EN Official Journal of the European Union C 269/1

SPECIAL REPORT No 3/2004

on recovery of irregular payments under the Common Agricultural Policy together with the Commission’s replies

(pursuant to the second subparagraph of Article 248(4) of the EC Treaty)

(2004/C 269/01)

CONTENTS

I-IX SUMMARY

1-8 INTRODUCTION

9-68 ANALYSIS

9-15 Reported irregularities

16-20 Notification of irregularities: who does what?

21-27 Notification of irregularities: delays, gaps and inconsistencies

28-29 Checks on data: unsatisfactory

30-32 Quality of information about irregular payments: incomplete and inconsistent

33-39 Recovery and writing off: responsibilities of Member States and the Commission

40-42 Low rate of recovery

43-51 Commission decisions on who should bear the cost of irregular payments which are not recovered: no clear principles

52-53 Division of responsibilities in the Commission

54-60 The Commission makes little use of its experience of irregularities

61-62 The blacklist

63-68 Recording of debts

69-73 CONCLUSIONS

74-80 RECOMMENDATIONS

THE COMMISSION’S REPLIES

SUMMARY

I. Member States are obliged to notify the Commission when they detect irregular payments over 4 000 euro made under the common agricultural policy (CAP) and to attempt to recover such payments. Where recovery is not possible the sums concerned are written off and the losses are borne by the Community unless non-recovery is due to the negligence of the Member State concerned. There is provision for a ‘blacklist’ to identify recipients of irregular payments in excess of 100 000 euro in any one year. Under separate arrangements Member States report all debts to the Community arising from the CAP.

II. At the end of 2002 total irregular payments reported since 1971 totalled 3,1 billion euro. Of this sum 537 million euro had been recovered from beneficiaries and 252 million euro written off at the expense either of the Community or of the Member State concerned. The remaining 75 % of reported irregular payments were still ‘pending’, neither recovered nor written off. Most reported irregular payments relate to intervention in markets: expenditure in the fruit and vegetable sector and on export refunds accounts for over half of the total.

III. The Court found that Member States provide information about irregularities as required but do so with varying delays. There are also inconsistencies in the data. There are discrepancies between the data supplied by Member States and the figures in the database drawn from them. The Commission's database on reported irregularities is not complete and accurate.

IV. The low rate of recovery of irregular payments (a cumulative recovery rate of only 17 % since 1971) is in part due to national administrative delays and practices (suspension of action to recover until related legal action concerning fraud has been completed, absence of preferred creditor status for CAP debts, no disincentive to frivolous appeals) and to the Commission's reluctance to accept offers of partial settlement.

V. Only 10 % of reported irregular payments have been written off, partly because Member States have put forward few cases as irrecoverable, partly because the Commission has been slow to take action on long-standing irregular payments. The Commission had no adequate criteria for deciding whether sums written off should be charged to the Member States or borne by the Community and has inadequate information on whether decisions written off are carried out correctly.

VI. Responsibilities for irregular CAP payments are shared between OLAF and the Directorate-General for Agriculture: formal and effective responsibilities differ; misunderstandings occur. The Commission does not make systematic use of the information it obtains about irregularities when managing and proposing changes in the CAP.

VII. The ‘blacklist’ does not work.

VIII. The separate arrangements by which Member States report all debts due to the Community in respect of the CAP have been improved in recent years but still have a number of weaknesses. It is not possible to reconcile the data produced with those for irregular payments.

IX. The Court recommends the Commission to consider changes in the arrangements for the reporting, recovery and writing off of irregular CAP payments to remedy the weaknesses set out above, and in the division of responsibilities between OLAF and the Directorate-General for Agriculture; and to consult with Member States on the future of the ‘blacklist’.

INTRODUCTION

1. The European Union spends more than 40 billion euro annually on the common agricultural policy (CAP). Responsibility for managing this expenditure is shared between the Commission and Member States. This report examines one aspect of shared management: notification and recovery of sums irregularly paid to traders, farmers and other recipients of spending under the CAP.

2. Almost all payments under the CAP are made by paying agencies in the Member States. Member States are required to check that payments are properly made; to notify the Commission of irregular payments made and debts owing; and to recover sums improperly paid.

3. The cost of irregular payments which Member States do not recover is borne by the Community budget unless non-recovery is the result of negligence by the Member State concerned. In that case the cost of irregular payments lies with the Member State concerned. Illustration 1 shows how the system works.

4. According to the Commission’s Anti-fraud Office (OLAF), at the end of 2002 the cumulative total of irregular CAP payments notified by the Member States to the Commission since 1971 was 3,1 billion euro. Table 1 details the composition of this amount and of the amount which remains to be recovered.

Table 1

Analysis of irregularities notified to the Commission since 1971

(million euro) Irregularities notified after payment 3 139 Amount recovered from claimants 538 Amount charged to Member States 142 Amount written off against the EAGGF 110 Amount to be recovered (1) 2 349 Position as at 31 December 2002. Source:OLAF ECR database

5. Member States are also required to inform the Commission (OLAF) if any recipients of CAP monies have received irregular payments totalling over 100 000 euro in a year - the ‘blacklist’ (2).

6. The objective of this audit was to assess the role of the Commission and Member States in the management and monitoring of recoveries of irregular CAP payments. This involved consideration of whether, once frauds and irregularities had been detected, Member States correctly notified cases to the Commission, established related debts and took recovery action. The audit did not examine how well Member States' control and fraud investigation agencies detect fraud and irregularities.

