THE COURT'S OBSERVATIONS THE COMMISSION'S REPLIES

INTRODUCTION

5.1. This chapter deals with the Court’s audit of Agriculture and Rural Development under the Guarantee Fund expenditure which totalled 49 799 million euro in 2006 (2005: 48 466 million euro (1)) (for details see Graph 5.1 ). Under the Treaty, the European Commission has overall responsibility for implementing the EU budget. Virtually all agricultural expenditure is carried out under shared management. This means that payments to final beneficiaries (farmers, private companies, traders, associations or public entities) are made by Paying Agencies approved by the Member States. Less than 1 % of expenditure is managed directly by the Commission.

5.2. The expenditure declared by the Member States is subject to several control systems: (a) check of the correctness of the farmer's claims under the Integrated Administration and Control System (IACS) (3); (b) sector-specific controls, e.g. for olive oil and rural development; (c) physical checks on subsidised exports of agricultural goods (4); (d) post-payment scrutiny of commercial documents on the premises of traders and processors of agricultural goods (5); (e) the clearance procedure, which covers all of the expenditure declared as far as the completeness and accuracy of the annual accounts are concerned (the financial decision) and, on a multi-annual basis, the legality and regularity of the expenditure (conformity decisions).

5.3. In order to obtain assurance as to the legality and regularity of the transactions underlying the Community's accounts, the Court audited these supervisory and control systems and tested a random sample of payments drawn from the expenditure of 30 paying agencies (which were collectively responsible for 68 % of CAP expenditure) (see Table 5.1 ).

Table 5.1 — Paying agencies by expenditure declared in 2006 No Member State Paying agency Amounts declared in million euro (6) % of total Modified certificates (7) Disjoined accounts (8) 1 France ONIC 4 263,0 8,5 × 2 Italy AGEA 3 307,3 6,6 × × 3 Greece OPEKEPE 3 083,2 6,2 4 United Kingdom RPA 2 925,2 5,8 5 Poland ARiMR 1 964,8 3,9 × 6 Spain Andalucía 1 806,0 3,6 7 Ireland DAF 1 723,3 3,4 8 France OFIVAL 1 646,2 3,3 9 Germany Bayern, Landwirtschaft 1 260,4 2,5 10 Denmark DFFE 1 163,3 2,3 11 France CNASEA 1 025,3 2,0 12 Spain Castilla — La Mancha 912,9 1,8 13 Germany Niedersachsen 905,8 1,8 14 Hungary MVH 890,2 1,8 15 Portugal INGA 879,8 1,8 × 16 Finland MMM 824,4 1,6 17 United Kingdom SERAD 679,5 1,4 18 Spain Aragón 560,2 1,1 19 Germany Nordrhein-Westfalen LWK 527,7 1,1 20 Italy AVEPA 498,4 1,0 × 21 Italy AGREA 426,8 0,9 × 22 Spain Cataluña 396,8 0,8 23 Belgium BIRB 393,5 0,8 24 Germany Schleswig-Holstein 371,3 0,7 25 Germany Hamburg-Jonas 313,5 0,6 26 Lithuania NMA 308,0 0,6 × × (9) 27 Germany Thüringen 293,8 0,6 × 28 Belgium Région Wallonne 272,7 0,5 × 29 Germany Rheinland-Pfalz 215,1 0,4 30 Spain Galicia 175,4 0,4 PAs covered by DAS 2006 Subtotal 34 013,8 68,0 31 Austria AMA 1 234,6 2,5 32 France ONIEP 1 077,2 2,2 33 Spain Castilla — Léon 966,4 1,9 34 France ONIOL 930,7 1,9 × 35 Sweden SJV 918,3 1,8 36 Spain Extremadura 686,9 1,4 37 Italy Region Lombardie 543,4 1,1 × 38 Germany Baden-Württemberg 514,5 1,0 × 39 Czech Republic SAIF 497,5 1,0 40 Germany Mecklenburg-Vorpommern 447,8 0,9 × 41 Netherlands PZ 447,4 0,9 42 France VINIFHLOR 446,6 0,9 × 43 Germany Brandenburg 443,7 0,9 44 Germany Sachsen-Anhalt 411,2 0,8 45 Italy FINPIEMONTE 381,5 0,8 × 46 Netherlands Dienst Regelingen 365,3 0,7 47 Germany Sachsen 355,3 0,7 × 48 United Kingdom DARD 350,3 0,7 49 Spain FEGA 333,8 0,7 50 United Kingdom NAW 333,5 0,7 51 Belgium ALV 277,2 0,6 52 Slovakia APA 266,1 0,5 × × 53 Germany Hessen 249,7 0,5 54 Netherlands HPA 233,5 0,5 55 Italy ARTEA 232,8 0,5 × 56 France AUP 208,1 0,4 × 57 Germany BLE 178,0 0,4 58 Poland ARR 175,3 0,4 59 Spain Valencia 174,6 0,3 60 Slovenia AAMRD 159,1 0,3 61 France FIRS 153,9 0,3 62 Spain Navarra 137,1 0,3 63 Latvia RSS 136,6 0,3 64 Spain Murcia 125,5 0,3 65 Italy ARBEA 124,3 0,2 × × 66 France ONIGC 113,6 0,2 × 67 France ONIVINS 108,6 0,2 68 Spain Canarias 99,0 0,2 69 Italy SAISA 91,4 0,2 70 Spain Asturias 85,2 0,2 × 71 Spain País Vasco 75,9 0,2 72 Estonia PRIA 75,3 0,2 73 France ODEADOM 74,8 0,1 74 Netherlands PT 72,4 0,1 75 France ONIFLHOR 68,6 0,1 × 76 Portugal IFADAP 68,4 0,1 × × 77 Spain Madrid 58,4 0,1 78 Netherlands PVE 54,3 0,1 79 France ONILAIT 52,1 0,1 80 Cyprus CAPO 48,5 0,1 81 Luxembourg Min. Agric. 46,9 0,1 82 Spain La Rioja 45,9 0,1 83 Spain Cantabria 44,2 0,1 84 Netherlands DLG 44,0 0,1 85 Austria ZA Salzburg 37,6 0,1 86 Spain Baleares 34,4 0,1 87 Germany Saarland 23,1 0,0 88 United Kingdom FC 18,5 0,0 89 Germany Bayern, Umwelt 16,6 0,0 × × 90 Italy ENR 15,6 0,0 91 Malta MRAE 9,3 0,0 92 France OFIMER 8,9 0,0 93 Germany Hamburg 7,2 0,0 94 United Kingdom CCW 5,3 0,0 95 Germany Nordrhein-Westfalen LfEJ 5,1 0,0 96 Germany Bremen 3,6 0,0 97 Spain FROM 2,4 0,0 98 Ireland DCMNR 0,6 0,0 Subtotal 16 033,4 32,0 Total 50 047,2 100,0 Source: Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2006.

5.4. In addition the Court has examined the systems put in place to implement the Single Payment Scheme (see paragraph 5.15) under which some 14 200 million euro was paid to beneficiaries in 2006 (10). It did not carry out any systems audit on the Single Area Payment Scheme (SAPS) (see paragraph 5.40) as it was too early to see improvements in the Member States previously audited. Nevertheless, the Court included these Member States in its direct testing of transactions.

5.5. Given concerns about the legality and regularity of payments in connection with schemes not directly covered by the IACS, the Court has carried out specific audits of olive oil production aid (including the reliability of the GIS) (see paragraph 5.82) and dried grapes (see paragraph 5.12).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

The Integrated Administration and Control System (IACS)

5.6. The IACS is the key management and control tool for the Single Payment Scheme (SPS) (see paragraph 5.15), the Single Area Payment Scheme (SAPS) (see paragraph 5.39) and all area aid and animal premium schemes. It covers almost 70 % of the Guarantee Fund budget.

5.7. IACS consists, in each Member State, of a database of holdings and applications, systems for identifying agricultural parcels and registering 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 % for on-farm inspections.

5.8. The IACS inspection results reported to the Commission by paying agencies address the legality and regularity of payments to farmers but the Court considers that they should be verified and validated by an independent body. Errors that have occurred in the calculation of entitlements are not included in the IACS inspection results although they affect the legality and regularity of the payments made. However, the errors found as a result of inspections by the paying agencies are corrected before payment. 5.8. In order to further improve the assurance that can be gained from the IACS inspection results with regard to the effectiveness of the control systems, the Commission has implemented the Court’s recommendations that the certification bodies should do more work to verify and validate the inspection statistics and post-payment checks. From financial year 2007 onwards, the certification bodies will be required by the Commission's guidelines to analyse and report on the results of on-the-spot controls and the control statistics.

5.9. According to these statistics (see Table 5.2 and Graph 5.2 ), for all Member States together, 28,9 % (40 % in previous year) of the area applications checked in 2005 and giving rise to payment in the financial year 2006 contained errors. These errors represent 1,4 % of the area verified by the paying agencies. For EU-15 this latter percentage decreased from 2,0 % in 2004 to 1,2 % in 2005. The decrease in the error rate is linked to the introduction of the SPS in 10 Member States of EU-15 (11), where the error rate has dropped to 0,7 %; in the other five the error rate is still 1,8 % and is the same in the new Member States. 5.10. In the 10 Member States that decoupled all or part of animal premiums the number of animals still subject to checking has gone down by between 35 % and 67 % depending on the aid scheme and the error rate has noticeably decreased. For the largest scheme, the suckler cow premium (see Table 5.3 and Graph 5.3 ), Member States found 0,7 % of animals claimed to be missing or ineligible (1,56 % in 2004); for the special beef premium it was 1,23 % (2,53 % in 2004) and for the sheep and goat premiums it has fallen to 3,6 % from 6,3 % in 2004. 5.9-5.10. The Commission would like to emphasise this positive trend towards lower error rates in applications and over-declarations of areas and animals and considers this to be a very positive impact of the recent CAP reforms.

