EN Official Journal of the European Union C 252/1

SPECIAL REPORT No 4/2007

on physical and substitution checks on export refund consignments together with the Commission's replies

(pursuant to Article 248(4), second subparagraph, EC)

(2007/C 252/01)

TABLE OF CONTENTS

I-VII EXECUTIVE SUMMARY

1-9 INTRODUCTION

1 What are export refunds?

2-3 What is the value of export refund subsidies?

4-6 What are physical and substitution checks?

7-9 Audit scope and approach

10-52 OBSERVATIONS

10-42 Do Member States carry out physical and substitution checks of export refund consignments as required by the Regulations?

10-18 Numbers of physical checks carried out and means of selection

19-21 Cost of checks carried out

22-23 Prior warning of checks

24 High value bulk consignments

25-28 Sealing of means of transport and substitution checks

29-31 Minimum number of substitution checks and their scope

32-33 Specific substitution checks

34 Quality of substitution checks

35-38 Follow-up of irregularities detected during substitution and specific substitution checks

39-42 Confirmation of exit from the EU

43-45 Results of physical checks and their context

46-52 Are the Commission's arrangements for monitoring the execution of these checks satisfactory and has the Commission reacted to the results of these checks or to weaknesses with appropriate measures?

53-57 CONCLUSIONS AND RECOMMENDATIONS

The Commission's replies

EXECUTIVE SUMMARY

I. Export refunds are subsidies paid to exporters of agricultural products to compensate them for the difference between EU internal market prices and the lower world market price. Whilst the amount of refunds paid has been decreasing in recent years it is still significant, amounting to some 3 000 million euro in 2005. This trend continued with 2 500 million euro being paid in 2006.

II. In order to ensure that refunds are paid only for eligible goods and to deter false claims, checks are required to be made on export consignments. They are made both at the point of departure from the Member State where the goods originate, and at the point of exit from the EU territory. These checks comprise a physical examination of at least 5 % of all export declarations at the point of departure and subsequent visual substitution checks at the EU frontier to ensure that the goods declared and claimed for are indeed those effectively exported.

III. The Court's audit examined this system of checks and sought to ascertain whether they are carried out in the Member States as required by the Community legislation. Furthermore the audit examined whether the Commission properly monitors the implementation of these checks and takes appropriate action where their implementation is found to be deficient.

IV. In respect of the physical checks the Court found that whilst the Member States had respected the requirement to physically check 5 % of the export declarations, as required, there were weaknesses in the methodologies applied which reduced, significantly in some cases, the effectiveness of these physical checks. Specifically: (a) Physical checks carried out at the place of loading (often the exporters own premises) were systematically carried out at the start of loading and had become predictable to the extent that they no longer fulfilled the requirement to be without tacit prior warning. This reduces the effectiveness of the check as an unannounced inspection designed to discover and deter false declaration and increases the risk that refunds are unduly paid. (b) The method of selection of export consignments for checking used in the Member States resulted in a relatively high number of low value and low risk exports being checked. This did not make the most efficient and effective use of scarce and expensive Customs resources. (c) The method used to check bulk shipments of goods, which often carry a high value of refund, did not ensure that the entire shipment was verified through a combination of physical and documentary checks with the attendant risk that refunds are unduly paid.

V. The audit of the substitution checks found that: (a) Checks were in some cases not detailed enough and that the interpretation of the number of checks to be made varied between Member States. (b) At the EU frontiers the officials charged with carrying out the checks faced difficulties in identifying which consignments to check. For this purpose they should eliminate those already subject to a physical check and properly sealed by Customs and identify high value, high risk consignments from the remaining population that should be checked.

VI. The monitoring of the checks by the Commission and its remedial action in respect of weaknesses found leads the Court to conclude that: (a) The Commission monitors the operation of the checks by audits in Member States and by reviewing the reports Member States are required to submit in respect of the export refund checks carried out. The Commission takes assurance from the physical and substitution checks as part of its overall assurance that agricultural subsidies are paid in a legal and regular manner. (b) The Court's findings are largely mirrored by those of the Commission's own audit services which were found to provide adequate coverage of key controls. Despite the Commission being aware of these weaknesses for some considerable time it has not reacted, with legislative changes or timely financial corrections.

VII. Based on the above the Court recommends: (a) That the Commission proposes legislative changes to strengthen the physical and substitution checks and to ensure the harmonious and effective application of such checks. (b) That the Commission particularly reviews the findings of the Court's audit in terms of the validity of the checks carried out prior to the loading of goods to determine whether these checks can be considered as fulfilling the criteria needed to count toward the minimum number required by the Community legislation.

INTRODUCTION

What are export refunds?

1. Export refunds are subsidies paid to exporters of agricultural products to countries outside the EU to stimulate exports by compensating for the difference between the EU internal market price and the lower world market price. Refunds are paid on the quantities of goods exported and the rates vary according to the nature and characteristics of those goods. In certain instances they also vary according to the country of destination. Products exported to countries outside the EU are normally transported in containers, on trucks/trailers and in bulk by shipload.

What is the value of export refund subsidies?

2. Expenditure on export refunds in 2005 amounted to 3 000 million euro, this was down from 9 800 million euro in 1988. Chart 1 shows the distribution of payments by Member State and Chart 2 by principal product for 2005. In 2006, export refunds amounted to 2 500 million euro.

3. The decline in expenditure on export refunds — as illustrated by Table 1 — is partly attributable to a narrowing of the gap between EU and world market prices due both to the successive reforms of the CAP and to the consequent results of the GATT/WTO international trade negotiations. At the end of 2005, during the Doha round of these negotiations it was expected that export subsidies would be abolished by end of 2013. However, the talks are ongoing and the final result is not yet known.

Table 1

Annual expenditure on export refunds compared to the agricultural budget

(million euro) Export refunds payments Total agriculture and rural development payments (1) Export refunds as a % of total agricultural payments 1988 9 786 27 687 35,3 % 1992 9 470 31 276 30,3 % 1996 5 702 39 108 14,6 % 2000 5 646 40 467 14,0 % 2004 3 384 44 761 7,6 % 2005 3 052 48 928 6,2 % Source: DG AGRI 35th Financial Report on the EAGGF — Guarantee Section.

