THE COURT’S OBSERVATIONS THE COMMISSION’S REPLIES

INTRODUCTION

3.1. This chapter presents the Court’s specific assessment of Agriculture and Natural Resources, which comprises policy areas 05-Agriculture and rural development, 07-Environment, 11-Maritime Affairs and Fisheries and 17-Health and Consumer Protection. Key information on the activities covered and the spending in 2009 is provided in Table 3.1.

Table 3.1 — Agriculture and Natural Resources — Key information (million euro) Budget Title Policy area Description Payments 2009 Management Mode 5 Agriculture and rural development Administrative expenditure 128 Centralised direct Interventions in agricultural markets 7 006 Shared Direct aids 39 114 Shared Rural development 8 738 Shared Pre-accession measures 254 Decentralised Other –31 Shared 55 209 7 Environment Administrative expenditure 87 Centralised direct Operational expenditure 269 Centralised direct/Centralised indirect 356 11 Fisheries and Maritime affairs Administrative expenditure 39 Centralised direct Operational expenditure 553 Centralised/Shared 592 17 Health and consumer protection Administrative expenditure 111 Centralised direct Operational expenditure 416 Centralised direct/Centralised indirect 526 Total administrative expenditure (38) 366 Total operational expenditure (consisting of): 56 318 – advances 518 – interim/final payments 55 800 Total payments for the year 56 684 Total commitments for the year 62 165 Source: Annual Accounts 2009.

3.2. Under the Treaty, the Commission has overall responsibility for implementing the EU budget. For agricultural and rural development virtually all expenditure is carried out under shared management whereby implementation tasks are delegated to Member States. For the other areas, budgetary appropriations are spent under the direct and indirect management of the Commission with the exception of the European Fisheries Fund which is under shared management on the basis of multi-annual programmes.

Specific characteristics of the policy group

Policy area agriculture and rural development

3.3. The objectives (1) of the common agricultural policy as set out in the Treaty are to increase agricultural productivity, thus to ensure a fair standard of living for the agricultural community, to stabilise markets, to assure the availability of supplies and to ensure that supplies reach consumers at reasonable prices.

3.4. The EU budget finances the common agricultural policy expenditure mainly through two Funds (2): the European Agricultural Guarantee Fund (hereinafter ‘EAGF’), which fully finances EU direct aid and market measures (3) as explained hereunder, and the European Agricultural Fund for Rural Development (hereinafter ‘EAFRD’), which co-finances at varying rates rural development programmes.

3.5. The main measures financed by EAGF are: — The direct aid scheme ‘Single Payment Scheme’ (SPS) which was introduced in order to decouple the payments made to farmers from production (‘decoupling’). To qualify under the SPS farmers must first obtain ‘entitlements’ (4) each of which, together with one hectare of eligible land declared by the farmer, gives rise to an SPS payment at least until 2013 (5). SPS has been growing in importance and in 2009 represented 28 806 million euro of expenditure. — The direct aid scheme ‘Single Area Payment Scheme’ (SAPS) which provides for the payment of uniform amounts per eligible hectare of agricultural land. SAPS is currently applied in ten of the new Member States (6) and in 2009 accounted for 3 723 million euro of expenditure. — Other direct aid schemes (coupled payments) designed to maintain production in areas which would otherwise be at risk of abandonment of production. The amounts involved, which in general are declining due to further decoupling and integration of other support schemes in the SPS, accounted for 6 585 million euro of expenditure. 3.5.

— Interventions in agricultural markets: the principal measures are intervention, storage and export refunds and other measures such as specific support for the wine, fruit and vegetable and food programmes (in total amounting to 3 988 million euro) and Sugar Restructuring Fund (3 018 million euro). — Payments made from the Sugar Restructuring Fund were financed by contributions from producers holding quota which are revenue assigned to the EAGF.

3.6. The European Agricultural Fund for Rural Development (EAFRD) co-finances Rural Development expenditure which 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 (8 992 million euro) (7). In 2009, in the framework of the so called CAP Health Check (8) and the European Economic Recovery Plan (9), additional funding has been channelled via Rural Development to finance priorities such as broadband internet infrastructure, climate change, renewable energies, water management, biodiversity and measures accompanying restructuring of the dairy sector. However, no expenditure has been incurred under the latter measures during 2009. 3.6. Member States started implementing the new priorities identified in the Health Check and the European Economic Recovery Plan already in 2009, but only declared expenditure to the Commission as of the end of 2009 because the programme modifications had not been approved before. The figure (8 992 million) relates to payment appropriations for chapters 0504 and 0505, which includes: — operational technical assistance; — genetic resources measures; — recoveries from former EAGGF guarantee programmes (EU15); — pre-accession instruments (SAPARD), which are not part of EAFRD and in fact are under a separate budget heading as well as another heading within the Financial Perspectives.

3.7. Under all EAGF direct aid schemes covered by Council Regulation (EC) No 1782/2003 (10) and certain EAFRD aid schemes, beneficiaries of EU aid have to fulfil ‘cross compliance’ requirements. These requirements relate to the protection of the environment, the public, animal and plant health, animal welfare (Statutory Management Requirements) and to the maintenance of agricultural land in good agricultural and environmental condition (GAEC) (11). EU legislation provides that when non-compliance with those requirements is noted, a reduction or exclusion (12) shall be applied on the overall amount of direct payments made in respect of the applications submitted in the course of the calendar year of the finding. The Court’s testing of payments to farmers includes only a limited number of cross compliance requirements (see paragraph 3.17, third indent). When infringements are detected they are classified as non-quantifiable errors and therefore not included in the error rate calculation.

3.8. Only farmers are eligible for EU area aid. A farmer is defined to be a person who carries out an agricultural activity. An agricultural activity is defined as the production, rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes, or maintaining the land in good agricultural and environmental condition (GAEC) (13). According to the relevant EU rules, if no other agricultural activity is carried out by the applicant, the maintenance of land in GAEC constitutes the minimum agricultural activity required of the applicant to be eligible for aid.

3.9. Expenditure under both funds is channelled through some 80 national or regional paying agencies. Before these paying agencies can claim any expenditure from the EU-budget, they must be accredited on the basis of criteria laid down by the Commission. These paying agencies make payments to the beneficiaries and prior to doing so, they must, either directly or through delegated bodies, satisfy themselves of the eligibility of the aid applications. The accounts and payments of the paying agencies are examined by independent audit bodies (certification bodies) which report to the Commission in February of the following year. 3.9. According to Article 5 of Commission Regulation (EC) No 885/2006, in addition to the annual accounts, the internal control procedures of the paying agencies are also examined and certified by the certification bodies on an annual basis.

Policy areas Environment, Maritime Affairs and Fisheries, Health and Consumer Protection

3.10. The Union’s policy on the environment should contribute to protecting and improving the quality of the environment, human health, and rational utilisation of natural resources, including at international level. The Financial Instrument for the Environment (LIFE) (14) is the most important instrument in terms of funding covering the EU contribution for projects in the Member States in favour of nature and biodiversity, as well as environment policy, governance, information and communication.

