Special Report No 4/98 on importation at reduced rate of levy into the Community and disposal of New Zealand milk products and Swiss cheese accompanied by the Commission's replies (submitted pursuant to Article 188c (4) (2) of the EC Treaty)
Date: 1998-04-01
Institutions: European Court of Auditors
Subjects: New Zealand, Switzerland, import, milk product, report, sales aid

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I

(Information)

COURT  OF  AUDITORS

SPECIAL  REPORT  No  4/98

on importation at reduced rate of levy into the Community and disposal of New Zealand milk
products  and  Swiss  cheese  accompanied  by  the  Commission’s  replies

(submitted  pursuant  to  Article  188c  (4)  (2)  of  the  EC  Treaty)

(98/C  127/01)

TABLE  OF  CONTENTS

Paragraph
reference

Page

1.  INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1  —  1.7

General

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annual  quotas  and  financial  impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1

1.2 

Origin  of  the  New  Zealand  quota  and  reduced  levy  rates  for  butter . . . . . .

1.3  —  1.4

Commercial  background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.5

Imports  of  New  Zealand  whole  Cheddar  cheese . . . . . . . . . . . . . . . . . . . . . . .

1.6  —  1.7

2.  ADMINISTRATIVE  AND  CONTROL  PROCEDURES . . . . . . . . . . . . . . . . .

2.1  —  2.16

Conditions  of  eligibility  for  the  New  Zealand  quota  for  butter . . . . . . . . . . .

2.1 

Certification  of  butter  for  quota  purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.2  —  2.5

Licences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.6

Restrictions  on  marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.7  —  2.9

Restrictions  on  use  within  the  Community . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.10  —  2.11

Conditions  of  eligibility  for  the  cheese  quotas 

. . . . . . . . . . . . . . . . . . . . . . . .

2.12  —  2.14

Control  provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.15  —  2.16

3.  RESULTS  OF  THE  AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.1  —  3.41

General

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.1  —  3.2

Weekly  returns  of  butter  imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.3

Control  of  quantity  limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.4  —  3.6

Accuracy  of  weight  declarations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.7  —  3.8

2

2

2

4

4

4

4

4

4

5

5

5

6

6

6

6

7

7

8

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Page

Clearance  into  free  circulation  from  bonded  warehouses . . . . . . . . . . . . . . . .

3.9  —  3.10

Respect  of  maximum  fat  content  provisions . . . . . . . . . . . . . . . . . . . . . . . . . .

3.11  —  3.21

Respect  of  minimum  age  criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.22

Respect  of  direct  manufacture  criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.23  —  3.27

Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.28  —  3.36

Cheese  for  processing  —  Eligible  end-use  products . . . . . . . . . . . . . . . . . . . . .

3.37  —  3.39

Eligibility  of  processed  cheese  containing  third  country  cheese  for  export
refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.40  —  3.41

4.  SWISS  EMMENTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1  —  4.6

5.  CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.1  —  5.8

Commission  replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

8

9

10

10

11

11

12

12

15

1. 

INTRODUCTION

General

1.1. This report deals with the importation and disposal
of  dairy  products  from  New  Zealand  (NZ)  imported  in
the  period  1990  to  1996  at  the  reduced  rates  of  levy (1)
(EC)  No
authorised  by  Commission  Regulation 
1600/95 (2)  and  preceding  legislation.  The  objectives  of
the  audit  were  to  examine  whether  or  not  the  conditions
of  eligibility  for  the  reduced  rates  of  levy  prescribed  by
the  abovementioned  legislation  and  the  rules  relating  to
in  Council  Regulation  (EC)  No
disposal  contained 
3290/94 (3) have been respected. The report also contains
a chapter on imports of Swiss Emmental at reduced rates
of  levy  covered  by  similar  legislation.

Annual  quotas  and  financial  impact

1.2. Both  the  full  rates  of  levy  and  the  rates  of  export
refund  are  much  higher  than  the  reduced  rates  of  levy

applicable to the imports in question. If the conditions of
eligibility  for  the  reduced  levy  are  not  met  then  the  full
levy  is  due.  If  the  products  are  re-exported  the  rate  of
refund  is  restricted  to  the  levy  collected  at  import,  the
normal  refund  rate  being  much  higher.  There  are
therefore  significant  amounts  at  risk  if  the  import  or
disposal  conditions  are  not  respected.  For  example  in
1996  the  reduced  rate  of  levy  for  butter  was  ECU  868,8
per  tonne  whereas  the  full  rate  of  levy  was  ECU  2 784
per  tonne (4)  and  the  full  export  refund  rate  for
equivalent  Community  butter  was  ECU  1 561  per  tonne.
On  the  annual  quota  quantity  for  that  year  of  76 667
tonnes the difference between the full and reduced rate of
levy  amounts  to  some  ECU  146,8  million  and  between
the reduced levy and export refunds the difference is ECU
53  million.  Tables  1  to  3  summarise  the  annual  volumes
and  values.  The  subjects  were  selected  for  audit  because,
involved  were
as  described  above, 
significant.

the  amounts 

(1)  The term ‘levy’ was replaced by ‘duty’ under Regulation (EC)
No  1600/95  but  the  term  ‘levy’  is  used  throughout  this
report.

(2)  OJ  L  151,  1.7.1995,  p.12.
(3)  OJ  L  349,  31.12.1994,  p.105.

(4)  From  1  July  1995  to  30  June  1996;  from  1  July  1996  to  31

December  1996,  the  rate  was  ECU  2  607/tonne.

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NZ  butter  quota  quantities,  levy  and  refund  rates,  risk  amounts

TABLE  1

Calendar year
unless  otherwise
stated

Quota  quantity
(tonnes)

Reduced levy
(ECU  per
tonne)

Full levy
(ECU  per
tonne)

Risk  amount
(ECU  million)

Export  refund
(ECU  per
tonne  for
Community
butter)

Risk  amount
(ECU  million)

(a)

(b)

(c)

(d)

(b)  ×  ((d)-(c))

(e)

(b)  ×  ((e)-(c))

1990

1991

1992

1993

1994

1995 (to 30.6)

1995/96

61 340

58 170

55 000

51 830

51 830

25 915

76 667

440,2

428,5

428,5

342,8

342,8

342,8

868,8

2 715,5

2 535,2

2 378,9

2 317,1

2 280,0

2 257,4

2 784,0

139,5

122,5

107,2

102,3

100,4

49,6

146,8

1 658,5

1 580,5

1 639,0

1 639,0

1 561,0

1 561,0

1 561,0

74,7

67,0

66,5

67,1

63,1

31,5

53,0

TABLE  2

NZ  Cheddar  for  direct  consumption

Year

Quota  quantity
(tonnes)

Reduced levy
(ECU  per
tonne)

Full levy
(ECU  per
tonne)

Risk  amount
(ECU  million)

Export  refund
(ECU  per  tonne
applicable to
Community
origin  Cheddar
only)

Risk  amount
(ECU  million)

(a)

(b)

(c)

(d)

(b)  ×  ((d)-(c))

(e)

(b)  ×  ((e)-(c))

1990

1991

1992

1993

1994

1995

1990

1991

1992

1993

1994

1995

6 500

6 500

6 500

6 500

6 500

6 500

150,0

150,0

150,0

150,0

150,0

181,1

2 138,6

2 255,9

2 211,7

2 244,4

2 141,5

2 537,8

TABLE  3

12,9

13,7

13,4

13,6

12,9

15,3

1 516,8

1 516,8

1 516,8

1 369,0

1 300,6

1 374,8

8,9

8,9

8,9

7,9

7,5

7,8

Swiss  Emmenthal,  Gruye`re  and  Sbrinz

Year

Quantity
imported
(tonnes)

Reduced levy
(ECU  per
tonne)

Full levy
(ECU  per
tonne)

Risk  amount
(ECU  million)

Export  refund
per  tonne
applicable to
cheese  of
Community
origin  only

Risk  amount
(ECU  million)

(a)

(b)

28 365

33 411

38 720

35 570

32 009

32 111

(c)

90,7

90,7

90,7

90,7

90,7

96,6

(d)

(b)  ×  ((d)-(c))

(e)

(b)  ×  ((e)-(c))

1 905,6

1 818,7

1 721,0

1 654,0

1 432,3

1 954,2

51,5

57,7

63,1

55,6

42,9

59,6

1 593,4

1 593,4

1 593,4

1 438,0

1 366,1

1 444,1

42,6

50,2

58,1

47,9

40,8

43,2

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Origin of the New Zealand quota and reduced levy rates
for  butter

1.3. Prior  to  the  accession  of  the  United  Kingdom  (UK)
to  the  EEC  in  1973,  the  traditional  market  for  New
Zealand  (NZ)  butter  had  been  the  UK.  To  allow  NZ  to
maintain  access  to  this  market  and  to  diversify  its
economy,  Protocol  18  to  the  Act  of  Accession  of
Denmark,  Ireland  and  the  United  Kingdom  introduced,
initially  for  a  five-year  period,  quotas  for  the  import  of
butter and cheese from New Zealand. The imports under
these  quotas  were  subject  to  the  application  of  special
levies.  Under  Protocol  18,  these  levies  were  set  at  a  level
such as to allow the quantities of butter and cheese to be
effectively marketed without prejudicing the marketing of
Community butter and cheese. However, when compared
with the rates applicable on imports of butter and cheese
of non-Community origin, the special levies applicable to
New  Zealand  butter  and  cheese  were  set  at  levels  which
were lower, in effect being reduced rates of levy. They are
hereinafter  referred  to  in  this  report  as  reduced  rates  of
levy.

1.4. From  1978  to  30  June  1995  imports  of  NZ  butter
continued under Protocol 18. From 1 July 1995 the tariff
quotas  for  milk  and  dairy  products  were  provided  for
under the Agreement on Agriculture concluded during the
Uruguay  Round  multilateral  trade  negotiations  held
under  the  auspices  of  the  General  Agreement  on  Tariffs
and Trade/World Trade Organisation (GATT/WTO). The
tariff  quota  for  NZ  butter,  which  was  part  of  this
into  Commission
incorporated 
Agreement,  was 
Regulation  (EC)  No  1600/95  and  the  quantities  eligible
for  quota  import  were  increased  from  51  830  tonnes  to
76 667 tonnes per annum. Butter exported by NZ to the
Community  still  accounts  for  some  32 %  of  all  NZ
butter  production.

1995  the  quota  was  included  in  Annex  I  to  Regulation
(EC)  No  1600/95.  The  annual  quota  for  the  import  of
NZ  whole  Cheddar  cheese  was  at  the  level  of  6 500
tonnes up to 31 December 1995 when it was increased to
7 000  tonnes  by  Commission  Regulation  (EC)  No
694/96 (6),  following  GATT  Article  XXIV.6  negotiations
consequent  on  the  accession  of  Austria,  Finland  and
Sweden.