What are physical and substitution checks?

4. In order to safeguard Community finances a control system — a combination of physical and substitution checks (under Council Regulation (EEC) No 386/90) and scrutiny of payment application files (2) — was created.

5. Physical checks, carried out by the Customs services, are designed to verify that the goods correspond in description, quality and quantity with the export declaration. Where this cannot be done visually (as in the case of dairy or meat products, or processed products, for example) the goods are sampled for subsequent laboratory analysis. Physical checks can be carried out at inland loading places (usually commercial premises), at inland Customs offices or at points of exit from the EU territory.

6. In addition, substitution checks comprise a visual check that goods certified as leaving the EU are the same as those originally loaded and declared. They are carried out at the points of exit from the EU. Annexprovides a general overview of how the system works.

Audit scope and approach

7. The audit sought to conclude on the extent to which: (a) Member States carry out physical and substitution checks of export refund consignments as required by the Regulations. (b) The Commission's arrangements for monitoring the execution of these checks are satisfactory and whether it reacted to the results of these checks or weaknesses with appropriate measures.

8. The Court: (a) evaluated the systems set up by the Member States visited for the execution of physical and substitution checks and for confirmation of the exit of goods from the EU territory. Checks were evaluated against Community legislation and national instructions; (b) evaluated the performance of those checks by reference to a sample of inspection reports for each Member State visited and, wherever possible, witnessed physical and/or substitution checks carried out by Customs; (c) reviewed the audits of these systems carried out by the Commission's Clearance of Accounts services. Checks were carried out against work programmes, reports and clearance/conformity decisions of the Commission; (d) reviewed the monitoring and follow-up action taken by the Commission in respect of the annual reports presented by Member States on the performance of these checks; (e) carried out analytical reviews of data relating to physical and substitution checks and irregularities detected, using the Commission's CATS (3) data and OLAF's database.

9. The audit was carried out from 2004 to 2006 at the Commission and in 11 Member States: Belgium, Denmark, Germany, France, Italy, Latvia (4), Hungary (4), the Netherlands, Poland (4), Slovenia (4) and the United Kingdom.

OBSERVATIONS

Do Member States carry out physical and substitution checks of export refund consignments as required by the Regulations?

Numbers of physical checks carried out and means of selection

10. Member States are required to carry out physical checks on 5 % of all export declarations by product sector, excluding those of low value or quantity (of less than 200 euro or less than a specified weight depending on the product). They can vary the percentages per product sector if they select the consignments for physical checks by means of a risk analysis. However, the overall rate of 5 % of declarations to be checked should still be maintained.

11. The Commission has defined a wide range of criteria to be taken into account in the risk analysis including i.a. the characteristics and value of the products, nature of the trade, reliability of exporters etc (5). Risk analysis is officially applied as laid down in the regulations in seven Member States (Denmark, Germany, Ireland, France, Austria, Sweden and the United Kingdom). The other Member States apply the rule that 5 % of the declarations are to be checked for each product sector, the declarations being then chosen either by reference to risk criteria not recognised under the regulation or on random basis.

12. In the period covered by the Court's audit, Member States had respected the requirements relating to the 5 % requirement of physical checks to be carried out. In the Member States visited where risk analysis had been formally adopted, the criteria defined by the Commission had largely been followed.

13. In France and Germany, the final decision as to which export declaration is selected lies in the hands of the local Customs office. In the United Kingdom, the risk analysis is managed centrally for the whole country. The declarations chosen by the risk analysis system for checking had to be frequently overridden and changed by the local offices due to systems problems and to the fact that the system was selecting too many similar consignments. The need for overrides and the systems problems encountered calls into question the functioning of the risk analysis in the United Kingdom.

14. Where risk analysis is applied the Commission provides that for Non-Annex I (processed products) (6), Member States may reduce checks to a level of 0,5 % of the declarations, as these represent a lower risk. Where no risk analysis is applied (i.e. in the other 18 Member States), 5 % of all these low risk declarations continued to be checked.

15. However, for both options (risk analysis or 5 % per product sector) the review of data concerning physical checks revealed a high incidence of checks on low export refund value declarations (of less than 200 euro). To make better use of the inspection possibilities, export declarations involving small quantities of products or a low amount of refund should be disregarded when calculating the minimum rates of checks unless there is a risk of fraud or abuse. The Court found that low value items were not always selected on this basis. Table 2 shows the incidence of checks on low value declarations reported by Member States in the CATS database (7), for the 2005 calendar year. Between 6 % and 13 % of all checks carried out were for such low value items. Further analysis shows that these checks represent only 0,1 % of the value of exports checked.

Table 2

The incidence of checks on low value declarations by Member State for 2005

Source: CATS database Commission.

Calendar year 2005 (1.1.2005-31.12.2005)

Minimum level: Analysis based upon totals per Single Administrative Document

Member State Total number of physical checks Total number of checks < 200 euro Number of checks < 200 euro in % of total number of physical check Total value of declarations physically checked in euro Total value of declarations checked in < 200 euro Percentage of amounts checked < 200 euro BE 858 25 3 % 17 795 108 2 398 DK 727 19 3 % 5 698 179 2 589 DE 4 906 239 5 % 37 689 281 20 213 IE 483 15 3 % 4 856 449 798 EL (8) 0 0 — 0 0 ES 1 325 204 15 % 7 282 634 23 647 FR 1 006 113 11 % 15 238 061 6 248 IT 2 211 105 5 % 6 933 376 12 262 LU 0 0 — 0 0 NL 7 851 444 6 % 28 648 158 53 979 AT 405 25 6 % 1 738 292 2 941 PT 370 80 22 % 1 826 201 7 804 FI 424 41 10 % 5 054 184 3 422 SE 388 9 2 % 6 514 754 1 132 UK 402 35 9 % 4 222 519 3 172 Total EU-15 21 356 1 354 6 % 143 497 195 140 605 CZ 1 320 24 2 % 10 018 787 3 057 EE 28 1 4 % 341 922 58 CY 44 3 7 % 336 423 246 LV 81 31 38 % 162 312 2 672 LT 213 2 1 % 4 538 449 203 HU 559 42 8 % 2 823 611 5 524 MT 0 0 — 0 0 PL 2 252 20 1 % 21 338 773 2 781 SI 249 8 3 % 678 726 1 039 SK 658 54 8 % 12 604 960 4 912 Total EU-10 5 404 185 3 % 52 843 963 20 492 Total EU-25 26 760 1 539 6 % 196 341 157 161 097 0,08 %





