Special report No 4/2007 on physical and substitution checks on export refund consignments together with the Commission's replies
Date: 2007-06-21
Institutions: European Court of Auditors
Subjects: audit, customs inspection, export monitoring, export refund, report

26.10.2007

EN

Official Journal of the European Union

C 252/1

IV

(Notices)

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

COURT OF AUDITORS

SPECIAL REPORT No 4/2007

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

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

(2007/C 252/01)

TABLE OF CONTENTS

Paragraphs

Page

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

What are export refunds? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

What is the value of export refund subsidies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

What are physical and substitution checks? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Audit scope and approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-VII

1-9

1

2-3

4-6

7-9

OBSERVATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-52

Do Member States carry out physical and substitution checks of export refund consign-
ments as required by the Regulations? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Numbers of physical checks carried out and means of selection . . . . . . . . . . . . . . .

Cost of checks carried out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prior warning of checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High value bulk consignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sealing of means of transport and substitution checks . . . . . . . . . . . . . . . . . . . . . . .

Minimum number of substitution checks and their scope . . . . . . . . . . . . . . . . . . . .

Specific substitution checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Quality of substitution checks

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

10-42

10-18

19-21

22-23

24

25-28

29-31

32-33

34

3

4

4

4

5

5

6

6

6

9

10

10

10

11

11

11

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Paragraphs

Page

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

Confirmation of exit from the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Results of physical checks and their context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Are the Commission’s arrangements for monitoring the execution of these checks satis-
factory and has the Commission reacted to the results of these checks or to weaknesses
with appropriate measures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35-38

39-42

43-45

46-52

53-57

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

11

12

12

14

15

21

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EXECUTIVE SUMMARY

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

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

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

IV.
In respect of the physical checks the Court found that whilst the Member States had respected the
requirement to physically check 5 % of the export declarations, as required, there were weaknesses in the meth-
odologies applied which reduced, significantly in some cases, the effectiveness of these physical checks.
Specifically:

(a) Physical checks carried out at the place of loading (often the exporters own premises) were systematically
carried out at the start of loading and had become predictable to the extent that they no longer fulfilled
the requirement to be without tacit prior warning. This reduces the effectiveness of the check as an unan-
nounced inspection designed to discover and deter false declaration and increases the risk that refunds are
unduly paid.

(b) The method of selection of export consignments for checking used in the Member States resulted in a rela-
tively high number of low value and low risk exports being checked. This did not make the most efficient
and effective use of scarce and expensive Customs resources.

(c) The method used to check bulk shipments of goods, which often carry a high value of refund, did not
ensure that the entire shipment was verified through a combination of physical and documentary checks
with the attendant risk that refunds are unduly paid.

V.

The audit of the substitution checks found that:

(a) Checks were in some cases not detailed enough and that the interpretation of the number of checks to be

made varied between Member States.

(b) At the EU frontiers the officials charged with carrying out the checks faced difficulties in identifying which
consignments to check. For this purpose they should eliminate those already subject to a physical check
and properly sealed by Customs and identify high value, high risk consignments from the remaining popu-
lation that should be checked.

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The monitoring of the checks by the Commission and its remedial action in respect of weaknesses

VI.
found leads the Court to conclude that:

(a) The Commission monitors the operation of the checks by audits in Member States and by reviewing the
reports Member States are required to submit in respect of the export refund checks carried out. The Com-
mission takes assurance from the physical and substitution checks as part of its overall assurance that agri-
cultural subsidies are paid in a legal and regular manner.

(b) The Court’s findings are largely mirrored by those of the Commission’s own audit services which were
found to provide adequate coverage of key controls. Despite the Commission being aware of these weak-
nesses for some considerable time it has not reacted, with legislative changes or timely financial
corrections.

VII.

Based on the above the Court recommends:

(a) That the Commission proposes legislative changes to strengthen the physical and substitution checks and

to ensure the harmonious and effective application of such checks.

(b) That the Commission particularly reviews the findings of the Court’s audit in terms of the validity of the
checks carried out prior to the loading of goods to determine whether these checks can be considered as
fulfilling the criteria needed to count toward the minimum number required by the Community legislation.

