Special Report No 1/2003 concerning the prefinancing of export refunds, together with the Commission’s replies
Date: 2003-02-13
Institutions: European Court of Auditors
Subjects: Community budget, export financing, export refund

24.4.2003

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Official Journal of the European Union

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I

(Information)

COURT OF AUDITORS

concerning the prefinancing of export refunds, together with the Commission’s replies

SPECIAL REPORT No 1/2003

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

(2003/C 98/01)

CONTENTS

Paragraph

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION TO PREFINANCING AND DESCRIPTION OF THE AUDIT . . . . . . . . . . . . . .

The reasons for paying export refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Refunds may be paid in advance of the actual export . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Why was prefinancing introduced? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Responsibility for prefinancing legislation is shared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The cost of prefinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PREFINANCING IN PRACTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prefinancing has been found to be problematic in the past

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

How much prefinancing takes place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A complex system of administration and control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The regulatory framework is not clear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Processing causes further complication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial reality has caused the regime to become unwieldy . . . . . . . . . . . . . . . . . . . . .

A SCHEME THAT NO LONGER MEETS ITS OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cereals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-X

1-11

1-4

5

6

7-8

9

10-11

12-29

12

13

14

15-21

22-26

27-29

30-38

33-37

38

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39-40

RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41

ANNEX — Observations on the Member States’ implementation of prefinancing . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

3

3

4

4

4

4

4

4

4

5

7

7

8

9

9

10

10

10

11

12

14

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SUMMARY

Many agricultural products cost more inside the EU than outside. A subsidy is paid to exporters to
I.
compensate for the difference between the EU price and a ‘world market’ price. In 2001, 3 394 million euro
was paid in the form of these export refunds.

II.
Prefinancing was introduced in 1969 in order to maintain Community preference for EU products over
those from third countries temporarily imported for storage or processing prior to re-exportation. Approxi-
mately 11 % of all refund payments are made under the prefinancing regime, whereby an advance payment is
made to the exporter up to 240 days prior to physical export (180 days for prefinancing plus 60 days as for
exports not subject to prefinancing). Prefinanced goods are held in customs control prior to export, during
which time they may be processed into other goods or remain in storage in the same state.

The audit examined the operation of the prefinancing regime as part of the export refund system in

III.
eight Member States as well as the management of the regime by the Commission.

IV.
Of the refunds paid in 2000 around 11 % of all refunds, estimated at around 600 million euro, were
under the prefinancing regime. There is no additional cost to the EU budget of the prefinancing arrangements.
There are however certain costs associated with the arrangements (financing costs in terms of interests on
refunds paid in advance of when they would normally be paid, and administrative costs) which are born by
Member States.

The regime has proved to be problematic. The last extensive check by the Commission, in 1997, revealed
V.
weaknesses in the checks made by national authorities, and financial corrections of over 166 million euro were
imposed by the Commission on the Member States. No in-depth review of procedures was subsequently car-
ried out.

VI.
The regulatory framework covering the prefinancing regime is complex to interpret and control provi-
sions are less than transparent. The checks on prefinanced refunds are not specified (number, scope and tim-
ing). Wide differences were found both between Member States, and within different regions inside Member
States, in the type and depth of controls carried out on prefinanced exports.

The records used for control purposes in respect of processing under prefinancing did not reflect real-
VII.
ity, the result is a waste of time and money for the parties concerned and a risk that reliance is placed on checks
carried out on records that are not reliable.

VIII.
The way in which large quantities of beef are placed under prefinancing and then exported in many
separate shipments mixed with other refund claims makes the audit trail extremely complex and control pro-
cedures become cumbersome, costly and excessively time consuming.

IX.
The original aims of prefinancing are no longer the only ones for which the regime is used. It is now
used primarily to increase control over beef exports and in the cereals sector to extend the period during which
export licences can be executed.

The Court recommends that a complete review of the prefinancing regime be made and consideration

X.
should be given to its removal.

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INTRODUCTION TO PREFINANCING AND DESCRIPTION OF
THE AUDIT

regime whereby refunds can be paid up to 240 days in advance
of the actual export (180 days for prefinancing plus 60 days as for
exports not subject to prefinancing).

The reasons for paying export refunds

1.
In general, prices for agricultural products are higher inside
the EU than outside. In order to allow EU produce to be exported
at a competitive price a subsidy is paid to compensate for the dif-
ference between the EU price and a ‘world market’ price.

3.
The rate of refund payable is calculated by the Commis-
sion and varies depending upon the product concerned and the
difference between the prevailing EU and a, sometimes theoreti-
cal, world price for that product. For certain products the amount
of refund payable depends upon the final destination of the prod-
uct exported.

2.
These payments are known as export refunds and around
8 % of agricultural subsidies, making up 3,7 % of the total EU
budget (3,4 billion euro), was spent on this type of support in
2001. Of the refunds paid in 2000 (the last year for which detailed
information was available), around 11 % of all refunds, esti-
mated (1) at around 600 million euro, was under the prefinancing

The refund is paid to the company or person exporting the
4.
product from the customs territory of the EU under a licence
granted by the Commission. Each payment is the subject of a
separate claim and these claims are administered by the national
authorities competent in each Member State (generally the Cus-
toms service and the paying agency (2)).

The importance of agriculture in general and export refunds in particular, to the EU budget

Illustration 1

Source: Budget outturn 2001 from draft budget 2003.

(1) Not all Member States provide the information to identify prefinanced
refunds, of the Member States where information was provided, 11 %
was prefinanced.

(2) The paying agencies are the organisations set up by each Member
State to administer the payment of agricultural subsidies under the
common agricultural policy (CAP).