3.11. The European Fisheries Fund (15) is the main instrument for the policy area Maritime Affairs and Fisheries. The Common Fisheries Policy pursues the same objectives as the Common Agricultural Policy (see paragraph 3.3).

3.12. Concerning Health and Consumer Protection, the EU contributes, on the one hand, to human, animal and plant health protection and, on the other hand, to consumer welfare.

Advances and interim/final payments

3.13. For EAGF the expenditure mainly consists of reimbursement of subsidies paid to farmers and other beneficiaries by the Member States.

3.14. For EAFRD and EFF, an advance corresponding to 7 % of the EU contribution to each programme was paid after the adoption of the programme by the Commission (16). In 2009, the payments charged to the EAFRD concerned only interim payments whereas for the EFF they comprised also advances.

3.15. Payments for Health and Consumer Protection do not include advances, Member States are reimbursed on the basis of their declared expenses. For Environment, pre-financing of up to 40 % of the EU contribution for a LIFE project, as established in the grant agreement, is foreseen.

Budgetary implementation

3.16. In the area of EAFRD budgetary appropriations for 1 650 million were cancelled at the end of 2009 (17) primarily as a consequence of a slowdown in Member States’ expenditure due to difficulties in providing national co-financing and, in the case of Romania and Bulgaria, lack of experience in the implementation of rural development programmes (18). 3.16. The cancellation of the EAFRD budgetary appropriations for 1 650 million euro at the end of 2009 was also due to the late initial approval of programmes in a number of cases. In addition, reprogramming to take account of the Health Check and the European Recovery Package may also have led to some delays in the launch of new projects by Member States pending adoption of the revised Rural Development programmes.

Audit scope and approach

3.17. The Court’s overall audit approach and methodology is described in Part 2 of Annex 1.1. For the audit of policy group Agriculture and Natural Resources the following specific points should be noted: — a sample of 241 payments was tested, — the assessment of supervisory and control systems covered for EAGF selected paying agencies in four Member States applying the SAPS — Cyprus, Latvia, Lithuania and Slovakia — and in four Member States applying the SPS: Malta, Greece, Italy (Emilia-Romagna) and Spain (Basque Country). Additionally, in the case of Malta the audit covered the allocation of entitlements following the introduction of SPS in 2007. For Rural Development expenditure, the Court tested the supervisory and control systems in Austria, Germany (Bavaria), United Kingdom (England), Greece, Czech Republic, Romania, Bulgaria and France. For Health and Consumer Protection the Court audited supervisory and control systems relating to the animal disease eradication and monitoring programmes, — as regards cross compliance, when auditing area related payments the Court limits its testing to GAEC obligations (minimum soil cover, encroachment of unwanted vegetation) for which evidence can be obtained and a conclusion reached at the time of the audit visit. Certain statutory management requirements (protection of groundwater and soil against pollution, animal identification and animal welfare) were tested in respect of EAFRD payments. Furthermore, in the context of its IACS systems audits the Court has analysed the implementation at national level of the GAEC standards and the control systems put in place by the Member States, — in addition, in order to assess the basis for the Commission’s financial clearance decisions the Court reviewed 60 of the certification bodies’ certificates and reports related to 54 paying agencies (19).

REGULARITY OF TRANSACTIONS

3.18. The results of transaction testing are summarised in Annex 3.1 . On this basis the Court’s estimate of the most likely error for Agriculture and Natural Resources lies between 2 % and 5 %. 3.18. The Commission considers that an error rate which over the recent years oscillates around 2 % confirms the overall positive assessment of previous years. Moreover the risk to the EU budget is adequately covered by the conformity clearance procedure.

3.19. In 2009, out of 241 transactions examined, 66 (27 %) (20) were affected by error. 42 (64 %) (21) of these transactions were affected by quantifiable errors notably concerning eligibility and accuracy. Examples of the types of error are given below.

Agriculture and rural development

3.20. In the EAGF, out of 148 transactions sampled, 35 (24 %) (22) were affected by errors. 24 (69 %) of these transactions were affected by quantifiable errors. With regard to Rural Development expenditure, out of 80 transactions sampled, 25 (31 %) were affected by errors. 16 (64 %) of these transactions were affected by quantifiable errors. 3.20. The Commission notes that most of the quantifiable errors are relatively small in financial terms and mainly concern small differences in the re-measurement of parcels carried out by the Court (see paragraph 3.22). Also, several errors were already identified by the Member State concerned prior to the Court’s audit.

3.21. Examples of eligibility errors found by the Court are the following: 3.21.

Examples EAGF A SAPS payment was made to a beneficiary without any proof of carrying out an agricultural activity: the beneficiary, a limited company owned by a municipality, made a SAPS claim for more than 530 hectares of meadows and pasture parcels. No proof could be provided to the auditors that the company qualified for aid by carrying out an agricultural activity — i.e. production or growing of agricultural products, rearing or keeping animals for farming purposes, or maintaining land in good agricultural condition (GAC) — with the result that payment of the aid (30 000 euros) was not justified. The Court considers that this case is a further example of the problem that the Court had already pointed out in its 2008 Annual Report (23). An SPS payment was made to a beneficiary who incorrectly declared an area of rented poor pasture land. The land in question was public land for which another farmer (the lessor) declared having grazing rights granted by the municipality. The beneficiary, a retired farmer, who had disposed of his original holding but had retained part of his entitlements entered into two specific contracts with the lessor ostensibly to meet the requirements of the regulation: — a rental contract for 57 hectares of the above mentioned pasture land, — a ‘back to back’ contract ceding the grazing rights back to the lessor. The municipality, however, had not granted any grazing right to the lessor for the parcel in question. In any case, any subletting (in whole or in part) of grazing rights is explicitly forbidden by municipality rules. Thus, the land was neither at the disposal of the lessor nor of the beneficiary. Consequently, the provisions of EU legislation (24) were not respected. The latter caseis considered to be a clear breach of the provisions of article 29 of the governing regulation which stipulates that ‘no payment shall be made in favour of beneficiaries for whom it is established that they artificially created the conditions required for obtaining such payments’. Examples EAGF Natural or legal persons are entitled to receive SAPS payments if they carry out an agricultural activity or maintain the land in good agricultural condition (GAC) (37). Thus, no specific agricultural activity is required. It is sufficient that the beneficiary respects good agricultural conditions (GAC). This case does not concern the regularity under the relevant EU rules, but rather the political choice made by the EU legislator during the Health Check by leaving it to the Member States to decide whether to grant direct payments to natural or legal persons whose principal business objects do not consist of exercising an agricultural activity or whose agricultural activities are insignificant. Further reflexion on this point is taking place in the context of the post-2013 reform of the Common Agricultural Policy. Evidence from the payment file shows that in September 2008, the national authorities concerned checked the land claimed on the spot, including some of the parcels inspected by the Court, and determined the payment on the basis of the area which they found to be in good agricultural condition. An on-the-spot visit of the Commission in May 2010 confirmed that the corresponding area paid continues to be in good agricultural conditions.