7. The Court examined: (a) what the information provided shows about the extent, nature and causes of irregularities; (b) whether Member States and the Commission take appropriate action to recover or write off irregular payments; (c) whether the arrangements for providing information about irregularities are satisfactory; (d) whether the ‘blacklist’ works effectively; (e) how the information on irregular payments compares with that on debts.

8. The audit was carried out at the Commission and in nine Member States: Denmark, Germany, Greece, Spain, France, Ireland, Italy, Portugal and the United Kingdom.

ANALYSIS

Reported irregularities

9. As at 31 December 2002 irregular payments notified since 1971 and recorded in the relevant Commission database (External Communications Registry (ECR)) amounted to 3 139 million euro (3). The amount recorded as ‘to be recovered’ at the same date was 2 349 million euro. In other words 25 % of irregular payments made since 1971 had either been recovered from beneficiaries, charged to Member States or written off against the budget.

10. Table 2 shows the value of irregular payments notified and the cumulative rate of recovery by Member States (4). The figures are dominated, and distorted, by those for Italy, which: (a) has reported 55 % of the irregular payments concerned (see however paragraph 24); (b) has the lowest cumulative rate of recovery (10 % of irregular payments made since 1971).

Table 2

Irregularities detected after payment and recovery rates (1971 to 2002)

Member State Amounts detected after payment Amount recovered Cumulative recovery rate (%) IT 1 735 173 10 DE 403 40 10 ES 264 35 13 BE 100 15 15 AT 8 2 22 PT 50 13 25 SE 1 0 36 FR 159 58 36 UK 122 49 40 EL 131 54 41 NL 84 47 56 IE 39 23 58 DK 40 28 71 FI 1 1 90 LU p.m. p.m. p.m. Total 3 139 537 17 Situation at 31 December 2002. NB:Figures rounded to 1 000 000 euro. Source:OLAF ECR database.

11. As at 31 December 2002, 21 % of the debts date back prior to 1994 (see lllustration 2).

12. Illustration 3 shows the main budget headings in which reported irregularities occur. Approximately a quarter are in the fruit and vegetable sector and between a quarter and a third in export refunds.

13. Irregular payments are relatively infrequently reported in the areas of spending subject to the Integrated Administration and Control System (essentially area aid and animal premium payments). This reflects the fact that: (a) IACS claims are subject to a 100 % check of all claims by means of computerised cross-checks and comparisons with independent data and sample checks on the spot, before payments are made. Discovery of an irregularity therefore means claims are blocked before payment; (b) where, exceptionally, irregularities are discovered after payment, the amount concerned will often be less than 4 000 euro and paying agencies can often make recovery by deduction from later claims; and (c) administrative penalties are built into the regulations, enabling paying agencies to take appropriate action when false claims are identified, without going to a court of law.

14. Irregularity cases, 29 notified, accounted for 40 % of the total amount to be recovered at 31 December 2002. They are listed in Annex A.

15. It is impossible to estimate accurately the rate of irregularities affecting the CAP. However on the basis of reported information: (a) the value of irregularities from 1994 to 2001 represents between 0,3 % and 1,4 % of the EU agricultural budget for the year in which they were notified. If Italy is excluded they represent 0,5 % or less (see Table 3). (b) irregularities in the budget headings most heavily affected (fruit and vegetables and export refunds - see Illustration 3) represent 1,7 % of spending on these headings in years 1994 to 2001.

Table 3

Trend in value of reported irregularities

(million euro) 1994 1995 1996 1997 1998 1999 2000 2001 2002 Expenditure declared EAGGF Guarantee 33 593 35 654 39 062 40 884 38 857 40 726 40 411 41 594 42 711 Irregularities notified 461,2 227,6 251,7 154,6 263,1 224,0 467,3 104,1 198,0 Percentage of annual budget 1,4 0,6 0,6 0,4 0,7 0,6 1,2 0,3 0,5 EAGGF expenditure declared excluding Italy 30 000 31 285 34 631 35 559 34 708 35 709 35 874 36 124 37 022 Irregularities notified excluding Italy 136,6 139,5 86,6 124,1 100,4 163,9 166,6 65,3 134,1 Irregularities notified excluding Italy 0,5 0,4 0,3 0,3 0,3 0,5 0,5 0,2 0,4 Source:Table 4.6 of the 2002 ECA’s annual report and OLAF ECR database as at 31 December 2002 (which is not consistent with figures given in the Commission Report 2002 on the Fight against Fraud).

Notification of irregularities: who does what?

16. Member States are required to notify the Commission quarterly (5) of all irregular payments in excess of 4 000 euro which ‘have been the subject of the primary administrative or judicial findings of fact’ (6). The notification should contain a range of quantitative and qualitative information on the fraud such as the amount involved, budget heading, type of fraud and method of detection etc. All of this information is entered in the ECR.

17. The Commission has developed the notion of primary administrative or judicial findings in legislation and working documents. Despite this, Member States interpret the requirement differently.

18. Member States must also notify the Commission on a quarterly basis of the steps they have taken following notification of the irregularities including amounts recovered, reasons for abandonment of recovery etc (7).

19. Where a Member State considers that an amount cannot be totally recovered it must inform the Commission whether it considers that the charge should be borne by EU or by the Member State (8) and why.

20. OLAF enters the data on notifications into the ECR. The ECR database has been successively managed by the Commission’s Directorate-General for Agriculture, the Commission's Anti-fraud Unit (UCLAF) and, since 1995, OLAF.

Notification of irregularities: delays, gaps and inconsistencies

21. Member States are required to report irregularities within two months of the end of each quarter; however, during 2002, some 65 % (2 147 communications) were not reported on time (9).

