THE COURT'S OBSERVATIONS THE COMMISSION'S REPLIES

INTRODUCTION

5.1. This chapter covers the Court’s findings on policy group Agriculture and Natural Resources, which comprises the following policy areas: 05-Agriculture and Rural Development; 07-Environment; 11-Fisheries and Maritime Affairs; and 17-Health and Consumer Protection. In 2007 commitments totalled 53 253 million euro and payments totalled 51 044 million euro (1). The distribution of payments by policy area is given in Graph 5.1 . More detailed information on spending for the year is provided in Annex I of this report. This expenditure falls mainly under the heading Preservation and Management of Natural Resources (2) of the financial framework. The audit results of EAGGF-Guidance expenditure incurred during the year 2007 in respect of the 2000-2006 programming period (3 449 million euro), are reported under chapter 6 — Cohesion Policy.

5.2. Under the Treaty, the Commission has overall responsibility for implementing the EU budget. Virtually all agricultural and rural development expenditure is carried out under shared management. For the other areas, budgetary appropriations are spent under direct or indirect centralised management with the exception of the European Fisheries Fund which is under shared management on the basis of multi-annual programmes. 5.2. Community legislation provides for a comprehensive system for the management and control of agricultural expenditure which relies on four complementary levels: (a) a compulsory administrative structure at the level of Member States, centred around the establishment of accredited paying agencies; (b) detailed systems for controls and dissuasive sanctions; (c) ex-post controls by independent audit bodies on the paying agencies’ annual accounts and the functioning of their internal control procedures and by special departments on aid measures other than direct payments covered by the Integrated Administration and Control System (IACS); (d) clearance of accounts through the Commission (both annual financial clearance and multi-annual conformity clearance). Taken together, these four levels are the basis for the Commission to gain reasonable assurance as to the effective management of the risk of error in the legality and regularity of the underlying transactions in agriculture.

Specific characteristics of policy group Agriculture and Natural Resources

5.3. The Single Payment Scheme (SPS) financed by EAGF: the SPS was introduced in order to break the link between agricultural production and the payments made to farmers (‘decoupling’). In order to qualify under the SPS farmers must first obtain ‘entitlements’. The number and value of each farmer's entitlements was calculated by the national authorities according to one of the models provided for under EU legislation (3). Every entitlement, together with one hectare of eligible land declared by the farmer and kept in good agricultural and environmental condition (GAEC), gives rise to an SPS payment at least until 2013. SPS has been growing in importance and now constitutes 55 % of expenditure (28 199 million euro) compared to 12 % (6 260 million euro) paid for direct coupled payments and 10 % (4 869 million euro) for intervention measures in agricultural markets. It is applied in 17 Member States with the remaining 10 (4) scheduled to apply the scheme from 2010 onwards.

5.4. The Direct Coupled Payments financed by EAGF: with the introduction of the SPS most farmers are paid independently of the volume of actual production. Nevertheless some aid schemes remain (5) or may be (6) coupled to output in order to avoid abandonment of production. The amounts involved are declining as the SPS is extended to additional products and Member States.

5.5. Intervention measures in agricultural markets financed by EAGF: the principal measures are intervention storage and export refunds. Expenditure has declined sharply in recent years due to policy choices made in the context of the recent CAP reforms and also because demand and market prices for agricultural products have increased.

5.6. Rural Development expenditure is funded under EAFRD and covers a large number of measures such as agri-environmental schemes, compensatory amounts for farming in less-favoured areas, investments in farms, and infrastructure in rural areas.

5.7. Environment, Fisheries and Maritime Affairs as well as Health and Consumer Protection are managed by the Commission under specific control systems. They cover protection measures for the environment and consumers, animal welfare measures, as well as international fishery agreements and the European Fisheries Fund.

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

Audit scope

5.8. In order to obtain assurance as to the legality and regularity of the transactions underlying the EU accounts, the Court tested a single representative statistical sample of 196 transactions covering the whole of the expenditure dealt with in this chapter (see paragraph 5.1).

5.9. As regards its assessment of supervisory and control systems, the Court has conducted an extensive audit of the establishment of SPS entitlements and the related payments in all Member States applying SPS, with the exception of Slovenia and Malta. During 2007 it examined the reliability of the supervisory and control systems applicable to Single Payment Scheme claims in selected paying agencies in Finland, France, Greece, the Netherlands, Italy, Portugal, Sweden, Spain (Andalucia) and the United Kingdom (England) (7).

5.10. The Court has also tested the supervisory and control systems for direct coupled payments in six Member States (8). The audit covered an assessment of the functioning of the administrative controls of all claims and the selection and execution by the paying agencies of on-farm inspections for a sample of a minimum of 5 % of the claims, depending on the scheme. In addition, the Court’s auditors conducted a number of re-performances of controls on the spot.

5.11. The Court also reviewed the certifying bodies’ certificates and reports as well as the paying agency directors’ statements of assurance and the related certifying bodies’ opinions for 34 paying agencies. For another five paying agencies, with qualified certificates, the grounds for the qualification were examined. Four certifying bodies were visited in order to evaluate the scope and quality of their work. The Court further audited the three conformity clearance decisions taken in 2007 (9).

Legality and regularity of underlying transactions

5.12. Based on the results of its audit work, the Court concludes that the transactions underlying the policy group taken as a whole, are affected by a material level of error of legality and/or regularity. The Court’s audit found that the intensity and the impact of errors in payments was not distributed evenly across all the policy areas. The Court reiterates that Rural Development expenditure is particularly prone to errors and notes that, in recognition of this, the Annual Activity Report of the Director General for Agriculture contains a global reservation in respect of that expenditure. 5.13. Out of 196 transactions examined, 61 were affected by error. Some two-thirds of the errors (40) were classified as ‘serious’. There was a material incidence of error affecting eligibility, accuracy or occurrence, such that the estimated value of the overall error rate falls into the range from 2 % to 5 %. This estimate is not significantly different from the value obtained last year but does not take account of certain serious errors which could not be quantified. Errors were significantly more frequent among rural development transactions examined by the Court than among transactions financed by the EAGF and examined by the Court. Rural development accounts for a disproportionately large part of the overall error rate: for EAGF expenditure the Court estimates the value of the error rate to be slightly below 2 %. The examples below illustrate the nature of the main errors found. 5.12-5.13. The Commission aims to ensure that supervisory and control systems are effective in detecting and correcting errors, with due regard to the costs and benefits of the checks which have to be made on the spot. As regards agriculture and rural development, the Commission underlines the Court’s finding that the most likely overall error rate is not significantly different from last year’s, as reported in its 2006 statement of assurance. Control statistics received from Member States, indicate as well that the error rate found at the level of final beneficiaries under the EAGF, which accounts for about 85 % of total agriculture and rural development expenditure, is below the materiality threshold. The Commission shares the Court’s view that rural development expenditure, in particular because of agri-environmental measures, is prone to a higher incidence of errors compared to EAGF expenditure. While the Member States have, at the explicit request of the Commission, provided detailed control statistics for the first time, these data are incomplete and have not yet been verified and validated by the certification bodies. The Director General of DG AGRI made a reservation for rural development in its Annual Activity Report 2007 (AAR 2007) for this reason and awaits future discussions on the level of the tolerable error with different institutions. The 2007 agriculture and rural development expenditure likely to be excluded from Community financing by future conformity decisions, amounts to an estimated sum of 439 million euro, together with the 152 million euro of recoveries from final beneficiaries (10). As described in its AAR 2007 the Directorate-General for Health and Consumers (DG SANCO) is confident that its transactions are not affected by a material level of error of legality and regularity given that the residual error rate is 1,6 % and thus below the materiality threshold of 2 %. As described in its AAR 2007 of the Directorate-General for Environment (DG ENV), the control systems and the shortcomings identification mechanisms have continuously matured and are complemented where appropriate. These alert mechanisms have not revealed any shortcomings, error or risk that could be qualified as significant and lead to reservations, according to the materiality criteria guidelines provided in the AAR circular, except in the area of the ex-post audits where the level of recovery orders recommended by the ex-post auditors and its regular increase over the last years lead to the expression of a reservation concerning the expenditures declared by the beneficiaries of action grants as the materiality level was exceeded by 0,6 %.

