to either gather evidence that the necessary corrections have been made for the errors accepted by the Member States, or will allow the Commission to reach a final conclusion, for the other cases.

Not all situations of error detected by the Court will give rise to a receipt of funds from the Member States of amounts paid. For example, if a programme where an error was detected is not closed there may be offsetting of new eligible expenditure against the non-eligible.

Commission departments responsible for employment activities ensure a close follow-up of all the substantial errors detected by the Courts of Auditors during the DAS exercise 1999. The totality of these errors have been reported for appropriate action to the Member States concerned. As 1999 was the last year of the programming period 94-99, most of the errors will be corrected in the framework of the closure process of the OPs (2001-2002). Final payment requests will be adjusted in order to take into account the observations of the Court, and, when applicable, recovery orders will be issued.

Furthermore the Council Regulation (EC) No 2236/95 of 18 September 1995 laying down general rules for the granting of Community financial aid in the field of trans-European networks stipulates that Member States shall take the necessary measures to recover any amounts lost as a result of irregularity including interest on account of late repayment in accordance with the rules adopted by the Commission. Commission officials or agents may

carry out spot checks, including sample checks, in respect of projects financed under this Regulation and may examine the control systems and measures established by the national authorities, which shall inform the Commission of measures taken to that end.

The Commission may require the Member State concerned to carry out an on-the-spot check to verify the correctness of payment applications. Commission officials or agents may take part in such checks, and must do so if the Member State concerned so requests.

In respect of the administration, two payment errors were identified. The first had a difference of EUR75.50 between the declared and correct amounts. No recovery was made as it was considered that Article 85 of the Staff Regulations was not applicable. The second error was for a difference of EUR3 055.32 and two recovery orders were established. The person concerned is repaying the balance in instalments. At 27 June 2001 the amount outstanding was EUR1 444.01. The Commission is continuing its efforts to recover the remainder.

In the area of fisheries, a payment error for EUR24 191.87 had been identified. In their request for reimbursement of expenditure connected with marine surveillance in 1999, the Greek authorities failed to declare to the Commission the amounts deducted by way of penalties or interest for late payment. In addition they applied a 0.10% deduction to certain payments to finance operational expenditure by the Ministry for Development. In their preliminary contacts with Commission departments on this subject, the Greek authorities did not object to the amounts in question being deducted from a future payment. A letter was sent to the Greek authorities on 8 September 2000 expressing the Commission's position, which is the same as that of the Court of Auditors. As the Greek authorities did not react to the Commission's letter despite a number of reminders, a recovery order was issued on 14 March 2001. During an on-the-spot visit in July 2001, the Commission officials were informed that as a result of a mistranslation of its application for repayment, the Greek authorities took the view that they did not have to repay anything. The Commission has insisted that the amount be repaid.

A simplification of the infringement procedure would imply a modification of the Treaty. The Court of Justice has underlined the large margin of discretion the Commission enjoys regarding the opening of infringement procedures under Article 228 of the Treaty, and the Commission uses other specialised and effective procedures for recovery of funds where significant expenditure with Member States occurs (EAGGF and Structural Funds). The Commission therefore does not see any pressing need to change the procedure at present.

3.5. Court of Auditors

6. (Court of Auditors)

3.6. Anti-Fraud Office

7. Underscores the urgent need for clarification of OLAF's information policy, so as to allow account to be taken of three demands, which are contradictory in some respects, in a rigorous and balanced fashion:

(i) a demand for transparency vis-à-vis the discharge authority;

(ii) a demand for confidentiality for certain information, the disclosure of which is likely to harm legitimate material and non-material interests;

(iii) a demand for compliance with the presumption of innocence and with the rights to defence of natural or legal persons called into question;

Commission's reply to Point 7:

OLAF remains fully committed to continuing to provide the European Parliament with information, in accordance with the legislation in force, on cases of fraud and irregularity affecting the Communities' financial interests. Given the need, on the one hand, to respect confidentiality in such a way as not to jeopardise ongoing inquiries or to harm the legitimate rights of the defence, and, on the other hand, to inform the Parliament in order to enable the latter to carry out its discharge duties, OLAF has taken the initiative of drawing up a draft document on its communication policy with regard to cases of fraud and irregularity affecting the Communities' financial interests, which aims to satisfy these different objectives. The draft document is now under discussion in the appropriate Commission's services and has been submitted to the OLAF Supervisory Committee for its opinion.