Table 5.2 — Area Aid, forage areas and other crops — Applications checked on-the-spot in 2005 (payment year 2006) Member States Applications submitted Applications checked Applications with anomalies Random selected inspections Random selected inspections with anomalies Number Area (ha) Average size (ha) Number % Area (ha) % Average size (ha) Number % Area (ha) % Number % Area (ha) % Number % Area (ha) % Belgium 43 430 1 057 350,81 24 2 930 6,7 119 400,66 11,3 41 609 20,8 541,54 0,5 687 23,4 14 490,60 12,1 107 15,6 75,39 0,5 Denmark 69 474 2 733 746,86 39 4 150 6,0 173 452,08 6,3 42 1 273 30,7 1 217,04 0,7 889 21,4 30 148,98 17,4 291 32,7 230,86 0,8 Germany 386 237 16 825 485,63 44 21 968 5,7 1 223 309,75 7,3 56 10 088 45,9 7 021,09 0,6 4 949 22,5 232 854,01 19,0 2 386 48,2 1 980,38 0,9 Ireland 129 187 4 830 161,00 37 7 695 6,0 349 026,00 7,2 45 1 863 24,2 2 227,00 0,6 1 422 18,5 54 115,09 15,5 400 28,1 514,48 1,0 Italy 662 539 8 412 971,00 13 38 760 5,9 949 459,22 11,3 24 4 087 10,5 9 176,00 1,0 9 631 24,8 116 336,77 12,3 1 074 11,2 1 761,90 1,5 Luxembourg 2 006 122 846,14 61 130 6,5 8 056,70 6,6 62 123 94,6 138,15 1,7 27 20,8 1 838,72 22,8 25 92,6 30,23 1,6 Austria 132 244 2 348 035,15 18 8 131 6,1 187 720,67 8,0 23 1 681 20,7 1 303,90 0,7 2 558 31,5 67 513,45 36,0 450 17,6 332,11 0,5 Portugal 138 883 2 445 810,32 18 7 864 5,7 558 980,18 22,9 71 2 699 34,3 6 972,42 1,2 5 257 66,8 335 304,79 60,0 849 16,1 4 355,35 1,3 Sweden 84 454 3 171 490,67 38 5 247 6,2 201 003,62 6,3 38 2 472 47,1 2 832,65 1,4 1 871 35,7 77 435,86 38,5 833 44,5 687,06 0,9 United Kingdom 198 078 15 300 055,19 77 10 357 5,2 1 675 942,00 11,0 162 5 675 54,8 9 258,00 0,6 2 157 20,8 181 028,19 10,8 1 366 63,3 1 474,95 0,8 Total 2005 EU 10 (12) 1 846 532 57 247 952,77 31 107 232 5,8 5 446 350,87 9,5 51 30 570 28,5 40 687,79 0,7 29 448 27,5 1 111 066,46 20,4 7 781 26,4 11 442,71 1,0 Total 2004 EU 10 1 576 525 50 678 823,20 32 102 780 6,5 4 389 417,33 8,7 43 49 863 48,5 102 017,33 2,3 20 114 19,6 806 796,95 18,4 8 320 41,4 9 209,88 1,1 Greece 318 768 4 111 168,74 13 38 503 12,1 1 239 442,18 30,1 32 12 003 31,2 29 577,44 2,4 7 318 19,0 78 555,17 6,3 1 425 19,5 2 080,74 2,6 Spain 451 929 16 441 131,63 36 42 912 9,5 1 873 231,00 11,4 44 17 002 39,6 44 205,00 2,4 8 788 20,5 339 989,80 18,1 3 189 36,3 4 297,20 1,3 France 391 787 25 481 183,83 65 22 425 5,7 1 791 403,51 7,0 80 10 467 46,7 12 305,08 0,7 5 152 23,0 376 748,88 21,0 518 10,1 603,88 0,2 Netherlands 52 358 828 546,15 16 6 522 12,5 137 551,00 16,6 21 2 598 39,8 3 150,89 2,3 841 12,9 13 881,92 10,1 340 40,4 501,79 3,6 Finland 65 219 2 102 180,12 32 4 151 6,4 140 872,40 6,7 34 2 329 56,1 1 630,23 1,2 1 022 24,6 29 836,58 21,2 513 50,2 171,33 0,6 Malta 3 961 4 417,15 1 372 9,4 1 061,77 24,0 3 301 80,9 217,86 20,5 55 14,8 77,57 7,3 35 63,6 14,79 19,1 Slovenia 61 169 388 952,48 6 5 149 8,4 46 779,93 12,0 9 747 14,5 314,56 0,7 946 18,4 5 095,79 10,9 146 15,4 49,56 1,0 Total 2005 EU 7 (12) 1 345 191 49 357 580,10 37 120 034 8,9 5 230 341,79 10,6 44 45 447 37,9 91 401,06 1,7 24 122 20,1 844 185,71 16,1 6 166 25,6 7 719,29 0,9 Total 2005 EU 17 3 191 723 106 605 532,87 33 227 266 7,1 10 676 692,66 10,0 47 76 017 33,4 132 088,85 1,2 53 570 23,6 1 955 252,17 18,3 13 947 26,0 19 162,00 1,0 Total 2004 EU 15 2 829 381 98 852 502,22 35 221 028 7,8 9 382 645,37 9,5 42 93 480 42,3 187 358,00 2,0 33 644 15,2 1 386 255,27 14,8 11 268 33,5 19 893,13 1,4 Total 2003 EU 15 (13) 2 840 153 98 843 983,00 35 230 170 8,1 11 309 077,00 11,4 49 97 729 42,5 199 740,00 1,8 58 241 25,3 1 928 924,38 17,1 20 766 35,7 29 445,65 1,5 Total 2002 EU 15 2 894 917 97 955 796,00 34 248 572 8,6 11 656 029,00 11,9 47 94 717 38,1 198 079,00 1,7 58 313 23,5 2 361 830,00 20,3 26 408 45,3 41 312,03 1,7 Czech Republic 20 251 3 490 297,79 172 1 455 7,2 172 348,94 4,9 118 750 51,5 2 491,00 1,4 285 19,6 33 305,74 19,3 141 49,5 470,3 1,4 Estonia 19 136 846 403,60 44 1 353 7,1 176 583,74 20,9 131 927 68,5 5 685,48 3,2 227 16,8 5 824,79 3,3 152 67,0 337,3 5,8 Cyprus 41 470 164 780,51 4 3 138 7,6 49 274,20 29,9 16 2 812 89,6 7 380,83 15,0 300 9,6 2 917,62 5,9 273 91,0 521,5 17,9 Latvia 78 781 1 498 451,19 19 6 124 7,8 382 704,18 25,5 62 3 233 52,8 11 084,54 2,9 911 14,9 12 425,20 3,2 471 51,7 539,5 4,3 Lithuania 225 402 2 568 705,71 11 12 337 5,5 278 460,87 10,8 23 4 622 37,5 7 927,10 2,8 3 044 24,7 35 505,47 12,8 1 236 40,6 1 426,3 4,0 Hungary 205 293 5 048 877,59 25 14 536 7,1 304 023,96 6,0 21 3 983 27,4 6 159,56 2,0 3 537 24,3 102 525,46 33,7 1 346 38,1 2 157,2 2,1 Poland 1 484 624 14 253 733,11 10 93 323 6,3 1 162 866,47 8,2 12 11 236 12,0 4 271,06 0,4 17 486 18,7 125 238,06 10,8 1 817 10,4 668,9 0,5 Slovakia 13 531 1 825 195,37 135 1 575 11,6 484 524,83 26,5 308 790 50,2 9 796,42 2,0 334 21,2 45 787,05 9,4 67 20,1 343,0 0,7 Total 2005 EU-8 2 088 488 29 696 444,87 14 133 841 6,4 3 010 787 10,1 22 28 353 21,2 54 796 1,8 26 124 19,5 363 529,39 12,1 5 503 21,1 6 464,00 1,8 Total 2004 EU-10 (14) 2 077 233 29 371 245,00 14 124 668 6,0 3 834 258,00 13,1 31 40 351 32,4 67 945,00 1,8 25 945 20,8 385 051,43 10,0 9 064 34,9 9 764,10 2,5 Total 2005 EU-25 5 280 211 136 301 978 26 361 107 6,8 13 687 480 10,0 38 104 370 28,9 186 885 1,4 79 694 22,1 2 318 782 16,9 19 450 24,4 25 626 1,1 Total 2004 EU-25 4 906 614 128 223 747 26 345 696 7,0 13 216 903 10,3 38 133 831 38,7 255 302,00 1,9 59 589 17,2 1 771 306,70 13,4 20 332 34,1 29 657,23 1,7 NB 1: Remote sensing involves the use of satellite or aerial photography to check IACS applications. NB 2: Test performed in year N are relevant to payments made in year N+1. Sources: IACS statistics submitted by Member States to DG AGRI. Annual Activity Report 2006 — DG AGRI.