Maximum level: Analysis based upon totals per position in the Single Administrative Document

Member State Total number of physical checks Total number of checks < 200 euro Number of checks < 200 euro in % of total number of physical check Total value of declarations physically checked in euro Total value of declarations checked in < 200 euro Percentage of amounts checked < 200 euro BE 884 62 7 % 17 795 108 4 406 DK 1 081 131 12 % 5 698 179 13 208 DE 5 186 415 8 % 37 689 281 31 931 IE 483 15 3 % 4 856 449 798 EL (8) 0 0 — 0 0 ES 1 328 374 28 % 7 282 634 28 535 FR 1 193 204 17 % 15 238 061 14 487 IT 2 919 592 20 % 6 933 376 49 113 LU 0 0 — 0 0 NL 8 328 894 11 % 28 648 158 87 185 AT 508 113 22 % 1 738 292 10 215 PT 477 147 31 % 1 826 201 12 814 FI 957 235 25 % 5 054 184 16 057 SE 391 17 4 % 6 514 754 1 725 UK 474 150 32 % 4 222 519 12 957 Total EU-15 24 209 3 349 14 % 143 497 195 283 433 CZ 1 330 29 2 % 10 018 787 3 428 EE 51 14 27 % 341 922 803 CY 48 5 10 % 336 423 541 LV 138 77 56 % 162 312 4 505 LT 218 4 2 % 4 538 449 463 HU 612 81 13 % 2 823 611 9 533 MT 0 0 — 0 0 PL 2 328 114 5 % 21 338 773 13 022 SI 270 33 12 % 678 726 2 876 SK 749 92 12 % 12 604 960 9 103 Total EU-10 5 744 449 8 % 52 843 963 44 274 Total EU-25 29 953 3 798 13 % 196 341 157 327 707 0,17 %

16. Even though Member States complied with the 5 % minimum checks, many undertook a greater number of checks on low value items mainly due to different interpretations of the legislation. These low value items were included in the calculation of the 5 % minimum population for checking when they should have properly been excluded. This resulted in a greater number of checks being carried out than the minimum laid down in the regulations. Table 2 shows that between 1 500 and 3 800 checks were carried out on consignments that should have been excluded.

17. In order to promote a more efficient and effective use of Customs resources an option could be to increase the de minimis value of consignments required to be considered for the minimum population and subsequently checked (see paragraphs 19 to 21 on Cost Benefit). Increasing the minimum value for which declarations are considered for physical checks could result in a significant reduction in the number of items to be checked. Evidently, if the threshold is raised then lower value exports, under the threshold, should continue to be checked if there was an indication of fraud or abuse.

18. The same scenario is true of substitution checks. Table 3 presents an analysis of the value of consignments subjected to substitution checks on the eastern frontiers of the EU. In this context it should be noted that there is no requirement to indicate the value of refunds claimed on the documention accompanying the goods (either the export declaration or the T5 control copy) and there is no readily available information regarding the rate of refund applicable, in particular for rates fixed by tendering procedures and for Non-Annex I goods. It is therefore difficult for officials to identify the most suitable consignments for checking.

Table 3

Analysis of the value of consignments subjected to substitution checks on the eastern frontiers of the EU audited by the Court between 1 May 2004 and 30 September 2005

Member State Hungary Latvia Poland Slovenia Export refunds value (euro) Number % Number % Number % Number % 0-200 25 46 0 0 1 3 17 35 NAI or similar 11 20 11 34 15 43 16 33 201-4 000 9 17 7 22 7 20 7 14 > 4 000 9 17 14 44 12 34 9 18 Total 54 100 32 100 35 100 49 100 NAI : Non Annex I. NB: The Hungarian authorities carried out 100 % checks on all vessels passing the Hungarian — Serbian boarder. It changes the relative weight of checks performed under euro 200 significantly.

Cost of checks carried out

19. Where consignments are presented for export at Customs offices of exit (a situation mainly seen in the United Kingdom and at certain French ports), the cost to the trade for the execution of physical checks may vary between 120 and 400 euro depending on local circumstances. These costs comprise the movement of containers in, or from, the port area to appropriate unloading places and the labour involved in unloading and reloading the containers (see Box 1). Box 1A United Kingdom exporter decided to forgo his export refund claim for 293,28 euro, as it would have required 51 container moves to make the container available for physical check, chargeable to the exporter, which would, in addition, have delayed the departure of the vessel by 5 hours.

20. Where consignments are presented for export at inland loading places, no cost to the trade occurs as consignments are generally presented before loading at the exporters' premises. Two of the Member States visited, Germany and Italy (9), charge the exporter for the physical check. The cost for a one hour intervention at the loading place is approximately 180 euro.

21. As can be seen above the cost of the check may exceed the value of refunds paid, providing evidence that checks on declarations attracting a low value of refunds are not cost effective.

Prior warning of checks

22. Community Regulations clearly stipulate that physical checks should be conducted frequently and without prior warning and that physical checks for which the exporter has received express or tacit prior warning shall not count toward the minimum required number of checks. Failure to comply with these requirements would normally be regarded by the Commission as a failure in carrying out a key control and be subject to a potential correction for the Member State concerned.

23. Physical checks, when carried out at the place of loading, which are often the exporters own premises- were judged by the Court to be predictable to a significant extent in several Member States: Belgium, Denmark, Germany, France, Italy, Netherlands, and the United Kingdom. The Court observed that the arrival of the officials before loading of the goods commenced was standard practice. Checks that commence systematically before the start of loading are tantamount to a tacit warning of the check in that, if the customs officer does not arrive prior to commencement of loading the trader will know that the consignment will not then be physically checked. The risk is that non-eligible products or insufficient products will then be loaded and a refund claimed to which the trader is not entitled. This effectively negates the purpose and effectiveness of the check.