8. Regards it as essential in this regard to continue the debate between OLAF and its competent committee, the Committee on Budgetary Control, so as to lay down agreed, precise and binding ground rules on the matter; looks forward to receiving from the Anti-Fraud Office, under appropriate conditions of confidentiality as laid down in Annex VII of the Rules of Procedure, the final internal and external reports of investigations into programmes or organisations that fall under the responsibility of the following Directorates-General; invites the Anti-Fraud Office to indicate the date the allegation was received, the overall cost, main problems identified and recommendations to the Commission and/or other parties:

Agriculture Directorate-General: // Illicit traffic in butter-based products

External Relations Directorate-General: // Commission delegations including:

Washington,

IRELA (Instituto de Relaciones Europeas Latino Americanas),

ACEAL (Association pour la Coopération Europe-Amérique latine),

Humanitarian Office: // ECHOFLIGHT - Africa,

International Federation of the Red Cross - former Yugoslavia,

Justice and Home Affairs Directorate-General: // European Migrants Forum,

Employment and Social Affairs Directorate-General: // European Social Fund in the Netherlands, Spain and Denmark,

Personnel & Administration Directorate-General: // Berlaymont building,

Commission's reply to Point 8:

OLAF agrees with the need to have precise rules for informing the Parliament of cases of fraud and irregularity affecting the Community's financial interests. With regard to the specific cases mentioned, the current position is as follows:

Butter

The adulterated butter case is a complex one involving criminal organisations and concerning several Member States. Investigations are continuing. A rogatory commission has recently been terminated in Italy by the French authorities in the presence of OLAF investigators and Commission staff with a view to establishing the existence or otherwise of a risk to public health on the basis of the elements known about the nature of the adulterated butter as well as regarding the destination of the final product. Recovery action is under way for those operators who acquired the finished product. The black list regulation has been applied for some of these economic operators.

Washington

OLAF is re-examining the Commission's internal report into the Washington delegation following the resubmission to it of the report by the Commission services in August. However, given the conclusions of the report, it is unlikely that an OLAF investigation will be initiated.

IRELA

The IRELA case is still under investigation by OLAF. Given the complexity of the case and the need to interview a considerable number of persons, it is anticipated that the dossier will not be finalised for a further two or three months.

ACEAL

OLAF is continuing its investigation into ACEAL.

ECHOFLIGHT

The OLAF investigation into ECHO FLIGHT has been finalised recently. No evidence has been found of any fraud and in consequence the file has been closed.

European Migrants' Forum

OLAF has completed its investigation into the matter of the European Migrants Forum and a file has been referred to the Belgian judicial authorities.

ESF

OLAF is following closely the developments regarding the European Social Fund in the Netherlands and is standing ready to provide assistance to the Dutch judicial authorities, if needed.

Berlaymont

Work on the Berlaymont case is ongoing. It is a complex case involving many different layers of responsibility. OLAF will report on the results of its investigation.

3.7. Commission

9. Expects the Commission to report back on developments in cases discussed below, in particular with regard to remedying underlying system weaknesses brought to light by those cases:

(i) Retroactivity and Proportionality - Fléchard affair

(a) recalls that in 1991 a French company Fléchard agreed to transport 6,750 tonnes of Irish butter, to the former Soviet Union, upon submission of a guarantee of ECU 17 617 500; points out that a joint mission by DG VI and the Irish authorities, to Poland in May 1992, concluded that the transaction "was orchestrated as a fraud from the beginning";

- notes that the Commission adopted on 22 July 1993 Regulation (EEC) No 1938/1993 under which the guarantee would be lowered to ECU 6 277 500 and applied retroactively to Fléchard;

- understands that a decision to lower the guarantee to ECU 3 003 750 was adopted during the meeting of 7 January 1994, chaired by the deputy head of Cabinet of the President of the Commission, in the presence of the Financial Controller, the Director-General of the Legal Service and the Director of EAGGF;

- points out that the Anti-Fraud Office, Parliament's Legal Service, the Court of Auditors, and the Committee of Independent Experts have questioned the legal basis of the decision taken by the Commission to lower the penalty to ECU 3 003 750;