Table 5.3 — IACS inspections for suckler cow premium — Results of on-the-spot checks in 2005 (payment year 2006) Member States Total number of animals Inspected animals partially rejected Inspected animals rejected Animals inspected (random selection) Claimed Inspected % Number % of total claimed Number % of total claimed Number % of total inspected % of total claimed Partially rejected % partially rejected Rejected % rejected Belgique 397 513 35 506 8,9 126 0,4 317 0,9 5 071 14,3 1,3 35 0,7 36 0,7 Greece 210 982 92 332 43,8 557 0,6 688 0,7 4 080 4,4 1,9 27 0,7 29 0,7 Spain 1 775 937 302 457 17,0 471 0,2 1 825 0,6 45 712 15,1 2,6 70 0,2 90 0,2 France 4 232 508 445 155 10,5 665 0,1 1 565 0,4 73 247 16,5 1,7 84 0,1 280 0,4 Netherlands 72 344 12 047 16,7 17 0,1 358 3,0 2 310 19,2 3,2 3 0,1 43 1,9 Austria 550 638 56 238 10,2 336 0,6 517 0,9 8 462 15,0 1,5 32 0,4 35 0,4 Portugal 422 430 86 825 20,6 442 0,5 1 201 1,4 11 003 12,7 2,6 83 0,8 83 0,8 Finland 46 311 7 072 36,0 36 0,5 97 1,4 1 454 20,6 3,1 6 0,4 6 0,4 Malta 0 0 0,0 0 0,0 0 0,0 0 0,0 0,0 0 0,0 0 0,0 Slovenia 88 781 13 009 14,7 662 5,1 692 5,3 2 337 18,0 2,6 121 5,2 121 5,2 EU-10 7 797 444 1 050 641 13,5 3 312 0,3 7 260 0,7 153 676 14,6 2,0 461 0,3 723 0,5 Sources: IACS statistics submitted by Member States to DG AGRI. Annual Activity Report — DG AGRI.

The situation in Greece

5.11. For the fifth consecutive year the Director General’s declaration contains a reservation concerning insufficient implementation of the IACS in Greece. For 2006 the Court has confirmed continuing failure to implement key controls, namely: claims handling, inspection procedures, animal database integrity and the Land Parcel Identification System. Some 850 million euro per year is paid to farmers under these unsatisfactory control conditions. For the period 1996-2005 the Commission has imposed corrections totalling 479 million euro, equivalent to some 6 % of the expenditure declared. Corrections have also been made for dried grapes. 5.11. As regards financial year 2006 (claim year 2005), audits confirm the persistence of important deficiencies in the functioning of the key elements of the IACS in Greece such as the claims procedure, the quality of on-the-spot-controls, the quality of animal data bases and in particular the Land Parcel Identification System. In order to protect the financial interests of the Community, the Commission continues with an intensive audit programme and as long as necessary will impose financial corrections on Greece. Moreover, the Commission closely monitors and supervises the Greek action plan that has been drawn up by the Greek authorities on the explicit request of and in close cooperation with the Commission in order to remedy the above deficiencies. The action plan contains strict deadlines for the implementation of the different actions which should produce their first results as of financial year 2007 (claim year 2006).

5.12. The dried grapes aid scheme requires growers to produce a minimum quantity of dried grapes per hectare (i.e. they have to achieve a minimum yield). Nearly all the aid (about 115 million euro p.a.) is paid in Greece.

5.13. The Court’s DAS audits in recent years as well as a specific audit in 2006 have established that since 1999 the Greek national authorities have incorrectly applied reductions in the minimum yield requirements for both sultanas and currants covering the great majority of the dried grapes area. Only in 2002/03, a year in which severe weather affected much of Greece, were these based on insurance agency assessments of the damage and were in accordance with the rules. In other years most of the reductions were decided by the national authorities, for reasons not linked to natural disasters (15). This has resulted in payments being made to growers who did not meet the minimum yield requirements (in particular for sultanas — some 50 % of total production) and who were not affected by a natural disaster. 5.13. The Commission conducted several missions on the dried grapes scheme in recent years in Greece and is aware of the developments described. For the most recent years the Greek authorities granted generalised derogations in the form of uniform reductions of mandatory production quantities for the whole of Greece, justifying them by referring to national disasters and, to a lesser degree, to other reasons. The Commission considers that this is not in compliance with Community legislation and as a result of its on-the-spot missions conformity procedures are underway.

5.14. The Commission has made flat-rate financial corrections for failures in key controls for the period 1997-2002 (40 million euro). Corrections have not yet been proposed for subsequent years and the Commission has not established the extent of ineligible payments, which for sultanas, may be significant. 5.14. The conformity procedures are on-going in respect of the remaining years and, given its integration into the single payment scheme from 2008, the Commission intends to propose financial corrections in two ‘packages’ — one for the years not yet corrected (i.e. 2003 to 2005) and, as necessary, a second for the remaining period which will take especially into account that the derogations from the minimum yield requirement have apparently not been granted in conformity with Community law in the most recent years.

The Single Payment Scheme (SPS)

What is it and how does it work?

5.15. Under the SPS farmers are not paid on the basis of what they produce or the number of animals they keep (16). Instead the following steps have to be taken to receive the aid in full: (a) application for entitlements for the first year (and in the same year application for payment (single application) accompanied by the declaration of eligible hectares); (b) once the entitlements are established, single application (every year) declaring all hectares and notably the SPS eligible hectares; (c) the farmer must keep his land in good agricultural and environmental condition (GAEC) and meet a number of specific environmental requirements (Cross Compliance).

5.16. In order to qualify under the SPS farmers must first obtain ‘entitlements’ (17). National authorities opt for one of the models provided for under EU legislation (see Table 5.4 ) and calculate the number and value of each farmer's entitlements. Under the historical model each farmer is granted entitlements based on the average amount of aid received and area farmed during the reference period 2000-2002. Under the regional model all entitlements of a region have the same flat-rate value and the farmer is allocated an entitlement for every eligible hectare declared in the first year of application. The hybrid model combines the historical element with a flat rate amount and, if it is dynamic, the historical component decreases each year until it becomes a predominantly flat rate-system. 5.16. Under the SPS rules Member States have a significant discretional margin to set up the system according to their specific needs and intentions. This goes for the basic choice of the model, whereby the regional model was conceived as an option to derogate from the historical model, and for the establishment of specific rules regarding the implementation of the model chosen.

Table 5.4 — SPS models adopted by Member State audited Member State Model applied Beneficiaries of EU-direct payments claim year 2004 (18) SPS Applications submitted 2005 (19) 2005 in % of 2004 (rounded) Number Area (1 000 ha) Number (20) Area (1 000 ha) (21) Number (%) Area (%) Denmark Hybrid dynamic 52 420 2 329,00 69 474 2 734,00 132,53 117,00 Germany Hybrid dynamic 330 640 14 050,00 386 237 16 825,00 116,81 119,00 Luxembourg Hybrid static 1 970 122,00 2 006 123,00 101,83 101,00 Sweden Hybrid static 59 440 2 763,00 84 454 3 171,00 142,08 115,00 United Kingdom UK — England Hybrid dynamic 70 031 7 425,00 116 500 8 248,00 166,00 111,00 UK — Scotland Historic 19 596 4 358,00 21 669 4 606,00 111,00 106,00 UK — Wales Historic 16 821 1 301,00 18 364 1 439,00 109,00 111,00 UK — N. Ireland Hybrid static 24 962 1 017,00 41 545 1 007,00 166,00 99,00 Total 575 880 33 365,00 740 249 38 153,00 129,00 114,00

5.17. Member States are to establish a national reserve (22) from which they allocate entitlements to new farmers, those in special situations or those affected by restructuring or development programmes.

The audit objectives

5.18. The Court has audited the systems for establishing entitlements in the 10 Member States (23) which introduced the SPS in 2005 (payments in 2006, budgetary ceiling 15 088 million euro (24), 27 % of total agricultural expenditure) (25). The objectives of the audit were to assess whether: (a) the national provisions adopted by the Member States comply with EU legislation and whether the entitlements have been correctly calculated; (b) the Member States have set up adequate administrative procedures and a reliable internal control for the correct, complete and accurate establishment and management of payment entitlements; (c) the Members States have implemented a reliable management and control system for processing SPS claims (26).

Calculating and allocating entitlements

5.19. Correct calculation and allocation of entitlements is a prerequisite for correct SPS payments. Incorrectly established entitlements will result in an over or under-payment in the first year and all subsequent years if not detected.

Non compliance with the rules

The ten months rule

5.20. Community legislation requires that land declared for SPS must be at the claimants’ disposal for a minimum period of 10 months each year. Contrary to this, in the United Kingdom entitlements were allocated under SPS and aid was paid to landlords, not engaged in farming, who let out their land for most of the year and who do not therefore meet the requirement. In Northern Ireland, for example, more than 176 000 entitlements (worth 13,8 million euro) were allocated to such landlords (27). 5.20. The general concept of de-coupling should be taken into account. Article 33 of Regulation (EC) No 1782/2003 establishes that only farmers as defined in Article 2 a of that regulation may have access to the Single Payment Scheme. Under the regional model, adopted as a derogation to the historical model at the request of several Member States, it is allowed to pay on the basis of the whole agricultural area declared the first year of application; this extension concerned mainly grassland and fruits and vegetables. Indeed this model implies that new beneficiaries, which beforehand did not receive direct support, became eligible, if inter alia the area is at their disposal, if the GAEC is applied and if they exert on it an agricultural activity pursuant to the definition of Article 2 of Regulation (EC) No 1782/2003. This can include landlords but only if they are engaged in agricultural activity. Indeed the claimant needs to have the land declared for a minimum of 10 months at his disposal. If in the cases the Court describes, land is less than 10 months at the landlord’s disposal, it is not eligible. The Commission will take action through conformity procedures.

5.21. The United Kingdom authorities consider that, depending on the terms of the letting agreement, landlords may qualify for SPS and/or rural development aid for land let to and farmed by the lessee. According to EU law however, only the farmer, i.e. the person disposing of the land and exercising an agricultural activity on the land is entitled to SPS payments and rural development aid. 5.21. The Commission shares the Court’s interpretation of the relevant EU law. One eligibility condition is to exercise an agricultural activity. The Member States have to identify who is considered as active farmers (having the right for entitlements). If the landlord bears the economic risk of the farming activity, it is not excluded to consider him ‘exercising an agricultural activity’.