5.14. In the EAGF, the following errors were identified by the Court’s sample: 5.14. While the transactions audited are designed to be representative of the policy group as a whole, the errors found do not necessarily permit conclusions to be drawn on the functioning of the individual aid. The errors observed by the Court listed below are only partly agreed by the Commission and the Member States concerned.

(a) SPS: farmers overclaimed and/or the entitlements were wrongly calculated, resulting in incorrect payments. (a) The audits carried out by the Commission services showed that in general the calculation of entitlements was performed in accordance with the applicable legislation and that administrative and on-the-spot checks are generally operating well. Problems are followed up in the conformity clearance. On payments coming from erroneous attributions of entitlements, the applicable regulation provides that the farmer shall not repay the amount in question if an error in the attribution of entitlements stemmed from the national administration and if it could not reasonably have been detected by the farmer. The Commission considers that the conformity clearance is a good instrument to cover the risk for the Fund while respecting the farmers’ legitimate expectations.

(b) SPS: overpayments to certain olive oil claimants as a result of being allocated extra entitlements from the national reserve when they were not eligible to receive them (Spain); the beneficiary audited was paid an amount considerably in excess of the average payment over the reference period (1999-2002) but did not meet the investment criteria of the programme under which the extra entitlements were awarded. (b) The Court’s findings in this respect were known to the Commission on the basis of its own audit missions and are already the subject of a conformity clearance.

(c) SPS: in its Annual Report concerning the financial year 2006 (11), the Court pointed out that in Greece, Spain and Italy the olive cultivation GIS data, was neither complete nor reliable, and could have an impact on the integration of the olive oil production aid scheme into the system. These weaknesses persist in Italy and Greece where four out of five transactions audited contained errors, some of which led to significant overpayments. (c) On the basis of its own audit findings, the Commission has already started a conformity clearance in respect of the systemic deficiencies of the Greek control system, including the calculation of entitlements (12). The olive cultivation geographic information system (GIS) data are only used as a consistency check before payment of olive oil production. As the entitlements delivered are based on the olive oil production payments, there is no direct link between GIS and the value of the entitlements allocated. Entitlements are regular and legal if they have been calculated on the basis of the amount paid during the reference period (13). The Court’s system audit on the establishment of entitlements in Greece concluded that those coming from the olive oil sector were systematically underestimated.

(d) Direct Coupled Payments: significant overpayments were found as a result of area discrepancies for nuts and dried grapes (Spain and Greece) and, in one case, large unexplained differences were noted between the number of sheep recorded in the farmer’s register, upon which EU aid was paid, and the actual number identified (Spain). (d) The implementation of the dried grapes aid scheme in Greece is subject to repeated and continuing conformity clearance procedures.

(e) Other schemes (non-IACS): errors relate to illegal deductions from payments to farmers (14) and failure to charge interest on debts (various Member States), weaknesses in export refund controls (Portugal) and missing quantities of rice from public storage (Greece). (e) The Commission and the Member State concerned do not share the Court’s view that the deductions from payments to farmers were illegal. As regards the export refund case, the Commission notes that the transaction was not affected by a quantifiable error.

5.15. With regard to rural development operations, the Court found the following types of error: 5.15.

(a) agri-environmental schemes: in nine out of 13 cases audited the farmers had not met all the eligibility conditions (France and Ireland); (a) Many of those errors having an important financial impact concern the keeping of records about nitrate reduction at farm level instead of at plot level and the non-presence of permanent fences to protect water courses. On the latter issue of fences, the Commission considers that the objective of the measure to prevent animal movements can also be achieved by movable fences.

(b) interest rate subsidies: the procedures in place do not ensure an adequate audit trail with the result that the regularity of the payment of the EU subsidies to the final beneficiaries cannot be verified (France); additionally, irregularities detected through Member State inspections were not taken into account in the computation of the payment claims to the Commission resulting in the declaration of unjustified expenditure which was charged to the EU accounts. (b) The Commission is aware of the issue referred to by the Court and recognises the importance of sound financial management of interest rate subsidy schemes and the existence of an adequate audit trail. It is following this issue up with the French authorities, including, if appropriate, in the framework of clearance of accounts procedure.

5.16. As regards environment, fisheries, and health and consumer protection, the payments audited revealed the following errors: 5.16.

(a) projects financed through the LIFE instrument included ineligible expenditure; (a) Such ineligible expenditure can only be detected at the time of the final payment or by an ex-post audit.

(b) inadequate documentation was presented to demonstrate that the invoiced work had actually been performed (Spain); (b) Such errors can only be detected by ex-post audits.

(c) a disease eradication programme payment was made without adequate supporting documentation; in addition, there was a non-respect of ceilings per test for eligible costs and failure to undertake recommended technical checks (Germany). (c) A Commission decision (15) has recently been adopted which strengthens the financial reporting requirements (16). The Commission considers that the ceiling referred to is a ceiling applied to Elisa (17) testing, implemented at a Member State level. The Commission does not share the Courts interpretation that this should be applied per individual test. Although the Member State involved was entitled to 50 % funding for the programme in question, the actual amount of funding was capped by Commission Decision at a level substantially below the estimated claim. The recommended check (to avoid double payment of test costs between eradication and emergency programmes) was carried out and immediately revealed that such costs were ineligible under the emergency programme. Consequently, more in-depth checks were not necessary.

Assessment of supervisory and control systems

Policy area Agriculture and Rural Development

5.17. The agriculture and rural development expenditure is carried out under shared management and is subject to the following main control systems: (a) checks on claims and payments under the Integrated Administration and Control System (IACS) (18); (b) sector-specific controls, e.g. for rural development; (c) physical checks of agricultural products exported under an EU subsidised exports scheme (19); (d) post-payment scrutiny of commercial documents on the premises of traders and processors of agricultural goods (20); (e) the clearance of accounts procedure, carried out ex-post under the responsibility of the Commission (see paragraph 5.39). 5.17. See reply to paragraph 5.2.

5.18. IACS covers the two main schemes audited at Member State level — SPS and Direct Coupled Payments. Certain elements are specific to each scheme while others are common to both. The specific provisions applying to areas such as Rural Development (some elements of which are also controlled by IACS), export refunds and ex-post scrutiny of payments are also the responsibility of the Member States. The clearance of accounts procedures are the responsibility of the Commission in order to establish the amounts to be definitively charged to the EU accounts. The Court’s assessment of each of these control systems is outlined in paragraphs 5.19 to 5.49.

The Integrated Administration and Control System (IACS)

5.19. IACS consists, in each Member State, of a database of holdings and applications, systems for identifying agricultural parcels and registering animals in case of coupled premium as well as a register of entitlements in those Member States implementing the SPS which constitutes a new component of IACS. The system provides for several eligibility controls: an administrative check of all claims, cross-checks with databases to prevent the same land/animals from being claimed twice and a minimum rate of 5 % for on-farm inspections to be carried out by the paying agencies.

5.20. IACS is effective in limiting the risk of irregular expenditure, where accurate and reliable data is introduced and the system is properly implemented. The IACS is thus the key management and control tool for: — the Single Payment Scheme (SPS) (see paragraphs 5.21 to 5.26), — direct coupled payments (see paragraphs 5.27 and 5.28), — common elements (see paragraphs 5.29 and 5.30). It now covers almost 85 % of the EAGF as a result of the inclusion in SPS of new aid schemes. This extension of IACS is intended to improve the financial management of high risk areas. In the case of EAFRD, and especially for agri-environment and less-favoured areas, certain basic elements such as surface, number of animals are covered by IACS and others by specifically designed controls.