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Refunds may be paid in advance of the actual export

DG TAXUD draws up and interprets the Community Customs
Code under which goods are held in customs control.

The export refund is payable when the goods concerned
5.
have left the customs territory of the EU. Refunds may be paid in
advance of the actual export where the beneficiary lodges a guar-
antee covering the amount of the payment plus a certain percent-
age. This guarantee is released when all conditions for payment
have been met. There are two types of payment in advance:

— advance payment, where the payment is made to the benefi-
ciary when the declaration of export is lodged (this can be
up to 60 days prior to physical export). This payment is
made subject to a 110 % guarantee),

— prefinancing of the refund, where payment is made as soon
as the basic products to be exported are placed under cus-
toms control for storage or processing for a period of up to
240 days prior to removal for export (180 days for prefi-
nancing plus 60 days as for exports not subject to prefinanc-
ing). In reality this means that the goods are placed in an
approved place or store (which can be the exporters’ own
premises) and are subject to the possibility of physical checks
by national authorities. Payment is made against a prefinanc-
ing (payment) declaration and is subject to a guarantee equal
to 115 % of the payment.

Why was prefinancing introduced?

6.
Export refunds have existed since 1968, and the possibil-
ity of prefinancing the refund payment was introduced in 1969 (1).
The reason given for the introduction of prefinancing was to put
goods of EU origin on an equal price footing with cheaper non-EU
goods temporarily imported or imported for processing and
re-export (inward-processing arrangements — IPR).

Responsibility for prefinancing legislation is shared

The cost of prefinancing

There is no additional cost to the EU budget of the prefi-
9.
nancing arrangements. There are however certain costs associated
with the arrangements (financing costs in terms of interests on
refunds paid in advance of when they would normally be paid,
and administrative costs) which are borne by Member States.

The audit

10.
The audit covered the application of prefinancing in
respect of beef and cereal export refund payments at the level of
the Commission and on the spot in Member States at paying
agencies, Customs services, beneficiaries, ports, stores and ware-
houses. Beef and cereals were selected because they account for
90 % of prefinanced payments. The Member States and beneficia-
ries visited were also selected on the basis of the importance of
prefinancing payments. The audit examined the management of
the regime by the Commission, the implementation of the regime
by the national authorities and the legality and regularity of a
sample of 117 payments from the 1999 EAGGF year.

The following questions were set for the audit of the pre-

11.
financing regime.

(a) Were the reasons for the introduction of the regime still

valid?

(b) Are the aims of the regime being achieved?

(c) Could the regime be usefully simplified, removed or replaced?

The Customs Code and its implementing provisions lay
7.
down the detailed rules for goods held under customs control
including those placed under prefinancing arrangements. Where
another regulation specific to an agricultural market differs from
the Customs Code then the specific regulation takes precedence.

PREFINANCING IN PRACTICE

Prefinancing has been found to be problematic in the past

8.
The Commission management of the regime is primarily
the responsibility of the Directorate-General for Agriculture (DG
AGRI) which has responsibility for export refunds in general and
for the market specific measures applicable to exported goods.

12.
The last major review by the Commission of prefinancing
of export refunds was carried out in 1997 (on EAGGF payment
years 1993 and 1994) (2). The study, made by the clearance of

(1) Council Regulation (EEC) No 565/80 (OJ L 62, 7.3.1980, p. 5).

(2) Commission document VI/5210/96, consolidated, of 15 April 1997.
Summary report on the results of inspections concerning the clear-
ance of the EAGGF Guarantee Section accounts for 1993.

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accounts unit, covered seven Member States examining the beef
and cereals sectors and found significant weaknesses in the opera-
tion of the prefinancing regime. In general, the Commission made
flat-rate corrections of 10 % in respect of cereal export refunds
and 5 % in respect of beef export refunds in the majority of the
Member States they visited. In total, Member States had to repay

over 140 million euro to the Commission (see Table 1). A later
audit in Spain uncovered irregularities in the prefinancing regime
and as a result the Commission imposed a financial correction of
26 million euro. Despite these negative findings, no further review
of the regime or its controls was carried out and, at the time of
audit, none was foreseen by the Commission services.

Table 1

Clearance decisions taken in 1997 as a result of the prefinancing audit by the Commission on financial years
1993 and 1994

These corrections were proposed on a flat-rate basis, i.e. the Member State was fined a percentage of the total
prefinanced refunds it had claimed from the EAGGF budget for that year. Certain Member States appealed against these
decisions and the Court of Justice has yet to decide on the outcome in one case (*).

Member State

1993

1994

Beef

10 %

5 %

5 %

5 %

5 %

Cereals

10 %

10 %

10 %

No audit

10 %

Beef

10 %

5 %

5 %

5 %

5 %

Belgium

Germany

France

Italy

(*) Netherlands

Total

Source: Commission Decision 97/333/EC (OJ L 139, 30.5.1997).
Commission Decision 98/358/EC (OJ L 163, 6.6.1998).

Cereals

10 %

10 %

10 %

Amount
(EUR)

19 635 473

37 103 644

59 948 684

No audit

11 361 336

10 %

14 821 602

142 870 739

How much prefinancing takes place

The Commission was initially unable to provide any infor-
13.
mation relating to the extent to which refunds are prefinanced.
Statistics are not kept on the quantity or value of products exported
under the prefinancing regime, or for the amount of time that the
exported goods are held under the prefinancing procedure prior
to export. An analysis of the 2000 EAGGF payment data for-

warded by the paying agencies (the last year for which the audi-
tors had the data available at the time of audit), indicated that
some 600 million euro, 11 % of total refunds, was prefinanced.
However, this data is not complete and an obligation to provide
sufficient detail did not come into force until the start of the
EAGGF year 2002. The analysis of transactions tested in Member
States, relating to 1999, shows the length of time the goods in
question remained under prefinancing (see Tables 2 and 3).