22. Member States have, on average, notified the Commission of irregularities more than one year after discovery (10). Member States’ individual average speed of notification ranged from eight months (Portugal) to 23 months (Luxembourg) (see Illustration 4).

23. Germany, Spain and France notified most cases in 2002 but Italy reported the highest value in that year, 80 million euro, followed by Spain with 59 million euro (see Illustration 5).

24. Italy notifies cases on the basis of the irregularity report from the control or investigation body. In some instances these bodies have not verified that the alleged irregular payments have been made. This has resulted in overstatements of amounts to be recovered in the ECR.

An Italian investigation agency reported a company for fraudulently obtaining CAP subsidies for processing tomatoes. The amount involved is 2,71 million euro. In fact the claims were made but never paid. There is therefore no debt.

25. For 91 of these cases in the ECR, Member States had not provided information on the amounts involved. Of these, 37 had been notified between 1979 and 1998. The Court brought this to the attention of OLAF in August 2002. A year later OLAF had not requested updated information from Member States for these cases.

26. The ECR provides for penalties and interest to be recorded separately (11). Some Member States, however, included penalties and interest in the principal (Spain and Ireland). Information on penalties and interest was recorded in less than 4 % of the cases in the ECR. Only 5 % of cases reported or updated in 2002 contained information on penalties.

27. There were also some significant inconsistencies of definition and coverage in the information supplied. For example, the product description had not been completed in some 47 % of cases notified for 2002 (12). In 7 % of cases the type of irregularity had not been identified and in 4 % nor had the detection method.

Checks on data: unsatisfactory

28. Because there was no procedure for systematically checking the completeness and accuracy of the ECR database on the spot against information on irregularity cases held in Member States, in 2002 and 2003 OLAF asked Member States to verify that the data in the ECR was accurate. For the most part Member States did not address irregularities notified before 2002.

29. Most Member States drew attention to discrepancies between Member State data and the ECR. OLAF does not have an analysis of these discrepancies, of the reasons for them, of corrective action or of the changes made to the ECR. Nor has OLAF sought to check that Member States have notified all of the cases they should have notified, or verified whether Member States have improperly closed cases and written down the impact of the irregularity to zero.

Quality of information about irregular payments: incomplete and inconsistent

30. For the reasons set out in paragraphs 21 to 29 and 31 and 32, the ECR database (and the figures relating to CAP irregularities and debts published in the Commission’s 2002 Report on the fight against fraud) cannot be considered reliable, complete and accurate.

31. In addition to cases notified by Member States, OLAF itself initiates investigations of some irregularity cases in the CAP sector (as elsewhere in the Community budget). OLAF maintains a Case Management System (CMS) database to record the progress of these cases. The CMS does not show whether the case is recorded in the ECR nor, if appropriate, whether it has been charged to Member States under the clearance-of-accounts procedure (see paragraphs 34 to 37). Of a sample of 26 cases recorded in the CMS, only 13 could be traced satisfactorily to either an entry in the ECR or to closure of the case because no irregularity had been detected.

32. The Commission's 2002 Report on the fight against fraud significantly overstates the cumulative total for reported irregularities against the CAP. The sources of the overstatement are: (a) 844 million euro where amounts relating to irregularities detected before payment, notified in Italian lira, were recorded as the same number of euro; (b) at least 50 million euro for notifications double counted because they were shown as being detected both before and after payment in the ECR; (c) at least 19 million euro for amounts reported in national currency and recorded as euro without conversion.

Recovery and writing off: responsibilities of Member States and the Commission

33. Member States must: (a) satisfy themselves that CAP transactions are carried out and executed correctly; (b) prevent and detect irregularities; (c) recover sums lost as a result of irregularities or negligence, in which case they may retain 20 % of the amounts recovered (13); (d) notify the Commission of sums which are outstanding; and (e) of sums which are unlikely to be recovered.

34. The Commission decides whether sums which cannot be recovered should be borne by the Community, or borne by the Member State concerned (on the grounds that non-recovery is the consequence of negligence or irregularity by that Member State (14)).

35. Where the Commission decides that the financial consequences of non-recovery should be borne by the Member State concerned, the decision is taken as part of the ‘clearance-of-accounts procedure’. This is the procedure in which the Commission decides whether expenditure undertaken by paying agencies has been carried out in accordance with EC law and should be definitively charged to EU budget. If sums are to be charged to Member States the Commission deducts them from the monthly payments to finance the CAP which it makes to the paying agency concerned.

36. OLAF (and formerly UCLAF) is responsible for recommending whether the amounts should be written off to the budget (i.e. borne by the Community taxpayer) or in cases of negligence should be charged to Member States. The Directorate-General for Agriculture is responsible for the Commission decision.

37. Community law leaves it to the Commission to judge whether lack of recovery in a given case should be attributed to negligence by a Member State, and its costs borne by national taxpayers. There is, however, relevant European Court of Justice jurisprudence. The European Court of Justice ruled in 1989 (15) that in waiting four to 10 years before starting proceedings to recover amounts wrongly paid, the Italian authorities had not acted with the necessary diligence (16).

38. In a well-functioning system: (a) Member States will take all required action to recover sums irregularly paid; (b) the Commission will encourage Member States to operate effectively; (c) the Commission will make appropriate judgements about whether sums irregularly paid and not recovered are charged to the Community budget or to the individual Member State concerned; (d) the Commission will use information about the incidence of irregularities for the management of the CAP to improve control procedures.