1.7. The  Community  also  imports  NZ  Cheddar  and
other  cheeses  for  processing  at  a  reduced  rate  of  levy  of
ECU  17,06  per  100  kg  instead  of  the  full  rate  of  ECU
253,78  per  100  kg.  The  quota  authorised  under  Annex  I
to  Regulation  (EC)  No  1600/95  specifically  for  New
Zealand  cheese  was  3 000  tonnes  per  annum  up  to  31
December  1995  when  it  was  increased  to  4 000  tonnes
by  Regulation  (EC)  No  694/96.

2.  ADMINISTRATIVE  AND  CONTROL  PROCEDURES

Conditions  for  eligibility  for  the  New  Zealand  quota  for
butter

in 

the  rest  of 

2.1.
In  contrast  to  the  butter  traditionally  supplied  to
the  UK  market  by  New  Zealand,  most  butter
manufactured  and  consumed 
the
Community  is  unsalted  with  a  fat  content  normally
between  82 %  and  85 %.  To  ensure  that  the  quota
arrangements  achieved  their  objectives  of  maintaining
NZ’s access to its traditional market for butter in the UK
and  of  protecting  producers  in  other  Member  States,  a
definition  of  eligible  NZ  butter,  corresponding  to  the
type  traditionally  imported  into  the  UK,  was  introduced
(EEC)  No  858/81 (7).  The
by  Council  Regulation 
conditions  imposed  were  that  the  butter  concerned:

Commercial  background

1.5. For  the  most  part  butter  is  imported  under  the  NZ
quota  by  subsidiary  companies  of  the  New  Zealand
Dairy  Board  (NZDB)  in  the  Community  who  purchase
the  butter  from  NZDB.  NZDB  is  wholly  owned  by  the
dairy  farmers  of  New  Zealand.

(a)  was  of  New  Zealand  origin;

(b) was  at  least  6  weeks  old;

(c)  had a fat content by weight of not less than 80 % but

less  than  82 %;

(d) had  been  manufactured  directly  from  milk  or  cream.

Imports  of  New  Zealand  whole  Cheddar  cheese

Certification  of  butter  for  quota  purposes

In  addition 

1.6.
the  Protocol  18
to  NZ  butter, 
arrangements  and  subsequently  GATT/WTO  Agreements
also  established  quotas  for  the  import  of  NZ  whole
Cheddar  cheese.  Protocol  18  authorised  the  quotas  and
reduced  rates  of  levy  from  1973  to  1977.  In  1978  and
1979  there  was  no  quota  for  New  Zealand.  From  1980
to  30  June  1995  imports  were  covered  by  the  GATT
in  Council  Decision
tariff 
80/271/EEC (5)  and  succeeding  legislation.  From  1  July

detailed 

quota 

as 

2.2. The  key  document  evidencing  entitlement  to  the
quota  and  reduced  levies  from  1981  to  June  1995  was
the  Protocol  18  certificate.  This  document  was  certified
by  the  New  Zealand  High  Commission,  the  agreed  NZ
certifying  body,  to  the  effect  that  the  quantity  of  butter
cited  thereon  met  the  conditions  of  eligibility  for  the
quota  and  was  within  the  limits  of  the  quota  for  the

(5)  OJ  L  71,  17.3.1980,  p.1.

(6)  OJ  L  97,  18.4.1996,  p.18.
(7)  OJ  L  90,  4.4.1981,  p.18.

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period  in  question.  It  was  presented  at  the  time  of
importation  as  a  supporting  document  to  the  import
declaration.  Protocol  18  arrangements  did  not  require
importers  to  enter  the  conditions  of  eligibility  on  the
import  declaration,  a  fact  which  did  not  facilitate
customs  documentary  controls.

2.3. From  July  1995  the  Protocol  18  certificate  was
replaced by the IMA 1 (inward monitoring arrangements)
document (8)  which  certifies  that  the  conditions  of
eligibility  for  quota  are  being  met,  and  the  NZDB  was
approved  as  the  IMA  1  issuing  agency.

2.4. Article  28  of  Regulation 
(EC)  No  1600/95
stipulates  that  an  issuing  agency  of  such  certificates  may
be  accepted  only  if:

(a) it  is  recognised  as  such  by  the  exporter  country;

(b) it  undertakes  to  verify  the  particulars  set  out  in  the

certificates;

(c) it  undertakes  to  supply  the  Commission  and  the
Member States, on request, with any information that
may be required to assess the particulars set out in the
certificates.

Article  28  further  states  that  Annex  VII (9)  shall  be
revised when the condition referred to in (a) is no longer
fulfilled  or  when  an  issuing  agency  fails  to  fulfil  one  of
the  obligations  it  has  undertaken.

2.5. Finally,  Article  29  requires  Member  States  to  take
the  measures  necessary  to  check  that  the  system  of
certificates  established  by  Title  IV  is  operating  correctly.

Licences

2.6. Article  13(1)  of  Council  Regulation  (EEC)  No
804/68 (10)  requires  that  imports  into  the  Community  of
any  of  the  products  listed  in  Article  1  (which  includes
butter)  shall  be  conditional  on  the  presentation  of  an
import  licence.  Import  licences  fix  the  rate  of  levy  to  be
applied and enable the Commission to monitor quantities
imported.

(8)  Background  to  the  system  of  IMA  1  certificates

IMA  1  (inward  monitoring  arrangements)  certificates  were
introduced  by  Commission  Regulation  (EEC)  No  1767/82
particularly  for  Swiss  cheese  to  be  imported  into  the
Community at reduced rates of levy. Their use has since been
extended  to  other  dairy  products  from  other  third  countries.
Their  purpose  is  to  certify  that  the  conditions  of  entitlement
to  the  reduced  rates  of  levy  have  been  met.  They  are  issued
by  approved  agencies  in  the  third  countries.

(9)  Annex  VII  to  Regulation  (EC)  No  1600/95  lists  the  agencies

approved  for  the  issue  of  IMA  1  certificates.

(10) OJ  L  148,  28.6.1968,  p.13.

Restrictions  on  marketing

and 

subject 

succeeding 

2.7. Protocol  18 
supplementary
legislation  specified  that  NZ  butter  should  not  become
the 
of
re-exportation to third countries. On 1 January 1993, the
restriction  on  intra-Community  trade  was  withdrawn
when  Council  Regulation  (EEC)  No  3841/92 (11)  became
applicable.

intra-Community 

trade 

or 

of 

2.8. The  restriction  on  re-exportation  to  third  countries
was  also  removed  in  the  same  Regulation.  However,
Article  7(2)  of  Council  Regulation  (EEC)  No  876/68 (12)
stipulated  that  the  rate  of  refund  on  re-export  of  milk
products  should  be  equal  to  the  lower  of  either  the  rate
of  levy  assessed  at  the  date  of  importation  or  the  rate  of
refund  applicable  on  the  date  of  exportation.  This  rule
has  been  perpetuated  in  subsequent  legislation.

2.9. Article  10  of  Regulation  (EC)  No  1600/95  requires
that  at  all  stages  of  marketing  NZ  butter  shall  bear  an
indication  of  its  New  Zealand  origin.  Although  they  are
not  specified,  the  Article  further  requires  the  UK  to
inform  the  Commission  of  measures  taken  to  that  end.

Restrictions  on  use  within  the  Community

2.10. Under  Article  7  of  Council  Regulation  (EEC)  No
858/81,  the  United  Kingdom  was  required,  among  other
things, to take the measures necessary to ensure that NZ
butter  imported  under  that  Regulation  was  not  used  for
processing  but  only  for  direct  consumption  on  the
territory  of  the  United  Kingdom.  Council  Regulation
(EEC)  No  1269/79 (13)  provided  a  definition  of  ‘direct
consumption’  used  in  the  application  of  Article  7.  This
restriction  was  removed  by  Article  4(2)  of  Council
Regulation  (EEC)  No  3667/83 (14).

2.11. Article  10(2)  of  Regulation  (EC)  No  1600/95
stipulates 
the  blending  of  NZ  butter  with
Community butter for direct consumption may only take
place  in  the  United  Kingdom.

that 

(11) OJ  L  390,  31.12.1992,  p.1.
(12) OJ  L  155,  3.7.1968,  p.1.
(13) Article  1(A)  of  Council  Regulation  (EEC)  No  1269/79
defined  ‘butter  for  direct  consumption’  as  being  ‘butter
purchased  by  the  final  private  consumer  from  retail  outlets
with  a  view  to  private  consumption, 
including  butter
purchased  from  the  retail  trade  by  hotels,  restaurants,
hospitals,  homes,  boarding  schools,  prisons,  and  similar
establishments  in  order  to  cater  for  persons  fed  in  such
establishments,  and  excluding  butter  purchased  for  sale  to
the  public  in  the  form  of  other  products  by  cake  shops,
caterers, etc.’

(14) OJ  L  366,  28.12.1983,  p.16.

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24.4.98

Conditions  of  eligibility  for  the  cheese  quotas

(b) the  quantities  of  butter  in  storage  in  the  United

Kingdom,  as  at  the  most  recent  date,

2.12.
In  order  to  benefit  from  the  reduced  rate  of  levy
appropriate  for  the  New  Zealand  quota  authorised  by
Regulation  (EC)  No  1600/95  and  preceding  legislation,
NZ  Cheddar  cheese:

(c) the  quantities  of  butter  sold  on  the  United  Kingdom

market  during  the  previous  week,

(d) the  cumulative  quantities  of  butter  since  1  January

—  must  be  of  a  fat  content  of  50 %  or  more  by  weight

each year,

in  the  dry  matter,

—  must  be  matured  for  at  least  three  months.

imported  under 

2.13. NZ  cheese 
for
processing  quota  shall  only  be  considered  as  processed
when  it  has  been  processed  into  products  falling  within
subheading 0406 30 of the Common Customs Tariff (i.e.
in  Article  2  of
processed  cheese)  as 
Commission  Regulation  (EEC)  No  2967/79 (15).

the  cheese 

laid  down 

Importations of NZ Cheddar cheese are also to be
2.14.
supported  by  IMA  1  certificates  to  the  effect  that  the
quantity  of  cheese  cited  thereon  is  within  the  quota  and
conforms  to  the  quality  conditions.