Consolidation of entitlements

5.22. EU legislation provides for the establishment of reference amounts for farmers in areas subject to restructuring and/or development programmes relating to public intervention in order to avoid the abandonment of land and/or to compensate for specific disadvantages for farmers in those areas. Where a farmer has lost land in this way and is no longer able to activate all of his entitlements, they may be consolidated, i.e. exchanged for a smaller number with a higher value.

5.23. Some Member States/countries (Austria, Ireland, Wales and Scotland) did not comply with EU legislation. They extended this provision to all cases (28) where a farmer in 2005 had fewer hectares than entitlements. Consolidation was granted in order to have the farmer's reference amount concentrated on a number of entitlements equal to the number of hectares held, and consequently to allow the farmer to activate all his entitlements. Wales and Scotland applied this irregular type of consolidation only in the first year of SPS whereas it continues in Austria and Ireland. In 2005, more than 200 000 hectars were consolidated in this way. The impact is estimated at 60 million euro per year (29). 5.23. The practice described by the Court has already been identified by the Commission and is being followed up through conformity procedures.

5.24. In Northern Ireland and England, which apply the hybrid model, a consolidation effect arose when contrary to Community provisions (30) farmers were allowed to restrict allocation of entitlements to part of the eligible area declared in their 2005 claim. This enabled farmers to have their historical reference amount spread over fewer hectares, i.e. they were allocated fewer entitlements with higher values, and allowed landlords to claim entitlements in their own name for land let to farmers. 5.24. This issue will be followed up through conformity procedures.

New beneficiaries

5.25. EU legislation (31) gives access to the SPS to a farmer, defined as a natural or legal person, whose holding is located within the Community and who exercises an agricultural activity — the production, rearing of animals or growing of agricultural products or maintaining the land in good agricultural and environmental condition (GAEC).

5.26. Although claimants may qualify for the SPS merely by maintaining their land in GAEC, the admission conditions were not applied uniformly throughout the Community. For example, Luxembourg restricted the allocation of entitlements to applicants who actually operate an agricultural holding with all the machinery and equipment necessary for independent management. All other Member States applying the regional or hybrid model accepted claims from landowners who undertook to keep their land, or have it kept, in GAEC, even if they did not have any agricultural machinery or equipment. 5.26. Applying the principle of subsidiarity, the concrete implementation of GAEC is Member States’ competence. Hence, no uniform implementation exists across the EU. Luxembourg has chosen stricter rules that it deemed suitable but those are not compulsory for the other Member States. The Commission does not oppose such a solution.

5.27. Table 5.4 shows that the number of direct aid beneficiaries has increased significantly. Especially under the regional model, where all grassland and land used for fruit and vegetables became eligible, the SPS has led to a substantial increase in the number of hectares in respect of which direct aid is paid and beneficiaries. The Court has also noted among them railway companies (England), horse riding/breeding clubs (Germany and Sweden) and golf/leisure clubs and city councils (Denmark and England). 5.27. The criteria for allocating entitlements had to be met by the beneficiary. To activate subsequently an entitlement he must have eligible agricultural land at his disposal and exert thereon an agricultural activity. If a natural or legal person meets all eligibility conditions for the land at its disposal and declared, it is eligible. Golf courses as such are not eligible. Similarly, it is clear that e.g. the area used to play golf or for other leisure activities is excluded, and that only areas used for agricultural activity are eligible. The Commission is following up the cases identified by the Court.

Side-effects of the SPS

5.28. Entitlements allocated to landlords, not engaged in farming, are, under the hybrid model, solely based on the flat-rate regional element of SPS. Under the dynamic version of the model, whilst the value of such entitlements starts low, by the end of the dynamic phase these entitlements will have a much higher value: all entitlements will end up with the same value. There will be a significant redistribution effect on EU direct aid away from those actually farming and towards landowners, who will see the value of their entitlements multiplied by four in Denmark and Germany and tenfold in England. In England, the flat-rate element of entitlements was worth 28,20 euro per hectar in 2005, whereas all entitlements will have a face value of some 280 euro per hectar in 2012 (32). 5.28. See also the Commission's reply to paragraph 5.20 as to the concept of the regional model and its importance for conservation purposes. First of all, the choice of the model is up to the Member State. The model described here entails also a redistribution effect since, with a view to a flat rate payment for all eligible agricultural area, 1. the coverage is extended to those area that previously did not receive aid, 2. some of the individual historical rights (varying among beneficiaries and per hectare) are added and equally distributed on the (extended) area. A legal or natural person who met the eligibility condition was entitled to receive the single payment.

Redistribution effect

5.29. Member States may apply the so-called windfall profit clause (33) whereby a farmer who had sold or leased for six years or more all or part of his holding after the reference period has the number of entitlements due to him on the basis of his aid during the reference period (34) reduced by up to 90 %. These deductions are credited to the national reserve. Only Belgium, Denmark, Italy, Luxembourg and Sweden chose to apply this clause (35). In the other Member States, farmers are allowed to keep all of their windfall entitlements. Windfall profits have not only increased the contribution rate borne by all farmers to the national reserve but also led to unequal treatment of farmers in the EU. 5.29. Member States have indeed the choice to revert under certain conditions entitlements to the national reserve. Four Member States made use of this option, while others did not. Where this option has been selected, certain conditions need to be applied (see Article 42(9) of Regulation (EC) No 1782/2003 and Article 10 of Regulation (EC) No 795/2004). The windfall profit clause is optional for Member States. Windfall profit situations have often been substantially reduced by private contract clauses, because it is impossible for the sellers to activate an entitlement without land.

5.30. The Court has found that the allocations made under the new farmer and investment schemes created substantial abnormal profits which fall within and outside the scope of the windfall profit clause.

5.31. EU legislation (36) allows Member States to allocate reference amounts from the national reserve to new farmers (37) who started their agricultural activity after the reference period. In Scotland several new farmers were given entitlements where the applicant did not meet the criteria of the new farmer scheme (38). In one case farmer A took over a holding in May 2004 for which the the former farmer B had been allocated 602 entitlements worth 287 000 euro in 2005. Farmer A successfully applied under the new farmer scheme of the national reserve and received his entitlements worth 111 000 euro for wich he was fully paid in 2005. Farmer B declared 410 (39) of his 602 entitlements with 410 hectares of rough grazing land rented more than 300 kilometers away in the Scottish Highlands (40) and on which he kept 85 sheep. For this new agricultural activity he was paid 182 000 euro in 2005. Farmers A and B were both legal entities that had jointly operated the holding in question until March 2004. 5.31. As it is described, farmer A did not qualify as a new farmer and therefore the allocation from the national reserve needs to be verified. The described practice is being followed up through conformity procedures.

5.32. A simple transfer of a holding between family members during or after the reference period was sufficient to increase the number and values of entitlements allocated for the holding. In Ireland a farmer who stopped farming in 2002 leased his holding to his son. The father was allocated entitlements worth 38 000 euro on the basis of premia paid in 2000 and 2001. His son was approved as a new farmer and allocated entitlements worth 87 000 euro on the basis of premiums paid in 2002. In 2005 the father transferred his land and his entitlements free of charge to his son who ended up owning entitlements worth 125 000 euro. If the transfer had not occurred the holding would have been allocated entitlements worth 67 800 euro. 5.32. If a transfer occurred within the reference period the same piece of land will generate two entitlements. The situation results from the incompleteness of the reference period (2000-2002) for father and son, during which both could constitute rights for entitlements on the same area. The described practice is being followed up through conformity procedures.

Increased entitlements due to investments

5.33. Entitlements from the national reserve may be allocated to farmers who made investments in production capacity or purchased land. In Scotland, the allocation for investment was disproportionate to the investment made. For example, one farmer had invested in 1 802 hectares of land located in a severely disadvantaged area, but the investment allocation was calculated on the basis of the much higher regional average value for the other land. He received entitlements worth 417 966 euro. In Northern Ireland, a farmer was allocated entitlements worth 109 000 euro. After the reference period he transfered more than 600 cattle to the holding of a family member who was allocated 140 000 euro for the same animals under the investment scheme. 5.33. Member States have a margin of appreciation when implementing the investment clause for the allocation of entitlements. However, the allocation of payment entitlement has to be based on objective criteria and should ensure equal treatment among farmers. The described practice is being followed up through conformity procedures.

5.34. By mid 2003, the features of the reform, including the existence of a scheme providing for allocations for investors, had become public knowledge. In the United Kingdom a 10 % increase in income was considered sufficient evidence of an investment. Paradoxically by increasing the number of cattle slaughtered during 2002 (i.e. destocking) farmers could meet this investment criterion. Consequently there was a general run on cattle premiums. For example, in Northern Ireland the number of animals claimed under the beef special premium and the slaughter premium schemes was more than 20 % higher in 2004 than the average for 2000-2002. As a consequence more than 82 % (10,5 million euro) of the allocations from the national reserve were made to investors. The same phenomenon was observed in Scotland and England (85 % (34,4 million euro) and 78 % (94 million euro) respectively). This run on premiums and the non-application of the windfall profit clause explain why the contribution rate to the national reserve was in excess of 3 %. 5.34. Member States have a margin of appreciation how to implement the investment clause. However, the described interpretation of ‘investment’ is not covered by the corresponding Community legislation. Indeed, the EU legislation refers to increasing production capacity and purchasing land, an increase in income, in some cases (as described) may not necessarely reflect an increase of the production capacity. See also the Commission's reply to paragraph 5.29 on the non-application of the windfall profit clause. The case is followed up through conformity procedures.