The Single Payment Scheme (SPS)

5.21. Correct calculation and allocation of entitlements by national authorities is a prerequisite for correct SPS payments to individual beneficiaries in the first year and all subsequent years. Member States are also required to respect their overall national ceilings. The Court again found (21) that various Member States have failed to correctly apply certain key elements of the system related to the establishment and management of the entitlements which are incorporated into IACS. Hence the Court considers that the systems for calculating the entitlements were only partially effective and that they do not yet provide reasonable assurance that the annual SPS payments based upon the allocated entitlements are correct. 5.21. Where wrong calculations of entitlements have led to a risk for the Fund, the Commission will follow this up in the conformity clearance. Due to the existence of legitimate expectations at operators’ level, it might not always be possible to correct wrongful attributions of entitlements. Furthermore, the trade in entitlements and further reforms require legal certainty as to the entitlements attributed. This issue is therefore addressed in the Health Check.

5.22. As an illustration, the following significant shortcomings, whose financial impact is difficult to estimate, were identified in the calculation of the entitlements: 5.22.

(a) in the United Kingdom (England) the four entitlements audited were erroneously calculated mainly due to failure to take account of changes in land parcels; while these errors did not have a significant impact on the 2007 payments, since England applies the ‘dynamic’ model (22), these initial entitlements, unless corrected, will result in significant over/underpayments in future years; (a) The problem was already known to the Commission on the basis of its own audit missions and is already the subject of a conformity clearance started in 2006. The remedial action of the UK authorities to minimise or avoid the consequences indicated by the Court is part of this procedure.

(b) the Netherlands initially allocated entitlements in excess of the national ceiling of 4,9 million euro and have carried out individual payments on this basis. Although the total payments made were less than the national ceiling, individual farmers were overpaid. At the time of the Court’s visit (January 2008) no formal recovery action had been taken; (b) According to the information available to the Commission, the total amount of payments made to farmers was 294 million euro, thus not exceeding the national ceiling of 312 million euro. As regards individual overpayments, the Dutch authorities have committed themselves to recover the undue amounts from the beneficiaries.

(c) when calculating the farmer's reference amounts, the Dutch and Greek authorities included bovine animals which were not eligible for premium in the reference period; furthermore the Greek authorities allocated reference amounts to farmers of arable land without taking into account the reductions that had been made during the reference period; (c) As to the Single Payment Scheme in Greece and The Netherlands, the conformity clearance has been launched in April 2007 and May 2008 respectively.

(d) when calculating the number of entitlements, the Greek and Spanish authorities systematically disregarded forage area requirements for farmers that benefited during the reference period exclusively from premia that did not require any land and allocated special entitlements (23) to them instead of the entitlements based on areas (24), thereby generating much higher payments per hectare, and a consequent reduction in areas required to be subject to GAEC; (d) The Court’s findings in this respect were known to the Commission on the basis of its own audit missions and are already the subject of a conformity clearance which commenced, as far as Greece is concerned, in April 2007 and for Spain in July 2007.

(e) unjustified withdrawal of entitlements, thereby depriving potential beneficiaries of aid (Greece). (e) The problem is already the subject of a conformity clearance procedure which commenced in April 2007.

5.23. Member States are required to establish a national reserve (25), from which they allocate entitlements to new farmers, those in special situations or those affected by restructuring or development programmes.

5.24. The audit found several weaknesses in the use of the national reserve: 5.24.

(a) various instances of misuse of the national reserve (France): two ineligible programmes (totalling 42,4 million euro), failure to respect the statutory deadline for four other programmes, acceptance of investments based on short-term rented equipment, failure to systematically apply mandatory provisions to new farmers who commenced farming during the reference period leading to an overallocation of 20,8 million euro; (a) The Commission, on the basis of its own audit findings, already started, by means of a letter of April 2008, a conformity clearance in respect of the same findings.

(b) irregular allocations of entitlements for new olive oil trees planted after the stipulated deadline and not covered by a specific programme (Italy). (b) The Commission will follow up this matter in the conformity clearance procedure.

5.25. When allocating entitlements to olive producers, the Italian authorities accepted 153 000 hardship cases on the sole recognition by the region or province that the territory concerned had been affected The available information does not permit an estimation of the total value of irregular payments. 5.25. The Commission, on the basis of its own audit findings, already started, by means of a letter of August 2006, a conformity clearance procedure in respect of the same findings.

5.26. As regards the management and monitoring of SPS entitlements, the following weaknesses were noted: 5.26.

(a) incorrect application of late claim penalties (Netherlands, Portugal and the United Kingdom (England); (a) For Portugal, the penalties applied were too severe: this is not a risk for the Fund.

(b) in the United Kingdom (England) the same parcel can be claimed by two ‘farmers’ under different area related EU aid schemes. In nine out of 12 on-the-spot visits to ‘new beneficiaries’ of EU direct aid that the Court had highlighted in its Annual Report concerning the financial year 2006 (26), the area declared for SPS was not eligible in whole or in part either because it was not in good agricultural condition, its main use was not agricultural or the beneficiary was not eligible because he did not carry out any agricultural activity on the land; (b) The Commission, on the basis of its own audit findings, already started, by means of letters of July 2007 and April 2008, a conformity clearance in respect of the same findings. As regards the issue of ‘new beneficiaries’, following the Court’s Annual Report 2006, the Commission has launched special enquiries with regard to those Member States that have chosen regional models and that may therefore be affected by the issue raised by the Court. These audits are still ongoing and risks to the Fund will be covered by financial corrections. Moreover, the issue of excluding certain beneficiaries from direct payments is also addressed in the Commission’s proposals for the Health Check.

(c) Portugal has allocated entitlements and paid SPS aid to farmers who declared areas on ‘baldio’ land. This land is usually public land of very poor pasture and mostly covered by bushes and trees. There are no limits as regards the number of trees allowed on such land and there is no obligation for farmers to respect GAEC on this land. In 2007 Portugal paid 3,5 million euro for ‘Baldio’ land. In Italy it was found that the areas accepted as permanent pasture for SPS payments were bigger than the eligible part actually covered by grass or herbaceous forage; (c) As regards Portugal, the Commission follows up this issue in the conformity clearance procedure. Regarding Italy the Commission, on the basis of its own audit findings, already started a conformity clearance in respect of the same findings.

(d) payments were made to 275 farmers in France and 33 farmers in Spain (Andalucia) who did not hold payment entitlements; no recovery action has been taken. (d) According to information available to the Commission, the differences found by the Court in relation to France are due to differences in parameters of extraction of the two files compared by the Court and no payment has been made to farmers not holding entitlements. For Spain, no payment was made to farmers without entitlements. For almost all the cases, these farmers had previously made a request for rectification which was still pending at the date of the payment. In case of withdrawal of entitlements, the paying agency asked for reimbursement.

The direct coupled payments

5.27. The direct coupled payments managed under IACS totalled some 5 500 million euro in 2007. For the animal-based schemes the systems are generally functioning satisfactorily, reflecting the reliability of the IACS for this purpose. However, the Court found a number of systems weaknesses in administrative and on-the-spot controls of the area aids (see Annex 5.1.1 ): 5.27. As concerns table 5, the Commission disagrees with the Court’s evaluation of the systems in Italy. As the Court has acknowledged, most of the system weaknesses identified were also identified by the Commission’s clearance of accounts and appropriate follow-up action has been taken.