INTRODUCTION

What are export refunds?

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

Chart 1
Distribution of export refund payments in 2005 by Member State
(total 3 052 Mio euro)

PL
3 % 
(99 Mio euro)

Other MS
13 % 
(408 Mio euro)

FR
17 % 
(525 Mio euro)

DE
14 %
 (433 Mio 
euro)

UK
9 % 
(280 Mio euro)

BE
13 % 
(388 Mio euro)

NL
14 % 
(429 Mio euro)

ES
4 % 
(108 Mio
 euro)

IE
6 % 
(178 Mio 
euro)

DK
7 % 
(204 Mio
 euro)

Chart 2
Distribution of export refund payments in 2005 by principal product
(total 3 052 Mio euro)

What is the value of export refund subsidies?

Beef meat, porc, poultry
10 %
 (311 Mio euro)

Other products
6 % 
(184 Mio euro)

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

Non-annex I goods
11 % 
(335 Mio euro)

Sugar
35 % 
(1 081 Mio euro)

Milk and milkproducts
37 % 
(1 141 Mio euro)

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

Table 1

Annual expenditure on export refunds compared
to the agricultural budget

Export refunds
payments

Total agriculture and
rural development
payments (1)

Export refunds as a %
of total agricultural
payments

(million euro)

1988

1992

1996

2000

2004

2005

9 786

9 470

5 702

5 646

3 384

3 052

27 687

31 276

39 108

40 467

44 761

48 928

35,3 %

30,3 %

14,6 %

14,0 %

7,6 %

6,2 %

(1) EAGGF Guarantee Section Expenditure.
Source: DG AGRI 35th Financial Report on the EAGGF — Guarantee Section.

What are physical and substitution checks?

Audit scope and approach

7.

The audit sought to conclude on the extent to which:

(a) Member States carry out physical and substitution checks of
export refund consignments as required by the Regulations.

(b) The Commission’s arrangements for monitoring the execu-
tion of these checks are satisfactory and whether it reacted to
the results of these checks or weaknesses with appropriate
measures.

8.

The Court:

(a)

evaluated the systems set up by the Member States visited for
the execution of physical and substitution checks and for
confirmation of the exit of goods from the EU territory.
Checks were evaluated against Community legislation and
national instructions;

(b) evaluated the performance of those checks by reference to a
sample of inspection reports for each Member State visited
and, wherever possible, witnessed physical and/or substitu-
tion checks carried out by Customs;

4.
In order to safeguard Community finances a control sys-
tem — a combination of physical and substitution checks (under
Council Regulation (EEC) No 386/90) and scrutiny of payment
application files (1) — was created.

(c)

reviewed the audits of these systems carried out by the Com-
mission’s Clearance of Accounts services. Checks were car-
ried
and
clearance/conformity decisions of the Commission;

against work

programmes,

reports

out

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

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

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

(d)

reviewed the monitoring and follow-up action taken by the
Commission in respect of the annual reports presented by
Member States on the performance of these checks;

(e)

carried out analytical reviews of data relating to physical and
substitution checks and irregularities detected, using the
Commission’s CATS (2) data and OLAF’s database.

(2) The Commission’s database, CATS, Clearance Audit Trail System, pro-
vides data in respect of export refund amounts paid per declaration
and EAGGF year and additional data related to export refund declara-
tions.
CATS data is related to the EAGGF year that runs from mid-October
to mid-October whereas data provided in Member States annual
reports refer to the calendar year.

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The audit was carried out from 2004 to 2006 at the Com-
9.
mission and in 11 Member States: Belgium, Denmark, Germany,
France, Italy, Latvia (1), Hungary (1), the Netherlands, Poland (1),
Slovenia (1) and the United Kingdom.

OBSERVATIONS

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

Numbers of physical checks carried out and means of
selection

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

11.
The Commission has defined a wide range of criteria to
be taken into account in the risk analysis including i.a. the char-
acteristics and value of the products, nature of the trade, reliabil-
ity of exporters etc (2). Risk analysis is officially applied as laid
down in the regulations in seven Member States (Denmark, Ger-
many, Ireland, France, Austria, Sweden and the United Kingdom).
The other Member States apply the rule that 5 % of the declara-
tions are to be checked for each product sector, the declarations
being then chosen either by reference to risk criteria not recogn-
ised under the regulation or on random basis.