High value bulk consignments

24. Bulk goods, mainly cereals and sugar, are usually exported by shipload to a single destination. Each shipload can represent a very high value in terms of export refunds (Example: 6 700 tonnes of white sugar to Tunisia was worth 3,4 million euro as at end of 2003). However, for administrative reasons, linked to export licences, the exporter frequently has to submit a number of export declarations covering the whole consignment. The practice observed during the audit, was that for a physical check only one declaration from the entire shipload is checked. Whilst this approach is not in contravention of current legislation, the physical checks currently carried out have a diluted effect as they only cover a part of the whole shipload, thereby reducing the effectiveness of the check (see Box 2). Box 2An exporter submitted six export declarations for 1 147 tonnes of white sugar to be loaded on one ship for export to Libya in July 2006 (total export refund value: 268 600 euro). One declaration of 200 tonnes was selected for a physical check (export refund value: 46 840 euro). United Kingdom Customs observed part of the 200 tonnes being loaded onto the vessel. The physical examination started at 06:20 h and finished at 07:10 h.

Sealing of means of transport and substitution checks

25. Where a physical check has been carried out, the means of transport are usually required to be Customs sealed. Such consignments are normally not considered for a further substitution check, unless the seals have been broken or removed in which case a specific substitution check as foreseen in the regulations should be carried out. Given the value this confers to the seal, a virtual ‘laissez passer’ for the consignment, then their use and meaning must be clear and unambiguous.

26. As part of the normal administrative procedure for validating export declarations, Customs may also affix customs seals to containers, trailers or trucks without having carried out a physical check. This practice was noted in particular, in Belgium, Germany, Spain, France and Italy. Further, consignments under the T.I.R. procedure (10) are also customs sealed, again without a physical check necessarily having been carried out (see Box 3 and Illustration 1). Box 3In 2001, a consignment consisting of 20 tonnes of beef was cleared for export at Customs in Spain with destination Russia. The consignment, sealed by Spanish Customs, was presented for interim storage at a coldstore in Hamburg (unloading and intake under Customs control). The goods were then removed from the coldstore under customs control for transport by truck to Russia. German Customs, despite the goods being sealed, took a sample and the analysis resulted in goods being classified as edible offal of bovine animals for which no refunds were payable. Based on these results, further investigations in Spain led to the detection of more irregularities, amounting to some 497 000 euro — including 56 000 euro of interest — committed by the same exporter. A recovery notification was issued by the paying agency end of 2006 finalising the administrative procedures. The case is currently pending final decision before a national court. Approximately 80 % of the control copies T5 showed that consignments were Customs sealed at departure without physical checks and were then — by definition — excluded from the population for possible substitution checks at various exit points of the Community.

27. The Court's audit found that seals affixed by Danish and Dutch consignors/exporters, authorised to affix seals themselves, gave rise to doubt at Customs offices of exit of the EU as these ‘company seals’ could not be clearly distinguished from ‘Customs seals’.

28. As a result, many consignments are legitimately or inadvertently excluded from the population of consignments considered for substitution checks as the real value of the seal attached is unclear and may lead to the assumption that a physical check has already taken place. The Danish Customs authorities amended their rules of the use of seals from 1 February 2006 onwards to prevent any misunderstanding.

Minimum number of substitution checks and their scope

29. Legislation provides (11), as a general rule, that Customs offices of exit shall carry out at least one substitution check for each day on which consignments leave from the various exit points within the EU. The selection of consignments for checking should be carried out wherever possible in the light of a risk analysis.

30. Different interpretations have been made of this ‘one per day rule’. If consignments arrive every day for seven days for loading a ship departing on the seventh day, then in the United Kingdom, only one consignment will be checked. In contrast, if consignments leave the EU via a customs office on the border between Latvia and Russia every day for seven days, then seven substitution checks will be carried out. This latter rule is also applied at ports in Belgium, Germany, France, Italy and the Netherlands.

31. A further problem of interpretation concerns consignments (truck/trailer or container) which consist of many export declarations, in certain rare cases of up to 30. Unclear legislation and differences in interpretation has led to situations where some Member States (e.g. Latvia, Hungary, and Slovenia) check the whole consignment whereas the majority of the other Member States selected only one of the declarations to check.

Specific substitution checks

32. Specific substitution checks have to be carried out by the Customs offices of exit from the EU territory if it is found that seals affixed at departure had been removed, broken or that a dispensation (12) from sealing had not been granted. Specific substitution checks may entail a full physical check.

33. The practice observed during the audit was that every truck/trailer at Customs offices of exit at the eastern border of the EU (Hungary, Latvia, Poland, Slovenia) is examined which allows the integrity of seals to be verified. In contrast, consignments (mainly containers) making their final exit from Community ports in France, Italy, the Netherlands and the United Kingdom are not subject to such strict checking. This is because, in these Member States, Customs officials do not systematically examine seals when the consignments arrive at the point of physical exit from the EU. Therefore consignments with broken, damaged or missing seals are not always identified and thus may escape specific substitution checks. Precisely to address this problem, French Customs have imposed a 2 % additional national check rate on sealing of consignments.

Quality of substitution checks

34. In principle, substitution checks are visual checks that goods correspond to the accompanying documents. The approach often found at the customs offices in the ports visited consisted of opening container doors and identifying only those goods which are immediately visible, so called ‘tail-gate’ checks. This was often due to the fact that no adequate facilities to unload are readily available particularly in small ports (e.g. Trieste, Dunkerque). Best practice was found at Customs offices on the eastern borders of the EU where checks on consignments in canvas topped trucks were thorough.

Follow-up of irregularities detected during substitution and specific substitution checks

35. Customs offices of exit must inform the paying agencies in the Member States concerned of irregularities detected by substitution checks and may request details of follow up action taken.