3.22. Most of the quantifiable errors were accuracy errors (87 % in EAGF and 81 % for Rural Development) and furthermore, most of the accuracy errors were over-declarations of eligible land. Other examples of accuracy errors found by the Court were the following: 3.22.

Examples EAGF In two out of 12 transactions audited in a Member State payments were calculated on the basis of incorrect entitlements recorded in the database leading to around 20 % overpayment in each case. In another Member State an SPS payment was calculated on the basis of the average value of entitlements held by the farmer and not on the basis of the average value of entitlements declared by the farmer in his application as provided by EU legislation, thereby resulting in an underpayment of around 20 %. Examples EAGF In both cases, the national authorities had already detected, prior to the Court, that payments were calculated on the basis of incorrect entitlements and that any overpayments would need to be recovered. The Commission regrets that, such underpayments, which do not result in any loss to the EU budget, are extrapolated to the whole of the expenditure in such a way as to increase the overall error rate, thus giving the incorrect impression that the error rate is an indication of the magnitude of the overpayment.

3.23. As for non-quantifiable errors, the Court found for example, in EAGF, that parcels were not clearly identified in the application , payments were made after the legal deadline and the date on which claimants have to have exclusive use of the parcel claimed was not specified. In EAFRD, the Court noted a case where certain conditions applying to an aid paid for organic farming had not been fully complied with. 3.23. The Commission systematically checks compliance with payment deadlines for direct aid and where necessary makes financial corrections. The other errors mentioned are formal and without financial consequences.

Environment, Maritime Affairs and Fisheries, and Health and Consumer Protection

3.24. As regards Environment, Maritime Affairs and Fisheries, and Health and Consumer Protection, out of 13 transactions sampled, 6 (46 %) were affected by errors. 2 (33 %) of these transactions were affected by quantifiable errors. 3.24. When deciding on its payments under shared management to the Member States the Commission was not aware of possible errors identified by the Court that had occurred at the level of the final recipient. However, the Commission has put in place a control environment to verify that the management and control systems of the Member States function effectively to prevent such errors. With regard to one transaction in the area of Maritime Affairs and Fisheries, the Commission’s calculation of the interim payment was a correct application of the applicable rules for the calculation of such payments as laid down in Article 76 of Council Regulation (EC) No 1198/2006 which does not allow the Commission to use a different method of calculation at its discretion.

3.25. Concerning the Financial Instrument for Fishery Guidance (FIFG), the Court found cases of projects completed outside the eligibility period. 3.25. The Commission deducts detected ineligible amounts from subsequent expenditure claims (if any remain to be submitted) or at the latest before the closure of the programme.

Example National authorities reimbursed expenditure incurred nine months after the deadline established for the construction of a fishing vessel. In light of the legislation this expenditure is ineligible since only in cases of ‘force majeure’ occurring within the project duration can such a deadline be set aside. Example Within the framework of the closure exercise the Commission will take all the appropriate measures to deduct from the final statement of expenditure and final payment claim the ineligible amount.

3.26. The Court also found non-quantifiable errors. 3.26.

Examples FIFG: a final beneficiary declared, amongst others, expenses for own staff and machinery which have been estimated at selling prices rather than based on costs actually incurred for implementing the project. As the actual costs incurred by the beneficiary could not be provided, this error has been classified as a non-quantifiable error. SANCO: in the case of a payment concerning the broadcasting of TV advertisements for an anti smoking campaign, the Court found that the Commission had not adequately verified that all the services paid for had actually been delivered. Examples FIFG: Within the framework of the closure exercise the Commission will take all the appropriate measures to deduct from the final statement of expenditure and final payment claim the ineligible amount. SANCO: The Commission services carried out a certain number of checks which provided evidence that the TV advertisements were broadcast. Additional controls will be carried out in the future.

EFFECTIVENESS OF SYSTEMS

Policy area agriculture and rural development

Systems related to regularity of transactions

3.27. The main control system to ensure the regularity of transactions is the Integrated Administration and Control System (IACS) (25).

3.28. IACS consists, in each Member State, of databases of holdings, applications, agricultural parcels and where payments are still linked to the number of animals a database of animals, as well as a register of entitlements in those Member States implementing the SPS. 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 % on-farm inspections to be carried out by the paying agencies.

3.29. IACS covers SPS, SAPS and all area related coupled aid schemes as well as animal premia schemes. In the case of EAFRD, and especially for agri-environment and less favoured areas, verification of certain key elements such as surface and number of animals is made through IACS while other requirements are governed by specifically designed controls (26).

3.30. The Court assessed eight IACS systems under the EAGF and eight specific control systems under the EAFRD (see paragraph 3.17).

3.31. The Court’s audit covered compliance with the provisions of the relevant regulations and an assessment of the effectiveness of the systems in ensuring regularity of transactions. The following elements were examined: 3.31.

(I) Administrative procedures and controls to ensure correct payment including quality of databases.

(II) Control systems based on on-the-spot checks.

(III) Systems to ensure implementation and control of Cross-compliance. (III) The Commission recalls that respect of cross-compliance criteria by farmers does not constitute an eligibility criterion and, therefore, the controls of these criteria do not pertain to the legality and the regularity of the underlying transactions. Farmers not respecting these criteria are entitled to receive payments, but are sanctioned on the basis of the severity, extent, permanence and repetition of the non-compliance found as well as negligence or intent of the beneficiary concerned.

3.32. While the IACS system is in principle well designed, the Court’s annual IACS systems audits carried out in recent years show that the effectiveness of IACS is adversely affected by inaccurate data in the databases, incomplete cross checks or incorrect or incomplete follow up of anomalies. In respect of financial years 2006-2008 the Court examined the operation of IACS systems related to SPS or SAPS in 20 paying agencies in 17 Member States and reported the results in its Annual Reports. For one paying agency IACS was assessed to be effective, for 12 partially effective and for seven, significant weaknesses were identified which led the Court to conclude that the system was not effective. 3.33. For its 2009 audit of eight paying agencies, the Court found the systems to be effective in ensuring the regularity of payments in only one agency, partially effective in four agencies, and ineffective in the remaining three (Greece, Cyprus and Malta). 3.32.-3.33. The Commission continues to consider that, as the Court acknowledged in previous annual reports since 2005, the IACS is generally an effective control system for limiting the risk of error or irregular expenditure, provided that it is properly applied. The effectiveness and constant improvement of the IACS is confirmed by the results of the conformity audits which the Commission has carried out over the past years in all Member States but Luxembourg as well as by the low error rate indicated in the control statistics which it receives from Member States and which are verified and validated by the certification bodies. This low error rate is also in line with that of the Court itself in its 2008 Annual Report. The Commission found that for claim year 2008, significant deficiencies existed in the IACS in Bulgaria and Romania. As a result these two Member States established action plans in 2009 which have been closely followed by the Commission. Other Member States have deficiencies of a lesser nature in their IACS which do not render their systems ineffective but, rather, perfectible and for which they have taken or are taking action. All these deficiencies are followed up through conformity clearance procedures which ensure that the risk to the EU budget is adequately covered.