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

(1) Audits only in relation to substitution checks.
(2) Commission Regulation (EC) No 3122/94 of 20 December 1994 lay-
ing down criteria for risk analysis as regards agricultural products
receiving refunds (OJ L 330, 21.12.1994, p. 31).

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

14.
Where risk analysis is applied the Commission provides
that for Non-Annex I (processed products) (3), Member States
may reduce checks to a level of 0,5 % of the declarations, as these
represent a lower risk. Where no risk analysis is applied (i.e. in the
other 18 Member States), 5 % of all these low risk declarations
continued to be checked.

15.
However, for both options (risk analysis or 5 % per prod-
uct sector) the review of data concerning physical checks revealed
a high incidence of checks on low export refund value declara-
tions (of less than 200 euro). To make better use of the inspec-
tion possibilities, export declarations involving small quantities of
products or a low amount of refund should be disregarded when
calculating the minimum rates of checks unless there is a risk of
fraud or abuse. The Court found that low value items were not
always selected on this basis. Table 2 shows the incidence of
checks on low value declarations reported by Member States in
the CATS database (4), for the 2005 calendar year. Between 6 %
and 13 % of all checks carried out were for such low value items.
Further analysis shows that these checks represent only 0,1 % of
the value of exports checked.

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

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

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Table 2

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

Calendar year 2005 (1.1.2005-31.12.2005)

Minimum level: Analysis based upon totals per Single Administrative Document

Member State

Total number of
physical checks

Total number
of checks
< 200 euro

Number
of checks
< 200 euro in %
of total number
of physical
check

Total value
of declarations
physically
checked
in euro

Total value
of declarations
checked
in < 200 euro

Percentage
of amounts
checked
< 200 euro

BE

DK

DE

IE

EL (1)

ES

FR

IT

LU

NL

AT

PT

FI

SE

UK

CZ

EE

CY

LV

LT

HU

MT

PL

SI

SK

858

727

4 906

483

0

1 325

1 006

2 211

0

7 851

405

370

424

388

402

25

19

239

15

0

204

113

105

0

444

25

80

41

9

35

Total EU-15

21 356

1 354

1 320

28

44

81

213

559

0

2 252

249

658

24

1

3

31

2

42

0

20

8

54

Total EU-10

5 404

Total EU-25

26 760

185

1 539

3 %

3 %

5 %

3 %

—

15 %

11 %

5 %

—

6 %

6 %

22 %

10 %

2 %

9 %

6 %

2 %

4 %

7 %

17 795 108

5 698 179

2 398

2 589

37 689 281

20 213

4 856 449

0

798

0

7 282 634

23 647

15 238 061

6 248

6 933 376

12 262

0

0

28 648 158

53 979

1 738 292

1 826 201

5 054 184

6 514 754

4 222 519

2 941

7 804

3 422

1 132

3 172

143 497 195

140 605

10 018 787

3 057

341 922

336 423

58

246

38 %

162 312

2 672

1 %

8 %

—

1 %

3 %

8 %

3 %

6 %

4 538 449

203

2 823 611

5 524

0

21 338 773

678 726

12 604 960

0

2 781

1 039

4 912

52 843 963

20 492

196 341 157

161 097

0,08 %

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

Member State

Total number
of physical
checks

Total number
of checks
< 200 euro

Number
of checks
< 200 euro in %
of total number
of physical
check

Total value
of declarations
physically
checked
in euro

Total value
of declarations
checked
in < 200 euro

Percentage
of amounts
checked
< 200 euro

BE

DK

DE

IE

EL (1)