Control  provisions

2.15. A  weakness  of  both  Protocol  18  legislation  and
Regulation  (EC)  No  1600/95  is  that  neither  contains  a
specific  requirement  for  Member  States  to  control  quota
quantities  or  conditions  of  eligibility.  The  only  control
provisions  in  force  are  those  of  a  general  nature  as  laid
down  in  Council  Regulation  (EEC)  No  2913/92 (16)
establishing  the  Customs  Code.  The  Code,  which  applies
to  all  types  of  importation,  provides  for  the  scrutiny  of
import  declarations  and  supporting  documents,  the
possibility  for  physical  examination  and  sampling  for
laboratory analysis and the possibility of ex-post controls
of  commercial  documentation.  The  responsibility  for  the
execution  of  these  controls  rests  with  the  national
customs  authorities.

(EEC)  No
2.16. Under  Commission  Regulation 
3038/89 (17)  and 
subsequently  under  Commission
Regulation  (EEC)  No  3885/92 (18)  and  Commission
Regulation  (EC)  No  3618/93 (19),  the  UK  authorities
were  required,  until  30  June  1995,  to  inform  the
Commission  not  later  than  the  end  of  each  week,  inter
alia, of:

(a)  the  quantities  of  butter  arriving 
Kingdom  in  the  previous  week,

in  the  United

(15) OJ  L  336,  29.12.1979,  p.23.
(16) OJ  L  302,  19.10.1992,  p.1.
(17) OJ  L  291,  10.10.1989,  p.45.
(18) OJ  L  391,  31.12.1992,  p.18.
(19) OJ  L  328,  29.12.1993,  p.23.

(e) the  quantities  of  butter  in  course  of  consignment
between New Zealand and the United Kingdom, with
a  statement  of  their  probable  arrival  date;  and

(f)  the  sale  price  of  butter  at  the  first  marketing  stage.

These reporting requirements applied to NZ butter which
was  to  qualify  or  had  qualified  under  the  special  import
(quota)  arrangements.

3.  RESULTS  OF  THE  AUDIT

General

the  audit  revealed  major  weaknesses  in  the  control
3.1.
arrangements to ensure compliance with the conditions of
eligibility  for  the  preferential  rates  of  levy.  The  principal
findings  can  be  summarised  as  follows:

(a)  the  UK  authorities  had  not  required  licences  for  the
importation  of  NZ  butter  in  the  entire  period  of
operation  of  the  Protocol  18  arrangements  (221/2
years),  because,  they  argue,  the  legal  basis  for  the
legislation  establishing  the  requirement  for  import
licences  (Council  Regulation  (EEC)  No  804/68)  was
Articles  42  and  43  of  the  Treaty  Establishing  the
European  Economic  Community;  whereas  the  legal
basis  relating  to  NZ  butter  imports  was  determined
the  various  Council  and
by  Protocol  18  and 
Commission  Regulations  which  have  regard  to  it.  In
July 1997, the Commission indicated that in its view,
the  arrangements  applicable  under  Protocol  18  and
succeeding  supplementary  legislation,  constituted  a
derogation  from  the  general  Community  regime
applicable  to  the  import  of  agricultural  products  and
that  the  New  Zealand  butter  was  therefore  not
subject  to  the  provisions  of  Regulation  (EEC)  No
804/68. The Court’s view is that Protocol 18 and the
succeeding supplementary legislation are an exception
to,  and  therefore  derogate  from  the  general  rules  on
the  import  of  butter,  laid  down  in  Regulation  (EEC)
No  804/68  and  implementing  legislation,  only  with

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regard  to  the  issues  with  which  they  specifically  deal.
Neither  Protocol  18  nor  the  succeeding  legislation
specifically deal with, or contain a contrary provision
concerning import licences as prescribed by Article 13
in
of  Regulation  (EEC)  No  804/68.  Moreover, 
principle  exceptions  to  general  rules  have  to  be
interpreted  restrictively.  Since  the  general  rules  on
import licences continued to apply to the importation
of  NZ  butter,  import  licences  should  have  been
requested.  The  effect  of  not  requiring  an  import
licence  was  to  withdraw  a  key  element  of  control  of
the  quota  level  over  imports  of  New  Zealand  butter.
The regularity of the totality of New Zealand imports
is therefore questionable. The Commission’s argument
according  to  which  the  certificate  under  Regulation
(EEC)  No  858/81  (and  subsequent  Regulations)
constituted  a  specific  import  procedure  derogating
from  the  general  import  procedure  under  Regulation
(EEC) No 804/68, requiring import licences, does not
take into account the fact that this specific procedure
did not exist in the period between 1973 and 1981, a
period  during  which  import  licences  have  not  been
requested either. Moreover, a similar certificate (IMA
1 certificate) and import licences have coexisted since
1995  under  Regulation  (EC)  No  1600/95.  This
confirms  the  difference  between  the  two  procedures,
making it legally impossible for one procedure to rule
out  the  other;

(b) the  UK  customs  service  had  never  examined  whether
the  quota  limits  had  been  respected  either  when
accepting  declarations  for  clearance  of  the  products
into  free  circulation  or  ex  post,  on  the  basis  of
commercial  documentation;  this  serious  lacuna  in
controls  was  justified  by  the  UK  Customs  authorities
on  the  grounds  that  they  had  noreason  to  doubt  the
veracity  of  the  Protocol  18  and  IMA  1  certificates
provided  by  the  issuing  bodies;

(c)  UK Customs had not carried out any checks to verify

that  the  declared  weights  were  correct;

(d) UK  Customs  had  not 

for
laboratory  testing  to  verify  the  fat  contents  of  the
imported  products;

taken  any  samples 

regarding  post-clearance 

(e)  despite the provisions of Article 78(2) of the Customs
Code 
examination  of
declarations  and  despite  the  rights  of  access  provided
for  by  Article  28(1)(c)  of  Regulation  (EC)  No
1600/95  with  effect  from  1  July  1995,  in  the  six
months  ending  31  December  1995  neither  the
Commission  nor  the  UK  authorities  had  requested
information  from  NZDB  (as  the  issuing  agency)  to
assess  the  particulars  set  out  in  the  IMA  certificates;

(f)  the responsible services of the Commission had failed
to  monitor  systematically  the  preferential  import
arrangements  and  had  never  undertaken  an
examination  of  these  activities;

(g)  UK  Customs  had  never  carried  out  any  ex  post
controls  of  the  conditions  of  eligibility  for  the
quotas.

3.2. As  a  result  of  these  failings,  there  can  be  no
assurance  that  the  terms  and  conditions  set  out  for  the
import  of  NZ  butter  and  cheese  at  preferential  rates  of
levy had ever been respected. In the following paragraphs
the  consequences  of  the  principal  weaknesses  observed
are  developed  further.  In  effect  the  UK  Customs  service
placed total reliance on the certificates issued by the New
Zealand  bodies  under  Protocol  18  and  Regulation  (EC)
No  1600/95.

Weekly  returns  of  butter  imports

information  which 

3.3. The 
the  United  Kingdom
authorities  were  required  to  provide  under  Commission
Regulations  (EEC)  No  3038/89,  (EEC)  No  3885/92  and
(EC) No 3618/93 was transmitted to the Commission by
the  UK  Ministry  of  Agriculture,  Fisheries  and  Food
(MAFF).  MAFF  obtained  this  information  from  the  New
Zealand High Commission, in the form of weekly returns
prepared  on  the  basis  of  information  provided  by  the
importing  company.  Neither  MAFF  nor  the  Commission
carried  out  systematic  checks  on  the  accuracy  of  the
information  on  the  returns.  UK  Customs  were  not
provided  with  copies  of  these  weekly  returns.

Control  of  quantity  limits

3.4.
In  late  May  1995  the  quota  for  NZ  butter  of  25
915  tonnes  for  the  period  1  January  to  30  June  1995
provided 
(EC)  No
for  under  Council  Regulation 
3232/94 (20)  had  already  been  exhausted.  Despite  this  in
June  1995,  352,5  and  319,2  tonnes  of  NZ  butter  were
cleared  into  free  circulation  at  the  reduced  rate  of  levy
appropriate  to  the  NZ  quota.  The  fact  that  these
quantities were in excess of the quota for that period was
not  detected  by  UK  Customs.

3.5. As  at  23  November  1995  the  United  Kingdom
authorities had not communicated to the Commission the
information  required  under  Article  4  of  Regulation  (EC)
No  3618/93  for  the  weekly  period  ending  2  July  1995.
This  information  should  have  contained  the  cumulative
figures  for  NZ  butter  cleared  against  the  quota  for  the
six months ending 30 June 1995. On 20 December 1995,
subsequent  to  a  request  by  the  Court  to  the  Commission
for  a  copy  of  this  information,  the  importer  made  a
voluntary  declaration  to  UK  Customs  that  the  quota  for
the  period  ending  30  June  1995  had  been  exceeded  and
offered  to  pay  at  the  rate  of  reduced  levy  of  ECU  868,8
per  tonne  in  force  after  1  July  1995.

3.6. On  2  February  1996,  subsequent  to  a  visit  by  the
Court in January 1996, the second importer also made a

(20) OJ  L  338,  28.12.1994,  p.12.

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24.4.98

voluntary declaration to indicate that the quota had been
exceeded  in  the  period  ending  30  June  1995.  The
importer  offered  to  pay  at  the  reduced  rate  of  levy  in
force  after  1  July  1995.  This  offer  was  accepted  at  the
time  by  UK  Customs  without  question.  Recovery  orders
have  however  since  been  issued  for  ECU  1,3  million
calculated  at  the  full  rate  of  levy.

3.10. Examination  of  stock  records  and  customs
declarations  for  transactions  passing  through  bonded
warehouses  showed  that  butter,  recorded  as  having  been
in bonded stock from December 1994 to February 1996,
had  actually  been  withdrawn  and  used  in  May  1995
without  payment  of  levies.  The  levies  estimated  to  have
been underpaid in this instance amount to some ECU 1,2
million.  UK  Customs  are  currently  investigating  the
matter.

Accuracy  of  weight  declarations

3.7. The  individual  weights  of  cartons  of  butter  are
declared for quota purposes as 24, 25 or 26 kg according
to  the  type  of  standard  packaging.  In  reality,  however,
cartons  are  subject  to  systematic  overfill  for  reasons  of
commercial  regulatory  requirements.  The  data  made
available  by  NZDB  shows  that,  for  liquid  fill,  the
overweight  averages  66  grams  per  24  kg  whereas,  for
solid fill, the carton overweight averages 17 grams per 25
kg.  In  the  case  of  cheese  the  overweight  per  20  kg  block
averages  148  grams.

for 

laying  down  provisions 

3.8. While  such  overweights  are  understandable  from  a
commercial  perspective,  Commission  Regulation  (EEC)
No  2454/93 (21) 
the
implementation  of 
the  Community  Customs  Code
specifies that the net mass must be declared for imported
products.  Furthermore,  although  the  overweights  are
insignificant  in  percentage  terms,  in  view  of  the  high
tonnages  involved  they  can  represent  material  sums  of
lost  import  levies.  UK  Customs  have  to  date  quantified
the  levies  underpaid  on  the  overweight  for  the  whole
cheese quota during the period 1.3.1994 to 30.6.1995 as
some  ECU  209 000.  The  quantification  of  the  butter
overweight  is  continuing.