3.34. Concerning the eight Rural Development supervisory and control systems audited, the Court found that three of the control systems implemented were effective and five of them were only partially effective in ensuring the regularity of payments. 3.34. The weaknesses of the rural development supervisory and control systems in Bulgaria and Romania are due to the deficiencies in the IACS, for which a reservation is included in the Directorate-General for Agriculture and Rural Development’s Annual Activity Report for 2009. The control system for the other Member States audited by the Commission in 2009 was found to be effective. However, there is scope for improvement for the following items: — Respect of general guidelines set out in the working document regarding agri-environment commitments and their verifiability, which notably provides that several control tools need to be used in combination; — Continued efforts are required to provide simple and clear eligibility criteria and to inform beneficiaries about their obligations in a clear and unequivocal manner; — Application of exhaustive administrative controls, in particular as regards agri-environmental measures; — Improvement of quality of control reports to permit better traceability and clear conclusions of the controls carried out.

3.35. The Court’s principal audit findings are outlined in the following paragraphs. The results of the examination of systems are summarised in Annex 3.2 .

(I) Administrative procedures and controls to ensure correct payment including quality of databases

3.36. Administrative checks must be undertaken on all applications for support and payment claims, and cover all elements that are possible and appropriate to control by administrative means (27). The administrative checks must include cross-checks wherever possible and appropriate, inter alia with data from the IACS databases. The Court’s audit verified whether the databases were complete and reliable as well as the adequacy of checks in identifying anomalies and taking corrective action. The most important systems weaknesses found are set out below.

EAGF

3.37. The Land Parcel Identification System (LPIS) is a database in which all the agricultural area (reference parcels) of the Member State is recorded. The Court found significant deficiencies of LPIS in three Member States that affect the effectiveness of administrative cross checks as illustrated hereunder: Examples LPIS-GIS technology became mandatory in 2005. In Greece until and including the claim year 2008 the LPIS-GIS did not contain any graphical information (ortho-photos) showing the actual eligible area of the reference parcels recorded. LPIS-GIS was still not fully operational for carrying out the necessary cross-checks as of December 2009. In Lithuania the Court found that the authorities failed to eliminate ineligible features of a total area of 13 700 ha from the eligible area of parcels recorded to be 100 % eligible in the LPIS. In Cyprus new ortho-photos were taken and analysed in 2008. The analysis showed that more than 39 000 reference parcels were affected by changes of land use and as a result the area eligible to SAPS aid dropped by more than 7 000 ha (i.e. 5 % of the agricultural area). Although updated information was available, the Cypriot authorities decided to base payments for claim year 2008 on the outdated 2003 ortho-photos. 3.37. In general, the quality of the LPIS is constantly improving in the Member States, as also demonstrated by the Commission’s reply to the examples referred to by the Court below. Moreover, as from claim year 2010 Member States are obliged to perform a quality assessment of the LPIS-GIS on an annual basis according to pre-determined procedures and to report on the results and the actions envisaged to, where required, improve the situation. The Commission accepts that there were problems with the Greek IACS in claim year 2008. However the financial risk for the past is covered by the conformity clearance procedure by which, until now, some 866 million EUR has been or is being excluded from EU financing. The LPIS-GIS became available in accordance with the action plan at 31 December 2008 and the roll out was done prior to the start of the 2009 claim period. The problem in 2009 was caused by the late digitisation of parcels by farmers and measures have been taken to rectify the situation in the meantime by the fixation of a cut off date for the digitisation. The Commission is following up the deficiencies which have existed in the Lithuanian LPIS-GIS since 2005 through conformity clearance procedures. However, the Lithuanian authorities have meanwhile informed the Commission that corrective measures have been implemented in the LPIS-GIS in December 2009. The Commission has been following the deficiencies in the LPIS-GIS of Cyprus since 2005. As a result of the missions carried out, Cyprus took remedial action so that as of 2009 the system is considered to be effective. This situation is followed up under the conformity clearance procedure.

3.38. The Court also found in two Member States (Italy, Spain) that the most recent ortho-photos available were not used for capping the eligible areas for calculating the payments. Examples In Italy (Emilia Romagna) and Spain (Basque Country) the eligibility rate for poor pasture land is not based on the most recent information available (ortho-photos or on-the-spot inspection) but on what the farmer had claimed before SPS was introduced. In the cases examined, both Italian and Spanish farmers were allowed to claim the higher historical eligibility rate for poor pasture land which on the latest ortho-photos shows significantly lower eligibility rates. Differences have lead to granting aid for significantly more than the actual eligible area. 3.38. It must be underlined that considerable work is required before new ortho-photos can actually be considered to be ‘operational’ in the system. They must be processed, digitised and the results quality checked before they can be efficiently used for cross checks. This process takes time. Nevertheless, the Commission considers it to be very useful that Member States make the ortho-photos available at an early stage to farmers for the claim process and for controllers for the on-the-spot-checks as it has been the case. Member States are obliged to recover any amounts from previous years if over-declarations are detected afterwards as a result of updated ortho-photos. Where the Commission considers that a Member State is not sufficiently proactive in protecting the EU budget, it follows up the situation under the conformity clearance procedure. Italy is in the process of finalising a total refresh of their LPIS. This implies that new ortho-images will cover the whole country, that the images will be renewed every third year, and that the reference parcels will be systematically assessed, including field visits where necessary. Over-declarations established following the refresh are being recovered. The Commission considers this approach to be a major step forward. As regards Spain, the Court looked at imagery that had not yet been processed. This imagery was made available to farmers for their 2008 claim lodging. The Commission actively follows up the measures taken to rectify past over-declarations.

3.39. The Court has observed in several Member States (Cyprus, Greece, Italy, Slovakia and Lithuania) that the claim database did not allow the nature and timing of modifications or corrections made to be identified. In the absence of a reliable audit trail the Court cannot assess the correct application of EU penalties. Examples In Greece the bulk of administrative cross checks and of the necessary corrections of the claim data is carried out under a procedure that leaves no audit trail and does not lead to the application of penalties. In Cyprus conflicting information regarding dates and content of amendments of claims was shown on the paper claim and in the database. 3.39. For Cyprus, Greece and Slovakia, similar findings to the ones of the Court were included in the certification bodies’ reports for financial year 2009 and in all three cases the paying agencies replied that measures have been initiated to remedy the problems. Member States have been reminded in the Agriculture Funds Committee to ensure full audit trail in their IT applications.

3.40. A reliable entitlements database is a prerequisite for correct SPS payments. Member States are also required to respect the overall national ceilings both for SPS and SAPS. The Court found a ceiling overshoot (Cyprus) although this did not affect the EU budget; and an inaccurate allocation of entitlements (Malta). 3.40.

Examples When Malta introduced SPS in 2007 all livestock or dairy farmers were allocated special entitlements including those who held eligible hectares which is contrary to EU legislation. EU legislation exempted Malta from the requirement that the claimant has to maintain at least 50 % of the historical animal raising activity in order to receive payment for a special entitlement. Malta decided not to set any minimum livestock requirements at national level for activation of special entitlements. Hence, farmers who significantly reduced their herd after the introduction of SPS remain eligible and are paid in full for their special entitlements. Cyprus exceeded the ceiling for EU SAPS aid by 1,44 %. The Cypriot authorities failed to apply a proportional reduction. As a result all individual payments were affected by a 1,44 % overpayment although this was financed by national rather than the EU budget. Examples Malta has a significant intensive animal production without land. The Council decided to make a derogation for Malta as concerns the obligation of maintaining at least 50 % of the agricultural activity exercised before the transition to the SPS. Cyprus is pursuing this issue as part of the review of the 2008 claims with a view to recovering the amounts concerned.