(a) administrative controls weaknesses, leading to errors such as: wrong input of application data (Greece), payment for multiple incompatible aid schemes on the same parcel (Italy), and a failure to correctly apply penalties and sanctions, which lead to overpayments (Greece, Italy, Spain and Portugal); (a) In respect of the incorrect application of sanctions in Italy, Spain and Portugal, the Commission, on the basis of its own audit findings, already started a conformity clearance.

(b) lack of documentation of the reasons why certain criteria of the risk analysis have been selected, and absence of yearly reassessment of the risk parameters by the paying agencies, for the selection of the 5 % on-farm inspections (Portugal, Spain). (b) The need for an annual evaluation has been laid down in Regulation (EC) No 796/2004. As part of its audits, the Commission reviews the improvement of the risk analysis both over the years and its effectiveness for the year concerned. Where it is found that there is a continued dysfunctional risk analysis posing a risk to the Fund, the Member State is asked to take remedial action and the conformity clearance is applied. In addition, the Commission simplified the Regulation and risk factors are no longer determined in the Commission Regulation as from 2008.

5.28. The re-performances of controls carried out by the Court found a number of specific weaknesses in the quality of the on-the-spot controls and identified ineligible areas or parcels that should have been excluded by the national inspectors. (Greece, Italy, Spain, Portugal). In Italy, a farmer had received aid for a parcel of pistachio nut trees. While the parcel had been subject to an on-the-spot control by the Italian authorities in 2005, the Court’s audit found the parcel to be long established general forest land and, thus, not eligible for aid. 5.28. The Commission audits the control systems of the Member States and deficiencies that create a risk for the Fund are followed up under the conformity clearance. This is the case for the Member States referred to by the Court.

Supervisory and Control Systems in IACS

5.29. As indicated at paragraph 5.19, the effectiveness of the supervisory and control systems incorporated in IACS forms a key element of the overall effectiveness of the system. This applies to each of the main aid schemes covered by IACS. A general assessment of the reliability of the system in the Member States visited for (the two main schemes SPS and direct coupled payments respectively) is shown in Annex 5.1.2 . and in Annex 5.1.1 . 5.29. The Commission does not share the overall evaluation regarding the effectiveness of IACS referred to in Table 5 as regards France, The Netherlands and the United Kingdom.

5.30. Administrative controls to establish eligibility of surfaces: the effectiveness of the administrative controls depends on the quality of the information recorded in the Land Parcel Identification System (LPIS (27)), the use of computerised geographical information techniques for the graphical layer of the LPIS which is the Geographic Information System (GIS) and the use of up-to-date aerial or spatial orthoimagery: 5.30. The quality of the Land Parcel Identification System (LPIS) is indeed crucial. The Commission is constantly working with the Joint Research Center (JRC) to use the best technical resources to update the LPIS system in the Member States and consequently to optimise the effectiveness of administrative checks.

(a) the administrative controls in the United Kingdom (England) do not provide assurance that EU aid is paid out correctly. The United Kingdom (England) do not avail of the option to use aerial or spatial orthoimagery in support of the GIS. The English LPIS does not always contain information on eligible area of the reference parcel; (a) The use of ortho-imagery is not legally required. As to the other deficiencies in the LPIS-GIS in England referred to by the Court, the Commission, on the basis of its own audit findings, already started a conformity clearance.

(b) in Greece the administrative controls are also deficient; the LPIS is incomplete and contains important errors in the referencing of parcels; (b) The deficiencies of the LPIS in Greece are the regular subject of conformity decisions. At the request of the Commission, the Greek authorities have adopted an action plan that foresees, inter alia, the implementation of a new LPIS-GIS by 31 December 2008.

(c) in France and the Netherlands the paying agencies do not sufficiently deduct ineligible features visible on orthoimages from the eligible area recorded in the LPIS and do not update their LPIS with the results of on-the-spot inspections. In Portugal the update is carried out with significant delays. France and Sweden use orthophotos some of which are more than 5 years old; (c) The findings referred to by the Court have also been identified by the Commission audits. Member States are asked to take remedial action and conformity clearance are started to cover the financial risk resulting from these deficiencies.

(d) in France, Portugal and Sweden the eligibility of land declared for activation of set aside entitlements (28) is not reliably verified. (d) The Commission will provide for an adequate follow-up in the context of the conformity clearance once the Court has transmitted to it all the relevant information.

Member State controls under IACS and inspection results

5.31. The IACS inspection results reported to the Commission by paying agencies assess the legality and regularity of claims submitted by farmers and have been verified by the certifying bodies for the first time in 2007. However, the certifying bodies do not extend their work to final beneficiaries for the verification and validation of IACS statistics. Neither has the Commission verified the reliability of these statistics. Furthermore, the Court’s analysis of the work of 28 certifying bodies for the purposes of such verifications, showed that two certifying bodies’ assessment was negative and one was unable to assess the situation. The Court further found that reconciliations provided for by the relevant Commission guideline had either not been done, not been done in the way foreseen or that the information provided did not allow a conclusion to be drawn upon the adequacy of the work. 5.31. From financial year 2007 onwards, the certification bodies are required by Commission’s guidelines to analyse the effectiveness of the paying agencies internal control systems including on-the-spot checks more systematically and to verify and validate these statistics. The Commission thus implemented the Court’s recommendation made in its Annual Report concerning the financial year 2005 (paragraph 5.46) that the certification bodies were to do more work to verify and validate the statistics. As regards the extension of the work to the final beneficiaries, the certification bodies review a sample of field inspection reports and check that any claim adjustments required (as a result of the check) are made to the final beneficiary’s data in the IACS. In roughly 90 % of the cases, the certification bodies made an assessment and concluded positively for approximately 85 % of them which must be considered as an acceptable result for the first year of application of this new control obligation. The Commission recognises that there is scope for improvement in this area, and has revised its Guidelines accordingly for financial year 2008. The Commission systematically analyses the IACS statistics for consistency and compliance with regulatory requirements. The data’s reliability is verified by the Commission’s conformity audits.

Rural Development

5.32. The imprecise definitions in national legislation of some eligibility conditions and the often complex rules, particularly those related to agri-environmental measures, adversely affect the quality of the controls carried out to verify the farmers’ compliance with the relevant requirements. These controls have once again, been found deficient. The principal weaknesses detected were: 5.32. As regards the definition of eligibility conditions in national legislation and their complexity, the Commission shares the view of the Court that they should be as simple as possible to reduce the risk of errors and to limit control costs. However in particular agri-environmental measures are complex by nature and there is very limited scope for simplification without jeopardising the purpose of these measures. As regards the control system, measures have been taken to reinforce and strengthen the control rules in this area and all eligibility criteria must now be controllable according to a set of verifiable indicators to be established by the Member States (29). Moreover, guidelines have been produced by the Commission on the verifiability of the agri-environmental measures.

(a) insufficient checks on the validity of the bids submitted in the context of private procurement. The checks carried out do not provide reasonable assurance as to the legality of the required tendering procedure which may consequently affect the eligibility of the project as a whole (Romania); (a) The findings referred to by the Court in its observation will be followed-up by the Commission in the context of the conformity clearance.

(b) lack of cross-checks with the specific animal databases (rare breeds) to validate the number of animals declared by the farmer which is the basis for the agri-environment payments (France);

(c) inadequate verification of the eligible area under agri-environment measures in cases where this area did not correspond to the data in the IACS database. As a consequence, not all the conditions for granting the support could be checked (Ireland); (c) The findings referred to by the Court in (c), (d) and (e) will be followed up in the conformity procedure.