(b) regrets that the Commission took an ad hoc decision:

- without a sufficient legal basis;

- without carrying out a conclusive investigation into fraud;

- without the involvement of the Commission College or responsible Commissioner on the basis of a meeting of its senior officials, the minutes of which have disappeared;

(c) welcomes the fact nevertheless that the Commission has:

- acknowledged, for the first time to Parliament, that the handling of the Fléchard case is open to criticism;

- acknowledged that a more thorough investigation should have been carried out;

- realised the extent of the problems highlighted by the case;

(d) calls on the Commission to:

- state clearly and unequivocally that it would not handle a similar case in the same manner today;

- bring forward, by November 2001, guidelines on the application of the principle of proportionality, as promised;

- ensure that the College takes a formal decision in cases involving proportionality for the waiving of debts greater than EUR 1 million or EUR 100 000, if this represents a reduction greater than 25%;

Commission's reply to Point 9. (i):

At the April 2001 Plenary, Ms Schreyer made a clear and unequivocal statement on this case. An interdepartmental working party has been set up in response to Parliament's request to the Commission to present guidelines on the application of the principle of proportionality. It is planned that the Commission will adopt a communication on the adoption of these guidelines. In this way the Commission will shortly be laying down a set of rules providing certain and transparent protection for the financial interests of the Communities when debts are waived for reasons of proportionality.

(ii) Flax

Questions why insufficient action was taken by competent authorities in Spain, even though weaknesses in control systems were reported by the Commission (Financial Control and the Agriculture Directorate-General) and the Anti-Fraud Office; asks the Anti-Fraud Office to investigate similar irregularities in the flax sector in other Member States; asks the Committee on Budgetary Control to continue to monitor developments in those cases; expects the Commission to apply rigorous financial corrections to Spain and other Member States under the clearance of accounts procedure; expects the Commission to sanction adequately the violation of Community legislation both by the producers of flax and by the processing factories;

Commission's reply to Point 9. (ii):

On the basis of the definitive results of the on-going OLAF investigation and the investigations undertaken by the competent authorities in Spain the Commission will calculate what part of expenditure under this regime will be excluded from Community financing. In this context the Commission is at present investigating in the framework of the Community regulations what financial consequences under the clearance of accounts procedure can be applied to the Member State concerned. A bilateral meeting between the services of the Commission, OLAF and the Spanish authorities has taken place. A decision on correction is being prepared. The Spanish authorities have been informed by letter that all the expenditure on flax incurred for the financial years 1996 until and including 2000 is under consideration.

The report on the OLAF investigation into the flax sector in so far as it concerned Spain has already been transmitted to the Budgetary Control Committee of the European Parliament. Further inquiries into the flax sector in other Member States in the north and south of Europe are continuing.

(iii) Adulteration of dairy products

Parliament is alarmed by reports of fraud, involving the adulteration of 35 200 tonnes of butter, orchestrated by a multi-national organised crime syndicate; recalls that Community subsidies were paid on what was declared illegally as butter; encourages the Anti-Fraud Office to continue to coordinate controls in a number of Member States, including Italy, France and Belgium; calls on the Commission, within the clearance of accounts procedure, to apply maximum financial corrections, once the results of the investigation by the Anti-Fraud Office are finalised;

Commission's reply to Point 9. (iii):

OLAF is continuing to coordinate ongoing inquiries into suspected irregularities involving adulterated butter products (see reply to point 8). Financial corrections will, if appropriate, be included in a clearance decision based on the results of the national judicial investigations with which OLAF is assisting and will be made in accordance with the formal procedure under Article 4 (obligations for Member States paying agencies) of Regulation (EC) No 1258/1999 on the financing of the common agricultural policy.