36. Irregularities have been communicated by Danish, Latvian, Polish and Slovenian Customs of exit to the responsible paying agencies in other Member States. However, in the majority of cases they have received no feedback on follow up action despite requesting such information.

37. A particular problem was found at the Danish Customs office of Aalborg. Checks carried out by this office revealed a high incidence of missing seals at the point of exit from the EU. However, instead of carrying out the required specific substitution checks, the office refused to certify that the goods had left the EU territory on the grounds that it was unable to establish the identity of the goods because the seals were missing. Between August 2004 and February 2006 this office informed paying agencies in the other Member States that it could not certify exit from the EU of 280 (13) consignments because the seals had been removed. Replies were only received in two cases (14) out of the 280 communicated. According to Danish Customs, paying agencies in France, Greece, Italy and Spain have not replied to any communication sent by the Danish authorities. In 17 similar cases relating to exports originating in Denmark, Customs Aalborg sent the information to the Danish paying agency and export refunds were subsequently withdrawn.

38. The problem can be illustrated by a case where a set of 30 authorised company seals was found by Danish Customs in the cabin of a truck. The seals should have only been affixed at the point of loading in France, as security against substitution in transit, but were clearly freely available.

Confirmation of exit from the EU

39. One of the key elements for proving the entitlement to export refunds is the confirmation that the goods have left the customs territory of the Community. For all goods exported, either the export declaration itself or a document which accompanies the consignment in transit (T5 control copy) must be stamped and signed by national authorities (Customs) confirming the exit of the goods.

40. In the United Kingdom, the responsibility for the confirmation of the exit of the goods, for goods exported in containers by sea, has been given to shipping agents and/or port operators. Legislation requires that such confirmation is made by the ‘competent authorities’ (15). Shipping agents and port operators cannot be considered as such. Checks carried out by the United Kingdom Customs on this system revealed that 21 % of the 913 claims checked contained incorrect data in respect of date of exit. The procedures seen in the United Kingdom give rise to the risk that the wrong date of exit is confirmed and further, given the lack of cross checks to commercial documentation, that exit is confirmed for goods that do not correspond to those declared.

41. Where goods are exported by sea, Community provisions foresee a complicated range of possibilities as to which Customs office is responsible for confirming the exit from the EU and for the substitution check depending on whether or not the sea transport (shipping service) is authorised by Customs as a ‘regular’ or recognised as a ‘non-regular’ one. Goods shipped on regular shipping lines are those on vessels which ply only between ports within the customs territory of the Community.

42. The audit found that certain consignments may escape substitution checks at the final point of exit from the EU. For example, where they are transported by sea between Member States using ‘regular’ shipping lines prior to being subsequently transported overland to an EU frontier point. This may lead to exit being confirmed at a point that is not the actual point of exit from the customs territory of the Community giving rise to the risk that incorrect exit dates are confirmed and that goods for which entitlement to refunds has been certified could be then reintroduced to EU territory (see Illustrations 2 and 3).

Results of physical checks and their context

43. Member States are required to report the incidence of irregularities detected by physical checks on export refunds. Table 4 shows the values of irregularities detected by physical checks and reported to OLAF (16) from 2000 to 2005. The total was 3,5 million euro. In this context it should be noted that irregularities related to export refunds, detected by all methods over the last five years, amounted to 98,6 million euro. This represented some 16 % of the total of all irregularities related to agriculture reported to OLAF during that period whilst the export refund share of all agricultural spending was 8,6 %. Therefore, although Member States carry out the physical checks in the required numbers, the results in terms of value of irregularities detected is relatively small.

Table 4

Values of irregularities detected by physical checks and reported to OLAF

Amounts of reported irregularities based upon a physical check under Regulation (EEC) No 386/90

(in euro) Member State 2000 2001 2002 2003 2004 2005 Total BE 66 723 40 875 64 191 57 129 228 918 DK 173 999 91 724 152 451 7 309 63 088 63 309 551 880 DE 272 941 99 239 89 706 212 440 674 326 IE 14 347 62 974 0 28 378 105 699 EL 0 ES 447 637 120 226 567 863 FR 93 026 55 887 135 144 311 035 80 443 675 535 IT 13 258 8 351 23 800 45 409 LU 0 NL 108 139 108 139 AT 165 748 4 300 13 931 4 662 90 616 41 685 320 942 PT 4 031 22 481 4 021 22 982 25 246 78 761 FI 0 SE 0 UK 0 EU-15 1 060 325 493 616 438 305 549 164 524 450 291 612 3 357 472 CZ 0 EE 0 CY 18 327 18 327 LV 0 LT 18 576 18 576 HU 0 MT 0 PL 8 671 50 914 59 585 SI 0 SK 0 EU-10 8 671 87 817 96 488 Total 1 060 325 493 616 438 305 549 164 533 121 379 429 3 453 960 Source: OLAF irregularities database as per December 2006.

44. The rate of reported irregularities expressed as a percentage of the value of the declarations checked (where this information has been supplied by Member States) is also relatively small. According to the Member States annual reports 2005 the overall rate of reported irregularity found by physical checks is 0,2 % of the export refund amounts checked (17).

45. If the value of irregularities detected by physical checks are compared to those found by other methods then the relatively low rate of detection may be demonstrated. Table 5 is a comparison of the value of irregularities, as reported to OLAF, detected by physical checks and those detected by ex post checks (18) of commercial records. The result (a ratio of 11 to 1 in favour of ex post checks) suggests that ex post checks, carried out after the physical export has taken place, have to date proved the more effective instrument in the detection of irregularities. Whilst only some types of irregularities detected by physical checks can be found by ex-post checks, both of which are indispensable to the overall control process, these figures nevertheless may suggest that the physical and substitution checks could be better targeted.

Table 5

Value of irregularities reported to OLAF discovered by ex-post administrative checks (Regulation (EEC) No 4045/89)

Source: Irregularity database of OLAF as of December 1st 2006.