The activation of entitlements and payments

Reasonable overall quality of the management and control system

5.35. In 2005 the management and control systems applied by the Member States for processing farmers’ claims were affected by three major changes: the introduction of a compulsory Geographical Information System (GIS), a new system for the identification and registration of payment entitlements, and the introduction of obligatory Cross Compliance checks. The Court’s audit covered the first two elements. For detailed observations and the overall evaluation, see Annex 5.2 .

5.36. In Scotland the system for identification and registration of payment entitlements is incomplete since it does not correctly record transfers of entitlements or monitor minimum activation obligations (41). In several Member States the payment calculation was incorrect in cases where the area established after control was not enough to activate all entitlements declared by the farmer. 5.36. The Commission will follow up these alleged shortcomings through conformity procedures.

Long delays in establishing entitlements and making payments

5.37. In all Member States visited (except Portugal and Belgium) definitive entitlements were allocated wholly or partly after the legal deadline of 31 December 2005 (more than 8,3 billion euro in value terms). Some Member States were consequently unable to pay all farmers by the 30 June 2006 deadline. This was a particular problem in England. 5.37. Generally, the late establishment did not lead to a delay in SPS payments to the farmers. In case of non-respect the rules as set out in Regulation (EC) No 883/2006, in particular its Article 9, will be applied. Reductions due to late payments in 2006 will be applied only in England.

Overpayments

5.38. The Court’s audit at final beneficiary level revealed 13 cases out of 54 (24 %) randomly selected payments tested where an incorrect area and/or ineligible areas had been taken into account for the calculation of the number of entitlements. The differences in area ranged from 0,35 % to 6,92 % but the total financial impact is limited. Nevertheless it should be noted that even very small errors can have a significant impact on future payments under the dynamic model (see paragraph 5.28). 5.38. The Court itself accepts that the design and implementation of the Single Payment Scheme limits the risk of irregular payments (see paragraph 5.66).

The Single Area Payments Scheme (SAPS)

5.39. The main difference between SAPS and SPS is that under the former ‘entitlements’ are not established. A uniform amount is paid for each hectare of eligible land. In due course the eight Member States that apply SAPS (42) will be required to adopt SPS.

5.40. For 2006 the SAPS coverage was completed by visiting the remaining three New Member States that apply the scheme (Estonia, Cyprus and Latvia) (43) and three Member States for a second time (Lithuania, Hungary and Poland). In total 24 payments were tested at final beneficiary level.

5.41. In Estonia the four beneficiaries audited had been paid for a larger area than was measured on the spot (average 4,6 %) and the Estonian authorities were unable to substantiate the figure for the calculation of the reduction coefficient they applied (3,51 %) (44). In Cyprus, there are continuing weaknesses in the land registry system (it dates from 1926 and the changes to the natural borders of fields that have taken place since then are not reflected in it) which explains the two relatively large differences in area found (7,26 % and 18,7 %). In Hungary the reduction coefficient was wrongly calculated, leading to a systematic overpayment of 1,62 %. 5.41. As regards Estonia, the Commission has carried out an audit of the IACS in 2005 which did not reveal major deficiencies. The Court’s findings are in line with the rate of error reported by Estonia to the Commission. As regards Cyprus, the Commission shares the concerns of the Court. The deficiencies are being followed up through the conformity procedure. After the audit in 2005, an additional audit of the IACS in Cyprus is scheduled for the second half of 2007. Moreover, having regard to the nature of the deficiencies, the Commission requested the Cypriot authorities to take immediate action in order to remedy these deficiencies. As regards Hungary, the Commission will examine the Court’s findings in the light of the reply from Hungary and, if necessary, follow them up through conformity procedures.

Rural development

Guarantee expenditure

5.42. EAGGF-Guarantee expenditure for rural development amounted to 5 623 million euro in 2006 (45). This covers spending on a large number of measures such as agri-environmental schemes, compensatory amounts for farming in less-favoured areas, investments in farms, and infrastructure in rural areas.

5.43. The Court’s audit covered the administrative and control procedures and the audit of 25 payments at final beneficiary level in eight Member States.

5.44. The Court’s audit found a high incidence of errors, by both nature and amount for the agri-environmental schemes. Payments under these schemes are dependent on respecting (often complex) conditions, such as observance of good farming practices. The Court found in seven out of eight cases audited that farmers had not met their commitments or that some conditions had not been effectively checked by the authorities. 5.44. The Commission considers that the high incidence of errors in agri-environmental measures found by the Court is not representative for the total of rural development expenditure. As regards agri-environmental measures, the Commission considers that their control is rather complex, but the objective of these measures to integrate environmental concerns in agriculture and their added value is widely recognised. With regard to the seven out of eight cases mentioned by the Court, the non-respect of the agri-environmental commitments was in many cases either partial or it had a limited impact. The Commission has established a comprehensive programme to audit the national management and control systems for agri-environmental measures.

5.45. The Court could not express an opinion in two cases because there was insufficient evidence to support the payment to the beneficiaries. It was not possible in one case to verify the reality of the investment and in the other to establish the link between the expenditure declared (interest rate subsidy on loans) and the financial benefit for the farmers. 5.45. The Commission will follow up these cases through conformity procedures.

Transitional Rural Development Instrument (TRDI)

5.46. Support for rural development in the EU-10 for the period 2004-2006 is made available under the ‘transitional rural development instrument’, against which an amount of 2 116 million euro was paid in 2006. The Court carried out system audits in two Member States: Latvia and Hungary. No problems were found in Latvia.

5.47. In Hungary for the financially most important measure, agri-environment (72,6 million euro), the audit found shortcomings in the control and management system. For example: on-the-spot checks were not performed throughout the year in 2005, but after the main harvest, (as a consequence many conditions were not verified at all); parcels could not always be reliably and individually identified; the condition of maximum livestocking density was not checked as part of IACS cross-checks (with animal databases). 5.47. The Commission has identified similar weaknesses in the course of its audits in Hungary. The impact of the detected weaknesses has been analyzed during the conformity procedure, and in cases where a risk for the Fund has been established, financial corrections are being applied.

Ex post scrutiny of payments to traders and processors

5.48. Member States are required to carry out annual programmes of post-payment checks of commercial documentation for export refunds, processing and transformation subsidies and some rural development expenditure. Member States must satisfy themselves that transactions have taken place and been executed correctly, and must take steps to recover sums lost as a result of irregularity or negligence. These checks are carried out under Regulation (EEC) No 4045/89.

5.49. The Commission plays a supervisory and coordination role by ensuring that Member States’ risk analysis and control programmes are appropriate. This includes an analysis of the relevant reports and other documents provided by Member States and may entail visits to Member States in order to check the implementation of the regulations.

5.50. In 2006, the Commission carried out specific missions to eight Member States. 35 conformity audits (46) included a review of at least one post-payment check as part of the work carried out. The Commission also introduced at the end of December 2006 for certain measures, new, harmonised methods for examining aspects of the regulation in the context of conformity audits (47). This should be extended to all measures involved in order to ensure standardisation of approach and coverage. In 2006, no audits covering aspects of the regulation were carried out by the unit responsible for rural development conformity audits although it represents 16 % of potential irregularities reported by Member States. In the other areas, both horizontal and conformity audits were carried out. 5.50. In 2006 the rural development unit mainly carried out audits of measures not covered by the regulation such as agri-environment. However, the horizontally responsible unit examined 21 rural development controls representing 19 % of all the controls reviewed by the unit. Rural development represents 8 % of expenditure under the regulation.

5.51. Despite the fact that the Regulation (EC) No 40/2006 introduced the obligation to report on expenditure actually checked, not all Member States were in a position to provide this information in 2006. The position in respect of checks on secondary purchasers of milk, public storage and multi-annual rural development projects and what constitutes a finished check is still differently interpreted and applied in the Member States. 5.51. The Comission is aware of these differences in the control practice of the Member States but these differences are not in violation of their obligations under the regulation.

5.52. In its Annual Report concerning the financial year 2005 the Court criticised the Commission for not being in a position to measure the success of checks in terms of detecting and recovering irregular payments. At the end of November 2006 the Commission sought information from Member States on recovery but with limited success — six Member States have responded to date. The Commission therefore still does not know how many of the potential irregularities initially reported under Regulation (EEC) No 4045/89 resulted in recovery or why they did not. 5.52. The success of Regulation (EEC) No 4045/89 depends on and is measured by the number and value of potential irregularities found by the ex-post controllers. The Commission has provided the Court with exact data in this respect. The Commission expects to know by the end of the year for all the Member States concerned how many irregular payments have been recovered. The follow-up given to the irregularities detected is systematically reviewed during the Commission's missions to the Member States. For the cases forming part of the sample of controls selected in 2006 the actions taken and justifications given were found generally to be acceptable. Moreover, under the Commission's new guidelines, certification bodies are required from financial year 2007 onwards to verify that paying agencies follow-up properly all potential irregularities revealed in the course of application of Regulation (EEC) No 4045/89.

5.53. Backlogs in the completion of post-payment checks for 2004/2005 and earlier persist in Germany (Niedersachsen), Italy (Ministero Politiche Agricole) and Spain (Andalucia) at the time of submission of annual reports by Member States as per 1 January 2007. 5.53. The backlog of Ministerio Politiche Agricole and of Niedersachsen is limited in financial importance. Moreover, it is regularly reduced. The Commission is closely monitoring the progress made. The Commission's mission to Spain from 11 to 15 June 2007 showed that the 2004/2005 and earlier backlog in Andalucia has been fully resolved.