Clearance 
warehouses (22)

into 

free 

circulation 

from 

bonded

3.9. Goods  can  be  cleared  into  free  circulation  directly
from  a  ship  or  after  being  placed  under  customs  control
in  a  bonded  warehouse.  Levy  is  paid  when  the  products
are  declared  for  release  into  free  circulation.  Most  of  the
NZ  butter  and  cheese  is  initially  stored  in  a  bonded
warehouse.  NZ  butter  is  declared  for  clearance  into  free
circulation  on  withdrawal 
for
de-cartoning  at  the  standard  carton  weights  for  butter  of
24,  25,  or  26  kg.

from  bonded  stock 

Respect  of  maximum  fat  content  provisions

In  September  1995  Netherlands  Customs  took
3.11.
samples  for  laboratory  analysis  of  fat  content  from  a
cargo  of  504  tonnes  of  NZ  butter  declared  for  clearance
into  free  circulation  in  the  Netherlands  against  the  NZ
quota. The test results showed a fat content of more than
82 %.  Levies  were  therefore  assessed  at  the  full  rate  in
force  and 
levied  an
additional  amount  of  approximately  ECU  1  million,
covering  both  underdeclared  weights  and  the  ineligibility
importing
of  the  products  for  reduced 
company  has  appealed  against  this  decision  on  the
grounds  that  the  manner  in  which  the  sample  was  taken
was 
tests
consequently unreliable.

importing  company  was 

inappropriate,  and 

levies.  The 

results  of 

the 

the 

the 

3.12. The  Netherlands  Customs  authorities  did  not
notify  the  Commission  of  the  alleged  irregularity  as
required  under  the  provisions  of  Council  Regulation
(EEC)  No  1552/89 (23)  until  April  1997  nor  did  they
communicate  the  facts  to  the  UK  Customs  authorities  as
provided for by Articles 11 and 12 of Council Regulation
(EEC)  No  1468/81 (24).  As  a 
the
Commission  was  unable  either  to  notify  other  Member
States  of  the  import  risks,  or  to  initiate  its  own  control
action.

consequence, 

3.13. NZDB  controls  the  quality  of  butter,  which  is
manufactured  by 
independent  dairies,  by  means  of
manufacturing  specifications  and  the  use  of  a  manual  of
quality  control  procedures.  The  NZDB  specifications
provide for limits in respect of the contents of water, salt,
milk solids-non-fat and minimum fat content. The NZDB
quality 
type,
methodology  and  frequency  of  laboratory  tests  to  be
carried  out  by  the  dairies  to  ensure  compliance  with  the
manufacturing  specifications.  Failure  to  meet  the  limits
results  in  butter  either  being  rejected  by  NZDB  or
accepted  with  the  dairy  suffering  a  financial  penalty.

control  manual  provides 

the 

for 

(21) OJ  L  253,  11.10.1993,  p.1.
(22) A  bonded  warehouse  is  one  in  which,  subject  to  the  lodging
of a guarantee, goods may be stored prior to payment of levy
and  release  into  free  circulation.

(23) OJ  L  155,  7.6.1989,  p.1.
(24) OJ  L  144,  2.6.1981,  p.1.

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3.14. The  NZDB  specifications  for  most  of  NZ  quota
butter  did  not  provide  for  a  maximum  fat  content  prior
to  August  1995.  Consignments  of  butter  exceeding  the
maximum  fat  content  permitted  by  the  quota  could
therefore  be  accepted  by  NZDB  for  shipment  to  the
Community  under  the  quota.

3.15. NZDB  maintained  that  the  fat-content  condition
has  never  been  the  subject  of  interpretation  discussions
with  the  European  Commission.  It  therefore  interprets
the  condition  as  meaning  that  the  annual  aggregate
average  of  butter  entered  into  the  Community  should  be
within  the  fat  content  parameters.  In  the  Court’s  view
this  is  contrary  to  the  Customs  Code  implementing
measures  which  require  the  description  and  quantity  of
the goods to relate to the precise goods being declared for
release into free circulation against the import declaration
in  question.

3.16. The Court examined a sample of 361 tests carried
out  in  the  years  1991  to  1996,  selected  to  cover  the
different  types  of  butter  manufactured  by  the  largest  NZ
producer  of  butter  for  the  Community  quota.  This
examination  revealed  a  high  incidence  (69 %)  of  fat
contents  exceeding 
limit  on  butter
produced  at  the  same  dairy  from  1991  to  1996.  Other
documents  and  test  results  indicate  that  the  problem
affects  other  NZ  dairies.

the  maximum 

3.17. Because  of  the  high  incidence  of  butter  with  fat
contents of 82 % or more found by this examination the
Court  requested,  and  obtained  from  NZDB,  all  available
laboratory test data for butter manufactured at this dairy
and  cleared  into  free  circulation  against  the  NZ  quota
during  the  period  1  January  1994  to  31  July  1996.

3.18. The Court’s analysis of that data shows that 65 %
of  butter  from  that  dairy  shipped  to  the  Community
between  1  January  1994  and  31  December  1994  and
54 %  between  1  January  1995  and  30  June  1995  failed
to  comply  with  the  maximum  fat  content  laid  down  for
NZ  butter  in  Council  Regulation  (EC)  No  3610/93  as
amended  by  Regulation  (EC)  No  3232/94.  The  range  of
the  excess  fat  content  is  between  0,1 %  and  1,5 %  in
absolute  terms  which  represents  between  5 %  and  75 %
of  the  2 %  margin  provided  for  NZ  quota  butter.
Although  invited,  NZDB  has  not  presented  any  evidence
to  refute  this  analysis.

3.19. NZDB  considered  that,  because  the  methodology
and  frequency  of  fat-content  testing  had  not  been

addressed  by  the  European  Commission  or  by  Member
State authorities, it is not appropriate to use the results in
question.  It  further  considered  that,  for  a  number  of
technical reasons, any conclusions drawn from the results
would  be  invalid.  The  Court  notes  that  test  results  were
obtained  following  a  test  methodology  prescribed  by  the
NZDB  quality  control  manual;  that  the  methodology  is
the  same  as  that  drawn  up  by  the  International  Dairy
Federation (IDF)and adopted as the Community reference
method  and  that  the  results  of  the  tests  are  used  by
NZDB for acceptance or rejection of butter in relation to
specification  requirements.

3.20. On  the  basis  of  the  number  of  instances  of  the
fat-content  maximum  being  exceeded  in  the  period  1
January  1994  to  30  June  1995  the  levies  estimated  to
have been underpaid in respect of butter produced at this
dairy for retail sale in the Community during that period
amount to some ECU 67 million of which some ECU 65
million  is  recoverable.  This  estimate  is  based  on  the  fact
that  any  butter  with  a  fat  content  of  82 %  or  more,
however  small  the  percentage  of  excess  fat  may  be,  gives
rise to the payment of the much higher full rate of levy. If
butter  produced  at  other  dairies  during  that  period  was
subject to the same ratio of fat content of 82 % or more
a  further  sum  of  approximately  ECU  24  million  could
have  been  underpaid.  In  NZDB’s  view  the  extrapolation
of  the  results  from  one  dairy  to  quota  butter  from  other
dairies  is  inappropriate.  Despite  requests  it  has  not,
however,  provided  the  laboratory  test  data  from  the
other dairies. By applying the same ratio to all NZ quota
butter  from  1990  to  1993,  years  which  are  out  of  time
for  recovery  action,  levies  underpaid  are  estimated  at
some  ECU  287  million.

3.21.
In  the  case  of  imports  of  NZ  Cheddar  cheese,  UK
Customs  also  did  not  carry  out  any  physical  checks,  at
the  time  of  acceptance  of  the  import  declaration  or  any
ex  post  checks,  to  ensure  that  the  qualifying  conditions
were  met.  In  particular,  no  samples  were  taken  for
analysis  of  fat  content.  However,  random  checks  carried
out  by  the  Court  did  not  reveal  evidence  of  non
compliance  in  respect  of  the  fat  content.

Respect  of  minimum  age  criterion

3.22. As  in  the  case  of  other  eligibility  criteria,  the  UK
Customs  authorities  failed  to  carry  out  any  checks  to
verify  that  the  minimum  age  criterion  was  respected  for
the  imported  butter.  Examination  by  the  Court  of  a
selection  of  Protocol  18  certificates  and  supporting
production  lists  in  respect  of  butter  cleared  into  free
circulation  directly  ex-ship  has  raised  doubts  whether,  in

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24.4.98

facie  evidence 

4  of  the  98  cases  examined,  the  butter  had  met  the
minimum age criterion. In one such case the shipping file
contained  prima 
the  dates  of
manufacture  had  been  misdeclared  with  the  consequence
that  the  butter  would  be  accepted  under  the  quota.  In
three  of  the  cases,  although  the  correct  dates  of
manufacture  had  been  indicated,  UK  Customs  failed  to
check  whether  the  minimum  age  criterion  had  been
adhered  to.

that 

Respect  of  direct  manufacture  criterion

3.23. One  of  the  eligibility  criteria 
in  respect  of
imported  butter  is  that  it  must  be  manufactured  directly
from  milk  or  cream.  However,  since  1990,  ‘spreadable’
butter,  which  is  manufactured  from  butter  concentrate,
has  been  cleared  into  free  circulation  under  the  quota.
Such  butter  is,  in  the  view  of  the  Commission,  ineligible
for  the  quota,  owing  both  to  its  indirect  manufacturing
process  and  because  its  Combined  Nomenclature  (CN)
code  is  not  included  in  Annex  I  to  Regulation  (EC)  No
1600/95  as  modified  by  Regulation  (EC)  No  1170/96.
Two  other  types  of  butter  manufactured  from  butter
concentrate  have  also  been  cleared  into  free  circulation
under  the  quota.

to 

the
3.24. NZDB  has  submitted  an  argument 
Commission  that  fractionated  butter  is  manufactured
directly  from  milk  or  cream  because  the  process  is
continuous.  This  argument  has  been  rejected  by  the
Commission  which  maintains  that,  as  described  by
NZDB’s  own  manufacturing  specifications,  the  butter  is
made  by  recombining  concentrated  butter  with  water
and/or  other  dairy  products.