(iv) Enlargement

(a) regrets, with regard to support for public administration, the lack of a strategy, the general nature of objectives and the fact that candidate countries appear not to have the capacity to apply, manage and monitor programmes to prepare for accession; welcomes, however, improvements in twinning programmes;

(b) deplores, with regard to PHARE, that financial decisions are concentrated at the end of the year; notes that the Commission was forced to make late payments, because supplementary and amending budgets were adopted at the end of the year; is concerned about the financial impact this may have on the beneficiaries of programmes or projects; expects that the adoption of new guidelines will improve tender procedures;

(c) calls on the Commission to ensure that, before accession to the Union, all applicant countries have introduced proper control systems in the areas of shared management of Community funds;

Commission's reply to Point 9. (iv):

(a) As emphasised in the Phare review, the Commission shares Parliament's concerns about the capacity of the candidate countries and the difficulties that this implies for the effective absorption of EU assistance. The issue can only be satisfactorily addressed by the candidate countries themselves. The Commission will help them to do so firstly by raising awareness (in particular through the Regular Reports and Accession Partnerships) of the issue and secondly by providing the countries with assistance to address it. This will be a high priority for Phare.

(b) Phare national programmes in a given year address the weaknesses identified in the Regular Reports which are only finalised towards the end of the previous year. Typically it takes six months to develop the Phare national programme. The programme is made up of projects in many sectors. Only fully developed projects are accepted and it is the speed of the slowest project that dictates the time taken to develop the programme. It takes a further four months to pass the programme through all the approval procedures (inter-service consultation, translation, management committee approval, Commission decision, budgetary commitment, signature of Financing Memorandum). For 2002 the Commission will split countries' national programmes so that projects in Institution Building and associated investment which are ready can proceed more quickly. This will allow commitment of a significant part of the budget in the first half of the year.

Provided adequate payment appropriations are available, the Commission would now expect to respect payment times for the Phare programme.

(c) The Commission is working closely together with the candidate countries to help them introduce "extended decentralisation" for pre-accession assistance whereby the Commission waives the right to ex ante control of tendering and contracting carried out by the countries and relies solely on ex post controls. This can only be done on the basis of a thorough analysis of the financial management and control systems in place in the candidate countries. Where possible, the Commission would wish to have such systems operational in advance of accession in order to ensure that they function correctly.

(v) Food aid to Russia

doubts the appropriateness of the programme to supply agricultural products to the Russian Federation; wonders whether the objectives pursued were realised; regrets that the Commission was unable to enforce its policy with the Russian federal authorities; expects the Commission to forward the final audit report to Parliament before the end of 2001;

Commission's reply to Point 9. (v):

The Commission made every effort under difficult circumstances to ensure that the programme as decided by Council was broadly successful in achieving its principal objective of delivering the food aid to Russia efficiently. Problems arose, inter alia, concerning control of the distribution of the food within Russia through the Russian organisations . The Commission stopped the programme in December 1999. The European Parliament will be informed of the results of the audit as soon as it is available.

(vi) Nuclear safety

encourages the Commission, to pursue efforts for:

(a) operations undertaken by the European Union in the field of nuclear safety in Central and Eastern Europe (CEE) and in the new independent states (NIS), to continue its efforts to improve the management of this aid in the context of the reform process, notably as foreshadowed in the document on 'Externalisation of the management of Community programmes' of 12 May 2000 by the Planning and Coordination Group on Externalisation, and

(b) redirecting funds by creating an independent budget line with the intention of strengthening cooperation in the field of nuclear safety for TACIS countries;

Commission's reply to Point 9. (vi):

(a) The Commission is continuing to improve management of external aid, including aid to strengthen nuclear safety.

(b) On 6 September 2000, the Commission decided to re-organise the responsibilities for nuclear safety programmes in support of Central and Eastern European Countries and Newly Independent States. This decision clarified the responsibilities and, particularly, with regard to PHARE pre-accession support reduced the number of interfaces between different Commission actors.

With regard to the PHARE financial instrument, one Commission directorate was given responsibility over the full project cycle. This directorate subsequently established a "Task Force for Nuclear Safety" to address both the political issues arising with regard to nuclear safety in the context of enlargement as well as the delivery of PHARE-funded assistance. This Task Force became operational during the first half of 2001. The lead directorate enjoys the support of the transport directorate as the line service in charge of nuclear safety issues. The concentration of responsibility in DG Enlargement allows the service in charge of the accession process to combine financial assistance with the pre-accession dialogue with candidate countries and thus contributes to a concentration of the Commission's efforts to ensure the improvement of nuclear safety levels in candidate countries. Simultaneously, the involvement of EC Delegations in candidate countries and their reporting to headquarters have been further streamlined to add to the impact of the Commission's activities.