Export refunds

5.54. Export refunds paid to exporters of EU agricultural products cover the difference between EU internal and world market prices, and allow surplus production to be disposed of on world markets. In 2006 refunds amounted to 2 493 million euro. Member States are required to physically check 5 % of exports to ensure that they are correctly described and entitled to the export refund claimed. They also have to carry out checks at the point of exit from the EU where this is different from the place at which the goods were presented for a physical check (substitution checks) (48). The Commission monitors the quality and number of these checks. 5.54. The Commission's monitoring of the checks includes on-the-spot audit and systematic collation and review of annual statistics supplied by Member States, which show a low level of irregularity.

5.55. Member States are obliged to provide the Commission with data regarding expenditure and information on the EAGGF-Guarantee Section for the purpose of the clearance of accounts as well for monitoring and forecasting (49). An analysis carried out by the Court on this data for 2004/05 shows that the information provided in respect of physical and substitution checks is not reliable. It was further noted that Greece has not submitted any data in this respect. In relation to the Netherlands, it was found that the definition of ‘physical checks’ applied by one paying agency included documentary checks, leading to a significant overstatement of the number of checks recorded. 5.55. Regulation (EC) No 2390/1999 concerns accounting data whose primary purpose is to provide details of individual transactions underlying Member State expenditure, but also captures other information known about a transaction at the time of entry in the accounts. The Commission is aware that, for this reason, the information is sometimes incomplete. Nonetheless, the data is useful for analytical and audit purposes but it is not used for monitoring physical control levels. Of much greater importance for this purpose are the detailed statistics which the Commission receives annually, which are checked systematically in-office and during on-the-spot audits and which are considered to be a very reliable monitoring tool. The question of missing cells in the payment data was already raised with Greece by letter of 19 October 2005 and Greece did include this information in the 2005/2006 data. Regarding the Netherlands, the Commission awaits the Member State's reply.

The Commission's clearance of accounts

5.56. Management of expenditure on agriculture is, in the main, shared between Member States and the Commission. Aid is paid by the Member States, who are then reimbursed by the Commission. These reimbursements are considered as advances until the Commission ‘clears’ the accounts. The current two-stage clearance system used for this purpose includes an annual financial decision and multi-annual conformity decisions taken by the Commission.

Financial clearance

5.57. In the financial decisions for 2006 (50) the Commission ‘cleared’ the accounts of 91 of the 98 paying agencies (see Table 5.1 ). The decisions are based on certificates of independent auditors (certifying bodies), which are limited to completeness, accuracy and the veracity of the paying agencies accounts. Checks on the legality and regularity of underlying payments (‘conformity issues’) are not explicitly stated in the Regulations and the Commission does not require the certifying bodies to perform them. Hence their certificates cannot be relied upon to provide such assurance. 5.57. According to the relevant legislation, the certificate drawn up by the certification body states whether it has gained reasonable assurance that the accounts transmitted to the Commission are true, complete and accurate. The certificate is based, inter alia, on an examination of procedures covering the paying agency's administrative structure as regards the question whether the structure is capable of ensuring that compliance with Community rules is checked before payments are made. The certificate forms part of the comprehensive system for the management and control of CAP expenditure and as such contributes to the assurance on the legality and regularity of the underlying transactions. Moreover, from financial year 2007 onwards, the certification bodies are also expected to provide an opinion on the effectiveness of internal control systems, i.e. whether the control system put in place by the paying agency provides reasonable assurance as to the legality and regularity of underlying transactions.

5.58. Certifying bodies had to audit the single payment scheme for the first time in 2006. The Commission did not specify the scope and depth of the work for this task. The Italian certifying bodies, for example, excluded verification of entitlements from their work and mentioned this in their certificates. The Commission accepted this without comment. 5.58. Certification bodies are requested to satisfy themselves that the paying agency's procedures for the verification of entitlements operate effectively. In contrast, they are not required to directly verify the accuracy of each beneficiary's entitlements in the sense of checking the legality and regularity of the underlying payment for each beneficiary in the sample. In 2006, all the certification bodies complied with this requirement by auditing the paying agencies’ procedures for the verification of the SPS entitlements. The scope and the depth of the work on the Single Payment Scheme has been specified in the Commission's new guideline on the model report which is applicable from financial year 2007 onwards.

5.59. The Commission mainly places reliance on a desk review of the certifying bodies’ certificates and reports. The Court found that the short time available and the number of languages involved limit the scope and depth of the Commission's review (51). For 7 of the 30 certificates and reports reviewed by the Court (52), the information available did not allow the Court to draw a conclusion as to the existence, or not, of material errors in the paying agencies’ accounts. 5.59. The Commission carries out the audit work necessary to gain reasonable assurance whether (based on the information presented) the paying agencies’ accounts are true, complete and accurate, i.e. that they are free from material misstatement. Disjunctions arise when it is unable to conclude positively. This is a distinct and separate mechanism from conformity exercises, which aim to exclude expenditure from Community financing which has not been incurred in accordance with Community rules. The Commission was able to satisfy itself that there was not a material error in the total expenditure of the accounts it cleared. This includes the 7 accounts referred to by the Court.

5.60. The Court visited seven certifying bodies to review their work (53). The main weaknesses found related to the scope and depth of the detailed testing, the work of delegated bodies, including on the spot controls and the check of completeness of debtors’ accounts. These weaknesses should be resolved in order to provide a greater level of assurance which can be gained from the work of the certification bodies. In 2006 the Commission services made visits to the certifying bodies of four other paying agencies (54). Its overall conclusion was limited to the statement that ‘the audit methodology of the certifying body appears to provide sufficient assurance for the clearance decision’. 5.60. As to the scope and depth of the certification bodies’ work, the applicable legislation requires these bodies to examine the paying agency's administrative structure only as regards the question whether that structure is capable of ensuring that compliance with Community rules is checked before payments are made. This is sufficient for the purpose of the financial clearance and should not be considered as a weakness. The Commission's audit missions carried out in 2006 confirm (via an assessment of the methodology used and the testing performed) that the certification bodies’ reports and certificates are fundamentally reliable, although there is scope for improvement in some areas. The issues cited are all given due prominence in the Commission's new guideline on the model report. The certification bodies will be expected to cover these issues in greater depth and present their findings more clearly.

5.61. The Commission has introduced a new recovery procedure (55) which includes tables for the presentation of the debtors’ accounts but final guidelines on the completion of these tables were only provided in November 2006. The Court’s work in relation to the reliability of the debtors’ accounts questions the completeness of these tables: limitations of the opinions in the certificates and major findings in the reports, limited work done by some of the certifying bodies and insufficient information in some of their reports. Furthermore, the Commission's reconciliation of these tables resulted in some changes to tables that had already been certified as correct. 5.61. The tables (56) referred to by the Court are designed to provide the Commission with the necessary information for applying the new clearance mechanism for irregularity cases provided for in Articles 32 and 33 of Council Regulation (EC) No 1290/2005. There is a clear link between these tables and the paying agencies’ debtors’ ledger, and the Commission's new guideline on the model report for the certification bodies applicable from 2007 requires the latter to reconcile the debtor's ledger with the tables and to provide explanations to any discrepancies found. The tables form part of the paying agencies’ annual accounts and, as such, are certified by the certification bodies. Moreover, the Commission devoted a considerable amount of work into gaining reasonable assurance that reported debt was fairly categorised and stated. The balances at 15 October 2006 were assessed and the closing balances of the old table 105 were reconciled with the opening balances of the new tables of Annex III as of mid-October 2005. Where the reconciliation could not be carried out successfully and the amounts were significant, thus, no reasonable assurance could be gained, such as in the case of AGEA in Italy, the accounts were disjoined. A detailed follow-up will be carried out by the Commission in the course of 2007 with a view to ensuring that the debts are properly reported in the tables of Annex III.

5.62. The decision on the amounts of outstanding irregularities, which are charged in equal parts to the Community and the Member States (‘50:50 rule’) (57) was included for the first time in the financial clearance decisions for 2006 and an amount of some 130 million euro each was charged to the Community and the Member States (58). An additional amount of 147 million euro was charged 100 % to the Community for irregularities that the Member States considered to be irrecoverable (59). The new procedure provides that significant amounts are charged to the Community on the basis of Member States’ information. This implies that a detailed follow-up must now be carried out by the Commission to ensure that the debts should properly be charged to the Community. 5.62. The results referred to by the Court are the consequence of the new clearance mechanism for irregularity cases introduced by Article 32 of Regulation (EC) No 1290/2005. According to Article 49 of Regulation (EC) No 1290/2005, the new 50/50-rule was applied in 2007 to all outstanding cases for which full recovery had not taken place by 16 October 2006. Some of these cases date back to the 1980s. This explains the relatively high amount cleared. It is expected that in subsequent years, when only the cases which in that year reach the maturity of 4 or 8 years are concerned, the amounts to be cleared will be significantly lower. The sums charged to either side are certified by the certification bodies, which means that they have been reviewed in detail by these bodies. Moreover, the Member States’ correct application of this new clearance mechanism is being followed-up by the Commission in the framework of its audits on the paying agencies.

Conformity clearance

5.63. Conformity decisions have the objective of excluding expenditure from Community financing where the Commission has found non-compliance with Community rules. Conformity clearance is also used by the Director General for Agriculture to support his declaration of assurance on the legality and regularity of EAGGF expenditure. Analysis of the system revealed the following weaknesses: 5.63.