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Table showing extent of prefinancing of beef in the Member States audited

Table 2

Member State

Denmark

Germany

Spain

France

Ireland

Italy

Netherlands

Refunds paid
(EUR)

10 281 015

113 439 015

14 945 513

47 020 119

294 632 062

32 763 912

56 455 398

Total

569 537 034

NB: No beef was exported from the United Kingdom.
Source: Paying agencies for the EAGGF year 1999.

Percentage prefinanced

Average time under prefinancing
as per the Court’s sample

25

31

44

60

82

70

22

61

54 days

39 days

25 days

12 days

74 days

38 days

36 days

Table showing extent of prefinancing of cereals in the Member States audited

Table 3

Member State

Denmark

Germany

Spain

France

Italy

Netherlands

United Kingdom

Refunds paid
(EUR)

37 619 784

120 038 104

35 401 709

389 885 096

52 196 669

38 084 267

86 282 834

Total

759 508 463

Percentage prefinanced

Average time under prefinancing
as per the Court’s sample

15

18

10

6

19

37 (1)

1

11

118 days

61 days

58 days

59 days

61 days

38 days

Only one export in year

—

(1) The data received from the Dutch paying agency for cereals and processed products (HPA) were found to contain errors, therefore the

accuracy of this figure cannot be guaranteed.
NB: Cereals exports from Ireland were not audited.
Source: Paying agencies for the EAGGF year 1999.

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A complex system of administration
and control

Extracts from previous Court reports on export refunds in general.

The suspected irregularities identified in this report involve more than 100 million

(i)
euro. (Special Report No 7/2001, paragraph 90).

(ii)
Control of payments by national authorities provides insufficient safeguard against
exploitation of the complex export refund system by fraudulent operators. (Special Report
No 2/90, paragraph 4.7(c)).

14.
Export refunds in general are
complex, the legislation is detailed, the
paperwork onerous. Because of
the
amounts of money and the risks involved,
the physical and documentary checks
need to be thorough. Previous work done
by the Court of Auditors has shown the
export refund system in general to be a
high risk area (1). Concerning the extracts
from previous Court’s reports set out in
the box, the Commission at the time
undertook to take corrective action where
this was not already in progress. Prefi-
nancing adds a further layer of complex-
ity to the export refund system since it
requires customs controls to be carried out while the goods are stored or processed in the period prior to export (see paragraphs 1 and
2 of the Annex).

The low level of irregularity detection by physical control can be read in different
(iii)
ways. It could imply that, generally speaking, operators do comply with Community legisla-
tion or that the controls are an effective deterrent. Conversely, it could also suggest that physi-
cal checks are inadequately targeted or executed and, as a result, ineffective. The Commission’s
findings on the adequacy of Member States’ checks and the findings of this report in respect of
targeting of checks, all point to the latter (Special Report No 20/98, paragraph 3.28).

The regulatory framework is not clear

(intake checks). If Member States carry out intake checks, they
may be counted towards the 5 % requirement provided that there
are also physical checks during the period the goods are in pre-
financing control, checks on the accounting and checks on exit.

15.
The regulatory framework covering the prefinancing
regime is complex to interpret and control provisions are less
than transparent. The provisions are contained in several differ-
ent pieces of legislation often with a particular check not speci-
fied but being by reference to other regimes (notably inward pro-
cessing and warehousing). The Commission’s administration of
the scheme has also been marked by a lack of coordination
between DG AGRI and DG TAXUD on the common interpreta-
tion of provisions relating to prefinancing.

16.
Despite the fact that specific articles were introduced into
a redrafted regulation by the Commission (2) in 1999 to clarify
the control arrangements, the legislative framework for the car-
rying out of checks on prefinanced refunds still fails to specify the
number, scope and timing of these checks.

18.
It is not surprising therefore that wide differences were
found both between Member States and within a Member State
(Denmark, France, Italy) in the type and depth of controls carried
out on prefinanced exports. In certain Member States (Germany,
France) prefinancing transactions are given a higher risk and are
checked more frequently. In some Member States all of the checks
itemised at paragraph 17 above were carried out, in others either
an unspecified number of checks were made or there were simply
no checks except at exit (see Table 4).

17.
Member States customs services are required to check
physically 5 % of all export refund consignments at the time the
export declaration is presented (3). There is, however, no obliga-
tion to check goods at the time they are placed in prefinancing

19.
Certain practices have been penalised by the Commission
clearance-of-accounts unit or effectively outlawed by written opin-
ion of the Commission division responsible for the management
of a particular market. An example of this is the practice seen in
the case of common storage of bulk products.

(1) Eight special reports have been published since 1990 dealing directly

or indirectly with the control of export refunds.

(2) Articles 26 and 28 of Commission Regulation (EC) No 800/1999

(OJ L 102, 17.4.1999, p. 11).

(3) Council Regulation (EEC) No 386/90 of 12 February 1990 on the
monitoring carried out at the time of export of agricultural products
receiving refunds or other amounts (OJ L 42, 16.2.1990, p. 6).