39. The arrangements were unsatisfactory in all four respects.

Low rate of recovery

40. Table 2 shows that, at the end of 2002, the cumulative recovery rate was only 17 %.

41. The main reasons for the low rate of recovery are as follows: (a) some Member States’ administrative and judicial systems are slow. This prejudices the likelihood of eventual recovery because assets disappear, companies are liquidated, individual beneficiaries disappear or die etc.; False claims for aid for the production of concentrated wine led to irregular payments of 8,3 million euro.The irregularity was first reported to the Greek paying agency in 1990.The Greek Ministry of Agriculture did not classify it as an irregularity until December 1996.The case, which has been referred to the Greek courts, has still not been heard and no monies have been recovered. (b) recovery is further delayed where recovery procedures are suspended until the outcome of any associated fraud case is decided (for example, in Italy). Fraud cases require proof of intent before someone can be found guilty which is not necessary for the recovery of a de facto irregular payment; (c) some Member States do not give CAP debts preferential status (there is no EU legislation requiring them to do so); In early 1992 a combined UCLAF/German investigation proved skimmed-milk powder from intervention stocks, exported with refunds, had not been placed on the market outside the EU. Irregular payments of export refunds amounted to 24,9 million euro to a German company and 18,6 million euro to a Belgian one.Despite a request from the Commission in February 1993, Germany did not issue recovery orders until August 1995.In August 1996 an offer was made to pay 5,1 million euro (being the value of the available assets of the German company). This was rejected by the Commission in April 1997.By December 1999 the assets had diminished to 1,5 million euro. None of the subsidies totalling 43,5 million euro has been recovered. (d) there is inadequate use of procedures to offset debts against other CAP payments which are due. Offset procedures between paying agencies (for example in Spain, France, Italy and Portugal) or within the same paying agency (for example in Denmark) are not used by either because such offset is precluded under national law or because of inadequate communication channels; (e) national legislation in some Member States does not require a guarantee to be lodged, equivalent to the amount in dispute, before an appeal can be made (the Court made this observation in 2000 in the context of olive oil consumption aid irregularities (17)); (f) the Commission has, to date, refused to accept offers to settle for amounts referred to it by the Member States. These are calculated on the basis of the assets available to the debtor and are lower than the debt. However, even if recovery procedures were faster and recovery possibilities maximised, some debts would still have to be written off because of insolvency, death, official error, equity, cost effectiveness etc. It is not possible to estimate how much would be written off for these reasons.

42. The Commission has limited powers to influence the way in which Member States carry out their responsibilities under the regulation. It cannot intervene in Member States, administrative or judicial procedures in order to speed them up. On the other hand: (a) the Commission can take action to recover the value of old debts from Member States, on the basis of the European Court of Justice ruling referred to in paragraph 37; (b) Community law provides an incentive to Member States to recover monies unduly paid in that they may retain 20 % of amounts recovered. In view of the cumulative recovery rate of 17 % this incentive cannot be considered to have achieved its objective. OLAF does not have a reliable record of amounts retained.

Commission decisions on who should bear the cost of irregular payments which are not recovered: no clear principles

43. According to the ECR, since 1971 a total of 110 million euro has been written off against the EU budget and 142 million euro charged to Member States. These amounts are small (10 %) in relation to the total amount to be recovered, partly because Member States have proposed few cases to be written off as irrecoverable and partly because the Commission action to clear up the old debts has not been timely.

Live bovine animals for slaughter, exported to Poland with refunds in 1990, were misdeclared as pure-bred animals with resulting irregular payments in three cases of 2,6 million euro.These cases were excluded from a clearance-of-accounts financial correction in 1994 for similar cases pending the result of recovery action.In 1999 the Court of Justice upheld the Commission's financial correction. The Commission has since however failed to follow up the three cases excluded.

44. The Commission had no adequate criteria for making recommendations for writing off nor on the nature of supporting evidence required. There was no systematic analysis in the files presenting the arguments and evidence in support of the recommendations.

45. Tests were carried out on a selection of 30 cases recorded in the ECR, where the Commission had decided that the cost should be charged to Member States. The selection concentrated on pre-1996 cases as there had been no clearance-of-accounts decision on cases since that year except for the special exercise mentioned below. Of the 30 cases examined, only three contained satisfactory evidence that the amounts had in fact been recovered from Member States (18).

46. Some 30 cases recorded as charged to the budget were also examined. In eight cases the files could not be found and in 15 cases there was insufficient evidence (19) that the amounts were irrecoverable. There were reasoned arguments for decisions in few (20) of the files examined.

47. There is a particular respect in which writing off procedures by Member States interact with the clearance of accounts. Under the clearance-of-accounts procedure, disallowance of expenditure normally takes the form of a ‘flat-rate correction’: the Commission judges that a Member State has failed to manage certain expenditure properly and disallows from EU financing (i.e. in effect charges to the Member State) a percentage of the expenditure concerned as a sanction for poor management and an incentive for improvement.

48. Some Member States have taken the opportunity of such flat-rate corrections to write off debts arising from irregularities committed in that same area of expenditure up to the value of the correction, rather than proposing writing off under the condition discussed in paragraphs 33 to 37. The Commission considers that this practice is not in conformity with the legal provisions relating to clearance of accounts. Neither OLAF nor the Directorate-General for Agriculture has maintained records of such accounts written off, nor reconciled them with the amounts of the related clearance-of-accounts corrections. The total amount written off in this way is therefore not known.

49. OLAF initiated a special exercise in March 1999 to examine pre-1996 amounts to be recovered. Old cases were defined as cases with administrative delays exceeding four years and/or judicial delays exceeding eight years (21). All such cases with amounts outstanding of more than 50 000 euro were to be examined in depth. Those less than 50 000 euro were to be subject to a less rigorous review.