(a) conformity decisions did not relate to payments made to final beneficiaries in the year in which the decisions were taken — they usually related to several years of expenditure and were taken several years in arrears. By the end of 2006 clearance was not complete for any year later than 1998; (a) At the end of 2006, only 12 audits carried out in the years 2002 and before, allowing financial corrections for the period prior to 2001, have not yet been closed. This means that the conformity work on expenditure from the years 2000 and before has largely been completed. The multi-annual nature of the conformity procedures referred to by the Court does not affect the assurance which can be derived from these procedures for the financial year 2006. While it is true that the financial consequences are only determined at the end of the procedures, the preliminary findings of the audits carried out in 2006 are already known. Moreover, since the Commission's audits cover the Member States’ management and control systems, they do not only provide information on the expenditure audited, but indirectly also on future expenditure covered by the systems in question.

(b) DG AGRI's Annual Activity Report 2006 referred, in the chapter on assurance, to the contingent assets recorded in its accounts for 2006. These amounted to 1 472 million euro (60) and are intended to predict the impact of future financial corrections. This accounting treatment improves the information available to the user of the accounts, but cannot provide the Court or the Commission with assurance as to the legality and regularity of the underlying transactions; (b) As stated in DG AGRI's Annual Activity Report 2006, it can be concluded from the results of the audits carried out in 2006 that the overall situation with respect to deficiencies in the national control systems is comparable to the situation in previous years and that, therefore, it is entirely justified to estimate the amount of financial corrections necessary to cover the risk for the 2006 expenditure on the basis of the average historical net correction rate for the period 1996-2001. The purpose of recording the contingent assets in the Commission's accounts is to disclose the (potential) receivables, based on the results of its audits, and has not been intended to provide any assurance as to the legality and regularity of the underlying transactions.

(c) the cost of financial corrections is borne by the Member States, usually by the general taxpayer, rather than by the beneficiaries of the aid irregularly paid; (c) Where undue payments are or can be identified as a result of the conformity procedures, Member States are required to follow them up by recovery actions against the final beneficiaries. However, even where this is not possible, for example because the correction is based on deficiencies in the national control system and cannot be linked to any individual irregular payment, financial corrections are an important means to improve the Member States’ management and control systems and, thus, to prevent or detect and recover irregular payments to final beneficiaries.

(d) there was a lack of evidence that the number of audits carried out by the Commission covered in a sufficient manner the risks identified in the Commission's risk analysis. The testing at the level of the beneficiary is determined by the time available rather than on the basis of a laid down instruction to the auditor. The audits carried out do not systematically include a verification of the existence and accuracy of the information in the declarations at the final beneficiary level; (d) In 2006, in total 354 audits including 184 with on-the-spot checks and 170 without such checks were carried out. The Commission considers that these audits cover in an appropriate manner the risks identified in the Commission's risk analysis. The Commission carries out compliance audits to evaluate the quality of the national management and control systems. Where appropriate, these audits may include tests of individual files at the level of the final beneficiaries, including on the spot checks. This approach is consistent with international audit standards as well as with the Commission's audit manual.

(e) the method used for calculating the expenditure to be excluded is in most cases a ‘flat rate’ where a percentage of total aid paid is recovered. Given that this method is based on the seriousness of the control system’s weakness and not on the value of irregularities found, no valid link can be made between the amounts recovered by conformity decisions and the real amounts of irregular payments. (e) The objective of the conformity clearance is to exclude expenditure from Community financing which has not been effected in compliance with Community rules. The Commission considers that this objective is achieved also in cases where financial corrections are applied on a flat rate basis because the amount of irregular payments to beneficiaries cannot be quantified. Flat-rate corrections are applied when the actual amount of irregular payments to beneficiaries cannot be determined by exact calculation or extrapolation. This principle has been regularly confirmed by the Court of Justice. Therefore, the Commission considers this method of flat rate corrections as fully appropriate

5.64. The Court carried out an audit of three financial corrections included in the three conformity decisions taken in 2006 which concerned the period 1999-2005 covering 25 % of the amount of the corrections made (61). The following observations are made: 5.64.

(a) given the limited resources available the Commission's conformity audits are selected on the basis of a risk analysis. Due to the two-year limit there is thus a risk that expenditure is not checked in time in order to allow a correction to be made (62). The Court found that corrections for irregular payments with an estimated maximum amount of 100 million euro could not be made as they were discovered after the time limit; (a) The conformity audits to be carried out are determined on the basis of a central risk analysis. For the purpose of the conformity process, this selection is in line with international auditing standards. DG AGRI devotes more than 10 % of its total staff to this task. If deficiencies are discovered in the framework of conformity audits which represent a financial risk to the EAGGF, any financial corrections are limited to the expenditure effected 24 months prior to the transmission of the Article 11 letter notifying the Member State of the Commission's findings. This so-called 24 month rule was adopted by the Council to ensure legal certainty for the Member States. It is inherent in the application of this rule that certain expenditure cannot be subject to financial corrections although it may be affected by deficiencies. In the cases audited by the Court, the Commission has reacted on time to the information received.

(b) the time needed by the Commission, for these complex cases, from the initial audit to the clearance decision, for the corrections examined, was between four and seven years which delayed the ‘finalisation’ of the clearance procedures for the financial years in question. (b) The time needed for completing the conformity procedures depends on a number of factors. Such factors include, for example, the complexity of the case, requiring additional work or even additional missions, the respect of deadlines by the Member States and the follow-up of the recommendations of the Conciliation Body. Furthermore, the full respect of the Member State's right of defence is a fundamental principle of the conformity clearance procedure. The Court’s statement (‘(…) which delayed the “finalisation” of the clearance procedures for the financial years in question.’) does not take into account the difference between the financial clearance of a given financial year and the conformity clearance. There is no conformity clearance per financial year.

Conclusions and recommendations

5.65. Agriculture and Rural Development expenditure under the Guarantee Fund is affected by errors which, although decreasing, remain material. IACS, where properly applied, is an effective control system for limiting the risk of error or irregular expenditure. However, this is not the case in Greece. 5.65. The Commission notes that the total level of error for all expenditure under the EAGGF Guarantee established by the Court has decreased markedly and is close to the materiality level. For the non-rural development part of EAGGF Guarantee expenditure, which accounts for more than 85 % of total expenditure, it is below this materiality level. Errors in rural development concentrate on agri-environmental measures. IACS is an effective control system to limit the risk of irregular expenditure. The situation in Greece is addressed through ongoing audits and clearance of accounts procedures to protect the financial interest of the Union and through the monitoring and supervision of the implementation of the Greek action plan.

5.66. The design and implementation of the SPS limits the risk of irregular payments to farmers. Nevertheless some Member States have failed to correctly apply certain key elements of the SPS: Austria, Ireland and the United Kingdom extended consolidation of entitlements beyond the provisions of the regulation (see paragraphs 5.22 to 5.24). 5.66. The Commission is aware of these practices and shares the view of the Court. Any possible risk to the Fund will be taken into account through the conformity procedures.

5.67. The United Kingdom did not comply with Community legislation when allocating entitlements and paying SPS and rural development aid to landlords for land let to and farmed by the lessee farmers (see paragraphs 5.20 and 5.21). 5.67. The Member States have to identify who is considered as active farmers (having the right for entitlements). If the landlord bears the economic risk of the farming activity, it is not excluded to consider him ‘exercising an agricultural activity’.

5.68. Even if the overall national ceilings were not breached, one quarter of the payments tested at final beneficiary level revealed overpayments although the total financial impact is limited (see paragraph 5.38).

5.69. Among the new beneficiaries, the Court noted railway companies, horse riding/breeding clubs, golf/leisure clubs and city councils in the United Kingdom, Germany, Sweden and Denmark (see paragraphs 5.25 to 5.27). Allocation of entitlements to landowners that never exercised any agricultural activity and who only keep land in GAEC has led to substantial redistributional effects of EU aid away from farmers to landlords, particularly in the dynamic hybrid model (see paragraph 5.28). The United Kingdom authorities set inappropriate criteria for allocations of entitlements for investments from the national reserve (see paragraphs 5.33 and 5.34). 5.69. Regional models do, indeed, open up support to those who may not have received it in the past. This was a clear and conscious choice of the Member States concerned to redistribute support in the new circumstances of decoupling. The new beneficiaries are those who farmed actively in the relevant reference period (i.e. in the first year of application). They may or may not have been the owners of the land, but this is irrelevant to the question of who received the premia rights.

5.70. The SPS regulations gave Member States discretion to choose how to allocate entitlements from the national reserve and whether or not to eliminate windfall profits (see paragraphs 5.29 to 5.34). The same issues have been dealt with very differently in, and even within, the Member States, consequently there can be no equal treatment of beneficiaries under the scheme. 5.70. Member States have indeed the choice to revert under certain conditions entitlements to the national reserve. Where this option has been selected, certain conditions need to be applied. Similarly, the responsibility for the implementation of the SPS lies with the Member States.

5.71. The Commission should take these consequences into account when performing the ‘Health Check’ (63) due in March 2008. 5.71. The ‘Health Check’ will scrutinise the functioning of the support schemes introduced with the CAP-reform 2003.

5.72. In rural development, the agri-environmental measures are prone to a high incidence of errors, because farmers do not meet the (often complex) eligibility conditions. The Commission should give due consideration to the pertinence of eligibility conditions for such measures. 5.72. The Commission considers that the high incidence of errors in agri-environmental measures found by the Court is not representative for the total of rural development expenditure. As regards agri-environmental measures, the Commission considers that their control is rather complex, but the objective of these measures to integrate environmental concerns in agriculture and their added value is widely recognised. Concerning the programming period 2007-2013 the newly introduced legislation (64) requires the Member States to ensure ex-ante that all the rural development measures and the related commitments and eligibility conditions they intend to implement are properly verifiable and controllable.