3.41. With regard to the correctness of payments, the Court found substantial deficiencies in one Member State leading to cases of forest claimed as permanent pasture (Greece). Moreover, Greece continues to allow the claimed area to exceed the eligible area of the reference parcel as recorded in the LPIS by applying a tolerance margin of 5 % not foreseen in the regulation. This observation was already reported by the Court in 2005. Furthermore, the Court found cases of payments to beneficiaries being made without known anomalies having been resolved (Italy) and without cross-checking the area claimed against the eligible area recorded in LPIS (Spain). In addition, examples were found of systematic incorrect calculation of aid and inadequate application of area and late claim penalties. 3.41. The Italian authorities confirm that prior to making the payments, the regional authorities carry out all administrative controls to verify the eligibility, to resolve anomalies, and to make the results available to the farmers. However, in cases where systems weaknesses which create a risk of undue payments are observed by the Commission, they are followed-up in the clearance of accounts procedure. The Spanish authorities confirm that in claim year 2008, the LPIS-GIS was indeed only used for a part of the cross-checks, but that they have remedied this situation as from claim year 2009.

Examples In Greece, areas recorded as forest in the LPIS were claimed as permanent pasture and benefited from SPS, although the ortho-photos clearly show a significant density of trees and rocks. Furthermore, Greece was found to systematically calculate SPS incorrectly in cases where the area determined is insufficient for payment of all entitlements claimed by the farmer and where these entitlements are of different unit values. A similar problem was observed in Malta where in one case the incorrect calculation method led to an overpayment of 69 %. In Cyprus overdeclaration penalties provided for in EU legislation were not applied in 2007 and in 2008 they were applied incorrectly. Examples The Commission accepts that there were problems with the Greek IACS in the past, however with the new LPIS-GIS in operation the risk has been reduced from claim year 2009. The financial risk for the past is covered by the conformity clearance procedure by which, until now, some 866 million euro has been or is being excluded from EU financing. The Commission shares the observations of the Court. The Greek authorities have stated they will remedy the problem. This is however, an issue with limited impact. The same can be said with regard to the Maltese case, which affects a total of 519 farmers or an area of 203 hectares. The Commission is aware of the situation for 2007 and Cyprus has assessed its financial impact during the review of the 2007 claims. With regard to 2008 claim year, the Cypriot authorities confirmed that the procedure was amended.

EAFRD

3.42. Administrative checks concern the correctness of the declarations made by the claimant and the fulfilment of the eligibility requirements for the granting of the aid (28). Such controls include cross-checks with data already available to the administration, for example in the IACS databases.

3.43. The audit found errors in the determination of the exchange rate used to convert to euro amounts of aid paid in national currencies (United-Kingdom, Czech Republic), and weaknesses in the calculation of aid reductions following on-the-spot checks (Germany (Bavaria)). Weaknesses were also found in the technical checks on reduction of nitrate pollution (Greece) and compliance with a specific eligibility condition such as adequacy of agricultural machinery relative to the land farmed (Bulgaria). 3.43. The financial impact of these errors was already corrected in subsequent declarations of expenditure (Czech Republic, United Kingdom) or is being followed under conformity clearance procedures. Moreover, these amounts in relation to the payments executed can be assessed as negligible (far below 1 %). The Court’s observation regarding Germany (Bavaria) does not affect the EU budget because the reduction of the part of the aid paid from the EU budget was correctly calculated. The weakness found by the Court in Bulgaria is followed up through a conformity clearance procedure.

(II) Control systems based on on-the-spot checks

3.44. The Member States must, each year, carry out on-the-spot checks covering for most aid schemes at least 5 % of all beneficiaries (29). The Court’s audit focussed on the adequacy of risk analysis procedures to select beneficiaries for such checks, the quality of the checks and the adequacy of the corrections made. The Court’s audit revealed specific weaknesses in the on-the-spot checks.

3.45. In EAGF, the Court identified cases of incorrect application of measurement tolerances (Malta, Italy), inadequate quality and insufficient coverage of on-the-spot inspections (Greece). 3.45. According to the Maltese authorities corrective measures have been taken for 2008 and applied for 2009 as well. The Italian authorities confirmed that they applied the correct procedures for application of tolerances in claim year 2009.

Example In Greece, the audit found that on-the-spot inspections did not always meet the legal requirement to measure at least 50 % of parcels and grassland was generally not or only visually inspected. In several cases examined by the Court, claimed parcels which according to the ortho-photos consisted of forest or bushland were not included in the sample of parcels inspected on the spot. In addition, in several inspection reports analysed by the Court the geographical coordinates reported for the parcel measured on the spot did not match with the locations of the digitised parcel in the LPIS-GIS (different locations, different uses, different shape and perimeter). Example The Commission accepts that there were problems with the Greek IACS in the past, however with the new LPIS-GIS in operation the risk has been reduced from claim year 2009. The financial risk for the past is covered under the conformity clearance procedure by which, until now, some 866 million euro has been or is being excluded from EU financing.

3.46. In EAFRD, the Court found weaknesses concerning precision and completeness of control reports (Germany (Bavaria), Romania), the global evaluation of the results of the controls (Bulgaria) and the respect of deadlines for reporting to the Commission on the controls carried out (Germany (Bavaria), France). 3.46. The weaknesses referred to by the Court concern an ancillary control rather than a key control. As regards reporting deadlines, the information was transmitted to the Commission sufficiently in time to be taken into account in Directorate-General for Agriculture and Rural Development’s Annual Activity Report for 2009.

(III) System to ensure implementation and control of Cross-compliance

3.47. Cross compliance requirements consist of Statutory management requirements (SMRs) and GAEC standards (see paragraph 3.7). Whilst SMRs are specified in various EU Directives and regulations, GAEC standards are to be defined at national level.

3.48. The Court found shortcomings in the definition of what is required to maintain land in GAEC and the control of these conditions. 3.48. Weaknesses in the definition and control of the GAEC standards have been detected in the cross-compliance audits carried out by the Commission and are being followed up in the context of the conformity clearance procedure.

Example In Italy the same sheep were counted for two different farmers to meet the minimum stocking density requirement. Example The Commission agrees with the Court that, in this individual case, the GAEC of minimum stocking density is not respected and the corresponding cross-compliance sanction should have been applied.

3.49. During its on-the-spot visits the Court observed, on the basis of the limited audit (see paragraph 3.17, third indent) cross compliance infringements in around 5 % of the payments subject to cross compliance obligations. The infringements observed related to both SMRs (groundwater pollution, registration of animals, animal welfare, improper use of plant protection products), and GAEC (encroachment of unwanted vegetation). 3.49. The findings of the Court are confirmed by the control statistics which the Commission received from Member States. These statistics show that sanctions are applied.