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Table 4

Processing causes further complication

Table to show rate of specific checks carried out on prefinanced
refund transactions in the Member States

Member State

Intake checks

During storage
checks

Exit checks

(in %)

Denmark

Germany

Spain

France

Ireland

Italy

Netherlands

2 (since
mid-1999)

No percentage
specified

100

0

5

5

100

2

0

0

5

2

No percentage
specified

1

No percentage
specified

5

5

5

5

5
5 (1)

5

5

United Kingdom No percentage

specified

(1) At least one exit checked per prefinancing payment declaration.
NB: The exit checks are those made under Regulation (EEC) No 386/90 covering all
export declarations and are given as a minimum. In some Member States there
is a customs presence at every exit from prefinancing (e.g. Germany); in other
Member States particular customs offices increase the rates of check according
to local risk analyses.

Source: Member States.

20.
Common storage is a practice whereby goods under pre-
financing are stored together physically with those from different
customs regimes. For example wheat under customs control for
processing for which a refund has been paid in advance stored in
the same physical store as wheat for domestic consumption or for
export outside the prefinancing regime. It is in the operator’s
interest to do this as separate storage is expensive, complex and
time consuming. The Customs Code however explicitly rejects
common storage for prefinanced goods (1). Common storage is
treated differently in different Member States and the Commis-
sion has not been consistent in ensuring that this requirement is
respected.

In France the interpretation of the rules has been strict
21.
and prefinanced goods are physically separated from those in
other regimes by means of locks and chains or by sealing storage
areas and silos. This interpretation was made following a financial
penalty applied by the Commission in relation to lax controls. In
others (Germany, Spain, Netherlands), normal commercial prac-
tices make the control effectively impossible. Where the regula-
tions are most strictly interpreted certain operators abandoned
prefinancing due to the costs, both administrative and financial,
outweighing any advantage gained.

(1) See Article 534(2) of Commission Regulation (EEC) No 2454/93

(OJ L 253, 11.10.1993).

22.
Where basic products are processed whilst under prefi-
nancing (grain into flour, beef into tinned beef, etc.) the quantity
of the processed product on which the refund is based is calcu-
lated on theoretical yields applied to the basic products. Theoreti-
cal yields are provided for either by legislation (cereals) or by the
requirement to place a quantity of the basic product under cus-
toms control sufficient to manufacture the declared quantity of
processed product (beef conserves).

The theoretical yields applied are those laid down for
23.
inward processing and they include yields for by-products in order
to ensure that all products manufactured under the IPR arrange-
ments are either re-exported or duty is paid. For example when
wheat is processed into flour, bran is produced as a by-product.
The by-products are of no direct financial importance for prefi-
nancing as refunds are paid only for the main product exported
and the by-products remain in free circulation in the EU (see also
paragraph 7 of the Annex in respect of cereals in Germany).

Exporters are required to keep accounting records in
24.
respect of processing to allow a subsequent check on the export
operation. These records were audited during the visits on the
spot. Without exception it was found that the records held in
respect of the regulations were an exact reflection of the customs
declarations and the yields achieved matched exactly the theoreti-
cal yields laid down. These records, drawn up solely to facilitate
customs control, were in fact a virtual set of stock accounts that
did not match the reality of processes that vary in yield depend-
ing on a range of outside factors.

25.
Where possible, attempts were made to reconcile these
records to the commercial accounts and stock records of the com-
panies concerned. The result being that variations were found,
with more or less of the basic product being required to achieve
the required quantity for export than was declared (see also para-
graph 6 of the Annex).

26.
The accounting records used for control purposes in
respect of processing under prefinancing did not reflect reality
and did not allow the requirements of the regulation to be checked
properly. The keeping of a separate set of ‘virtual’ stock accounts
specifically for customs control was not the intention of the pre-
financing legislation. The result is a waste of time and money for
the parties concerned as no reliance can be placed on checks car-
ried out on records that do not reflect reality.

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Commercial reality has caused the regime to become unwieldy

27.
The intention of export refunds is to allow EU goods to
compete successfully on world markets. In facilitating the export-
ers’ needs, the regime has become more convoluted and unwieldy.
Storage and transport are expensive, therefore in order to mini-
mise costs for exporters, whilst retaining customs control over
goods, equivalence is allowed. This allows basic products to be
stored in one place, under prefinancing, whilst the actual process-
ing and export of goods takes place elsewhere. Customs have to
check that the goods are of equivalent quality and when the export
is successfully completed the equivalent goods are released from
customs control. Obviously the paperwork and control measures
covering this type of operation are more complex than a direct
export or even a normal prefinancing operation.

28.
In the case of grain processed into flour the industry is
geared to continuous milling of grain, often 24 hours a day. The
strict regulatory requirements mean that the prefinanced grain
and flour should be separately identifiable in the records and
physically stored separately from product under other customs
regimes. Where this rule has been strictly interpreted (certain
regions in France) the cost to exporters has proved prohibitive
and certain operators have discontinued prefinancing and export
directly.

correct quality enters the process and that the processed product
exported is produced from grain of an equivalent quality. The
operations continue but the authorities cannot follow the prefi-
nanced product through the entire process to export. In reality
therefore the controls required by the regulation cannot be car-
ried out.

A SCHEME THAT NO LONGER MEETS ITS OBJECTIVES

30.
The original objective for the introduction of prefinanc-
ing was to put EU products on an equal price footing with cheaper
non-EU products temporarily imported or imported under the
inward-processing arrangements with suspension of duty.

The majority of prefinanced refunds are paid for beef at
31.
the rate applicable to its condition at the moment of entry into
the prefinancing regime, i.e. fresh or chilled, although it is actu-
ally exported frozen. There are virtually no imports of chilled
meat for processing under the inward-processing arrangements.
Approximately 7 % of beef export refunds is for processed beef
products. Figures for the total amount of processed prefinanced
goods are not held by the Commission.