Irregularities detected on basis of Regulation 4045/89 audits (amounts in euro)

2001 2002 2003 2004 2005 Total Total 7 711 833 4 655 655 5 638 791 8 044 471 1 695 640 27 746 390





Amounts of reported irregularities based upon a physical check under Regulation 386/90 (in euro)

2001 2002 2003 2004 2005 Total Total 493 616 438 305 549 164 533 121 379 429 2 393 635





Comparison of amounts of irregularities reported based upon Regulation 4045/89 and Regulation 386/90

(amounts 4045/89 divided by amounts 386/90)

Ratio 4045/89 vs 386/90 15,6 10,6 10,3 15,1 4,5 11,6

Are the Commission's arrangements for monitoring the execution of these checks satisfactory and has the Commission reacted to the results of these checks or to weaknesses with appropriate measures?

46. The Commission carries out audits on a regular basis in Member States on export refund control procedures. Desk checks are also carried out on Member States' annual reports. The Court evaluated reports of these audits for the period 2001 to 2004 and concluded that there was adequate coverage of key controls in the system of physical and substitution checks. The Commission's audits covered the main areas of Regulation (EEC) No 386/90 as to the application of risk analysis schemes, sufficient number of checks, proper documentation of checks, exit certification, sealing procedures, origin of goods. In addition checks were made on pre-financing and also on the methodology of controls under Regulation (EEC) No 4045/89 in relation to export refunds.

47. The Commission's action in respect of Member States annual reports under Regulation (EEC) No 386/90 covers any obvious non-compliance with numbers of checks to be carried out (i.e. self reporting of deficiencies by Member States). Although the issues raised by Member States have been discussed at Trade Mechanisms Committee meetings, further action still has to be taken as regards the predictability of checks (raised by Italy in April 2003) and the potential avoidance of substitution checks (raised by Denmark in May 2004). In order to check the accuracy of Member States' annual reports, the Court checked the values of irregularities reported for 2004 and found that the Dutch authorities reported a total amount of 1,4 million euro. Following the Court's enquiries, this was subsequently reduced to 78 000 euro.

48. As a result of the Commission's audits in Member States, financial corrections have been imposed for weaknesses in Member States' control systems as shown in Table 6. 67 % or 34 million euro relate to corrections stemming from shortcomings in substitution, physical and documentary checks (Belgium, Denmark, Netherlands, United Kingdom) whilst 33 % or 16,5 million euro are linked to deficiencies in respect of animal welfare (Germany, France, Netherlands).

Table 6

Export refunds — Financial corrections 2002 to 2007 (in euro)

Animal Welfare Scheduling regime (19) Physical checks (20) Substitution checks Mission dates Delays in year Netherlands (21) (25) 1 064 627 27-29/11/2000 8-10/1/2001 3,0 26 664 623 14-18/5/2001 5,7 Germany (22) 13 823 822 13-17/11/2000 23-26/1/2001 3,6 France (22) 1 649 756 23-25/10/2000 5-9/2/2001 3,8 Belgium (23) 225 713 3-7/12/2001 3,4 United Kingdom (24) 369 440 10 772 June 2001 November 2001 4,3 Denmark 6 616 032 24-28/9/2001 21/6/2002 Total 16 538 205 369 440 236 485 33 280 655 Grand total 50 424 785 Percentage of the total amount of corrections 32,8 % 0,7 % 0,5 % 66,0 % NB: Exchange rate used: 1 euro = 0,6791GBP (27.7.2006).

49. However, cases concerning compliance failures relating to substitution checks in Italyand the Netherlands, where audit missions were carried out in 2001/2002, are still pending. This also applies to audits carried out in 2004 where clearance of accounts procedures may result in financial corrections for Germany, Ireland, Spain, France, Italy, the Netherlands and the United Kingdom. The Commission's auditors detected shortcomings related to the quality of physical and substitution checks, exports of sugar, application of penalties, quality of risk analysis systems and the compliance with inspection rates.

50. The Commission has not yet taken effective action to clarify and/or to tighten legislation as a result of its Clearance audit findings. The problem of the predictability of checks was noted in audit reports on the Netherlands in June 2004, Spain in May 2004 and in Belgium in March 2005 without any clear proposals being made to date.

51. Whilst the Commission's own internal standards set a period of between 16 months (without conciliation) and 24 months (with conciliation) as being the time required between audit visit and final decision, for the audit of physical and substitution checks these periods have not been fully complied with.

52. The main subjects/observations of this report which were raised by the Court in its preliminary findings to Member States and also made available to the Commission in April 2005. They were further discussed at the meetings of the Trade Mechanisms Committee, most recently in mid 2006. However, no concrete measures by the Commission have yet been taken to address these findings.

CONCLUSIONS AND RECOMMENDATIONS

53. In relation to physical checks the Court found that the interpretation by the Member States of the regulatory framework had led to many checks at the exporters' premises being carried out systematically at the start of the loading process. This has the effect of rendering the check predictable to the exporter thereby negating their effectiveness. The regulations clearly state checks must be frequent, without prior warning and that checks for which the exporter has received express or tacit prior warning do not count as checks towards the minimum requirements. Recommendation 1The Commission should ensure the regulation is applied properly to guarantee that checks at exporters' premises are being carried out in an unpredictable manner and without tacit prior warning. It should ensure an effective follow up of the Court's and its own observations in this regard with a view to determining whether such checks not meeting this criteria should be counted towards the 5 % minimum requirement.

54. Physical checks were carried out on a significant number of low value declarations in contradiction with the legislation. Between 6 % and 13 % of physical checks carried out in 2005 covered only 0,1 % of the total refund value subject to those checks. This was especially so where Member States did not apply a risk analysis to the selection of the declarations but even in the three Member States visited by the Court which applied risk analysis low value consignments were regularly checked. Recommendation 2The Commission should review the method by which Member States select declarations subject to physical checks; it should consider making the use of a risk analysis obligatory and consider increasing the minimum value of refund for which a declaration is subject to physical checks. This would make physical checks more cost effective and help to ensure a more efficient use of customs resources by the selection of higher value, higher risk consignments.