(d) lack of systematic verifications as to whether detailed agri-environment commitments tailored to the farm fulfil the overall requirements of the measure (e.g. the maximum permitted level of chemicals);

(e) inconclusive and poorly documented administrative and on-the-spot controls with an over reliance on beneficiaries’ declarations before approving final payments (Ireland);

(f) inadequate consideration of the risk factors stipulated in EU legislation for the selection of a sample of farmers to be controlled on the spot (France and Ireland); (f) As to the risk parameters, the Commission simplified legislation and risk factors are no longer determined as from 2008.

(g) inadequate verification of the existence of private co-financing. Projects were often approved without the required certificate from a financial institution, increasing the risk that EU funds are paid to beneficiaries who are unable to pay their share of the investment (Romania); (g) The risk is mitigated by the fact that for each project which foresees self-financing, a bank statement not older than 5 working days before the submission of the payment claim is annexed to the claim.

(h) the inadequate audit trail for projects receiving interest rate subsidies made it impossible to trace the final beneficiaries who benefited from EU funding. Consequently, the auditors could not verify whether the amounts declared were correct or if beneficiaries respected all eligibility requirements (see also paragraph 5.15(b) — France). (h) The Commission is aware of the issue referred to by the Court and recognises the importance of sound financial management of interest rate subsidy schemes and the existence of an adequate audit trail. It is following this issue up with the French authorities, including, if appropriate, in the framework of clearance of accounts procedure.

Ex-post scrutiny of payments to traders and processors

5.33. Member States are required to carry out annual programmes of post-payment checks of commercial documentation for export refunds, processing and transformation subsidies and some rural development expenditure. Member States must satisfy themselves that transactions have taken place and been executed correctly, and take steps to recover sums lost as a result of irregularity or negligence. These checks are carried out under Regulation (EEC) No 4045/1989. The Commission plays a supervisory and coordination role.

5.34. The timely execution of the scrutiny programme has improved in 2007. However, there is a limited number of scrutinies not completed from each of the preceding scrutiny periods dating back as far as 2000/2001 (30). These bear the risk of not being properly executed given that beneficiaries only have a legal obligation to keep the relevant documentation for a limited period and that the payments examined during a scrutiny period normally relate to payments from 2 years earlier. That is to say, the outstanding scrutinies from period 2000/2001 relate to payments made as far back as 1998/1999. Furthermore, the results of the scrutinies carried out on payments made in the year 2006/2007 will not be available to the Commission until the 31 December 2009. 5.34. At Community level (based on the 2006/2007 scrutiny reports) the required minimum number of scrutinies had been reached for each of the preceding scrutiny periods, with the exception of 2002/2003 and 2004/2005. This was mainly due to a backlog in Italy. According to information received from the Italian authorities on 29 May 2008 the minimum number of scrutinies at Community level has been reached for each of the preceding scrutiny periods. However, the Member States’ obligation to eliminate the backlog remains.

5.35. The Court noted a limited coverage of rural development measures both at Commission and Member States level, despite Rural Development representing, for the scrutiny period 2006/2007, 11 % of the expenditure covered by the Regulation and 57 % of all the potential irregularities reported. 5.35. In 2007, the rural development unit mainly carried out audits of measures not covered by Regulation (EEC) No 4045/89, such as agri-environment. However, the unit with horizontal responsibility for Regulation (EC) No 4045/89 carried out two missions in early 2008 covering rural development together with the rural development unit in the framework of the 2007 work programme. More importantly, at Member State level about 18 % of the total number of scrutinies in scrutiny year 2006/2007 concerned rural development measures, and this is considered to be an appropriate level of coverage.

5.36. The Court’s analysis of the certifying bodies’ reports has also shown a need for improvements in the verification and reporting by the paying agencies on the follow up of the potential irregularities reported. 5.36. For the paying agencies concerned the certification bodies made an assessment in 90 % of the cases and in 80 % of them the statement on the follow-up given by the paying agencies is a positive one. The revised Guidelines presented to the Member States for the financial year 2008 address the Court’s observation.

Export refunds

5.37. Export refunds are paid to exporters of EU agricultural products to cover the difference between EU internal and world market prices. In 2007, 1 445 million euro was paid, 42 % less than the previous year due to policy choices made in the context of the recent CAP reforms and also to increases in world market prices. Regulation (EEC) No 386/90 requires Member States to physically check 5 % of exports to ensure that they are correctly described and qualify for export refunds. They are also required to carry out substitution checks at the point of exit from the EU where this is different from the place at which they were presented for a physical check. The Commission is required to monitor the quality and the number of those checks. 5.37. The quality and number of both physical and substitution checks are verified by means of on-the-spot audit enquiries and analysis of the detailed annual returns furnished by all Member States.

5.38. In its Special Report No 4/2007 (31), the Court pointed out shortcomings in respect of the system of physical and substitution checks on export refund consignments. The Council and Commission acted promptly on the recommendations made by amending the relevant legislation (32). However, the particular weakness concerning the reintroduction of exported goods into EU territory following transportation on a non regular shipping line, has not yet been addressed. 5.38. The Commission takes the view that, when it is established that the refund products have left the Customs territory within 60 days, the rest of the journey to the third country of destination continues over international or third country territory which may include transhipment under Articles 9 or 10 of Regulation (EC) No 800/1999 with the related transit through parts of the Community customs territory under customs supervision, which by the EU enlargements since 2004 is more likely to happen. It is legally not possible that the goods or products in question remain on customs territory under a different customs regime although having received refunds.

The Commission’s clearance of accounts procedures

5.39. As the management of expenditure on agriculture is, in the main, shared between Member States and the Commission, aid is paid by the Member States, who are then reimbursed by the Commission. These reimbursements are considered as advances, although they are reported as payments in the financial statements submitted by the Commission. The final recognition of expenditure is determined through a two-stage procedure called the clearance of accounts. The two stages consist of an annual financial decision and multi-annual conformity decisions taken by the Commission. 5.39. The reimbursements by the Commission to Member States are, according to the legal rules, defined as monthly payments and not as advances (33).

Financial clearance

5.40. On 30 April 2008 the Commission took three financial clearance decisions for the expenditure made under EAGF, EAFRD and TRDI and cleared all paying agencies accounts, except those shown in Annex 5.3 . These decisions are based on certificates provided by independent auditors (certifying bodies). The Court’s audit did not detect expenditure cleared by the Commission which should have been refused (disjoined) in the financial clearance decisions.

5.41. The financial decisions are however limited to the veracity, completeness and accuracy of the paying agencies’ accounts. Legality and regularity of underlying payments (‘conformity issues’) are outside the scope of the certifying bodies’ substantive testing and claims for EU aid are not usually checked on the spot by the certifying bodies. Financial decisions do not therefore mean that the expenditure ‘cleared’ is free of irregular payments. 5.41. The audit assurance given is not limited solely to accounting matters. Each certificate also provides an opinion on whether the paying agency’s internal control system has functioned satisfactorily for the financial year in question and in this context on-the-spot checks are also assessed. In addition, certification bodies provide a separate opinion on the Statement of Assurance (the DAS) provided by each paying agency’s director, as well as an analysis of the effectiveness of the on-the-spot controls and the accuracy of the inspection statistics.

5.42. In 2007 the certifying bodies work was extended. In addition to the new verification and validation of IACS statistics (see paragraph 5.31), opinions on the paying agencies Directors Statements of Assurance and on internal control procedures were required. The Court’s audit showed that the added value of these new elements has so far been limited. Furthermore, in three cases there was an unresolved contradiction between the paying agency Directors’ Statement of Assurance and the qualified audit certificate issued by the certifying body. 5.42. Together with the other elements referred to by the Court in its observation, the verification and validation work by the certification bodies introduced following recommendations of the Court in its Annual Report concerning the financial years 2005 (paragraph 5.46) and 2006 (paragraph 5.8) are a positive step towards a further improved accountability of paying agencies and lead to greater transparency and ownership of the control results. This is also recognised by the conference of the directors of the paying agencies and by independent certification bodies. Each certification body analyses, and reports on, how well each paying agency complies with the accreditation criteria as laid down in Regulation (EC) No 885/2006, and gives an opinion accordingly. The difference of view between the DAS and the certification body’s opinion proves the added value of the opinion on the DAS, in that the certification body has appraised the DAS in the light of its own audit work, as foreseen. The 3 paying agencies concerned are now all under probation. For the remaining 79 paying agencies, the two documents were consistent.