29.
Elsewhere (e.g. Spain, Italy and certain regions in France),
where the regulations have not been interpreted so strictly, the
authorities aim to ensure that grain of Community origin and

Exporters use the regime primarily in respect of beef,
32.
pork and cereal exports (these three groups make up 96 % of
prefinanced refunds). Wine, sugar, processed products and eggs
and poultry make up the remaining 4 % of prefinanced exports.

Illustration 2

The breakdown of prefinanced refunds by product group

Source: Data provided by the paying agencies.

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Beef

goods it considers as high risk are kept under customs control
throughout the processing/manufacturing procedure (1) and until
such time as they are exported.

For certain types of beef exports the Commission effec-
33.
tively obliges the exporters to use prefinancing by setting a higher
refund rate for goods exported under the regime or setting a rate
only for goods exported under prefinancing. This is to enforce
customs control over high risk goods.

34.
There are special high rates of refund for exports of beef
from male animals in a fresh or chilled state. The rate for the same
beef exported in a frozen state is lower. However beef placed
under customs control in the prefinancing regime in a chilled
state attracts the special high rate even though it is exported in a
frozen state. The Commission does not set a specific equivalent
rate for frozen male beef. As of the 12 January 2001 in respect of
the refund code for the front part of the carcase of bovine ani-
mals, the rates set were as follows:

Destination code

Fresh and
chilled, male
animals

Frozen, all
animals

Ratio frozen to
fresh

(EUR/100 kg)

B02 (mainly Asia and
Africa)

(mainly

B03
Europe)

eastern

039 (Switzerland)

71,5

43,0

23,5

33,5

10,0

11,5

213,4 %

430,0 %

204,3 %

Source: Commission Regulation (EC) No 66/2001 (OJ L 10, 31.1.2001, p. 12).

37.
The Court found significant weaknesses in the customs
control procedures for prefinancing. In its 1997 clearance-of-
accounts audit, the Commission also found such weaknesses.
Therefore it is inappropriate to place reliance upon these proce-
dures. The need to ensure tighter controls over high risk products
is further not a justification for payment of refunds in advance
under the prefinancing regime (see paragraphs 3 to 6 of the
Annex).

Cereals

38.
Refund rates may be fixed in advance. The normal period
of validity of an advance fixing certificate is no more than six
months. Where, however, the goods are placed in prefinancing
and the unexpired period of validity of the advance fixing certifi-
cate is less than three months, the validity of the advance fixing
period is set at three months (2). This is effectively an extension
of the advance fixing by almost three months for goods placed in
prefinancing shortly before the expiry of the validity of the advance
fixing certificate. In the sample of cereals prefinancing transac-
tions tested 43 of 49 cases had the effect of extending the period
of validity of the advance fixing certificate; in 37 of the 49 cases
exports took place after the original period of validity. At present
all certificates can be extended through prefinancing.

CONCLUSIONS

35.
The beef exported under the special beef refund scheme
often involves the placing of a large quantity of beef under a single
prefinancing declaration and many subsequent exports are then
made under separate export declarations. These exports often
involve many different ships and beef mixed with product from
other prefinancing operations, direct exports, and goods from
other exporting companies. The reconciliation of the export docu-
mentation and proofs of arrival at destination (required for all
beef exports) can become so complex that it is not auditable
within a reasonable time.

39.
Prefinancing has evolved from its initial intention of put-
ting EU goods on an equal price footing with cheaper non-EU
goods temporarily imported under the IPR arrangements, into an
overly complex and unwieldy system with different aims. The rea-
sons for the introduction of prefinancing are not the prime rea-
sons for its current uses. It is now used primarily to increase con-
trol over beef exports (see paragraphs 33 to 37). The need for
increased controls is, in itself, not sufficient justification for pay-
ment of refunds in advance under the prefinancing arrangements.
Further, the Commission’s own services have imposed financial
penalties on Member States because of inadequacies in the prefi-
nancing control procedures (see paragraph 12). In the cereals

36.
Beef conserves, such as corned beef, can now only be
exported via prefinancing i.e. manufactured from beef placed
under customs control. The Commission’s only justification for
using the prefinancing regime in these cases is to ensure that the

(1) See, for example, preamble to Commission Regulation (EC) No 1089/

2001 (OJ L 149, 2.6.2001, p. 27).

(2) Article 28(6) of Commission Regulation (EC) No 800/1999 (OJ L 102,

17.4.1999, p. 11).

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sector it is used in the main to extend the period during which
export licences can be executed (see paragraph 38). The Commis-
sion should consider whether it is appropriate to use prefinancing
to achieve these other aims.

be the case if the lower rate, calculated by the Commission, for
frozen beef was applied (see paragraph 34).

40.
The majority of payments are for exports of frozen beef
which, logically, was not the intention of the regime given that it
was designed to counterbalance inward-processing arrangements
and temporary importation under warehousing. A higher rate of
refund is paid based on the fresh state of the beef when it entered
prefinancing. This has a higher cost to the EU budget than would

41.
In the light of the findings of the Court’s audit and those
of the Commission’s own control service (clearance of accounts),
the prefinancing regime should be reviewed and consideration
should be given to its removal.

RECOMMENDATION

This Report was adopted by the Court of Auditors in Luxembourg at its meeting of 13 February 2003.

For the Court of Auditors

Juan Manuel FABRA VALLÉS

President

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OBSERVATIONS ON THE MEMBER STATES’ IMPLEMENTATION OF PREFINANCING

ANNEX

Prefinancing contributes to delays in release of guarantees

In some cases (notably beef refunds in Denmark but not exclusively) problems existed in respect of the timely release

1.
of the guarantees held covering the advance payment of the refund.