3.25. As  a  result  of  an  appeal  by  the  importer  the  UK
VAT and Duties Tribunal has considered evidence on this
matter  in  respect  of  importations  of  two  test  samples  of
the  types  of  butter  concerned,  manufactured  in  1996
after  the  problem  of  direct  manufacture  had  been  raised
between  the  Community  and  New  Zealand.  This  butter
may  not  therefore  have  been  manufactured  in  the  same
way  and  from  the  same  raw  materials  as  the  totality  of
the  butter  referred  to  in  paragraph  3.23.  The  Tribunal
has  ruled  that  the  butters  in  the  two  test  samples  are
eligible under Regulation (EC) No 1600/95. This ruling is
under  further  appeal  by  United  Kingdom  Customs.

3.26.
In  order  to  come  to  its  ruling  the  Tribunal  has
interpreted  the  words  ‘manufactured  directly  from  milk
or cream’ in Regulation (EC) No 1600/95. Moreover the
Tribunal  points  out  that  the  decision  relates  only  to  the
two  test  samples  and  would  not  apply  to  butter
manufactured  by  a  substantially  different  process.  The
importer  has  also  lodged  appeals  against  the  additional
levies  demanded  by  UK  Customs  &  Excise  in  respect  of

butter  imported  prior  to  1  July  1995.  Subject  to  the
outcome  of  these  appeals  the  Court  estimates  that  levies
amounting 
to  ECU  29  million  may  have  been
underpaid.

3.27. The  matter  has  also  been  referred  to  the  Disputes
Committee  of  the  World  Trade  Organisation  (WTO)  for
a  decision  whether  these  butters  are  considered  eligible
for  the  quota  under  the  GATT/WTO  Agreement  which
was  effective  from  1  July  1995.  A  decision  by  that  body
is  expected  in  September  this  year.

Disposal

3.28. Contrary  to  the  provisions  of  Article  10  of
Regulation (EC) No 1600/95, the UK authorities failed to
inform  the  Commission  of  measures  taken  to  control  the
marketing  and  blending  of  NZ  butter.  Furthermore,  UK
Customs  had  never  carried  out  controls  on  the  disposal
of  NZ  butter  in  the  period  1  July  1995  to  30  June
1996.

3.29.
In  the  course  of  its  audit,  the  Court  established
that almost the totality of NZ butter imported for sale to
retail  or  wholesale  outlets  was  actually  sold  to  such
outlets.  As  the  inherent  risk  of  such  disposals  being
subsequently  re-exported  was  judged  by  the  Court  to  be
negligible  no  further  verification  of  such  disposals  was
undertaken by the Court. The remaining small quantities,
disposed  of  essentially  to  the  catering  trade,  were
test-checked  by  the  UK  Customs  at  the  Court’s  request.
No  irregularities  were  detected.

3.30. The  butter  imported  for  industrial  use  was  sold
either  to  processed-cheese  manufacturers  or  to  butter-
concentrate  manufacturers.  On  the  basis  of  the  audit  of
the  disposal  of  this  butter,  the  Court  estimates  that
around one third was incorporated into processed cheese.
A small proportion of this processed cheese was exported
with  the  benefit  of  export  refunds.

3.31. Some  67 %  of  the  industrial  butter  was  sold  to
butter-concentrate  manufacturers  who  used  it,  inter  alia,
in  the  framework  of  Regulation  (EEC)  No  570/88,  thus
receiving  Community  aid  for  butter  used  for  pastry
making  etc.  NZ  quota  butter  is  not  excluded  from  this
latter  regime  in  so  far  as  it  is  used  for  the  production  of
concentrated  butter  which  conforms  to  the  conditions  of
Regulation  (EEC)  No  570/88.

3.32. The  rate  of  aid  under  Regulation  (EEC)  No
570/88  is  equivalent  to  ECU  126  per  100  kg  of  butter.
The  reduced  rate  of  import  levy  on  NZ  quota  butter  is
ECU 86,88 per 100 kg. By allowing NZ butter to be used
under  the  provisions  of  this  Regulation,  the  Community

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is  providing  a  net  subsidy  for  the  butter  amounting  to
ECU  39,12  per  100  kg.  The  Court  questions  the
justification  for  allowing  NZ  butter  to  benefit  from  the
full rate of aid under Regulation (EEC) No 570/88 (25). It
is estimated that 10 500 tonnes of NZ butter has already
been  used  under  the  provisions  of  Regulation  (EEC)  No
570/88  from  1.7.1995  to  30.6.1996  attracting  aid
amounting  to  around  ECU  13,2  million  at  a  net  cost  to
the  Community  of  ECU  7,7  million  per  annum (26).

3.33. The  Commission  has  twice  proposed  to  the
Management  Committee  that  a  rule  be  introduced  that
all butter used in the framework of Regulation (EEC) No
570/88  should  be  of  Community  origin.  The  Committee
has rejected the proposal arguing that such a requirement
would  pose  too  many  control  problems.  The  Court  does
not share this view because Regulation (EEC) No 570/88
already  provides  for  physical  and  documentary  controls
over  raw  materials  and  finished  products.

3.34. The  audit  also  revealed  that  one  Italian  company
had  either  imported  directly  or  purchased  levy-paid  in
free  circulation  888  tonnes  of  NZ  butter  in  1995  and
1 734 tonnes in 1996, all of which had been cleared into
free  circulation  at  the  reduced  rate  of  levy.  Most  of  that
butter  was  either  repacked  or  blended  with  Community
butter  and  sold  in  25  kg  cartons  for  industrial  use.
Neither the invoice nor the packaging bore any indication
of the fact that the butter was of NZ origin or that it was
a  blend  of  NZ  and  Community  butter,  contrary  to
Article  10(2)  of  Regulation  (EC)  No  1600/95.

3.35. The  Commission  has  confirmed  that  failure  to
indicate  the  New  Zealand  origin  on  the  packaging  is  in
contravention  of  Article  10  of  Regulation  (EC)  No
1600/95  and  that  the  sanction  for  this  infringement  is  a
matter  for  the  Member  State  authorities.

into  butteroil 

3.36. Finally,  56  tonnes  of  butter  were  traced  to
conversion 
in  Denmark  which  was
subsequently exported to Thailand with export refunds in
excess  of  the  levy  having  been  collected  on  importation.
The  conversion  of  butter 
is  not  an
operation which changes the origin of the butter. Refunds
on  export  of  the  butteroil  should  therefore  be  limited  to

into  butteroil 

(25) In  the  case  of  export  refunds  on  milk  products  the  refund
rate is equal to the lower of either the rate of levy assessed at
the  date  of  importation  or  the  rate  of  refund  applicable  on
the  date  of  exportation.

(26) EU butter is displaced from the Regulation (EEC) No 570/88
scheme  by  NZ  butter.  It  therefore  has  to  find  alternative
markets, typically with the aid of export refunds at ECU 160
per  100  kg.  The  additional  net  cost  to  the  Community  per
100  kg  of  allowing  NZ  butter  to  benefit  from  Regulation
(EEC)  No  570/88  aid  is  therefore  the  difference  between  the
reduced rate of import levy of ECU 86,88 and the equivalent
rate  of  aid  under  Regulation  570/88  aid  of  ECU  126,  which
is  ECU  39,12  plus  the  difference  between  the  Regulation
Community  570/88  aid  of  ECU  126  and  the  rate  of  export
refunds  of  ECU  160,  which  is  ECU  34.

the levies collected on importation. The refunds found to
be overpaid and recoverable in this case amount to some
ECU  57 000.

Cheese  for  processing  —  Eligible  end-use  products

3.37. Article  2  of  Commission  Regulation  (EEC)  No
2967/79  lays  down  that  a  cheese  imported  under  cheese
for  processing  end-use  arrangements  shall  only  be
considered  as  processed  when  it  has  been  processed  into
products  falling  within  subheading  0406  30  of  the
Common  Customs  Tariff  (i.e.  processed  cheese).  If  the
cheese  is  used  in  the  manufacture  of  any  other  product
the  full  rate  of  levy  must  be  paid.

3.38. End  use  of  cheese  for  processing  is  subject  to
written  authorisation  to  the  importer  and  end  user  for
the  cheese  to  be  used  for  the  prescribed  purpose.  One  of
the  authorisations  issued  by  the  UK  authorities  was  for
the cheese to be used in the manufacture of cheese sauce,
a  use  not  authorised  by  Regulation  (EEC)  No  2967/79.

3.39. The Commission has upheld the Court’s view that
cheese  sauce  is  not  an  eligible  end  use.  Accordingly,
additional  levies  amounting  to  ECU  1,5  million  are
estimated  to  be  due.  A  recovery  order  was  issued  by  UK
Customs  but  it  has  since  been  withdrawn  because  of  an
administrative  error.  In  the  circumstances,  the  amount
involved  should  be  made  available  to  the  Community  by
the  UK  authorities.

Eligibility  of  processed  cheese  containing  third  country
cheese  for  export  refunds

3.40. The  rate  of  refund  for  processed  cheese  varies
between  ECU  14  and  120  per  100  kg  depending  on
composition  and  destination.  For  most  processed  cheese,
the  rate  is  considerably  in  excess  of  the  reduced  import
levy  of  ECU  17,06  per  100  kg.  According  to  Article
17(11) of Regulation (EEC) No 804/68 the rate of refund
on  re-export  of  third  country  milk  products  shall  be  the
lower  of  the  rate  of  refund  and  the  rate  of  levy  collected
on  importation.  However,  because  of  the  failure  of  the
Commission  to  clarify  the  position,  processed  cheese
incorporating third country cheese imported at a reduced
rate  of  levy  has  been  allowed  to  receive  the  full  rate  of
export  refund.

3.41. Audits  covering  the  use  of  NZ  cheese  for
processing  and  the  final  destination  of  the  finished
product  were  carried  out  at  five  manufacturers  of
processed  cheese.  Three  had  made  arrangements  to
ensure  that  third  country  products  were  only  used  in
for
the  manufacture  of  processed  cheese  destined 

C  127/12

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24.4.98

consumption  within  the  Community.  Two  had  claimed
refunds  at  the  full  rate  on  products  incorporating  NZ
cheese,  although, 
instances,  the  quantities
involved  were  relatively  minor.

in  these 

4. 

SWISS  EMMENTAL

4.1. The  Community  has  been  traditionally  the  largest
market  for  Swiss  cheese.  Preferential  reduced  rates  of
import  levy  have  been  in  force  since  1968.  Regulation
(EC)  No  1600/95  provides  the  current  legal  basis  for  the
importation of Emmental, Gruye`re, Sbrinz and Appenzell
cheeses  from  Switzerland  at  the  reduced  rate  of  levy  of
ECU  9,66  per  100  kg  instead  of  the  full  rate  of  ECU
195,42  per  100  kg.  The  cheeses  in  question  are  destined
both  for  direct  consumption  and  for  manufacture  of
processed  cheese.