50. The Commission Decision (22) on these cases was published on 28 June 2003. The amount of 69,4 million euro was written off against the budget and 5,3 million charged to Member States. Italian cases, which account for 66 % (750 million euro) of the amount to be recovered for pre-1995 cases, were excluded from the recommendations and decision. No reason was given for this. Also excluded from consideration were 95 pre-1995 cases for a total value of 118,8 million euro.

51. As was the case for recommendations made under the normal procedure, there was no systematic analysis in the files of the reasons leading to the recommendations. The Commission has now set up a task force to examine pre-1999 cases for amounts in excess of 500 000 euro.

Division of responsibilities in the Commission

52. As explained above, OLAF manages the ECR database. The Directorate-General for Agriculture is responsible for clearance-of-accounts decisions. There are instances in which this division of responsibilities causes problems of communication: (a) there was no provision for the Directorate-General for Agriculture to transmit systematically to OLAF copies of all clearance decisions whereby Member States have been charged with the financial consequences of irregularities. Consequently there was no systematic evidence in the OLAF files that the amounts recorded as having been charged to Member States had actually been recovered under the clearance-of-accounts procedure; (b) the 1995 decision (23) to write off amounts against the budget was not reflected in the ECR database. As a result cases were examined again in 2003 and in some instances the decision was the opposite of that taken in 1995; (c) some Member States have written off amounts on the basis of OLAF’s recommendations in advance of a Commission Decision.

In the framework of the clearance of accounts for 1993, the Commission proposed to charge Germany 8,2 million euro for 21 cases where it considered Germany to have been negligent in its recovery action. The financial correction was however not implemented because of inadequate bilateral consultation.All but two of the cases were reconsidered for the 1995 decision and were charged to the EAGGF.The Commission has not documented the reasons for reversing its original proposal.

53. Current arrangements split nominal and effective responsibility for this procedure in a way which reduces accountability. Recommending writing off is not a function that fits well the role of a fraud investigation and coordination body.

The Commission makes little use of its experience of irregularities

54. Notifications to OLAF for input to the ECR were intended, amongst other things, to intensify the campaign against fraud and irregularities.

55. In this context, the Council (24) requested the Commission to develop an investigation policy based upon strategic and operational analysis of information on fraud, irregularities and recoveries reported by Member States. Parliament (25) has criticised the fact that the debt arising from irregularities and fraud has built up to an unacceptable level and that the recovery procedures do not work. It called upon the Commission to submit a detailed analysis of the causes of this problem and proposals to remedy it. The Commission (26) submitted a communication on improving the recovery of Community entitlements in December 2002. Parliament expressed doubts that the recovery procedures could be improved without clarification of the division of responsibilities between OLAF and the Directorate-General for Agriculture.

56. The Commission has drawn attention to the poor quality of information provided by Member States in its Annual Report on the fight against fraud 2002. It quotes the example that in 47 % of cases reported, that the products involved were not identified, which does not facilitate risk analysis and which makes it harder to draw appropriate lessons. It is attempting to improve the quality and timeliness of notifications by the introduction of direct input to the ECR by Member States, coupled with a programme of training courses and the provision of an ECR user manual.

57. However there are other weaknesses to be addressed in the design of ECR information. There are too many descriptions for the type of fraud and irregularities, 79 in all, some of which are ambiguous (see Table 4); the budget headings have not been entered in a consistent format and there are 46 codes for method of detection, some of which are again ambiguous (see Table 5). Rationalisation and simplification of these descriptions would facilitate meaningful interpretation.

Table 4

Types of irregularity

Type of irregularity Value of irregularities reported (million euro) Percentage of total reported value Cumulative percentage Fictitious use or processing 984 23 23 False or falsified commercial documents 379 9 32 Inexact quantity 270 6 38 False or falsified request for aid 208 5 43 Fictitious movement 201 5 48 Variation in quality or content 169 4 52 Other cases of irregular documents 148 3 55 Other irregularities 120 3 58 Trafficking in withdrawn or stockpiled products 97 2 60 Falsified customs documents 91 2 62 Change of destination 91 2 64 Non arrival at final destination 91 2 66 Failure to respect other conditions 71 2 68 Situation as at 31 December 2002. Source:OLAF ECR database of irregularities reported under Regulation (EEC) No 595/91.





Table 5

Detection methods

Detection method Value of irregularities reported (million euro) Percentage of total reported Cumulative percentage Documentary checks 1 137 27 27 Judicial enquiry 950 22 49 National fiscal control 253 6 55 Routine control 237 6 60 Accounting control 180 4 64 EU initiative 153 4 68 Judicial enquiry 126 3 71 Interservice collaboration 123 3 74 Laboratory analysis of samples 92 2 76 National customs control 90 2 78 Control on the premises of the beneficiary 85 2 80 Other 81 2 82 Situation as at 31 December 2002. Source:OLAF ECR database of irregularities reported under Regulation (EEC) No 595/91.

58. The Court also found that there were significant errors in the data recorded in the ECR and even the absence of financial data of any kind for 91 cases (see paragraph 25).

59. The ECR records the identities of persons consulting the database and the number of times it has been consulted. From October 2001 to September 2002 there were 11 direct consultations by Commission Directorates-General. OLAF, however, has not carried out an evaluation of the use of the ECR data to determine whether or not it has provided useful information and has thus contributed to the fight against fraud.