These delays were primarily caused by non-functioning administrative systems (Denmark) (1), but were also the result
2.
of the inherent complexity and excessive documentation required by the prefinancing system (certificates, laboratory analy-
ses, etc.) and as noted in previous reports by the Court (2), the onerous requirement for proofs of arrival at the goods final
destination to be forwarded and verified in the case of differentiated refunds (see paragraph 14).

Checks over prefinanced beef exports

3.
Beef is the main product exported under prefinancing. The majority is exported as frozen beef under the special beef
refund scheme with smaller amounts exported as other types of beef e.g. processed beef (tinned and corned beef for
example).

4.
The number and frequency of checks on beef are not uniformly applied (see paragraphs 16 to 18 in the report above).
In certain specific cases checks were inadequate to ensure a continuous chain of control over the beef from slaughter to
export. For example in Spain inadequate sealing of the boxes lead to a risk of substitution of the beef during the period prior
to export. As a result of the Court’s audit, improvements have been made to the Spanish national procedures in an effort to
eradicate this weakness.

5.
In Ireland the prefinanced beef exports are discharged at the port of exit rather than at the office where the prefinanc-
ing declaration was made. As a result of this practice, the strict rules laid down in the Community regulations (3) are not
applied and a simplified national procedure is in operation. The checks required relating to identity of the product on dis-
patch and checks on substitution of the goods cannot be carried out correctly under these circumstances.

6.
In France and Italy checks on processed beef products were not adequate. In order to comply with the regulations,
registers had been introduced to monitor the production of the finished product from the basic product (beef) in store. These
records, which were used for checks, were not based on reality and the actual quantities of beef used and quantities of
finished product obtained could not be accurately monitored (see paragraphs 25 and 37).

Different interpretations of the yield requirements

7.
In all Member States visited the beneficiaries used the standard rates of yield in order to calculate quantity of the basic
product being put under customs control for prefinancing. Germany was the only Member State to carry out ex post checks
on these yields. These checks revealed that the real rate of yield had been significantly lower than the standard rate used.
This meant that an insufficient quantity of the basic product had been placed under customs prefinancing control. Accord-
ing to the IPR rules, which have to be followed for processing under the prefinancing regime, the real rates of yield must be

(1) The problem in relation to beef refunds has subsequently been ‘normalised’ according to a Danish Public Accounts Committee report of

February 2002.
See Special Report No 7/2001 concerning export refunds (OJ C 314, 8.11.2001, p. 1).

(2)
(3) Article 5(7) of Commission Regulation (EC) No 800/1999 (OJ L 102, 17.4.1999, p. 11).

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used where they differ from the standard rates. The outcome of the exercise led to recovery orders of some 112 000 euro.
However, they were remitted because the beneficiaries were acting in good faith. The real rate of yield is now used by one
of the beneficiaries for its prefinancing operations. The strict but legally correct application of the rules has, however, an
unwanted effect for export refund purposes. The purpose of export refunds is that the processed product, for which an
export licence is issued, is to be exported in the quantity applied for and that the quality is in conformity with export refund
code granted (see paragraph 23).

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THE COMMISSION’S REPLIES

SUMMARY

The Court estimates that EUR 600 million, i.e. some 11 %
IV.
of total refund expenditure, was prefinanced. This estimate of the
Court is close to the order of magnitude of the Commission’s own
estimate.

V.
The Commission services conduct continuous audit of all
aspects of EAGGF expenditure, including export refunds, on the
basis of risk analysis. While they have not carried out an audit of
the prefinancing arrangements per se since 1997, they have been
actively examining matters related to export refunds. They have
also been following the progress of the Court’s audit, which began
in 2000 and has taken an approach similar to that of the earlier
Commission audit. They have taken account of the Court’s find-
ings in the risk analysis used to determine its future work pro-
gramme.

Furthermore, prefinancing by way of storage for unprocessed beef
was initially introduced against the background of the very spe-
cific way most beef for export is produced and traded. This situ-
ation still prevails today.

Prefinancing has also been used to ensure better monitoring of
certain processed beef products.

The Commission shares the Court’s view that a review of

X.
the system is necessary.

INTRODUCTION TO PREFINANCING AND DESCRIPTION OF
THE AUDIT

VI.
The Commission shares the Court’s opinion concerning
the complexity of the refund prefinancing arrangements. The
Commission has made an effort to improve the implementation
of physical checks in the Member States, and is planning to fur-
ther harmonise checks on products subject to prefinancing.

2.
The Commission would stress that this EUR 600 billion
advance does not involve any additional cost to the Community
budget.

VII.
The Commission will, in response to the Court’s com-
ments, examine whether standard rates of yield should no longer
be applied for prefinancing purposes. It would add that theoreti-
cal standard yields have never existed for beef.

VIII.
The Commission services would agree, regarding prefi-
nancing of beef, that control procedures for paying agencies are
cumbersome and costly. The financial guarantee put up by an
exporter cannot be liberated until the paying agency has recon-
ciled the quantity placed under prefinancing with the quantity or
quantities exported and placed in free circulation in a third coun-
try. This reconciliation is a routine and integral part of paying
agency procedures.

The period of prefinancing for meat processing is limited

5.
to three months.

The maximum period of prefinancing for storage is 180 days.

PREFINANCING IN PRACTICE

IX.
The initial objectives of the prefinancing, which are to
allow the processing factories in the Community to use Commu-
nity basic products on equal footing with third-country com-
modities processed under the inward-processing arrangement and
to facilitate the storage of Community products intended for
exports in the Community instead of storing them in third coun-
tries, are still valid today.