4.2. There  is  no  fixed  quota  to  control  the  volume  of
imports.  Instead  the  Community  producers  are  protected
by  the  requirement  that  minimum  free-at-frontier  prices
are  to  be  respected.  The  rates  of  levy  vary  with  the  level
of the minimum free-at-frontier price. By way of example
the  minimum  price  for  the  lowest  rate  of  levy  of  ECU
9,66 per 100 kg under Regulation (EC) No 1600/95 was
set  at  ECU  430,62  per  100  kg.

4.3. Both  Regulation  (EC)  No  1600/95  and  preceding
legislation  provide  for  the  importation  of  Swiss  cheese  at
reduced  rates  of  levy  to  be  subject  to  the  presentation  of
an  IMA  1  certificate.  The  approved  issuing  agency  is  the
Swiss  Cheese  Union  (SCU).  In  completing  the  IMA  1
certificate, the Swiss Cheese Union was required to certify
that  the  particulars  set  out  on  the  IMA  1  form  were
accurate,  complete  and  complied  with  the  Community
provisions  in  force,  and  that  for  the  products  described
on  the  form  no  discount,  refund  or  any  other  rebate
would  be  granted  to  the  buyer  that  would  lead  to  the
product 
less  than  the
minimum  import  value  fixed  for  the  product.  As  well  as
issuing  the  IMA  certificates,  SCU  also  sold  much  of  the
Emmental  to  Community  customers.

in  question  having  a  value 

4.4. As  reported  in  Special  Report  No  1/94  the  audit
was  commenced  by  the  Court  in  France  on  the  basis  of
information  obtained  and  analysis  of  import  statistics.

The  investigation  subsequently  carried  out  by  the  French
authorities  at  the  Court’s  request  has  proved  that
minimum  free-at-frontier  prices  were  overstated  on  IMA
1  certificates  supported  by  false  invoices  so  that  they
appeared  to  qualify  for  the  reduced  rate  of  levy.  The
invoice  price  was  later  adjusted  by  a  variety  of  methods
involving  SCU,  including  the  issue  of  credit  notes,
payments  to  private  bank  accounts  of  directors  of  the
importing  companies  and  contributions  made  via  third
parties.

4.5. Subsequent  investigations  in  Italy  suggested  by  the
Court  and  coordinated  by  UCLAF  have  identified  some
ECU  42  million  in  levies  allegedly  evaded.  Independent
investigations  in  Germany  have  identified  an  amount  of
ECU  1,2  million  in  levies  allegedly  evaded.

4.6.
In  March  1997,  nearly  three  years  after  the  case
had  first  been  reported  to  the  Commission,  Regulation
(EC)  No  1600/95  was  amended  by  Commission
Regulation  (EC)  No  503/97 (27)  in  respect  of  imports  of
cheese  from  Switzerland.  Switzerland  was  deleted  from
the  Annex  listing  countries  and  agencies  authorised  for
the  issue  of  IMA  1  certificates;  the  onus  is  placed  on  the
importer  to  declare  that  minimum  free-at-frontier  prices
are  respected;  the  importer  is  obliged  to  supply  the
competent  authorities  with  any  information  necessary  to
judge compliance and allow any audit of accounts, and in
cases of non-compliance, levy shall be paid at the full rate
plus  a  penalty  increase  of  25 %.

5.  CONCLUSION

5.1. The  Court’s  audit  of  the  importation  and  disposal
of  NZ  dairy  products  imported  at  preferential  rates  has
identified  the  absence  of  appropriate  controls  leading  to
levies 
estimated  underpayments  of 
respect  of
non-compliance  with  quota 
limits  and  conditions
amounting  to  some  ECU  410  million  and  to  estimated
undue  payments  of  export  refunds  amounting  to  some
ECU 57 000. Of these amounts some ECU 118 million is
recoverable,  as  detailed  in  Table  4.

in 

(27) OJ  L  78,  20.3.1997,  p.12.

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TABLE  4

Irregularities  identified,  amounts  recoverable  and  recovered

Nature  of  irregularity

Butter  —  excessive  fat  content

Fractionated  butter

Butter  —  exceeding  quota

Butter  —  irregular  warehouse  removals

Butter  —  underdeclaration  of  carton  weights

Total
(ECU  million)

Amount
recoverable
(ECU  million)

Amount
recovered
(ECU  million)

378,00

29,00

1,30

87,00

28,00

1,30

Butter  —  irregular  claim  to  export  refunds

0,06

0,06

Butter  —  irregular  packaging

NZ  cheese  —  irregular  end  use

NZ  cheese  —  underdeclaration  of  block  weights

Sub-total  NZ

Swiss  cheese  —  misdeclaration  of  minimum  free-at-frontier
prices

1,50

0,21

1,50

0,21

410,07

118,07

46,00

46,00

Total

456,07

164,07

0,00

the 

to  verify 

5.2. The  UK  Customs  service  failed  to  implement  any
procedures 
specific  conditions
that 
established  for  the  importation  of  New  Zealand  butter
and  cheese  at  reduced  rates  of  levy  had  been  respected
and did not ensure that the rules relating to disposal had
been  respected.  The  UK  authorities  have  begun  to  take
the  necessary  steps  to  ensure  that  the  observations  raised
in  this  report  are  swiftly  followed  up  and  any  levies
found  to  be  underpaid  are  recovered.

5.5.
In  the  broader  context,  because  the  control  of  the
quota quantities and conditions of eligibility relies heavily
on  the  issue  of  IMA  1  certificates,  the  Court  questions
whether agencies authorised for their issue should have a
commercial/financial  interest  in  the  quota  transactions  as
this  may  lead  to  a  conflict  of  roles.

5.6. Finally  the  Court  calls  on  the  Commission:

5.3. The  Commission  is  responsible  for  allowing  this
unsatisfactory  situation 
to  continue  over  such  an
extended  period.  It  did  not  ensure  that  adequate
monitoring and control procedures were in force and that
the  weekly  returns  of  butter  imports  were  submitted  and
checked.

—  to  take  appropriate  action  to  recover  the  amounts

involved,

—  to  introduce  more  effective  obligatory  requirements
for  the  control  of  imports  at  reduced  rates  of  levy,

5.4. The  Court  furthermore  concludes  that  the  New
Zealand  Dairy  Board  has  not  respected  the  conditions
and obligations imposed by Regulation (EC) No 1600/95
in  respect  of  tariff  quotas  pursuant  to  GATT/WTO
Agreements.  The  New  Zealand  Dairy  Board  must
therefore  be  removed  from  Annex  VII 
listing  the
countries  and  agencies  approved  for  the  issue  of  IMA  1
certificates in line with the action taken against the Swiss
Cheese  Union.  The  obligations  on  the  importers  and  the
penalty  for  non-compliance  introduced  for  imports  from
Switzerland  must  likewise  be  applied  to  imports  of  New
Zealand  dairy  products  under  Regulation  (EC)  No
1600/95.

—  to  review  the  validity  of  the  IMA  1  system,

—  to 

initiate 

in  depth  controls  of  other  quota

agreements  involving  reduced  rates  of  levy,

—  to 

resubmit 

the  proposal 

for  an  EU  origin
requirement in Regulation 570/88 and similar internal
schemes,

—  to  clarify  the  rules  relating  to  the  eligibility  of  third
country  products  to  export  refunds  after  processing.

C  127/14

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24.4.98

report 

is  based  on 

5.7. The  Court’s 
fact.  The
Commission’s  general  comments  are  largely  speculative,
based  on  hypotheses  of  what  the  New  Zealand  Dairy
Board  might  have  done,  had  certain  events  occurred.
They  suggest  that  the  Commission  has  taken  proper
assurance  as  to  compliance  with  Regulation  (EC)  No
1600/95,  based  on  representations 
the  New
Zealand  dairy 
the  New  Zealand
Government,  rather  than  from  actual  controls.  The
Commission asserts that if customs controls had detected
non-compliance earlier then the anomalies may have been
rectified  for  future  shipments.  This  does  not  constitute  a
reason  for  the  butter  imports  in  question  not  to  comply
with  the  legislative  requirements  in  the  first  place.

industry  and 

from 

failed 

to  meet 

5.8.
In  addition,  the  comments  do  not  consider  parallel
situations  in  other  measures,  such  as  export  refunds.
Each  year  national  authorities  detect  cases  where
products  have 
the  compositional
requrements  for  export  refunds  and  as  a  result  the
undertakings  not  only  lose  their  entitlement  to  refunds
but  also  suffer  penalties.  The  products  in  question  are
nevertheless  marketed.  Examples  of  such  cases  and
similar ones detected by the Court have been documented
in Special Reports 2/92 (28) and 7/93 (29) and in the 1995
Annual  Report (30).  It  is  therefore  inappropriate  to  single
out  New  Zealand  as  a  special  case.

This  report  was  adopted  by  the  Court  of  Auditors  in  Luxembourg  at  its  meeting  of  1  and  2
April  1998.

For  the  Court  of  Auditors

Bernhard  FRIEDMANN

President

(28) OJ  C  101,  22.4.1992,  p.  1.
(29) OJ  C  53,  19.2.1994,  p.  1.
(30) OJ  C  340,  12.11.1996,  p.  80.

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COMMISSION  REPLIES

GENERAL  COMMENTS

This  report  deals  with  serious  weaknesses  in  the  control
of  two  of  the  many  preferential  agreements  between  the
Community  and  third  countries.  It  is  important  to  stress
that  these  arrangements  are  limited  in  scope  and  deal
with  only  a  proportion  of  imports  of  specific  products
from  individual  countries.

In  the  case  of  butter  imports  from  New  Zealand,  the
major  subject  of  the  report,  a  reduced  rate  of  levy,  later
duty,  was  granted  for  the  import  of  fixed  quantities  of
butter.  This  arrangement  was  intended  to  permit  the
continuation  of  the  traditional  trade  in  salted  butter
between  New  Zealand  and  the  United  Kingdom  which
would  otherwise  become  uneconomic.  The  butter
imported at this reduced rate had to meet certain criteria
which  themselves  reflected  the  attributes  of  the  products
traditionally involved. These attributes were technical and
did  not  affect  the  commercial  description  of  the  goods.
(There  were  also  special  arrangements  for  some  imports
of  cheese.)  The  close  and  cooperative  relationship
institutions  and  the  New
between  the  Community 
Zealand  Government  was  underpinned  by 
two
documents, Protocol 18 and the Dublin Declaration. Also
in  1994  annual  NZ/EC  agricultural 
trade  policy
consultations  were  initiated.  With  this  background  and
given  that,  because  of  their  political  sensitivity,  decisions
on  quota  quantities  were  taken  on  a  unanimous  basis,  it
was  considered  unlikely  that  the  New  Zealand  Dairy
Board  would  take  or  permit  any  action  which  would
endanger  the  continuation  of  the  arrangement.