Systems related to recoveries and financial corrections

Recovery of old debts

3.50. 50 % of any undue payment which the Member States have not recovered from the beneficiaries within four years, or within 8 years in the case of legal proceedings, will be automatically charged to their national budget (30) (so called 50/50 rule) (31). Member States are obliged to continue their recovery procedures. In 2009, the 50/50 rule was applied (32), hence amounts not recovered dating from 2000 or 2004 were cleared (eight and four years old respectively): 31,4 million euro was charged to the Member States while 20,1 million euro was borne by the EU budget. 3.50. The Commission points out that the amount of 20,1 million euro was borne by the EU budget for reasons of insolvency of the debtor and, thus irrecoverable before the 4-8 year deadline had elapsed.

3.51. In its Annual Activity Report 2009 (33), DG AGRI reports having achieved by the end of financial year 2009 an overall recovery rate of 42 % of the 1 266 million euro outstanding at the end of financial year 2006. According to the Commission, in the period 2007-2009 Member States recovered 121 million euro directly from beneficiaries and an additional 411 million euro was recovered from the Member States by the Commission applying the 50/50 rule. The Court observes that the 121 million euro recovered from the beneficiaries corresponded to less than 10 % of the total recoveries. 3.51. Recovery procedures are often delayed by lengthy proceedings in the national courts which, according to the principle of shared management, as defined in Article 53b(2)(c) of the Financial Regulation and Article 9(1)(a)(iii) of Council Regulation (EC) No 1290/2005, are the sole responsibility of Member States. This is the reason why the new clearance mechanism for irregularity cases was introduced, as a result of which the amount outstanding towards the EU budget has been reduced by 60 %. The Commission considers this outcome to demonstrate that this new mechanism is an effective and efficient way of clearing irregularity cases and protecting the EU’s financial interests and a strong incentive for Member States to accelerate recovery procedures.

The Commission’s clearance of accounts procedures

3.52. 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, which are then reimbursed by the Commission (34). 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.

Financial clearance for financial year 2009

3.53. On 30 April 2010 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 3.5 . These decisions are mainly based on certificates provided by independent auditors (certification bodies). The Court’s audit did not detect expenditure incorrectly cleared in the financial clearance decisions.

3.54. The Court noted shortcomings in the last three years regarding the reliability of the debtors’ accounts. For financial year 2009 the Commission has initiated financial corrections in respect of 13 paying agencies in 10 Member States for 14,8 million euro, representing some 1,43 % of the 1 037 million euro that were to be recovered at the end of financial year 2009. 3.54. The Commission obtained enough information on debtors for clearance and accounting purposes. The corrections of EUR 14,8 million were proposed by the Commission based on its assessment of the information provided by the certification bodies in their reports. The financial errors found are pursued through the normal clearance of accounts procedures.

Conformity clearance

3.55. 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’ (35).

3.56. In previous annual reports the Court has criticised the fact that the Member States administrations, and not the final beneficiaries, are charged with the financial corrections. In addition, the method provided for in the rules for calculating the conformity adjustments as applied by the Commission, involving considerable use of flat-rate corrections, means that the amounts thus recovered are not directly related to the real amount of irregular payments. The conformity clearance system continued unchanged in 2009. 3.56. What the Court criticises in the conformity clearance system is inherent to this system and was not objected to by any of the parties intervening in the adoption of Council Regulation (EC) No 1290/2005. The conformity clearance is designed to exclude expenditure from EU financing which has not been effected in compliance with EU 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 with recovery actions against these beneficiaries. However, even where recoveries from beneficiaries are not needed because the financial correction relates only 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. Financial corrections are determined on the basis of the nature and gravity of the infringement and the financial damage caused to the EU. The amount is calculated on the basis of the loss actually caused or on the basis of an extrapolation. Where this is not possible, flat-rates are used which take account of the severity of the deficiencies in the national control systems in order to reflect the financial risk for the EU. The Commission therefore considers there to be a valid link between this type of financial corrections and the level of irregular payments to final beneficiaries. The use of flat rates has been accepted by the Court of Justice as being in conformity with the legal rules governing the conformity work and endorsed, under certain circumstances, by the European Parliament in its 2007 discharge resolution (paragraph 83). Finally, while the legal rules governing the conformity clearance system have remained unchanged, the Commission has taken action to improve its operation, including new guidelines on financial corrections and the proposal on the reinforcement of assurance referred to by the Court in paragraph 3.62.

Validation of Member States’ controls and inspection results

3.57. The inspection results reported to the Commission by paying agencies assess the regularity of claims submitted by farmers and since 2007 have to be verified by the certification bodies. On the one hand, the certification bodies are requested to give an opinion on the quality of the on-the-spot inspections by checking a sample of at least 10 inspections for each of the following four populations: EAGF-IACS, EAGF-non IACS, EAFRD-IACS and EAFRD-non IACS. On the other hand, they are asked to verify and validate the Member States’ control statistics. In his AAR 2009, the Director General of DG AGRI indicates that the verification by the certification bodies of the quality of the on-the-spot inspections was largely (around 90 %) positive for the different populations and that as regards the accuracy of control statistics the opinion of the certification bodies was positive for 70 % of the EAGF population and for only 54 % of the EAFRD population.

3.58. The Commission guidelines leave the certification bodies the choice to either accompany or to re-perform 10 on-the-spot inspection. The certification body reports analysed by the Court showed that only six re-performed inspections, while 23 accompanied inspections and the remainder do not specify their approach. The Court considers that re-performance of a previous inspection would provide a better basis for assessing the quality of inspections procedures as the presence of the certification body may influence the behaviour of the inspectors being assessed. 3.58. Even though the Commission agrees that if carried out in due time, a re-performance of a previous check provides a better assessment of the quality of on-the-spot checks, it is still possible to evaluate the control environment through inspections accompanied by the certification body. In certain cases, it may not even be possible to re-perform a check in due time. These limitations are inherent in many ex-post controls performed by external auditors. In such situations, accompanied inspections are a good alternative. They also have the additional benefit of reducing the administrative burden on the farmer. An analysis of the certification bodies’ reports with regard to financial year 2009 shows that the certification bodies checked in total around 3 700 controls. Where the certification bodies carried out the checks required: — in around 25 % of the cases, inspections were re-performed; — inspections were accompanied in a further 50 % of the cases; — in 5 % of cases both approaches were used (re-performance for certain populations and accompanied inspections for other populations); — in an additional 20 % of the cases, the certification bodies did not distinguish explicitly between the two methods. However, it is clear from the tables in the reports that these bodies also checked the quality of inspections using at least one method.

3.59. Furthermore, the certification bodies do not always provide detailed information on the results of inspections that were re-performed. The Court considers that such information would be useful for the Commission to allow it to reliably assess the quality of the work carried out by the certification bodies. 3.59. Certification bodies are required to keep, for each check made, a sufficiently detailed audit trail. However, the Commission does not require certification bodies to provide, in the report submitted to the Commission, details of all checks made (in total around 3 700 every year), but rather to provide a summary report of the work done and the overall conclusions. Certification bodies have been asked from financial year 2010 onwards to provide more detailed information in this respect.