5.43. Despite the Spanish paying agencies making payments for the first time under the SPS during the year, the Spanish certifying bodies did not include the required verification of entitlements in their work. 5.43. The certification bodies checked the data provided by the autonomous communities for the calculation of entitlements, but not the calculation carried out at overall national level. The Commission has revised its Guidelines for financial year 2008 to clarify that if the system is managed centrally at national level, but the central paying agency does not manage SPS (as is the case in Spain), the certification body of the central paying agency would still have to cover this part in its report.

5.44. Based on the examination of the certifying bodies work (34) the Court reiterates (35) its doubts as regards accuracy of the debtors accounts: two certifying bodies include qualifications in their certificates and 15 highlight shortcomings in the paying agencies’ debt management procedures; 12 certifying bodies failed to provide enough information on the work carried out and two did not adequately test the accounts. Whilst the Commission has initiated the procedure to apply corrective measures (36) for the reported shortcomings, the financial impact of these actions is not yet known. Further the Court notes that the different policies applied to the date of recognition of debts by the paying agencies result in an inconsistent presentation of the global value of debts. 5.44. The Commission considers that for at least one of these two cases sufficient work was in fact carried out. The Commission also considers that it obtained enough information on debtors for clearance and accounting purposes. In no case was the financial impact found to be material at the overall account level (and thus as regards the Decision). However, the Commission recognises that there is scope for improvement in this area, and has revised its Guidelines for financial year 2008 accordingly. It will also continue to closely monitor the situation (via 7 audit missions to paying agencies and 6 audit missions to certification bodies in 2008).

5.45. The Commission in its response to the Court’s Annual Report concerning the financial year 2006 (37), has committed itself to follow up the amounts, charged from the debtors’ tables to the EU budget under the first financial clearance decision for 2006 taken on 27 April 2007. The three Commission audits carried out in 2007 covered some 7 % of the amounts included in this financial clearance decision. 5.45. In 2007, two audits covering debts were carried out to the Italian paying agency AGEA. The Decision clearing AGEA’s accounts which were disjoined for the financial year 2006 was taken on 30 April 2008. This means that the audits carried out in 2007 covered some 41 % of the amounts included in the first and second clearance decisions for financial year 2006 (the latter taken after the Court’s audit).

Conformity clearance

5.46. Conformity decisions are taken following additional verifications by the Commission of the expenditure declared by the Members States. They cover a number of years and have the objective of excluding expenditure from EU financing where the Commission has found that it ‘has been incurred in a way that has infringed EU rules (38)’.

5.47. The Court in its 2006 and previous annual reports indicated the limitations which are partly inherent in the clearance system such as the retroactive and multi-annual nature of the conformity clearance and the fact that the Member States, and not the final beneficiaries, are effectively charged with the financial corrections. In addition, the Commission’s method of calculating the conformity adjustments, largely based on the use of a flat-rate corrections, means that no valid link can be made between the amounts thus recovered and the real amount of irregular payments (39). These limitations were found to persist in 2007. 5.47. What the Court describes as limitations are inherent to the system laid down in Community legislation and was not objected to by the Court in the context of the adoption of Council Regulation (EC) No 1290/2005. While financial consequences are only determined at the end of the procedures, the preliminary findings of the Commission’s audits carried out in a given year are already known by the end of that year. Since the audits cover the Member States’ management and control systems, they do not only provide information on the expenditure audited but indirectly also on future expenditure. Furthermore, normally the corrections take into account expenditure effected after the date of the audit and are therefore not only retro-active. The conformity clearance is designed to exclude expenditure from Community financing which has not been effected in compliance with Community rules. In contrast, it is not a mechanism by which irregular payments to beneficiaries are recovered, which according to the principle of shared management is the sole responsibility of Member States. Where undue payments to beneficiaries can be identified as a result of the conformity clearance, Member States are required to follow them up by recovery actions against these beneficiaries. However, even where recoveries from beneficiaries are not needed because the financial correction only relates to deficiencies in the Member States’ management and control system and not to undue payments, these corrections are an important means to improve the Member States’ systems and thus to prevent or detect and recover irregular payments to beneficiaries. Flat-rates take account of the severity of the deficiencies in the national control systems in order to reflect the financial risk for the Community. Therefore the Commission considers there to be a valid link between this type of correction and the amount of irregular payments to final beneficiaries.

5.48. The Court’s audit of the conformity decisions taken in 2007 found that: 5.48.

(a) expenditure was not excluded from EU financing when in fact it should have been and expenditure had not been covered by a conformity audit in time to allow recovery of the full amount of the possible irregularities found; (a) The Commission considers that the expenditure which it has excluded from Community financing as a result of its conformity audits is sufficient to cover the risk for the Funds. The legal rule which limits the possibility of financial corrections in time (24 months rule) is a deliberate choice of the Community legislator with a view to ensuring legal certainty for Member States. It is inherent in the application of this rule that certain expenditure cannot be subject to financial corrections although it may be affected by deficiencies. The Commission has repeatedly proposed an extension of this time limit, but these proposals were turned down by both the Council and the European Parliament.

(b) for two of the corrections examined, six years have elapsed between the initial audit and the clearance decision, with the result that ineligible expenditure was only excluded from the accounts at the end of this procedure. (b) The two cases referred to by the Court were very complex and are not representative of the Commission’s conformity clearance work.

Policy areas Environment, Fisheries, Health and Consumer Protection

5.49. Environment, Fisheries and Maritime Affairs as well as Health and Consumer Protection are managed by the Commission under specific control systems. The Court’s audit of these policy areas detected the following system weaknesses: 5.49.

(a) for environmental measures, projects financed by the main fund (LIFE projects) included ineligible expenditure. Important delays in concluding audits still remained. However the situation improved in 2007. The Annual Activity Report of the Directorate-General for the Environment (DG ENV) recognises these weaknesses by establishing a specific reservation;

(b) in the fisheries policy area, the lack of appropriate legal rules and poor documentation of expenditure relating to data collection for fisheries management increase the risk that irregular payments are made. On the other hand liabilities arising from particular cases of renewed bilateral fisheries agreements have not been covered in a timely manner by the commitment of the corresponding appropriations; (b) The legal rules that the Court is referring to as regards data collection for fisheries management have been changed in 2008 (40). The corresponding implementing Commission Regulation and Decision will be adopted in the course of 2008. The new legal basis contains clear rules and should address the concerns of the Court. As regards the current situation, procedures have been put in place to address the weaknesses identified by the Court with regard to documentation. Budgetary commitments covering the fisheries agreements can be made only after the legal basis (Council decision and/or regulation) has been adopted. This explains why, when it has not been possible to adopt the legal basis before the provisional entry into force of the new protocol (which is often the case, even though the lengthy periods required for negotiation and adoption have been built in), the budgetary commitment post-dates the legal commitment (provisional application of the new protocol). The Commission will continue to examine alternative procedures in order to take into account the remarks of the Court while bearing in mind the specific constraints linked to the fisheries agreements. The Council reached a political agreement on 24 June on the Commission’s proposal on fishing authorisations for Community vessels outside Community waters. The new regulation foresees the continuity of fishing operations on a transitional basis before the formal adoption of the new protocol by the Council.