As a further measure to improve the management of assistance in this field, the Commission also adopted new rules for contracts in the field of nuclear safety (for details, see annex to the Communication COM(2000) 493 final). These rules are intended to result in an improved delivery of the programmes' objectives.

Already in the 2001 budget a specific line was created B7-524 "Assistance in the nuclear sector" with a p.m. The allocation for the nuclear sector will be provided via transfer of appropriations. In the PDB 2002 the Commission has suggested allocating EUR85 million for the purpose of strengthening cooperation in the nuclear sector for TACIS countries. Furthermore on the line B7-525 "Chernobyl Shelter Fund" EUR25 million has been proposed.

(vii) "Screening" of Delegations

(a) regrets that staff and resources allocated to the Commission's delegations are not always commensurate with the Union's current political priorities or amount of aid disbursed; points out that there is an uneven attribution of resources, noting by way of example that the delegation to Mali, responsible for an annual budget of EUR 152 million, is staffed by six officials while Barbados, with a negligible aid budget, also has six officials; notes that there are no delegations in key regions including Singapore, Malaysia or any of the Gulf States;

(b) notes that in view of the benefits deriving from Annex X of the Staff Regulations, the average cost of an official overseas is EUR 270,000 in the first year and EUR 207,000 in subsequent years, as compared with the average cost of officials in Brussels or Luxembourg of EUR 120,000; notes that the cost of a locally recruited expatriate is one third of the cost of an official; encourages the Commission to continue the redeployment programme launched in 1996 in which regional delegations would be created; notes that, since 1996, 70 statutory posts were redeployed between Delegations and 50 posts from headquarters to Delegations; considers that a number of official posts in ACP countries could legitimately be replaced with locally recruited expatriates;

(c) calls for a clear definition of the duties to be conferred on all categories of staff; considers that a coherent approach must be taken to the question of the ratio of officials to local staff; calls for a proposal on how to simplify management of auxiliary, temporary and permanent staff in order to avoid the application of different standards;

Commission's reply to Point 9. (vii):

(a) Concerning the reported uneven attribution of resources in Delegations, the College has recently decided (COM(2001)381 of 03.07.01) on redeployment of resources within the External Service, including the opening of new Delegations and streamlining of others. Concerning the allocation of resources to the Commission Delegation to Barbados, it should be stressed that this Delegation has regional responsibilities covering 13 countries. Concerning Parliament's wish to see the redeployment programme continue, this question was also addressed in the recent communication on the External Service.

(b) As regards the possibility of replacing officials by locally recruited expatriates, this possibility is one of the instruments used by the Commission provided the professional profile makes this replacement possible.

(c) Parliament's call for a clear definition of the duties to be conferred on all categories of staff is addressed in the ongoing administrative reform programme. As regards the ratio of officials compared with local staff, the redeployment of officials initiated in 1996 constitutes a re-balancing of this nature. This exercise will be continued. Concerning Parliament's call for proposals on how to simplify staff management in order to avoid the application of different standards, the different contractual patterns in use in the External Service are related to the different aspects of the mission statement (temporary or permanent tasks). The administrative reform programme includes a review of the legal framework for non-permanent staff (auxiliaries, seconded national experts). Annex X of the Staff Regulations does not allow for auxiliary contracts nor temporary staff in third countries.

(viii) Sarajevo delegation

welcomes that at Parliament's instigation the Commission gave greater powers to the Sarajevo delegation which is now a role model for other offices;

(ix) Jerusalem delegation

(a) welcomes that a further 23 delegations have been selected to take on direct financial responsibilities, including the delegation in Jerusalem; notes that although aid to Palestine amounts to EUR 132 million, in 1999 the Jerusalem office was essentially staffed by two A-grades, one B-grade and one C-grade official; invites the Commission, in view of its new tasks, to increase the number of staff in Jerusalem beyond the fixed ceiling of officials and experts, established by the Israeli authorities, by starting negotiations with Israel, as the delegation itself already suggested in 1999;

(b) stresses the importance of European Union assistance within the framework of the Middle East Peace Process; points out that both the independent external evaluation and the special report No 19/2000 by the Court of Auditors, noted that the positive impact of aid was reduced by a number of factors including the fragmentation of responsibility, a lack of performance indicators and insufficient coordination with other donors; calls on the Commission, within the context of the reform of external aid, launched on 16 May 2000, to draw up an action plan following the audit and evaluation and to report on progress, the first time after six months and thereafter at least once a year;