55. Physical checks on bulk shipments may result in only a small part of the shipload being subject to a physical check. Where this is done in isolation without further verification that the entire consignment is in accordance with the declarations and eligible for refund there is a risk that the value of the check is eroded. Recommendation 3The Commission should consider clarifying that, where part of a bulk shipment is selected for a physical check, the national authorities are required to verify the entire shipment through, for example, cross checks with other records and ensuring that not only one part of the shipment is checked in isolation.

56. In relation to substitution checks the Court found that: (a) Certain checks carried out were only cursory visual examinations of a part of the consignment that did not fulfil the intended purpose of the checks. (b) The way in which the minimum required number of substitution checks was established varied between Member States. (c) The regulations provide that goods that have been subject to a physical check and sealed by customs are then exempt from further substitution checks (except in exceptional circumstances). The audit found that certain consignments customs sealed (for other purposes), but not having been physically checked, were then exempted from the possibility of substitution checks at the point of exit from the EU territory. (d) Specific checks on seals are carried out by the Customs offices of exit where seals affixed earlier are broken or tampered with. As no explicit rules for checking seals exist, they were found to be performed in an inconsistent way. (e) Where consignments of goods are transported between Member States by sea prior to their exit from the EU by road or rail there is a possibility that they avoid being selected for substitution checks at the point of final exit from the territory of the Community. (f) Consignments arriving at the point of exit from EU territory are not accompanied by documentation clearly stating the value of refund, or even whether or not a refund is payable, making it difficult for the officials charged with carrying out such checks to identify which consignments should be checked. (g) Where substitution checks detect irregularities these must be communicated back to the Member State where the goods originate, a request for information on any follow-up made may also be included. The Court found that this system was not operating as foreseen and that follow-up information was not returned to the authorities carrying out the checks. Recommendation 4The Court recommends that:The regulatory requirements for substitution checks should ensure that the entire consignment selected for checking can be visually identified.Consideration should be given to requiring that the number of substitution checks to be made should be established on the basis of a minimum percentage of declarations rather than the ‘one per day rule’.The Commission should take steps to ensure that the value of the seals attached to consignments of goods eligible for export refunds is clear and unambiguous. Thus ensuring that substitution checks apply to all exports other than those which have been physically checked and sealed by Customs at departure.The Commission reviews the regulations governing substitution checks — including specific substitution checks — to ensure that their application is harmonised between Member States and so that it is clear to the officials charged with these checks at the EU frontiers which consignments should be considered for checking.The Commission should ensure that the procedures for the communication and follow-up of reported irregularities discovered by substitution checks are adhered to and that the required follow-up action is carried out efficiently by the Member States concerned.

57. As regards the Commission's monitoring of the application of the regulatory framework and its actions to remedy known deficiencies in its operation: (a) The Courts findings are largely mirrored by those of the Commission's own audit services. Despite the Commission being aware of these weaknesses for some considerable time it has not reacted, with legislative changes or timely financial corrections. (b) The fact that ex-post checks on refunds, carried out on records after the export process is completed, show a significantly higher number of irregularities than the physical checks, may suggest that physical and substitution checks could be better targeted. (c) The Commission monitors the operation of the checks by audits in Member States and by reviewing the reports Member States are required to submit in respect of the export refund checks carried out. The Commission takes assurance from the operation of such checks as part of its overall assurance that agricultural subsidies are paid in a legal and regular manner. The weaknesses identified by the Court need to be effectively addressed in order to ensure that the system of physical and substitution checks provide the Commission with a greater level of assurance on export refund expenditure. Recommendation 5The Court recommends that:The Commission proposes legislative changes to strengthen the physical and substitution checks and to ensure the harmonious and effective application of such checks. This would include ensuring that checks are not predictable, making selection of checks by risk analysis obligatory and ensuring that substitution checks are applied to those exports where no physical check has previously been made.That the Commission particularly reviews the validity of the checks carried out prior to the loading of goods to determine whether these checks can be considered as fulfilling the criteria needed to count toward the minimum number required by the regulation.

This Report was adopted by the Court of Auditors in Luxembourg at its meeting of 21 June 2007. For the Court of Auditors Hubert WEBER President

(1) EAGGF Guarantee Section Expenditure.

Source: DG AGRI 35th Financial Report on the EAGGF — Guarantee Section.

(2) OJ L 42, 16.2.1990, p. 6.

(3) The Commission's database, CATS, Clearance Audit Trail System, provides data in respect of export refund amounts paid per declaration and EAGGF year and additional data related to export refund declarations.

CATS data is related to the EAGGF year that runs from mid-October to mid-October whereas data provided in Member States annual reports refer to the calendar year.

(4) Audits only in relation to substitution checks.

(5) Commission Regulation (EC) No 3122/94 of 20 December 1994 laying down criteria for risk analysis as regards agricultural products receiving refunds (OJ L 330, 21.12.1994, p. 31).

(6) Non-Annex I goods. Export refunds are paid on basic products such as cereals, sugar, milk and butter when they are used in the manufacture of products such as spirit drinks, dairy preparations, pastry, cakes and other sugar confectionery.

(7) The Court's analysis of the CATS database shows between 26 760 and 29 953 checks for the calendar year 2005, whilst Article 11 reports by Member States gave the number of physical checks as: EU-15: 31 003, EU-25: 36 249.

(8) Greece did not provide data on physical checks for the EAGGF year 2005, therefore the data is not presented.

Source: CATS database Commission.

(9) French Customs charge the exporter if clearance of the goods is requested outside official opening hours of the Customs office.

(10) ‘Transports internationaux routiers’.

(11) Article 10(2) of Commission Regulation (EC) No 2090/2002 (OJ L 322, 27.11.2002, p. 4) stipulates that ‘The number of substitution checks carried out each year shall be not less than the number of days on which consignments of export refund products, not sealed according to the first subparagraph, leave the Community's customs territory through the customs office of exit concerned.’

(12) Dispensation from sealing may be granted due to the characteristics of the goods exported (eg hatching eggs).

(13) For 2005, the total population eligible for a substitution check was ‘1 482’. The number of irregularities detected in carrying out specific substitution checks was ‘263’.