(c) in the health and consumer protection area payments were made for veterinary measures in the absence of all the necessary supporting documentation. (c) The Court’s statement refers to the reception of vaccines and tests for which no written confirmation of delivery has been requested by the Commission. Nevertheless, the Commission considers that, based on its contacts with the Member States and its internal control procedures (including the signing of the ‘Conforme aux faits’ by two staff members), this lack of formal documentation relating to the reception of these goods and tests, does not put at risks its payments. A Commission decision (41) has recently been adopted which strengthens the financial reporting requirements set out in Commission Decision 2002/677/EC.

Overall conclusions and recommendations

5.50. Based on its audit work, the Court concludes that the transactions underlying the expenditure declared for the policy group taken as a whole are affected by a material level of error of legality and/or regularity (see paragraphs 5.12 and 5.13). 5.50-5.51. The Commission aims to ensure that supervisory and control systems are effective in detecting and correcting errors, with due regard to the costs and benefits of the checks which have to be made on the spot. As regards agriculture and rural development, the Commission underlines the Court’s finding that the most likely overall error rate is not significantly different from last year’s, as reported in its 2006 statement of assurance. Control statistics received from Member States, indicate as well that the error rate found at the level of final beneficiaries under the EAGF, which accounts for about 85 % of total agriculture and rural development expenditure, is below the materiality threshold. The Integrated Administrative Control System (IACS) covering most of agricultural expenditure is effective in limiting the risk of irregular expenditure, where accurate and reliable data is introduced and the system is properly implemented. The 2007 agriculture and rural development expenditure likely to be excluded from Community financing by future conformity decisions, amounts to an estimated sum of 439 million euro, together with the 152 million euro of recoveries from final beneficiaries. As described in the Annual Activity Report (AAR) 2007 the Directorate-General for Health and Consumers is confident that its transactions are not affected by a material level of error of legality and regularity. Furthermore, as explained in the AAR 2007 the residual error rate is 1,6 % which is below the materiality threshold of 2 %. As stated in the AAR 2007 of the Directorate General for Fisheries and Maritime Affairs, a reasonable assurance on the regularity and legality of DG Fisheries and Maritime Affairs expenditure can be given and weaknesses detected are not material enough to justify a reservation. DG ENV made a specific reservation in the Annual Activity Report on the eligibility of expenditure declared by the beneficiaries of action grants.

5.51. The Court’s overall assessment of the supervisory and control systems for the policy areas covered by this chapter is that they are partially effective. 5.51. As stated in the Annual Activity Report (AAR) 2007 of the Directorate General for Fisheries and Maritime Affairs under the conclusion on the effectiveness of internal control system, there is a reasonable assurance that the internal control systems in the DG function effectively. In its AAR 2007, the Management of the Directorate-General for Environment ‘feels confident about the overall state of internal control and financial and operational management in DG ENV’. This conclusion is also confirmed by the results of the analysis of the subdelegated authorising officers and management reports to the Director General which were requested from all of them in January 2008. The Internal Audit Capability of DG ENV has not discovered material weaknesses in the financial control systems or serious flaws in the management systems during its 2007 audits. The weaknesses flagged by the Management in 2007 were due to specific circumstances and will be further addressed in 2008.

5.52. The Court concludes, however, that IACS continues to be effective in limiting the risk of irregular expenditure where properly implemented and if accurate and reliable data is introduced as regards SPS payments based upon allocated entitlements (see paragraphs 5.20 and 5.21). The recent introduction in SPS of support schemes, such as those related to olive oil (see paragraph 5.14), is a positive development although in the short term might lead to a higher frequency of errors. 5.53. Some 20 percent of payments audited at final beneficiary level again revealed incorrect payments, a limited number of which had a high financial impact. Furthermore, the Court identified errors in interpreting the provisions of the regulations. If not corrected, there will be significant cumulative effects of all such errors over a number of years. 5.52-5.53. The audits carried out by the Commission services showed that in general the calculation of entitlements was performed in accordance with the legislation and administrative and on-the-spot checks are generally operating well. Where problems were noted these are followed up in the conformity clearance. As regards frequency and impact of errors, the IACS statistics received from the Member States (except Greece) and verified and validated by the certification bodies show that the frequency of errors including financial year 2007 is steadily decreasing and the financial impact of the errors is limited to only 0,83 % of the expenditure concerned.

5.54. Although the clearance of accounts systems (as well as post-payment checks) have the objective of excluding expenditure which does not comply with EU rules, at present they fail to do so at the level of payments to final beneficiaries; rather they are borne by Member States so that no valid link can be made between the amounts excluded and the real amount of irregular payments. 5.54. The conformity clearance is designed to exclude expenditure from Community financing which has not been effected in compliance with Community rules. In contrast, it is not a mechanism by which irregular payments to beneficiaries are recovered, which according to the principle of shared management is the sole responsibility of Member States. Where undue payments to beneficiaries can be identified as a result of the conformity clearance, Member States are required to follow them up by recovery actions against these beneficiaries. However, even where recoveries from beneficiaries are not needed because the financial correction only relates to deficiencies in the Member States’ management and control system and not to undue payments, these corrections are an important means to improve the Member States’ systems and thus to prevent or detect and recover irregular payments to beneficiaries. The Commission considers there to be a valid link between its financial corrections and the level of irregular payments to final beneficiaries.

5.55. The Commission’s conformity decisions are not complete for any year later than 2000. Since the decisions in respect of 2007 have yet to be taken, the expenditure is subject to possible corrections in subsequent years following verifications made by the Commission. Globally, however, the corrections made in subsequent years do not normally change the order of magnitude of the payments reported by the Member States. 5.55. At the end of 2007, only 24 out of around 1 400 audits carried out in the years 2003 and before, allowing financial corrections of expenditure from the period prior to 2002, had not been closed. The financial corrections related to these audits as regards expenditure from the period prior to 2002 are estimated to be around 6 million euro. This means that the conformity work on expenditure incurred in the years 2001 and before had largely been completed. As regards the magnitude of the financial corrections, the 2007 agriculture and rural development expenditure likely to be excluded from Community financing by future conformity decisions, amounts to an estimated sum of 439 million euro, together with the 152 million euro of recoveries from final beneficiaries (42).

5.56. The Court recommends that the systems weaknesses leading to such errors are resolved. In this regard, the most urgent issues to address concerning the reliability of payments made under the SPS are: 5.56. Most of the weaknesses referred to by the Court are known and followed up in the conformity clearance. Weaknesses are not due to unclear legal provisions but to the weaknesses in implementing them.

(a) improving the identification, registration and management of the entitlements; (a) Member States are encouraged to improve their systems and to work closely together with the Commission services and JRC on the issues mentioned.

(b) eliminating from the database ineligible areas and beneficiaries and ensuring up-to-date information on land parcels (e. g. orthophotos); (b) Guidelines on recording of eligible areas and ensuring up-to-date information have been established by the Commission services (DG AGRI and JRC) already in 2002. These guidelines have been discussed with the Member States at different occasions. Where it is found that the non respect of these Guidelines can lead to irregular payments, action is taken under the conformity clearance and Member States are requested to detail an action plan to resolve the issues. In this, the Commission services (DG AGRI and JRC) are providing the necessary assistance.

(c) clarifying and simplifying the rules underpinning the measures — in particular the use of the national reserve. (c) Simplification is proposed in the Health Check proposal: by further decoupling some partial payments and by allowing Member States to gradually shift towards flatter payment rates per entitlement, SPS will become more effective, efficient and simple.