Because  of  the  control  weaknesses  described  in  the
report,  problems  with  the  operation  of  the  arrangement
only  emerged  belatedly.  In  a  six-month  quota  period
preceding  the  introduction  of  quotas  under  the  WTO
Agreement  the  quantitative  limit  was  breached.  This
resulted  in  an  underpayment  of  duty  of  ECU  1,3  million
and  is  currently  the  subject  of  criminal  proceedings.

It  has  also  emerged  that  goods  which  the  UK  authorities
now consider ineligible had been granted reduced rates of
duty.  Where  butter  with  a  higher  fat  content  than  that
permitted by the Regulation was imported then the effect
was that of a further breach of the quota limits and thus
an  underpayment  of  duty.  The  maximum  potential
benefit  thus  obtained  by  the  importing  companies  has
been estimated, by the UK, at some ECU 1,4 million each
year.

Because  of  the  terms  of  the  regulations  under  which  no
butter  that  exceeded  the  fat  content  parameters  was
entitled to the reduced rate, large customs debts are now
being  established.  These  debts,  which  also  cover  other
eligibility  issues,  are  estimated  to  total  ECU  200  million,
reflecting  the  difference  between  the  reduced  rate  paid
and  the  full  rate  now  considered  to  have  been  due.

Although  from  a  legal  standpoint  it  could  be  considered
that  this  figure  is  a  loss  of  own  resources  it  was  never
anticipated  that  these  amounts  would  accrue  to  the
Community  budget.  Recovery  of  these  debts  would
amount  to  an  economic  sanction,  as  unlike  the  breaches
in  the  quantitative  limit,  the  amounts  involved  do  not
accurately  reflect  either  a 
loss  of  anticipated  own
resources  or  any  potential  benefit  that  might  have
accrued  to  the  importers.  The  following  circumstances
need  to  be  noted:

—  these were not instances where inferior products were
substituted  for  superior  items.  The  goods  imported
may  not  have  met  the  specific  technical  requirements
of  the  relief  regarding  fat  content  and  method  of
manufacture  but  were  equally  as  merchantable  as
goods  that  did.  Although  they  are  instances  of
non-compliance  with  the  specific  requirements  of  the
Regulation  these  imports  had  little  effect  on  the
Community  butter  market,

—  if  suitable  customs  controls  had  detected 

the
non-compliance with the technical criteria earlier then
it  is  reasonable  to  suppose  that  the  anomalies  would
have  been  rectified  for  future  shipments.  Thus  no
duty  would  have  been  chargeable  other  than  on  the
consignment  selected  for  laboratory  analysis,

—  had  the  necessary  changes  not  been  possible  then  the
imports  would  have  ceased  as,  without  the  reduced
rate  of  duty,  the  trade  would  have  been  uneconomic.
Again  in  these  circumstances  there  would  have  been
no  own  resources  to  collect,

—  the  New  Zealand  Government  might  also  have
attempted  to  renegotiate  the  arrangement  to  reflect
the  development  of  new  production  methods.  Had
they  been  successful,  no  own  resources  would  have
been  due.

The  Community  budget  may  however  have  suffered  a
loss, in so far as if the imports had ceased or diminished
then,  less  money  may  have  been  required  to  support
Community  butter  prices  or  pay  export  refunds.  There
may also have been greater opportunities for Community
butter  producers.  These  ‘costs’  were  doubtless  taken  into
account  when  the  arrangement  was  adopted.

The  situation  set  out  above  arose  because  of  the
weakness of controls in the United Kingdom. However, it
should  be  recognised  that  the  arrangement  is  merely  one
of  many  preferential  regimes  and  that  customs  controls
can  only  be  selective.  The  United  Kingdom  uses  various
risk-analysis  techniques  to  target  controls.  These  were
regular  imports  of  what  had  been  duty-free  goods.  The
amounts  involved  were  restricted  (when  compared  to  the
value  of  duty  relief  granted  under  other  preferential
agreements).  There  were  only  ever  two  companies
involved  in  the  imports  which  were  considered  to  be
compliant by the UK authorities. Therefore these imports
were  considered  low-risk. 

C  127/16

EN

Official  Journal  of  the  European  Communities

24.4.98

techniques 

The  Commission  also  has 
some  monitoring  and
inspection  responsibilities  for  the  relief.  The  resources
limited,  the  Commission  also  uses
available  being 
risk-analysis 
to  decide  priorities.  The
importance of the arrangement to the New Zealand dairy
industry  together  with  the  close  cooperation  of  the  New
Zealand  Government  and  the  Commission  all  indicated
compliance.  However,  as  a  result  of  monitoring  action,
queries regarding the possible breaches of the quantitative
limits  were  passed  to  the  United  Kingdom  authorities  in
1983.  Assurances  that  the  quota  limits  had  not  been
exceeded  were  received  from  the  UK  authorities  and,
after  further  checks,  were  confirmed.  As  the  permitted
quota  diminished  so  did  its  market  sensitivity  and  the
trade  was  considered  low-risk.  The  Commission  aims  to
obtain  maximum  assurance  from  inspections  and  thus
selects  for  examination  topics  which  have  a  wide
application  for  example  the  general  system  of  tariff
preferences  which  was  examined  in  the  UK  in  1993.

Since  the  first  notification  of  the  Court’s  findings,  the
Commission  has  been  monitoring  the  establishment  of
debts  as  a  result  of  investigations  made  by  the  United
Kingdom  authorities.  They  estimate  that  debts  totalling
some  ECU  202  million  may  eventually  be  established.
However, it should be noted that all the debts established
so  far  are  the  subject  of  legal  appeal  proceedings.

1.  INTRODUCTION

Annual  quotas  and  financial  impact

agrees  with 

1.2. The  Commission 
the  Court’s
conclusions that own resources may be at risk should the
quota be exceeded. However, it has already in its general
comments drawn a distinction between the consequences,
for  own  resources  and  the  Community  budget  generally,
of  breaches  of 
limits  and
non-compliance  with  the  other  technical  requirements.

the  quota  quantitative 

Origin  of  the  NZ  quota  and  reduced  levy  rates  for
butter

(EC)  No  1600/95, 

1.4.
It  should  be  noted  that  while  the  legal  base  for  the
arrangements remained Protocol 18 up to the adoption of
the
Regulation 
arrangements  changed  substantially  from  1  April  1981.
The  original  arrangements  in  Protocol  18  were  extended
by a series of Council Regulations up to 31 March 1981.
Council Regulation (EEC) No 858/81 introduced the new
arrangements  from  1  April  1981,  which  were  then
renewed  with  minor  adaptations  until  30  June  1995.

the  nature  of 

replacing 

for  NZ  butter 

The  expression  ‘tariff  quota  for  New  Zealand’  is  not
completely  accurate.  This  Agreement  included  a  tariff
the  autonomous
quota 
concession  under  the  special  arrangements.  The  quota
was  fixed  under  the  Agreement  and  in  accordance  with
WTO  obligations  as  76 667  tonnes  per  year,  an  increase
over  the  maximum  quantity  allowed  to  be  imported
under  the  special  arrangements  for  the  preceding  period
of  51 830  tonnes  per  year.  The  new  tariff  quota  for  NZ
butter  was  opened  by  Commission  Regulation  (EC)  No
1600/95.

2.  ADMINISTRATIVE  AND  CONTROL  PROCEDURES

Conditions  of  eligibility  for  the  NZ  quota  for  butter

2.1. There  is  no  express  reference  in  Regulation.  No
858/81  to  the  reasons  for  the  technical  specifications  in
particular  the  fat  content.  The  recitals  provide  only  two
relevant explanations about the type of butter covered by
the  quota:

—  arrangements  should  be  made  to  permit  NZ  to
continue  to  export  butter  to  the  UK  on  special  terms
and

—  provisions  should  be  made  that  the  New  Zealand
butter  in  question  may  be  used  only  for  direct
consumption.

Besides,  at  that  time  a  major  simplification  in  the
management  of  the  system  was  introduced.  The  system
based  on  a  minimum 
import  price,  which  was
administratively  burdensome  to  control  was  replaced,  by
a  reduced  levy  system  while  continuing  to  guarantee
sufficient protection of the market. The reduced levy was
expressed  as  a  percentage  of  the  intervention  price  for
salted  butter.

In  order  to  calculate  this  reduced  levy  it  was  decided,  in
Council,  to  specify  the  milk-fat  content  of  NZ  butter  in
conformity  with  the  milk-fat  content  of  salted  butter
eligible  for  intervention  in  the  UK.

Finally,  satisfying  this  provision 
implied  that  New
Zealand  could  not  artificially  increase  its  quota  by
exporting  butter  with  a  fat  content  exceeding  82 %.

Certification  of  butter  for  quota  purposes

2.2. Protocol  18  certificates  were  issued  by  the  New
Zealand  High  Commission  in  London,  the  competent
authority  selected  by  the  New  Zealand  Government  and
accepted  by  the  UK  authorities.  This  agency  was
responsible  for  limiting  the  issue  of  certificates  to  the
quantity  agreed  by  Council  Regulation  and  to  products
respecting the eligibility criteria. Therefore, this body had
the  initial  responsibility  for  control.  The  UK  Customs
authorities  were  presented  with  four  copies  of  the
Protocol  18  certificate 
import
declaration. Since the two documents had to be presented
together,  there  was  no  requirement  that  the  details  given
in  the  Protocol  18  certificate  should  be  repeated  on  the
import declaration.

together  with  an 

Control  provisions

2.15. The  fact  that  the  Regulation  does  not  contain
specific  control  provisions  is  not  peculiar  to  the  New
Zealand  Agreement.  It  does  not  absolve  the  Member
State 
from  applying  appropriate  procedures.  These
procedures, in common with those for all imports, should
ensure 
that  selective  controls  based  on  a  proper
assessment  of  the  risk  involved  are  exercised.