(c) notes that the European Union, as the Palestinian Authority's largest donor, should ensure that its assistance promotes peace and reconciliation; the Commission should ensure that its support for Palestinian education does not either directly or indirectly finance expressions of racial hatred but that, on the contrary, its desire to play a role in the peace process results in the promotion of peace and reconciliation among the younger generation in a region where peoples have been subjected to terror for too long;

Commission's reply to Point 9. (ix):

(a) Clearance was received from the Israeli authorities in June 2001 to enable the Commission to increase the staff by up to 8 persons. Having obtained this authorisation the Commission Representative's Office in Jerusalem will receive extra staff as part of the deconcentration from Brussels of financial control which will take place in 2002; the exact timetable will depend on the security situation.

(b) The reform of the management of the Commission's external aid programmes is designed to increase effectiveness, and includes measures to define responsibilities more clearly through the unification of the project cycle and through devolution to the Delegations, and to improve the quality of project preparation and monitoring through better use of performance indicators. Measures for improved coordination were adopted in January and should have been sent by each Member State to their representatives in the field (all Commission Delegations have been briefed). A progress report on the implementation of the Action Plan is being prepared.

(c) The European Union as a whole, and the Commission in particular, has a proven record of seeking to promote peace, tolerance and human rights in the Middle East. The Commission has allocated in 1999-2000 EUR50 million to peace-building programmes promoting peace building through joint projects and awareness campaigns. Among these projects are "Democracy Education for Youths" and "Peace Education - Curriculum Enrichment". The latter develops guidelines and outlines for lesson plans for joint educational endeavours, which instil the values of the peace process.

The issue of support to Palestinian education has come up on several occasions. The Commission finds it deplorable that textbooks containing messages of racial hatred are still being used in some schools in the West Bank and Gaza and profoundly supports initiatives taken by the Palestinian authorities in 2000 to phase out the use of those textbooks.

The European Commission does not finance the production and distribution of schoolbooks in the Palestinian territories, either directly or indirectly. None of the Commission's projects in support of the Palestinian authority, include the production or distribution of textbooks.

(x) Stockholm representation

regrets, as regards the Commission's handling of the Stockholm office affair, the lack of openness to the discharge authority, delays in the disciplinary case of involved officials and the failure to investigate other offices for similar cases:

(a) notes that the Commission audit of the Stockholm office in March 1999 apparently revealed no problems, although allegations in November 1999 following press reports of alleged malpractice proved partly true; urges the Commission to improve the quality of audits; regrets procedural delays, pointing out that whilst the Anti-Fraud Office recommended disciplinary enquiries in May 2000, three disciplinary cases were only transmitted to the disciplinary board in March 2001; expects the disciplinary proceedings to be concluded in a consistent, professional and fair manner;

(b) calls on the Commission to inform Parliament of the rules and their application regarding officials under investigation;

(c) welcomes that audits were carried out in the Commission's representations in Helsinki, Vienna, Madrid and Barcelona; calls upon the Commission to initiate preventive controls in all its remaining Representations and to inform Parliament of the results;

Commission's reply to Point 9. (x):

(a) Audit tests are not intended to identify fraudulent practices, but to ensure that the rules are complied with and that the audited structure is working in optimal manner. Financial irregularities identified during an audit are normally not fraudulent; however any suspected cases of fraud identified by such means would be passed to OLAF.

The disciplinary proceedings concerning certain local staff at the Commission's representation in Sweden were conducted with due diligence and in full compliance with the requirements of Swedish law. The decisions were taken by the Authority Empowered to conclude Contracts of Employment within the time-limits laid down by Swedish law and were not delayed at all. The local staff concerned then had every opportunity to make use of the appeal procedures available under the procedure applied and their cases are now pending before the national courts.