3.60. The Court notes that for a number of paying agencies the certification bodies could not confirm the reliability of the control statistics either because the reports were incomplete or were not made available. 3.60. Certification bodies have properly discharged themselves of their responsibilities, by either reporting and concluding on the work done, or signalling where this was not possible. This issue was clearly reported on in the Annual Activity Report 2009 of the Directorate-General for Agriculture and Rural Development and is being followed up by the Commission which has requested that the paying agencies in the affected Member States should take the necessary steps to ensure timely delivery of accurate information in future.

3.61. In 2009 the Commission offered Member States the possibility of asking certification bodies to re-perform a representative sample of checks and verify that these on-the-spot checks have been appropriately followed up. If the certification body on this basis is able to confirm the accuracy of a Member State's control statistics, then the Commission will accept that the resulting error rate represents the maximum risk possible, i.e. financial corrections for the year in question can never be higher than that level. These provisions are scheduled to enter into force in 2010 for financial years 2011 onwards. 3.61. At the moment of this report, several Member States have indicated that they will be asking the certification bodies to carry out the required work or are considering whether to do so. Moreover, the Commission notes that the re-performance would not be limited to the on-the-spot checks, but would cover the entire handling of the file, from receipt of the aid application to the calculation and execution of the final payment, including the application of any sanctions (substantive testing).

Policy areas Environment, Maritime Affairs and Fisheries, Health and Consumer Protection

3.62. Environment, Maritime Affairs and Fisheries as well as Health and Consumer Protection are managed by the Commission under specific control systems. The audit examined the internal control system relating to the animal disease and eradication programmes (36) managed by DG SANCO.

Internal Control System relating to the animal disease eradication and monitoring programmes

3.63. In this context 30 randomly chosen payments for the animal disease eradication and monitoring programmes were tested. The audit revealed that there is neither a systematic segregation of functions nor a clear definition and distinction of the roles and duties of the initiating and verifying officers. The same is true for the veterinary and the financial officers. Moreover, key controls are not implemented on the basis of a periodically reviewed formal risk analysis. 3.63. The duties and the roles of the officers (financial initiators and verificators, operational initiators and verificators) are set out in the job description. The Commission will further clarify the segregation of duties between the different officers. It can also be seen from the consecutive annual decisions related to the envisaged EU contributions towards the eradication/surveillance programmes of the diseases that legislation is evolving in function of the needs on the field and the risks (ceilings are in/decreased, eligible measures are adapted and better defined, the reporting requirements are updated and fine tuned).

3.64. Some important control procedures are left to the discretion of the individual officers. Since internal controls are not standardised, there is a risk of non-performance of important controls. There is no standardised report of the veterinary officers about the implementation of the operational programmes and there are no standardised checklists for the controls performed. Finally, the small number of ex-post audits does not adequately contribute to providing assurance that the payments are free from material error. 3.64. Although the nature of the programmes is not fully comparable (eradication vis-à-vis monitoring) a maximum of standardisation is envisaged for internal control, reporting and checking. It should be recalled that the financial initiators and the veterinary officials are experienced and act under close supervision of the direct hierarchy. Due to a lack of human resources during 2009 and the priority that had to be given to ex-ante audits on the Emergency Fund, only a small number of ex-post audits could be carried out. Nevertheless, as the ex-post controls are organised on a two-year basis, more than 35 % of the amount paid could be ex-post checked. The Commission underlines that all the building blocks taken together provide reasonable assurance (management’s assessment of the entire internal control system, audit results, follow-up of previous year’s reservation and action plan for audits from previous years and assurance received from other authorising officers in cases of crossed sub-delegation).

RELIABILITY OF COMMISSION MANAGEMENT REPRESENTATIONS

3.65. The Court reviewed the Commission management representations, notably the Annual Activity Reports (AAR) and declarations by Directors-General, for Commission Directorates General AGRI, ENV, MARE and SANCO. The results of the review are summarised in Annex 3.3 .

3.66. In his AAR the Director General for Agriculture concludes that there is no evidence of major problems that could affect the assurance of the Director General. Referring to DG AGRI’s own audit results and the results of on-the-spot inspections carried out by the Member States he concludes that the residual error rate for direct aids, market intervention and rural development measures is below 2 %. 3.66. The declaration of assurance and the annual activity report of the Director-General for Agriculture and Rural Development have been established in accordance with the Commission’s internal guidelines and, for the reasons set out in the Commission replies to paragraphs 3.67 to 3.69, give a fair assessment of the financial management in relation to the regularity of agricultural expenditure. The reservation on rural development measures under Axis 2 is based on Commission guidelines which provide for materiality to be assessed at EU level per ABB activity. With regard to the lifting of the reserve for Greece, see the Commission’s reply to paragraph 3.69. The Annual Activity Report 2009 of the Directorate-General for Agriculture and Rural Development mentions that the residual error rate for agricultural expenditure as a whole is below 2 %, while for the EAFRD it is slightly above.

3.67. The Court does not endorse DG AGRI’s approach which restricts the concept of the residual error to anomalies established during on-the-spot inspections. This approach ignores residual errors resulting from cross checks made on the basis of inaccurate databases or inadequate follow up of anomalies. The Court applies an integrated audit approach which covers for every transaction both components of the residual error. The Court’s audit has shown that, for several transactions, administrative controls failed to detect errors. These weaknesses in the administrative controls are equally confirmed by the Court’s IACS systems audit results. Furthermore, the Court’s audit revealed that only limited assurance can be placed on the quality of on-the-spot inspections carried out by Member States. 3.67. Member States are required under the relevant EU rules to carry out administrative controls on all aid applications received. In principle, payments are consequently free from any errors which can be detected through such administrative controls. DG AGRI’s approach of determining the residual error rate on the basis of the results of the randomly selected on-the-spot checks is therefore conceptually correct. The Commission is aware that weaknesses in the administrative controls or on-the-spot checks imply the risk that the error rates in the control statistics which it receives from Member States are understated. To address this risk, DG AGRI applied a safety margin of a 25 % increase in these error rates.

3.68. The AAR of the Director General for Agriculture contains a reservation in respect of the expenditure under the IACS in Bulgaria and Romania. Whilst those reservations are consistent with the results of the Court’s systems audit carried out in 2008, the Court reiterates its previous observation that it was premature to lift the long standing reservation in respect of IACS in Greece. 3.68. The reservation for Greece was justified by the high reputational risk for the Commission which resulted from the insufficient implementation of the IACS in Greece and not by the financial risk for the EU budget resulting from the deficiencies, which has always been covered by the financial corrections imposed on Greece through the conformity clearance procedures. After Greece had completed its action plan to remedy the deficiencies by the end of 2008, this high reputational risk no longer existed and it was therefore fully justified to lift the reservation. Furthermore, the financial risk for past deficiencies is sufficiently covered under the conformity clearance procedure by which, until now, some 866 million EUR has been or is being excluded from EU financing.