(14) Danish Customs did not confirm the exit and informed the Belgium paying agency (BIRB) about the results of the substitution check in October 2004. However, BIRB paid the export refund of some 3 200 euro for sugar, based on a proof of arrival from Norway and informed Danish Customs about the decision taken in August 2005.

In June 2005, Danish Customs refused to certify the exit of the goods as they were not able to establish the identity because of the seal missing affixed at departure in Germany. In September 2005, the German paying agency (HZA Hamburg-Jonas) refused to pay export refunds of some 21 800 euro for the container of butter to Norway. The Dutch exporter lodged an appeal against that decision. The case is still pending before the Finanzgericht Hamburg as per end of January 2007.

(15) Commission Regulation (EC) No 800/1999 (OJ L 102, 17.4.1999, p. 11), Article 9(1)(a): ‘Where the T5 control copy or the national document proving that the products have left the customs territory of the Community has been endorsed by the competent authorities, the products …’.

(16) European Anti-Fraud Office.

(17) Article 11 reports under Regulation (EC) No 2090/2002 by Member States and summary report by the Commission as per 17 November 2006.

(18) Under Council Regulation (EEC) No 4045/89 of 21 December 1989 on scrutiny by Member States of transactions forming part of the system of financing by the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (OJ L 388, 30.12.1989, p. 18).

(19) Deficiencies in the design of the scheduling system.

(20) Failure to carry out minimum inspection rates.

(21) Decision No 17 (2004/561/EC); OJ L 250, 24.7.2004, p. 21.

(22) Decision No 18 (2005/354/EC); OJ L 112, 3.5.2005, p. 14.

(23) Decision No 20 (2005/579/EC); OJ L 199, 29.7.2005, p. 84.

(24) Decision No 22 (2006/554/EC); OJ L 218, 9.8.2006, p. 12.

(25) Decision No 24 (2007/243/EC); OJ L 106, 24.4.2007, p. 55.

NB: Exchange rate used:

1 euro = 0,6791GBP (27.7.2006).

ILLUSTRATIONS Illustration 1 Beef from Spain to Russia via Germany and Latvia, by truck Export refund value for a consignment of beef: 9 000 euro. Goods on the way to the final destination may be kept in a coldstore (e.g. Hamburg/Germany) under Customs supervision for a given period before a decision is made by the exporter concerning the final transport means (ship or truck). Illustration 2 Frozen chicken (poultry) from Morlaix (France) to Saudi Arabia (Saudi Arabia) via Brest (France) and Rotterdam (Netherlands) by feeder and ocean going vessel in containers of 24 tonnes Export refund value for a 24 tonne container: 10 800 euro in November 2004. Office of departure: Morlaix Office of exit: Brest (transhipment Rotterdam) The feeder vessel Brest/Rotterdam (although a regular shipping line in commercial terms) has the customs status of a ‘non-regular’ shipping line in the meaning of the Customs code. The exit of the goods from the EU is therefore correctly confirmed by Brest Customs on the day when the vessel is leaving the port of Brest. Illustration 3 Full Cream Milk Powder from Cookstown (United Kingdom) to Moscow (Russia) via Rotterdam (Netherlands), Riga (Latvia) and Grebneva (Latvia) by vessel and truck Export refund value for a 25 tonne container:13 650 euro in June 2005. Office of departure: Belfast (inland clearance at Cookstown) Office of (first) exit: Belfast Office of (final) exit: Grebneva/Latvia Depending on ‘regular’ or ‘non-regular’ shipping lines used, the Customs office of exit, responsible for substitution checks and confirmation of the exit of the goods from customs territory of the Community, may be Belfast/United Kingdom, Rotterdam/Netherlands or Grebneva/Latvia.

ANNEX HOW THE SYSTEM WORKS The following is a brief outline of the system of physical and substitution checks of export refund consignments and confirmation of exit from the EU. (a) exporters may present their export refund consignments inland at the place of loading (at commercial premises), or at customs offices either inland or at the place of exit from the EU; (b) the goods must be accompanied by an export declaration which gives i.a. the description and the quantity; (c) where the goods are presented at an inland loading place, the exporter must, as a general rule, give 24 hours notice of start and finish of loading times (pre-announcement) (1); (d) not less than 5 % of export declarations submitted per product sector should be physically checked per annum (2); (e) reduced rates of checks per product sector (3) are permitted when risk analysis is used to select declarations to be checked, however, the overall rate of 5 % of declarations must still be respected. Physical checks in ‘high risk’ product sectors would compensate for checks at a rate of less than 5 % in ‘low risk’ product sectors; (f) low export refund value and low quantity declarations (<200 euro and <500 kg) should not be considered for physical checks unless there are suspicions of fraud or abuse (4); (g) physical checks shall not count as checks where the exporter has received express or tacit warning (5); (h) where the goods physically leave the EU at a different point to where the goods and export declaration were presented, the means of transport or the packaging must be sealed. Seals are affixed by customs authorities or by exporters themselves having been authorised by customs to use company seals (6); (i) substitution checks (7) should be carried out on at least as many declarations as the number of days on which unsealed (8) export refund goods leave the EU through the office concerned (in principle one ‘declaration’ per day as a minimum); (j) in addition, specific checks should be carried out when the seals have been removed or have been broken or dispensation from sealing has not been granted; (k) substitution checks are visual checks to ensure that the goods correspond to the customs document accompanying them; (l) export refunds are payable, i.a., on confirmation by customs that the goods have left the territory of the EU (9). (1) Article 5(7) of Regulation (EC) No 800/1999. (2) Article 3 of Regulation (EEC) No 386/90. (3) ‘… a minimum rate of 2 % shall be compulsory per product sector.’ (4) Article 2 of Regulation (EC) No 2090/2002. (5) Article 3 of Regulation (EEC) No 386/90 and Article 5 of Regulation (EC) No 2090/2002. (6) Article 7 of Regulation (EC) No 2090/2002. (7) Article 10 of Regulation (EC) No 2090/2002. (8) Substitution checks should not normally be carried out when consignments have been Customs sealed at departure as they are considered as having been physically checked and in accordance with the declaration. (9) Where rates of refund vary according to the country of destination proof is required that the goods have been placed on the market in the declared country of destination.