60. The Commission is required to study the information of which it has been notified and to inform Member States’ representatives (meeting in the EAGGF Committee (27)) of any conclusions it intends to draw from them (28). Although some information has been provided to the ‘Irregularities Group’ (29), neither OLAF nor its predecessor UCLAF has made such a report to the EAGGF Committee (30).

The blacklist

61. Member States are required to notify the Commission of the identity of operators who have committed irregularities exceeding 100 000 euro over a period of one year, together with details of the measures taken against those operators. Member States have in general considered it impossible effectively to exclude entities found to have been involved in irregular or fraudulent operations from claiming further payments (e.g. the business can be transferred to another legal entity with the same shareholders etc).

62. Only six Member States have ever notified a company or individual under these arrangements (see also Special Report No 8/98, paragraphs 4.12 to 4.14 (31)). Comments received from Member States visited indicated that the greatest hindrance to the regulation was the fact that placing a company or individual on the blacklist may leave them open to legal redress and possible damages. Until fraud is proven in a court of law (often a very lengthy process) it is uncertain whether a Member State can itself legally notify the names of companies and or individuals.

Recording of debts

63. Since 1996 Member States’ CAP paying agencies have been required to establish a list of debts (32) due to the Community under the CAP (debtors’ ledger). Since 2000, Member States have been required to inform the Commission (Directorate-General for Agriculture) twice yearly of the debt situation and progress of recoveries, as recorded in the debtors’ ledger, in an account known as Table 105 (33). The amounts notified via Table 105 are included in the Commission’s consolidated balance sheet (34).

64. Since 1996, certifying bodies (35) have had to evaluate whether the debtors’ ledger, produced by CAP paying agencies which they audit, gives a correct and complete picture of the amounts to be recovered, the procedures for recovery are effective, and the amounts are correctly credited to the budget in good time.

65. So far as Table 105 material is concerned, the Directorate-General for Agriculture concluded in 1999, on the basis of audits carried out in Member States, that there were some doubts over the completeness and accuracy of some paying agencies’ debtors’ ledgers and that there was no guarantee that Member States were consistent in their approach to recording debt. The ensuing report recommended that Commission services, paying agencies’ internal audit services and certifying bodies should make further efforts to improve the management of debts. Since 2001 certifying bodies have had to certify the accuracy of Table 105.

66. Certifying bodies do not use information held by the various control and fraud investigation bodies to check the completeness of debtors’ ledgers. Using information held on debtors at paying agencies, three certifying bodies qualified their certificates and nine certifying bodies noted serious weaknesses in the procedures for recording and recovering debts (see Annex B). The Court also noted that, in nine cases, the scope of the certifying bodies’ audits of debtors did not meet the Commission’s guidelines.

67. All Member States have set up debtors’ ledgers and since 2000 have submitted Table 105 to the Commission containing the required information. The audit did not reveal any material errors in the recording of new debts. The requirement to maintain a debtors’ ledger was introduced with effect from 1996. However, some Member States (Denmark, Germany, Greece and the United Kingdom) have still not registered all debts incurred before that year in the debtors’ ledgers. Member States have also written off amounts as irrecoverable without a Commission Decision that the debt cannot be recovered and whether the budget or the Member States should bear the cost. The total debt for 2002 is therefore understated by 43,8 million euro (36).

68. The information provided in Table 105 distinguishes between cases which are notifiable to the ECR and other cases (not arising from irregularity or amounting to less than 4 000 euro). Although the reporting dates for the two sets of figures are different, it should be possible to reconcile, identify and correct the differences between them (the ECR showed a total of 2 349 million euro at 31 December 2002: the equivalent figure in Table 105 was 2 093 million euro at 15 October 2002). The Commission is unable to do so. OLAF and the Directorate-General for Agriculture are therefore working on the basis of different sets of data and have not reconciled them.

CONCLUSIONS

69. The European Union’s arrangements for the notification, recovery and writing off of irregular payments provide for relevant information to be reported (type of irregularity, detection method, etc.) and encourage Member States to take recovery action by providing both an incentive (20 % retention of amounts recovered) and a sanction (amounts not recovered to be charged to Member States in cases of negligence).

70. However, in practice, of the irregular payments made and notified to the Commission since 1971, totalling 3,1 billion euro, 537 million euro had been recovered from CAP beneficiaries by the end of 2002; 110 million euro had been written off against the Community budget and 142 million euro had been written off at the cost of Member States. Three quarters of irregular payments reported remain ‘pending’, neither recovered nor written off.

71. No system will achieve 100 % recovery of irregular payments; and some backlog of cases is inevitable. But the Court’s audit revealed a number of weaknesses in the design of the arrangements for recording, recovering and writing off irregular payments under the CAP and, in particular, in how these arrangements are operated by the Commission and the Member States. (a) Member States interpret the definition of the point when they should report irregular payments in different ways (see paragraph 17). Some of the data requirements for Member States are unclear (see paragraphs 56 and 57). (b) Member States have been slow, and some much slower than others, in reporting irregular payments (see paragraph 22). There are also significant gaps and inconsistencies in the data which they supply (see paragraphs 24 to 27). (c) There were significant weaknesses in Member States' arrangements for the recovery of irregular CAP payments (see paragraph 41). (d) Decisions on whether irregular payments should be written off and, if so, whether at Community or national expense must normally await a Member State proposal for write off. The Commission has only limited powers to intervene in this procedure. On the other hand European Court of Justice jurisprudence provides support for Commission action in the case of unreasonable delay by Member States. This is the background to the creation of the Task Force discussed in paragraph 51. (e) The Commission did not have clear criteria for deciding whether irrecoverable irregular payments should be charged to the Member States concerned or to the Community budget (see paragraphs 43 to 51). (f) The involvement of both OLAF and the Commission's Directorate-General for Agriculture in decisions of writing off is a source of confusion and inefficiency (see paragraphs 52 to 55).