12.
The Commission services conduct a continuous audit all
aspects of EAGGF expenditure, including export refunds, on the
basis of risk analysis. While they have not carried out an audit of
the prefinancing arrangements per se since 1997, they have been
actively examining other matters related to export refunds. They
have also been following the progress of the Court’s audit, which
began in 2000 and has taken an approach similar to that of the
earlier Commission audit. They have taken account of the Court’s
findings in the risk analysis used to determine its future work
programme.

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The Court estimates that EUR 600 million, i.e. some 11 %
13.
of total refund expenditure, was prefinanced. This estimate of the
Court is close to the order of magnitude of the Commission’s own
estimate.

In one individual case relating to the application of the standard
rate of yield, the interpretation given by the two Commission ser-
vices was different.

Since 2002, the Commission has been able to refer to informa-
tion supplied by the Member States on the amounts of refunds
granted on the basis of prefinancing.

17.
The Commission has made an effort to encourage Mem-
ber States to improve the physical checks they carry out at the
time of export. Nevertheless, in view of the Court’s comments, it
will examine with the Member States whether physical checks can
be improved for prefinancing purposes.

The Commission agrees with the Court concerning the
14.
complexity of the export refunds system. In this respect, it has to
be said that the Commission has always examined carefully the
special reports drawn up by the Court of Auditors dealing with
the control of export refunds and has taken whatever practical
measures were possible in order to improve the effectiveness of
controls in this area. For example, further to the Court’s Special
Report No 7/2001 on export refunds, the Commission immedi-
ately drew up an action plan to reduce risks. This plan has been
put into effect by means of Commission Regulation (EC) No 1253/
2002.

The Commission is surprised that eight special reports of the
Court have been summarised in a fashion which is at the very
least inadequate, and would point out that, of these eight reports,
not one is about prefinancing.

18.
It should be noted that at least six of the eight Member
States mentioned in table 4 carry out checks on goods at the time
they are placed in prefinancing (intake checks).

19.

The Commission would refer to its reply to paragraph 17.

21 and 22.
these findings in its risk analysis and future work programme.

The Commission services will take account of

15.
Prefinancing facilitates the work of exporters, and this is
why 11 % of expenditure is implemented via prefinancing despite
the administrative complications also involved for exporters.

The Commission has taken various measures to prevent prefi-
nancing being applied differently by Member States, particularly
with regard to common storage (see the Commission’s reply to
paragraph 16). Nevertheless, the Commission will further clarify
or supplement the interpretations given.

16 to 19.
The Commission acknowledges that the prefinanc-
ing arrangements are more complex and cumbersome to manage
than a system of direct export. This complexity is partly due to
the fact that, in order to reduce the administrative workload, the
control provisions of other legislative arrangements are used, in
particular those of the inward-processing arrangements.

23 and 24.
The standard rates of yield referred to in Annex 69
to Regulation (EEC) No 2454/93 apply to prefinancing. These
rates are used to determine the quantity of basic products (e.g.
wheat) to be placed under the prefinancing/processing arrange-
ments in order to obtain the main processed product (e.g. flour).
Under the export-refund arrangements, products processed with
prefinancing receive the same refund as processed products which
are exported directly (without the use of prefinancing).

Nevertheless, the Commission has taken the initiative of clarify-
ing the situation with regard to control arrangements.

Control provisions were laid down when the horizontal regula-
tion for the export-refund arrangements was last codified (see
Regulation (EC) No 800/1999). Moreover, a working paper of
22 December 1998 explaining how physical checks should be
carried out was distributed to Member States in January 1999.
Subsequently, in March 2002, another working paper dated 22 Feb-
ruary 2002 was submitted to the Member States in the relevant
management committee which further clarified the conditions for
the verification of prefinancing.

The fact that standard rates of yield are used has no impact on
refund expenditure given that the refund is paid on the processed
product (flour) indicated in the export certificate.

23 to 27.
The processing of meat into processed products is
not based on theoretical yields. Even if provisional indications are
given when the basic product to be processed is placed under the
arrangements, these must be replaced by definitive data obtained
once processing has been completed (Article 26(3) of Regulation

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(EC) No 800/1999). These definitive data must correspond to eco-
nomic reality (stocks entered in the accounts, quantities sold, etc.).

Prefinancing has also been used to ensure better monitoring of
certain processed beef products.

25 to 27.
With regard to the keeping of accounting records,
Article 28(3), third subparagraph, second indent, of Regulation
(EC) No 800/1999 provides that stock records must be updated
daily and permit comprehensive monitoring of the total quantity
placed under the prefinancing arrangements.

The Commission will examine whether standard rates of yield
should no longer be applied for prefinancing purposes..

There is across-the-board provision for using equiva-
28 to 30.
lent product
for prefinancing in the area of processing
(Article 28(3), second subparagraph, of Regulation (EC) No 800/
1999). This arrangement can also be applied to intermediate
products stored in bulk.

The use of equivalent products for prefinancing purposes is not
permitted with regard to storage. However, Regulation (EEC)
No 1776/92, designed to improve the management of storage
capacities in the cereals sector, permits limited use of equivalent
products for cereals placed under either the prefinancing arrange-
ments for storage or the direct-export arrangements (Article 5 of
Regulation (EEC) No 565/80 and Article 7 Regulation (EC) No 800/
1999 respectively).

Given that Member States apply the relevant Community rules
differently, the Commission will further clarify or supplement the
interpretations given (see point 22).

29 and 30.
these findings in its risk analysis and future work programme.

The Commission services will take account of

Generally speaking, meat can only be kept for direct con-

32.
sumption by freezing.