Concerning the three "Stockholm" cases the disciplinary proceedings are still pending. The Disciplinary Board has delivered an opinion on one case. A second opinion is expected shortly and the third and final opinion is likely to be delivered in autumn. In principle, the appointing authority must then take its decisions on the basis of these opinions in accordance with Article 7 of Annex IX to the Staff Regulations. However, as regards the investigation by the Swedish judicial authorities it is still open whether the Swedish prosecutor will start judicial proceedings against the three officials concerned. If the three officials should be indicted, the disciplinary procedures will have to be suspended in accordance with Article 88(5) of the Staff Regulations.

(b) The rules regarding officials under investigation are set out in Title VI and Annex IX of the Staff Regulations and are further fleshed out in the case law of the Court of First Instance and the Court of Justice and the administrative practice of the Commission. In the interest of transparency, the Commission is currently in the process of bringing these rules together and codifying its practice in a comprehensive code of administrative procedures, a copy of which will be provided to Parliament.

(c) Audits will be conducted in the Representations in the other Member States.

(xi) Washington delegation

(a) notes that the Financial Controller, following a comparison with the German, British and Dutch embassies, pointed out highly questionable practices regarding the refurbishment of the Washington delegation residence, the cost of which was in excess of the sale value, and the provision of temporary accommodation, at greater than average market value cost, over a two-year period;

(b) believes that a posteriori approval of overspend on refurbishment by the Advisory Committee on Procurements and Contracts and approval by headquarters for lodgings of delegation staff that breach existing standards is questionable; asks the Commission to investigate this incident and review its buildings policy with respect to delegations;

Commission's reply to Point 9. (xi):

The ACPC did not issue an opinion because the case was presented ex post.

The report following an administrative inquiry on the reported practices regarding the refurbishment of the Washington Delegation residence was sent to OLAF on 6 August 2001.

However, given the conclusions of the report, it is unlikely that an OLAF investigation will be initiated.

As regards internal rules on lodging, these rules are now under review in order to achieve better transparency and value for money. Decisions are expected for December 2001.

(xii) Europe Aid

notes that the new 'Europe Aid' service is an important step towards solving existing problems of arrears in payment appropriations. Nonetheless considers that such a step is not sufficient to achieve the desired level of efficiency; therefore invites the Commission to draw on the experience of external agencies in implementing external aid on the ground, provided that these agencies can demonstrate a higher level efficiency than the existing centralised and decentralised services; points out that in such cases the activities of these agencies must be carried out in compliance with policy guidelines set by the Commission and the European Community's legal framework with regard to financial and accounting standards;

Commission's reply to Point 9. (xii):

The key objective of the measures to reform the management of external assistance, which were set out in the Commission's decision of 16 May 2000, is to increase the speed and quality of the delivery of the Community's aid to third countries. In particular, the creation of EuropeAid is partly intended to address the problems of weak political control and accountability which have arisen through the inappropriate use of Technical Assistance Offices in this area.

Considerable efforts have been made since the creation of EuropeAid to build links with the agencies which some Member States have established to implement their bilateral aid programmes - this is clearly necessary in the interests of coordination and complementarity. The Commission envisages cooperating fully with these agencies, within the framework of the Commission's own regulations and procedures, and whilst ensuring the need for Community actions to retain their distinctly Community character.

(xiii) IRELA

(a) points out that Commission services were alerted to problems regarding the management of the Europe-Latin America Institute (IRELA) by Financial Control in its report of 6 June 1997 and by the Court of Auditors in its sector letters of 12 May 1998 and 13 November 1998, as well as in its special report No 12/2000 of 18 May 2000; regrets that the Commission audit was only completed in 2001;

(b) asks the Commission to give urgent consideration to the means of solving the problem of unpaid staff not involved in irregularities and mismanagement, calls on the Commission to recover EUR 4.4 million, identified by the audit, lost owing to gross mismanagement including losses incurred owing to ineligible expenditure, including non-contractual remuneration of the Director and double payments from parts A and B of the General Budget and undue travel expenses;

(c) urges the Commission to launch administrative enquiries and, if appropriate in the light of the Anti-Fraud Office internal enquiry, disciplinary proceedings;

Commission's reply to Point 9. (xiii):

(a) The external audit was launched as soon as possible once the Court had finalised its own audit.

(b) IRELA is an independent body. The Commission cannot be held responsible for IRELA's closure. Following the last audit, the Commission has issued recovery orders for the EUR3.4 million which remains outstanding from IRELA.

(c) The Commission will act u