72. The parallel arrangements for debtors’ ledgers provide information for balance sheet purposes about a broader range of debts under the CAP. All Member States have set up debtors’ ledgers and have submitted the required data. The Commission also provided guidelines for certifying bodies to audit debtors. The Court however noted a number of gaps and, in respect of debts arising from irregular payments, inaccuracies in these debtors ledgers (see paragraphs 63 to 68).

73. The ‘blacklist’ has proved unworkable. Only six Member States have ever communicated names of individuals or companies and it has proved impossible to effectively implement the sanctions foreseen (see paragraphs 61 and 62).

RECOMMENDATIONS

74. The Court recommends the Commission to consider a number of possible changes in the arrangements discussed above, in order to: — improve the information available to the Commission about CAP irregular payments and debts, — improve recovery by Member States of sums irregularly paid, — clarify the basis on which the Commission decides whether irregular payments written off should be borne by Member States or by the Community, — clarify responsibilities within the Commission and improve communications, — make better use in managing the CAP of information obtained about irregular payments. Some of the changes suggested for consideration would require legislation.

75. To improve information and facilitate its use, the Commission should consider: — ensuring that Member States interpret the ‘primary administrative or judicial findings of facts’ in a consistent and harmonised manner when reporting irregular payments, — increasing the 4 000 euro threshold for reporting cases in the ECR, — simplifying and reducing the number of definitions of types of fraud and methods of detection in the arrangements for reporting irregular CAP payments, — improving its own checks of the data supplied by Member States, — taking action to reconcile the ECR figures and debtors’ ledgers.

76. To encourage recovery by Member States of irregular payments under the CAP, the Commission should consider: — charging to Member States irregular CAP payments which have been outstanding for longer than a specific period and in respect of which no proposal for writing off has been received, — ensuring that irregular payments are offset against other EU payments due to the recipient, — asking Member States to give at least the same priority to the recovery of CAP debts as to the recovery of national subsidies.

77. The Commission should establish clear criteria for deciding whether irregular payments written off should be charged to Member States or borne by the Community. The Commission should take action against Member States which have offset amounts to be recovered against flat-rate corrections.

78. The Commission should consider whether the present sharing of responsibilities for CAP irregularities between OLAF and the Directorate-General for Agriculture is appropriate.

79. The Commission should report each year on lessons learned from data on irregularites and the conclusions drawn for the management of the CAP. Such a report might be included in the annual report on the fight against fraud or in the Annual Report on the CAP.

80. In addition, the Commission should consult with Member States on the future of the ‘blacklist’.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 10 June 2004. For the Court of Auditors Juan Manuel FABRA VALLÉS President

(1) Member States estimated that 46 % of this amount was realistically recoverable

Source:OLAF ECR database

(2) Council Regulation (EC) No 1469/95 of 22 June 1995 (OJ L 145, 29.6.1995, p. 1).

(3) A further 1 144 million euro detected before payment (and unpaid) are also recorded in the ECR.

(4) These figures should be treated with caution for the reasons detailed in paragraphs 21 to 32.

(5) In practice OLAF.

(6) Article 3 of Council Regulation (EEC) No 595/91 of 4 March 1991 (OJ L 67, 14.3.1991, p. 11).

(7) Article 5(1) of Council Regulation (EEC) No 595/91 of 4 March 1991.

(8) Article 5(2) of Council Regulation (EEC) No 595/91 of 4 March 1991.

(9) Source: Paragraph 10.2 of the Annual Report for 2002 on the Protection of the Financial Interests of the Communities and the fight against fraud.

(10) In 17 955 out of a possible 29 311 cases it is possible to establish the speed with which Member States notified irregular payments.

(11) Article 3 of Council Regulation (EEC) No 595/91 of 4 March 1991 requires ‘the financial consequences of the irregularity to be reported’ and Article 5 ‘the judicial and administrative procedures instituted with a view to (…) applying sanctions’.

(12) Source: paragraph 11.2 of the Annual Report for 2002 on the Protection of the Financial Interests of the Communities and the fight against fraud.

(13) Article 8(1) of Council Regulation (EC) No 1258/1999 of 17 May 1999 (OJ L 160, 26.6.1999, p. 103).

(14) Article 5(2) of Council Regulation (EEC) No 595/91 of 4 March 1991.

(15) The Court of Justice ruled that Member States should respect the obligation of diligence which ‘implies that the Member States must take steps to rectify irregularities promptly’, adding that ‘with the passage of time, recovery of sums wrongly paid is likely to become more complicated or impossible for reasons such as the fact that the undertakings may have ceased trading or accounting documents may have been lost’.

(16) Case C-34/89 of 11 October 1990, Italian Republic v Commission of the European Communities.

(17) Special Report No 11/2000, paragraph 101 (OJ C 215, 27.7.2000).

(18) Five files could not be found; four cases had been treated as being already covered by flat rate corrections and in one case the amount had been charged to the budget not to the Member State.

(19) For example, bankruptcy or winding up orders.

(20) There were reasoned arguments in eight of the 30 files examined.

(21) This definition is derived from the judgment in European Court of Justice Case No C-34/89.

(22) Commission Decision 2003/481/EC of 27 June 2003 (OJ L 160, 28.6.2003, p. 83).

(23) This was the last of the annual decisions dealing with cases recommended for writing off by Member States.