5.57. Further significant efforts are also required to ensure that beneficiaries respect their obligations in the area of rural development which is particularly prone to errors because of the often complex rules and eligibility conditions. 5.57. The Commission has given in its audit programme 2008 priority to the audit of agri-environmental measures. The Commission shares the view of the Court that rural development measures, in particular due to the inherent complexity of agri-environmental measures, are prone to a higher incidence of errors than EAGF payments. Agri-environmental measures are complex by nature and that there is only very limited scope for simplification of these measures without jeopardising their objectives. The Commission, therefore, considers that due to the added value of these measures and their high complexity, the tolerable risk of errors should be higher. Despite these considerations, important improvements of the rural development control framework have been introduced for the EAFRD programming period 2007-2013. As an example, Member States shall now ensure that all the eligibility criteria established by Community legislation or by the rural development programmes can be controlled according to a set of verifiable indicators to be established by them. As eligibility criteria are often complex, different rules and guidelines have been produced by the Commission services to assist Member States in their interpretation. Moreover, the application of the IACS has been further reinforced for area and animal related rural development measures under Axis 2 that constitute 44 % of the total expenditure programmed.

5.58. Finally, it is necessary to overcome the system's weaknesses identified as affecting the policy areas of environment, fisheries, health and consumer protection. 5.58. The Directorate-General for Health and Consumers refers to its statement in paragraph 5.51. See reply in 5.51 for fisheries.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

The common organisation of the market in raw tobacco

5.59. In its Special Report No 7/2004 (43) the Court identified a number of shortcomings, notably unreliable data, inadequate analysis of the market situation, as well as a failure to meet objectives set, such as encouraging the conversion of production to other sectors. The Court made a number of recommendations which were supported by the Parliament and the Council.

5.60. The CMO for raw tobacco has since been reformed in the context of the 2003 general reform of the CAP. The Commission has largely taken into account the Court’s recommendations, namely regarding the collection and use of more complete and reliable data. Furthermore, full decoupling of the aid from production is gradually being introduced. This, together with the financing of reconversion measures, will when fully implemented, address the weaknesses of the market measures and are themselves an incentive for producers to voluntarily give up tobacco production.

The Commission’s management and supervision of the measures to control foot-and-mouth disease

5.61. In it Special Report No 8/2004 (44), the Court noted that the Commission and the Council had already remedied many of the legislative weaknesses highlighted by the Court’s audit. However, it recommended further measures, notably: 5.61.

(a) outside crisis periods, regular evaluation of the prevention and control arrangements and increased supervision of their implementation;

(b) a study of ways of involving farmers more closely in rapid notification of the disease and compliance with movement restrictions;

(c) clarification of the financial framework applicable to epidemics of animal disease, combined with maximum reduction of the financial risks to the EU budget. (c) In the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions ‘A new Animal Health Strategy for the European Union (2007-2013) where “Prevention is better than cure” (COM(2007) 539 final)’ it expected to develop a harmonised EU framework of the criteria for responsibility and cost-sharing. This is to be achieved by a revision of the EU financial instrument for animal disease financing (Council Decision 90/424/EEC) in the framework of the action plan of the new animal health strategy. Preparatory work has already started. Further actions, including a feasibility study that will include a consultation process are planned.

5.62. The Commission undertook a major evaluation of the prevention and control measures in 2006 and took a series of initiatives which partially address the Court’s recommendations. 5.62. In December 2004, the Commission launched an external evaluation to thoroughly review the outcomes of EU action on animal health and the direction it may wish to take in the future. Based on the evaluation’s results and a wide stakeholder consultation, the Commission presented its proposal for a new animal health strategy in September 2007 (45). It was the first time that the Commission set out its strategic aims and objectives for animal health.

5.63. Nevertheless, the Court considers that further efforts are needed to: 5.63. The Council (in December 2007), the European Economic and Social Committee (January 2008) and the European Parliament (May 2008) have welcomed the development of a strategic approach to EU animal health policy and support the overall aims, objectives and principles set out in the Animal Health Strategy, which covers the period 2007-2013. Based on the results of discussions in these EU inter-institutional forums, the Commission will adopt in the near future its Action Plan on Animal Health to deliver the strategy’s vision over the next five years and beyond.

(a) simplify legislation concerning the health and welfare of animals (46); (a) In the framework of the Better Regulation policy, major actions have already been undertaken to simplify the existing legal framework, including for example the new Directive 2006/88/EC on aquaculture animals (47) and the proposal for a Council Directive simplifying procedures of listing and publishing information in the veterinary and zootechnical fields and amending 22 existing Council Directives (48), which is currently at the final stage of procedure for adoption by the Council. However, as explained in its Communication on the new Animal Health Policy Strategy, the Commission also intends to bring forward a proposal for a new animal health law that would simplify considerably existing legislation.

(b) increase the human resources dedicated to the control of the application of EU legislation taking into account the enlargement of the Union; (b) In the food safety and animal health area, the Commission’s Food and Veterinary Office (FVO) works to assure effective control systems and to evaluate compliance with EU standards within the EU, and in third countries in relation to their exports to the EU. The FVO does this mainly by carrying out inspections in Member States and in third countries exporting to the EU. The FVO carries out a total of about 250 to 270 missions per year. Recruitment is ongoing according to the requirements for recruiting preferentially experts from the recently acceded Member States.

(c) remedy the persistent weaknesses in the contingency plans, as highlighted namely in Food and Veterinary Office reports; (c) This point will be followed up.

(d) improve the organisation and follow-up of real time alert exercises; (d) The Commission is currently gathering updated information from the Member States to ensure a proper follow-up to this recommendation.

(e) reduce the frequent delays in the notification of bovine movements and their registration in the central database and improve the identification and movement legislation for pigs; (e) The shortcomings reported by the FVO are related with the implementation of the relevant Community Acts on identification of animals, registration of holdings and movement records; they do not question the provisions in the respective Regulations and the Directive.

(f) incorporate the food hygiene requirements adopted in 2004 in the provisions for imported meat. (f) The Commission prepared an appropriate proposal already in the second half of 2007 (SANCO/10018/2007) and received a favourable opinion of Member States at the SCoFCAH (49) meeting of 10 September 2007. The document is now in the legislative procedure for formal adoption by the Commission and subsequent publication in the Official Journal.

5.64. As regards the greater involvement of farmers in the rapid notification of the disease, limited progress has been achieved to date. 5.64. All outbreaks of major contagious animal diseases (classical swine fever, foot and mouth disease, avian influenza) that have occurred in the EU in the last 5 years have led to very limited costs for the Community budget and have been successfully eradicated. One of the reasons for these results is that — in general — notification of disease has been done in a timely manner. Member States have often not (fully) compensated those farmers that have not fully co-operated with the authorities or not reported the disease in a timely manner in order to discourage such behaviour.

5.65. Finally, as regards the clarification of the financial framework, the Commission adopted measures in 2005 fixing limits on compensation, based on market prices. However, further measures are necessary, given that payment of national aid varies greatly among the Member States. 5.65. The ceilings specified in the legislation provide an overall idea of the compensation granted by the Member States. However, the basic rule remains that the compensation should never exceed the market value of the animal. Correct application of the legislation prevents over- and undervaluations. The legislation concerning compensation and state aid is harmonised and is identical for all EU Member States. The difference observed in this case stems from the different made of the instruments available.

Measurement of farm incomes by the Commission

5.66. In its Special Report No 14/2003 (50) on the evaluation of farmers’ income by the Commission, the Court concluded that the EU statistics did not provide sufficiently exhaustive information on the disposable incomes of agricultural households and did not allow an assessment to be made of the living standard of the agricultural community. This was notwithstanding the fact that three separate instruments were available, all intended to determine agricultural income, but which were not designed for the same purpose. The Court recommended that the Commission evaluate the statistics available concerning the situation of holdings and agricultural households and define precisely the statistical framework to monitor the achievements of the objectives of the common agricultural policy, notably that concerning a reasonable standard of living for farmers. The European Parliament and the Council supported the Court’s recommendations.