Freezing is not limited solely to cases in which the prefinancing
arrangements are applied but is also permitted for products
declared for direct export (meat may be frozen during the 60-day
period, see Article 7(3) of Regulation (EC) No 800/1999). Freez-
ing is not therefore linked to prefinancing.

34, 37.
A distinction should be made between the economic
and the technical aspect of the prefinancing system. As previously
indicated, the economic objectives are valid in the light of the
objectives on market management where the refunds play an
important role to secure the fulfilment of those objectives. Non-
application of prefinanced export refunds could lead either to
increased refunds or to increased market support expenditure on
other budget headings.

The technical aspect is linked to the processing of beef. Specific
controls are necessary to ensure that the meat proteins are exclu-
sively from beef and that the beef used is of the correct origin.
The export refund for preserved products is based on the meat
content of such products.

Meat content is determined by means of chemical analysis (Regu-
lation (EEC) No 2429/86).

While analysis can indicate the quantity of animal proteins in the
finished product, it does not say anything about their origin. Given
that the refund does not apply to offal or additives (rich in animal
protein) used but is limited to beef meat of Community origin, it
is essential that, in addition to the chemical test, the processing
operation be monitored.

A SCHEME THAT NO LONGER MEETS ITS OBJECTIVES

Without monitoring of all the stages of processing, there is a very
real risk of irregularities.

31.
The initial objectives of the prefinancing, which are to
allow the processing factories in the Community to use Commu-
nity basic products on an equal footing with third-country com-
modities processed under the inward-processing arrangement and
to facilitate the storage of Community products intended for
exports in the Community instead of storing them in third coun-
tries, are still valid today.

35.
As already indicated in the reply to paragraph 33, the dif-
ference between the refund for fresh or chilled meat and frozen
meat is not a consequence of the refund-prefinancing arrange-
ments because freezing is not limited solely to products placed
under those arrangements but is also authorised for products
which are exported directly (freezing within the 60-day period,
see Article 7(3) of Regulation (EC) No 800/1999).

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In the context of market management, the term ‘frozen meat’
must be understood in its economic and commercial sense as
being distinct from fresh/chilled meat, i.e. in conjunction with the
date of slaughter and production, which is by definition more
recent for fresh/chilled meat.

39.

Cereals exporters use the prefinancing arrangements:

— in order to compete on world export markets on terms simi-

lar to those enjoyed by their competitors,

The refund for a product which is already frozen when presented
at customs relates to production which might date back a long
time. Consequently, the amount of the refund does not have an
immediate effect on price formation in the Community. More-
over, since it will generally be meat intended for the processing
industry, and largely from cows, it has a substantially lower com-
mercial value.

The difference in rate is thus the result of considerations relating
to the management of markets and is not limited solely to the
preservation of the product or its physical presentation.

Therefore, the table annexed to the draft report demonstrating the
relationship between the refund rates for fresh/chilled products
and for frozen products does not have any major significance.

36.
The Commission services share the Court’s opinion on
the complexity of dealing with the dossiers in question, and in
particular the difficulties in reconciling the various documents
making up the dossier. This aspect is being examined with a view
to improving the situation.

The Commission services agree that the reconciliation of prefi-
nancing declarations, export documentation and proof of arrival
at destination is complex, perhaps excessively so, but do not
accept that it is ‘not auditable within a reasonable time’. The
financial guarantee put up by an exporter cannot be freed until
the paying agency has reconciled the quantity placed under pre-
financing with the quantity or quantities exported and placed in
free circulation in a third country. This reconciliation is a routine
and integral part of paying agency procedures.

37.

The Commission would refer to its reply to paragraph 34.

38.
The Commission would stress the size of the corrections
resulting from the 1997 audit. The Commission will follow up
weaknesses found by the Court in an adequate manner and will
furthermore strengthen the procedures in the case of the weak-
nesses identified by the Court.

— to participate on the world market in transactions which go

beyond the validity of the export certificate,

— to solve specific commercial problems.

However, it is important to make a clear distinction between the
period of validity of an export and its actual use.

The period of validity of a certificate guarantees that the quantity
of cereals covered by it will no longer be available on the Com-
munity market when it expires. Placing goods under the prefi-
nancing arrangements does not change what is a principal char-
acteristic of an export certificate and, moreover, has no budgetary
impact. It should be pointed out the extending the certificate’s
validity on the basis of the prefinancing arrangements has a neu-
tral impact in terms of budgetary cost to the Commission (no
monthly increases) and also makes it possible to limit a whole
range of administrative problems which may result from unex-
pected situations at the time of export (strike, ship damage, late
arrival of a letter of credit, etc.).

CONCLUSIONS

40.
Prefinancing continues to be used for the purposes for
which it was originally designed but is also used to strengthen
checks.

The Court does not acknowledge the difference between, on the
one hand, the economic/commercial value of the prefinancing
and, on the other, the technical aspects of this scheme requiring
technical verifications.

Because prefinancing, as the term itself says, generates working
capital for exporters at a moment prior to the actual export (but
with an irrevocable commitment to export the product which at
the time of entering the scheme, has physically already been taken
off the internal market) this advance payment has a positive
impact on the cost structure for the goods to be exported. With-
drawing this payment increases the need to find working capital
from commercial sources and will lead to an increased level of
costs at the export stage.

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The difference between the refund rate for fresh or chilled
41.
meat and for frozen meat is not a consequence of the refund-
prefinancing arrangements but of a decision taken in the context
of the management of the market.

RECOMMENDATION

The Commission will carry out a review, bearing in mind

42.
the observations and findings of the Court.