24.4.98

EN

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C  127/17

3.  RESULTS  OF  THE  AUDIT

General

In  1980,  when 

3.1(a)  The  Commission  does  not  consider  that  import
licensing  procedures  should  have  been  applied  given  the
the
legal  basis  described  below. 
Commission proposed to extend the New Zealand butter
quota  to  all  Member  States,  it  considered  introducing  an
import licence system. In the event the Council decided to
limit the imports to the UK and the Commission opted to
retain  the  Protocol  18  certificate  as  the  means  of
controlling  quantities  and  certifying  that  the  eligibility
criteria  were  met.  The  maintenance  of  this  method  took
account  of  the  traditional  nature  and  national  character
of  the  special  arrangements.

the  Council  Regulations  which 

Title  III  of  Regulation  (EEC)  No  804/68  sets  out  the
general  system  applicable  to  trade  in  dairy  products
between the Community and third countries. Protocol 18
and 
subsequently
continued the special arrangements for NZ butter did not
provide  for  trade  between  a  third  country  and  the
Community,  but  authorised  one  Member  State  to  import
certain  quantities  of  butter  from  a  particular  third
country on the condition (until 1993) that the butter was
not traded within the Community or exported out of the
Community.  It  was  a  special  arrangement  for  which
specific  procedures  were  laid  down  in  the  Council
Regulations  whose  legal  base  was  Protocol  18.  As  far  as
the 
there  was
therefore  a  lex  specialis.  While  Article  13  of  Regulation
(EEC)  No  804/68  provided  generally  that  the  import  of
dairy  products  was  subject  to  the  presentation  of  an
import  licence,  Article  4  of  Regulation  (EEC)  No  858/81
(and subsequent Regulations) provided that the import of
New  Zealand  butter  under  the  special  arrangements  was
conditional  on  the  presentation  of  a  certificate  showing
that  the  butter  met  the  requirements  for  eligibility.  This
specific  rule  took  priority  over  the  general  rule.

import  procedures  were  concerned, 

subjects 

limited  resources  for  making
The  Commission  has 
inspections 
for
in  Member  States.  The 
examination  are  therefore  selected  using  risk-analysis
techniques.  The  aim  is  to  gain  the  maximum  assurance
from  the  visits  made  and  therefore,  in  the  absence  of
specific  information  (for  example  that  referred  to  in
paragraph  3.14  of  the  Court’s  report),  those  topics  that
have  wide  application  are  usually  selected.  Thus  the
procedures  used  to  apply  the  standard  system  of  tariff
preferences  was  inspected  in  1993  in  the  UK,  as  well  as
other  Member  States.  (This  did  not  include  the  special
arrangements  with  New  Zealand.)  The  1998  inspection
programme  will  include  an  examination  of  the  workings
of  other  specific  preferential  agreements. 

Weekly  returns  of  butter  imports

3.3. The  Commission  sought  detailed  information  for
market  management  reasons  and  used  the  information
for  that  purpose  particularly  during  sensitive  periods.

Control  of  quantity  limits

3.6. The  Commission  has  been  monitoring  the  UK
authorities’  actions  to  establish  and  recover  the  amounts
due.  According  to  the 
information,  criminal
proceedings  have  been  started  for  related  offences.
Security  for  the  debts  is  held  but  these  are  currently  the
subject  of  appeals  by  the  companies  concerned.  The
monitoring  of  progress  will  continue.

latest 

Accuracy  of  weight  declarations

3.8. The  Commission  continues  to  monitor  the  UK
authorities’  actions  to  establish  and  recover  any  amounts
due.  It  is  aware  that  customs  debts  have  now  been
established  for  both  butter  and  cheese  imports.  These
debts  are  the  subject  of  appeals.

Clearance  into  free  circulation  from  bonded  warehouses

(e) There 
post-clearance  checks. 

no 

is 

obligation 

to 

perform 

such

3.10. The  Commission  will  continue  to  monitor  the
outcome  of  the  UK’s  further  investigation  of  this  issue.

(f) Regarding  monitoring  the  use  of  the  procedure,  in
1983  the  Commission  asked  the  UK  authorities  to  verify
an  apparent  overshoot  of  the  quota  quantitative  limits.
The  UK  trade  data  showed  higher  butter  imports  from
New  Zealand  into  the  UK  than  provided  for  by  the
quota.  However,  according  to  the  UK  authorities,  the
NZDB  had  given  categorical  assurances  that  they  had
taken  the  greatest  possible  care  not  to  place  into  free
circulation  in  any  year  any  butter  or  cheese  above  the
quantity  allowed  under  the  quota  arrangements.  The
Commission  was  unconvinced  by  this  argument  and
requested  further  checks.  The  UK  customs  authorities
carried  out  further  checks  that  showed  that  the  quota
limits  had  not  been  exceeded.

Respect  of  maximum  fat  content  provisions

3.15. The  Commission  agrees  with  the  Court  that  the
butterfat  parameter  should  be  satisfied  on  a  consignment
by-consignment  basis  and  that  the  Customs  Code  in  this
respect  is  clear.

While  reserving  its  position  regarding  the  past,  NZ  has
accepted  that  it  apply  in  the  future,  but  has  asked  for
technical  talks  to  establish  the  testing  and  sampling
methods,  on  a  mutually  agreed  basis,  in  order  to
demonstrate  compliance  in  this  regard.  These  technical
talks  are  under  way.

C  127/18

EN

Official  Journal  of  the  European  Communities

24.4.98

3.18  and  3.20. The  applicability  of  the  fat-content  rules
remains the subject of court proceedings. The NZDB has
indicated  to  the  ECA  that  it  was  unable  to  make  further
details  of  the  analysis  available  because  it  bears  directly
on  matters  currently  before  the  UK  courts.  It  was  also
indicated that it is prepared to release that material at the
appropriate 
legal  proceedings  are
the 
concluded.

time  once 

Eligibility  of  processed  cheese  containing  third  country
cheese  for  export  refunds

3.40. The Commission services are examining a possible
proposal to the Council that export refunds shall be paid
only  on  milk  and  milk  products  wholly  obtained  in  the
Community.

The  Commission  is  aware  as  a  result  of  monitoring  the
UK  authorities’  actions  that  customs  debts  have  been
established  based  on  the  figures  given  by  the  Court  for
imports  of  butter  considered  ineligible  for  inclusion
because of its fat content. The companies concerned have
appealed  against  the  assessments.  The  Commission  will
continue  to  monitor  future  action.

3.19. See  reply  to  paragraph  3.15.

Respect  of  direct  manufacture  criterion

3.25  to  3.26. The  Commission  notes  that  the  UK
authorities  have  a  period  of  56  days  from  the  release  of
the  Tribunal  decision  concerning  the  two  specimen
samples  to  lodge  an  appeal.

Disposal

3.32. Commission Regulation (EEC) No 570/88 aims to
increase demand for butter with a view to improving the
balance between supply and demand on the Community’s
butter  market.  New  Zealand  butter  forms  part  of  the
supply  and  from  a  market  management  point  of  view,  it
is  not  relevant  which  butter  is  used  for  industrial
purposes. The Commission has always estimated the cost
of  the  butter  concession  to  New  Zealand  as  the  sum
required  to  export  an  equivalent  quantity  of  butter  to
levy/duty  paid  on
third  countries 
import

less  the  reduced 

3.34. The  Commission 
is  monitoring  an  ongoing
investigation  concerning  suspected  repackaging  of  NZ
butter.

3.35. The  Commission  has  now  been  informed  by  the
competent  national  authority 
is
applicable  for  such  an  infringement.

that  no  sanction 

3.36. The  Commission  agrees  with 
conclusions  and  is  still  examining  these  cases.

the  Court’s

Cheese  for  processing  —  Eligible  end-use  products

3.39. On  the  basis  of  the  information  available  the
Commission agrees with the Court that the Member State
concerned has a financial responsibility. The Commission
will  contact  the  competent  authorities  to  obtain  further
information  and  will  take  recovery  action  if  appropriate.

4.  SWISS  EMMENTAL

General  comment

The  cases  referred  to  by  the  Court  are  all  under
examination  by  the  Member  States  involved.  Indeed
France,  Germany  and  Italy  have  all  reported  the
establishment  of  customs  debts  under  the  irregularity
reporting  arrangements  provided  for  under  Regulation
(EEC)  No  1552/89.  The  Commission  will  follow-up
appropriately  the  subsequent  recovery  action.

5.  CONCLUSION

5.2. The  Commission  will  continue  to  monitor  the
recovery action.

5.3. The  Commission  does  not  consider 
the
monitoring  and  control  procedures  were  in  force  at  the
Commission  level.  The  weekly  returns  were  used  by  the
Commission  for  the  purposes  for  which  it  sought  the
information,  namely 
in
particular  orderly  marketing  of  New  Zealand  butter  in
the  UK. 

for  market  management, 

that 

5.4. Should 
this  prove  necessary  an  appropriate
proposal  regarding  the  issuing  agency  will  be  considered
when  all  elements  are  available.

5.5. The  Commission  wishes  to  point  out  that  agencies
issuing certificates while they may have a commercial and
financial interest in the transaction is a possible feature of
all  preferential  systems.

taken  by 

5.6. First  indent The  Commission  concludes  from  its
ongoing  monitoring  of  actions 
the  UK
authorities  so  far  that  customs  debts  totalling  ECU  128
million  have  been  established.  The  UK  authorities’
investigations  are  continuing.  They  have  made  initial
estimates that a further ECU 74 million of underpaid levy
may be demanded. All the debts established so far are the
subject  of  appeals  by  the  companies  concerned. 

Second  and  third  indents A  round  of  technical  talks,  as
referred  to  in  the  reply  to  3.15,  has  been  initiated  to
ensure  that  the  system  functions  properly  in  future.

Fourth  indent Given  the  number  of  such  arrangements
the  Commission  cannot  possibly  conduct 
in-depth
itself.  (The
examinations  of  all  these  arrangements 

24.4.98

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C  127/19

Commission  has  the  resources  to  make  around  25  visits
during  a  year.)  It  is  however  planned  that  the  own
resources  inspection  programme  for  1998  will  cover
preferential systems including some specific arrangements.
The  Commission  will  however  ask  Member  States,  who
have 
these
responsibility 
arrangements,  to  give  priority  to  such  systems  when
undertaking  their  own  examinations. 

the  primary 

to  control 

indent The  Commission  considers 

Sixth 
the
principles  governing  the  eligibility  of  third  country
products  to  export  refunds  are  clear.  If  substantial

that 

transformation  of  the  product  in  the  Community  gives
rise  to  a  change  of  origin,  and  hence  to  a  new  product
which  is  exported,  that  product  is  entitled  to  a  grant  of
export  refunds  in  the  normal  way.  If  the  imported
product  is  exported  without  prior  transformation,  the
refund granted cannot exceed the duty paid on import in
accordance  with  Article  17(2)  of  Council  Regulation
(EEC)  No  804/68.

The  Commission  is  currently  undertaking  further  work
on 
‘substantial
transformation’.

the  question  of  what  constitutes