(24) Council conclusions on protection of the financial interests of the Communities and the fight against fraud 13244/1/02 REV 1 of 6 November 2002.

(25) Report of the Committee on Budgetary Control on the Annual Report on the fight against fraud 2001, PE 315.805 of 3 March 2003.

(26) COM(2002) 671 final of 3 December 2002.

(27) The EAGGF (European Agricultural Guidance and Guarantee Fund) Committee and Irregularities Group are advisory bodies to the Commission. They are chaired by a Commission official and consist of representatives from Member States.

(28) Article 2(3) of Council Regulation (EEC) No 595/91 of 4 March 1991.

(29) Group ‘Irregularites and mutual assistance, agricultural products’, Regulations (EEC) No 595/91 of 4 March 1991 (OJ L 67, 14.3.1991, p. 11) and (EC) No 515/97 of 13 March 1997 (OJ L 83, 25.3.1997, p. 1).

(30) Irregularities and Mutual Assistance - Agricultural Products, Regulations (EEC) No 595/91 and (EC) No 515/97.

(31) OJ C 230, 22.7.1998, p. 16.

(32) Including irregularities and other amounts due, for example, irregularities less than 4 000 euro, official error, etc.

(33) Article 3(6) of Commission Regulation (EC) No 296/96 of 16 February 1996 (OJ L 39, 17.2.1996, p. 5) as amended by Commission Regulation (EC) No 2761/1999.

(34) Under heading VII (Short-term assets) B. (Current assets) 2. (Advances owed by Member States) (a) (EAGGF Guarantee).

(35) Certifying bodies are appointed by Member States under the clearance-of-accounts procedures. They audit the CAP expenditure declared by Member States’ paying agencies and certify (or qualify) the accounts of such expenditure. The Commission takes account of these certificates in arriving at its annual financial decision to clear CAP expenditure.

(36) As Table 105 was introduced with effect from 2000, the amounts incorrectly written off from the debtors’ ledgers in previous years will have to be established by Member States.

ANNEX A LIST OF CASES REPORTED WITH THE HIGHEST VALUES (euro) Member State YEAR Measure Outstanding debt IT 2000 Support measures in the oilseed sector 170 936 471 IT 2000 Export refunds on cereals 118 956 431 IT 1998 Olive oil consumption aid 65 710 432 IT 1993 Export refunds on cereals 63 933 593 IT 1994 Export refunds on cereals 41 760 653 IT 1998 Olive oil consumption aid 40 623 436 ES 1994 Export refunds on cereals 32 896 221 BE 2000 Export refunds on butter 31 547 680 IT 1994 Export refunds on beef 29 851 835 DE 1995 Export refunds on butter 24 926 886 IT 1994 Olive oil consumption aid 19 743 900 IT 1996 Export refunds on cereals 19 054 353 DE 1995 Export refunds on butter 18 630 965 IT 1998 Olive oil consumption aid 17 253 375 IT 1996 Support measures in the oilseed sector 17 196 270 IT 1988 Processing fruit and vegetables 16 860 045 IT 1988 Processing fruit and vegetables 16 296 644 IT 2002 Processing fruit and vegetables 15 805 670 IT 1996 Aid for cereals 15 774 830 IT 1994 Export refunds on beef 14 262 505 DE 1998 Export refunds on beef 14 023 242 IT 1988 Processing fruit and vegetables 13 944 336 ES 1994 Export refunds on wine 13 334 611 IT 1996 Storage of cereals 12 302 920 IT 2001 Processing fruit and vegetables 11 784 714 IT 1994 Olive oil consumption aid 11 445 839 IT 2002 Support measures for fresh friuit & vegetables 11 012 392 IT 1996 Storage of cereals 10 949 622 BE 1994 Export refunds on beef 10 121 398

ANNEX B WEAKNESSES IN PROCEDURES FOR RECORDING AND RECOVERING DEBTS Qualification raised by Certifying Bodies Grounds for qualification OPEKEPE (EL) Accuracy/completeness/provision of doubtful debts' problems. Vlaamse Gemeenschap (BE) Unable to certify completeness of Table 105. IFADAP (PT) Unable to certify completeness of Table 105. Significant weaknesses noted by Certifying Bodies Reasons for weaknesses Bayern StMLU (DE) Delays in the recovery of debts, no interest charged on the capital amount of debt. Brandenburg (DE) Problems concerning completeness and accuracy aspects of Table 105. DFFE (DK) Backlog of debts pending recovery. CATALUÑA (ES) Long delays in the recording and recovery of debts, there was no consistent policy on charging interest. AGEA (IT) Problems noted in the recovery of debts. SEERAD (UK) Long delays in the recording and recovery of debts, no reconciliation between the accounting records and debtors’ ledger. SDE (FR) Qualification was raised last year, recovery problems continued to be noted this year. DAF (ES) Lengthy intervals between the notification of irregularities and their recording in the debtors’ ledger. INGA (PT) Debts understated by 3 %. Lack of satisfactory work carried out by Certifying Bodies on debtors’ section (1) Reasons for unsatisfactory work FAGA (ES) Scope of CBs debtors’ audit did not meet the requirements mentioned in the Commission guidelines. Castilla la Mancha (ES) OFIMER (FR) OFIVAL (FR) BLE (DE) Baden-Württemberg (DE) DLG (NL) HPA (NL) PZ (NL) PVVE (NL) Source:Debtors’ section in Certifying Body reports for EAGGF year 2002. (1) Conclusions are based upon the Court's evaluation of the CB reports. Source:Debtors’ section in Certifying Body reports for EAGGF year 2002.