3.69. The AARs of the Director Generals for Environment and for Maritime Affairs and Fisheries contain reservations which are in line with the Court’s previous findings. While the AAR of the Director General for Health and Consumers contains no reservation, the errors affecting the Food and Feed Safety activities, in addition to an insufficient audit coverage should have led to a reservation. 3.69. Thanks to additional human resources and using extra capacity by externalising some audits, a significant part of the total amount to be paid in 2010 has been and will be audited. Ex-ante audits are performed on almost 40 % of this amount. In addition more than 35 % of the amount will be ex-post audited. This will lead to a very high coverage level.

CONCLUSIONS AND RECOMMENDATIONS

3.70. Based on its audit work, the Court concludes that the payments for the year ended 31 December 2009 for Agriculture and Natural Resources were affected by material error. 3.70. The Commission considers that an error rate which over the recent years oscillates around 2 % confirms the overall positive assessment of previous years. Moreover the risk to the EU budget is adequately covered by the conformity clearance procedure.

3.71. Based on its audit work, the Court concludes that the supervisory and control systems for Agriculture and Natural Resources were generally, at most, partially effective in ensuring the regularity of payments. 3.72. As regards IACS the Court concludes that significant improvements are necessary especially in three out of the eight paying agencies audited (see paragraph 3.33). 3.71.-3.72. The Commission continues to consider that, as the Court acknowledged in previous annual reports since 2005, the IACS is generally an effective control system for limiting the risk of error or irregular expenditure, provided that it is properly applied (see also Commission reply to paragraphs 3.32 and 3.33). The Commission found that for claim year 2008, significant deficiencies existed in the IACS in Bulgaria and Romania. As a result these two Member States established action plans in 2009 which have been closely followed by the Commission. Since, however, the completion of these action plans is only foreseen for 2011 and there are already some delays in the implementation of the individual actions, the Director-General of DG AGRI made a reservation for the IACS in Bulgaria and Romania in his 2009 annual activity report, based on the reputational risk for the Commission. Other Member States have deficiencies of a lesser nature in their IACS which do not render their systems ineffective but, rather, perfectible and for which they have taken or are taking action to resolve their deficiencies. All these deficiencies are followed up through conformity clearance procedures which ensure that the risk to the EU budget is adequately covered. Updates to the LPIS are always needed because both the technical possibilities and the reality in the field are constantly evolving. Moreover, it is now a legal obligation for the Member States to make an annual assessment of the quality of their LPIS. The result of the quality check will indicate whether a refresh is needed.

3.73. The Court recommends that the systems weaknesses identified are resolved. In this regard, the most urgent deficiencies to be addressed for the SPS and SAPS are: 3.73.

(a) to overcome the systems weaknesses leading to errors relating to ineligible land or over-declarations of land as well as inaccurate entitlements, notably by improving the reliability and completeness of the data recorded in the LPIS (e.g. most recent ortho-photos); (a) The Commission is on a continuing basis working, together with the Member States, on actions to improve the reliability of information in the LPIS-GIS. As from claim year 2010 Member States are obliged to perform a quality assessment of the LPIS-GIS on an annual basis according to pre-determined procedures and to report on the results and the actions envisaged to, where required, improve the situation.

(b) to ensure that all IACS databases provide a reliable and full audit trail for all modifications made; (b) Annex I to Regulation (EC) No 885/2006, as part of the accreditation criteria, already requires that there is an audit trail. These criteria are checked by the certification bodies on an annual basis.

(c) to clarify and enforce further the rules so that EU direct aid is not paid to claimants who have neither used the land for farming nor maintained it in GAEC; (c) The issue of the farmer definition referred to by the Court has been addressed in the framework of the Health Check by giving Member States the possibility to exclude natural or legal persons from the direct payment schemes whose principal business objects do not consist of exercising an agricultural activity or whose agricultural activities are insignificant (Article 28(2) of Regulation (EC) No 73/2009). Further reflections on this issue may be envisaged in the context of the post-2013 CAP, bearing in mind the need to avoid complicated rules which would result in a complex control system whose implementation would be costly and contrary to the simplification efforts of the Commission.

(d) to set at EU level minimum annual maintenance requirements for grassland to be eligible for EU direct aid. (d) The current system provides for a common legal framework within which the Member States are responsible for defining the maintenance criteria under the GAEC. This allows for the diversity of agricultural areas and traditions in the EU to be taken into account.

3.74. The Court also reiterates that further efforts are required in the area of Rural Development to further simplify the rules and conditions. 3.74. For the 2007-2013 period, the Commission has already implemented simplifications in the Common Agricultural Policy, including rural development, and will continue to do so in future. However, any such further simplification will not be enough to reduce the error rate in certain areas of rural development below the Court’s 2 % threshold without the risk of jeopardising policy objectives. Therefore, the Commission has proposed that for EAFRD expenditure, a tolerable risk of error level be set in the range between 2 and 5 %. An error rate around the middle of this range would be acceptable and justified. Above this level, additional action would be taken to reduce the error rate through increased controls and addressing the major causes of error.

3.75. Furthermore, the Court considers that the Commission guidelines as regards the work to be performed by certification bodies must be reviewed concerning the nature, coverage and reporting obligations, especially as regards the work related to the validation of Member States’ control and inspection statistics. 3.75. The Commission considers the overall structure and reporting requirements of these to be appropriate, particularly as a basis for the financial clearance decision (see also paragraph 3.54). The revised guidelines for financial year 2010 were distributed in the Agriculture Funds Committee meeting of 18 June 2010. Changes were limited to the reporting modalities and did not affect the work to be carried out by the certification bodies. Moreover, with regard to the work related to the control and inspection statistics, the Commission has recently put forward a system by which Member States can reinforce the overall framework for gaining reasonable assurance as to the legality and regularity of transactions at the level of final beneficiaries. To this end, certification bodies should extend their work beyond the present requirements by fully re-performing, for a given expenditure population, a representative sample of transactions which the paying agency in question has checked on-the-spot. The work would cover the entire handling of the file, from receipt of the aid application to the calculation and execution of the final payment.

3.76. Finally, effective measures need to be taken, together with the concerned national authorities, to avoid the payment of ineligible expenditure for fisheries projects. Internal controls on payments for animal disease eradication and monitoring programmes to the Member States require a clear segregation of functions between the Commission services and the development of appropriate formal control procedures. 3.76. For the programming period 2000-2006, the Commission took all the necessary actions to correct ineligible amounts. During the closure exercise it will be ensured that all ineligible amounts are deducted from final claim. Under the EFF, the control environment has been reinforced with new provisions on the effective functioning of the systems to prevent and to correct ineligible expenditure. The Commission exercises a supervisory role, verifying the reliance which can be placed on the work of the Audit Authorities in the Member States. Under shared management, responsibility for control on the ground rests with the Member States. The control environment described above ensures that the Member States have put in place reliable and effective management and control systems to prevent and to correct ineligible expenditure. Furthermore the Directorate-General for Maritime Affairs and Fisheries in cooperation with the other Structural Funds Directorates General are issuing regularly guidance notes on topics of common interest for improving the effectiveness of the management and control systems in place.