5.73. The nature of post-payment checks (65) and remaining weaknesses in their application limit the assurance that can be gained as to the legality and regularity of payments made in previous years. 5.73. The Commission considers that the system of post-payment checks works adequately. Its own audits confirm that assurance can be gained from these checks. Although there might not be a direct link between the expenditure incurred in 2006 and that controlled by the post-payment checks, these checks contribute to the overall assurance regarding the legality and regularity of the underlying transactions in 2006 since the system as such is functioning properly. In fact they are an extra level of controls in addition to the pre-payment checks and must therefore be regarded in the context of the overall system for the management and control of agricultural expenditure (see also the Commission's reply to paragraph 5.77).

5.74. Improvements are required in respect of the shortcomings detected by the Court and the Commission's clearance unit before the system of physical and substitution checks on export refund consignments can be considered as operating satisfactorily. 5.74. The physical and substitution checks under Regulation (EEC) No 386/90 form part of the whole chain of controls, which also include ex-ante administrative checks of refund payment claims, ex-post controls under Regulation (EEC) No 4045/89 and the Commission's own audits. The Commission considers this system as operating satisfactorily. As a proportion of expenditure, the irregularities reported by the Member States for both physical and other controls in export refunds have been decreasing in recent years and are now at a low level. Nevertheless, in response to the Court’s main concerns identified in the Special Report No 4/2007 legislative changes are under consideration.

5.75. The Commission's financial clearance decisions concern the reliability of the accounts. The certificates issued by the Certifying bodies do not cover legality and regularity. Claims for EU aid are not usually checked by them on the spot. In order to improve the assurance that can be gained from this element of clearance, the Commission services should make frequent audit visits to a sufficient number of certifying bodies and ensure that conditions for its desk review of certifying bodies’ certificates and reports provide for adequate scope and depth. 5.75. The Commission visits certification bodies (and paying agencies) on the basis of a risk analysis, which takes the magnitude of the issues confronting both bodies into account. This practice will be continued for the financial year 2007. The scope and depth of the Commission's review of certification bodies’ certificates is considered to be adequate. The Commission carries out the audit work necessary to gain reasonable assurance whether (based on the information presented) the paying agencies’ accounts are true, complete and accurate. Disjunctions arise when it is unable to conclude positively.

5.76. Although clearance systems (as well as post-payment checks) have the objective of excluding expenditure which does not comply with Community rules, at present they fail to do so at the level of payments to final beneficiaries (66). The level of irregular payments financed by the CAP is not yet known or estimated by the Commission in a way considered appropriate by the Court (67). 5.76. The conformity procedure is designed to exclude expenditure from Community financing which has not been effected in compliance with Community rules, thus shielding the Community budget from expenditure that should not be charged to it. 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. The results of the controls at the level of the final beneficiaries as communicated to the Commission by the Member States and published in DG AGRI's Annual Activity Reports for a significant part of the CAP-expenditure provide for a reasonable indication of the extent of irregular payments. To further improve the assurance which can be gained from this information, as from 2007, the Commission has implemented the Court’s recommendation that the certification bodies should do more work to verify and validate the inspections statistics and post payment checks.

5.77. The Commission should ensure that supervisory and control systems provide assurance as to the legality and regularity of the transactions at the level of the final beneficiary and should seek to ensure that irregular payments are recovered. The Court has proposed different options to achieve this. The impact of the Commission's choice that the certifying bodies do more work to verify and validate IACS statistics and post-payment checks can only be evaluated later. Nevertheless where the Commission uses the work of others as a source of assurance it should perform sufficient work to ensure that it is reliable. 5.77. A comprehensive system for the management and control of agricultural expenditure ensures that irregular payments to final beneficiaries are prevented or detected and recovered. This system relies on four complementary levels: (1) compulsory administrative structure at the level of Member States, centred around the establishment of paying agencies and an authority at high level which is competent for issuing and withdrawing the agency's accreditation. The decision for issuing the accreditation is based on a detailed review by an external audit body; (2) detailed systems for controls and dissuasive sanctions to be applied by those paying agencies, with common basis features and special rules tailored to the specificities of each aid regime; (3) ex-post controls through independent certification bodies and special departments performing checks under Regulation (EEC) No 4045/89; (4) clearance of accounts through the Commission (both annual financial clearance and multi-annual conformity procedures). Taken together, the four levels are therefore the basis for the Commission to gain reasonable assurance as to the effective management of the risk of error in the legality and regularity of the underlying transactions in agriculture.

5.78. The Commission's conformity decisions are not complete for any year later than 1998. Since these decisions in respect of 2006 expenditure will be taken in the future, the expenditure is provisional and assurance as to the legality and regularity of the transactions underlying the Community accounts can only be provided once a full clearance procedure is in place and applied. 5.78. By the end of 2006, only 12 audits carried out in the years 2002 and before, allowing financial corrections for the period prior to 2001, have not yet been closed. This means that the conformity work on expenditure from the years 2000 and before has largely been completed. The Commission does not consider that the 2006 expenditure is provisional and that assurance as to the legality and regularity of the underlying transactions can only be provided once a full clearance procedure is in place and applied. Such an appreciation of the conformity procedure does not take into account that this procedure is but one, albeit important, part of the comprehensive system for the management and control of agricultural expenditure. This system, which is described in detail in the Commission's reply to paragraph 5.77, is the basis for the Commission to gain reasonable assurance as to the effective management of the risk of error in the legality and regularity of the underlying transactions in agriculture. As regards specifically financial year 2006, the preliminary findings of the audits carried out in 2006 are already known. Generally speaking, it can be concluded from these findings that the overall situation with respect to deficiencies in the national control systems is comparable to the situation in previous years.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Recoveries of irregular payments

5.79. In its Special Report No 3/2004 on the recovery of irregular payments the Court identified a number of serious weaknesses in the system of recording, recovering and writing off irregular payments.

5.80. The Council and Commission have responded positively to many of these by: 5.80.

(a) setting up a joint Task Force Recovery (TFR) to resolve/clear the backlog of irregularity cases over 0,5 million each (68). The outcome was a Commission Decision (69), charging 317 million euro (70) to the Member States and 176 million to the Community Budget;

(b) introducing new requirements for reporting and dealing with irregularities (71), and taking steps to clarify the responsibilities of DG AGRI and OLAF in respect of the financial follow up of irregularities (although a draft memorandum of understanding between the parties has yet to be signed); (b) The new regulation dealing with irregularities (72) has been successfully implemented by all 27 Member States from 1 January 2007 onwards and a Working Party of Cocolaf (73) was held on 23 May 2007 to present detailed practical guidelines to Member States. The instrument clarifying the responsibilities of all services concerned is subject to an Inter Service Consultation during June/July 2007 and is expected to be applicable shortly thereafter.

(c) putting some 2 600 cases, communicated before 1999 and under the ‘500 000 threshold’, of a total amount of 168,7 million euro (74) under the ‘50/50’ approach (75) applicable from 16 October 2006.

5.81. However there are still some important issues which have to be resolved: 5.81.

(a) the Commission is not yet in a position to finalise the ‘Jordan/Iraq’ case relating to false proofs of arrivals of exports of meat and poultry involving 35 million euro of alleged irregular payments, since legal proceedings, including a preliminary ruling procedure before the European Court of Justice are still pending in June 2007;

(b) the placing of the 2 600 lower value task-force cases under the new 50:50 clearance procedure implies that a follow-up is made by the Commission to ensure that the amounts charged to the Community under this procedure are correct; (b) As far as the charging of sums is concerned, the Commission observes that this is subject to the certification by the certifying bodies and that the sum of 147 million euro is therefore reviewed in detail by these bodies. Furthermore, the Commission is in the process of following up on the cases where amounts have been charged to it in the context of the audits of the paying agencies.

(c) the discussion of the 2nd Report from the Commission on the implementation of Council Regulation No 1469/95 (referred to as the ‘blacklist’) has not yet reached an operational conclusion since the European Parliament has not issued any opinion on the subject. (c) The Special Committee on Agriculture (76) had a last debate and adopted its conclusions on 6 June 2006 (77). The Commission report (78) was transmitted to the European Parliament (Cocobu (79)) on 24 October 2005, however, it has not been debated by the European Parliament yet.

Olive oil

5.82. In its previous Annual Report (80) the Court raised concerns about the reliability of the olive cultivation Geographical Information System. For the 2004/2005 marketing year the Court carried out a specific audit of the olive oil production aid scheme in the main producer Member States (Italy, Spain and Greece).

5.83. As part of the audit, 50 payments files were tested, 33 of which were checked on the spot. Eight farmers (24 %) had declared at least 5 % more olive trees than were counted. Two of these led to significant overpayments. 5.84. The audit confirmed that the weaknesses previously identified persist and that the GIS in all three Member States is neither complete nor reliable. Since the GIS data is used to calculate entitlements under the SPS (81) the Court will pay particular attention to this aspect during its audit of 2007 expenditure. 5.83-5.84. The aid was paid on the basis of the quantity of olive oil produced. The number of trees was an element of the system of control of the scheme, among many other elements (control of the mills, control of the yield, etc.). A sanction on the amount of aid is foreseen in the regulation when the discrepancy between the trees declared and the trees counted is higher than 5 %. In the cases where those sanctions have not been applied or have been badly applied by the Member States, or in the cases where the olive GIS was not updated, the procedure of clearance of accounts is ongoing or has already led to financial corrections. Some 180 million euro of financial corrections have already been applied by the Commission since financial year 2000 and more significant corrections are in the pipeline. As of 1 January 2006, the olive oil production aid has been fully decoupled and integrated in the single payment scheme (only Spain kept a small element of coupled aid). Now, the olive parcel is to be considered as a ‘classical’ agricultural parcel which is controlled within the framework of the IACS. This should significantly reduce any risk of error.

SPECIAL REPORTS