ES

FR

IT

LU

NL

AT

PT

FI

SE

UK

CZ

EE

CY

LV

LT

HU

MT

PL

SI

SK

884

1 081

5 186

483

0

1 328

1 193

2 919

0

8 328

508

477

957

391

474

62

131

415

15

0

374

204

592

0

894

113

147

235

17

150

Total EU-15

24 209

3 349

1 330

51

48

138

218

612

0

2 328

270

749

Total EU-10

5 744

29

14

5

77

4

81

0

114

33

92

449

Total EU-25

29 953

3 798

7 %

12 %

8 %

3 %

—

28 %

17 %

20 %

—

11 %

22 %

31 %

25 %

4 %

32 %

14 %

2 %

27 %

10 %

56 %

2 %

13 %

—

5 %

12 %

12 %

8 %

13 %

17 795 108

4 406

5 698 179

13 208

37 689 281

31 931

4 856 449

0

798

0

7 282 634

28 535

15 238 061

14 487

6 933 376

49 113

0

0

28 648 158

87 185

1 738 292

10 215

1 826 201

12 814

5 054 184

16 057

6 514 754

1 725

4 222 519

12 957

143 497 195

283 433

10 018 787

3 428

341 922

336 423

803

541

162 312

4 505

4 538 449

463

2 823 611

9 533

0

0

21 338 773

13 022

678 726

12 604 960

2 876

9 103

52 843 963

44 274

196 341 157

327 707

0,17 %

(1) Greece did not provide data on physical checks for the EAGGF year 2005, therefore the data is not presented.
Source: CATS database Commission.

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

17.
In order to promote a more efficient and effective use of
Customs resources an option could be to increase the de minimis
value of consignments required to be considered for the mini-
mum population and subsequently checked (see paragraphs 19
to 21 on Cost Benefit).
Increasing the minimum value for
which declarations are considered for physical checks could
result in a significant reduction in the number of items to be

checked. Evidently, if the threshold is raised then lower value
exports, under the threshold, should continue to be checked if
there was an indication of fraud or abuse.

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

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

Table 3

Member State

Hungary

Latvia

Poland

Slovenia

Export refunds value
(euro)

Number

0-200

NAI or similar

201-4 000

> 4 000

25

11

9

9

%

46

20

17

17

Total

54

100

Number

0

11

7

14

32

%

0

34

22

44

100

Number

1

15

7

12

35

%

3

43

20

34

100

Number

17

16

7

9

49

%

35

33

14

18

100

NAI: Non Annex I.
NB: The Hungarian authorities carried out 100 % checks on all vessels passing the Hungarian — Serbian boarder. It changes the relative

weight of checks performed under euro 200 significantly.

Cost of checks carried out

19.
Where consignments are presented for export at Cus-
toms offices of exit (a situation mainly seen in the United King-
dom and at certain French ports), the cost to the trade for the
execution of physical checks may vary between 120 and 400 euro
depending on local circumstances. These costs comprise the
movement of containers in, or from, the port area to appropriate
unloading places and the labour involved in unloading and reload-
ing the containers (see Box 1).

Box 1

A United Kingdom exporter decided to forgo his export refund claim
for 293,28 euro, as it would have required 51 container moves to
make the container available for physical check, chargeable to the
exporter, which would, in addition, have delayed the departure of the
vessel by 5 hours.

Where consignments are presented for export at inland
20.
loading places, no cost to the trade occurs as consignments are
generally presented before loading at the exporters’ premises.
Two of the Member States visited, Germany and Italy (1), charge
the exporter for the physical check. The cost for a one hour inter-
vention at the loading place is approximately 180 euro.

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

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

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Prior warning of checks

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

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

High value bulk consignments

24.
Bulk goods, mainly cereals and sugar, are usually
exported by shipload to a single destination. Each shipload can
represent a very high value in terms of export refunds (Example:
6 700 tonnes of white sugar to Tunisia was worth 3,4 mil-
lion euro as at end of 2003). However, for administrative reasons,
linked to export licences, the exporter frequently has to submit a
number of export declarations covering the whole consignment.
The practice observed during the audit, was that for a physical
check only one declaration from the entire shipload is checked.
Whilst this approach is not in contravention of current legisla-
tion, the physical checks currently carried out have a diluted effect
as they only cover a part of the whole shipload, thereby reducing
the effectiveness of the check (see Box 2).

Box 2

An exporter submitted six export declarations for 1 147 tonnes of
white sugar to be loaded on one ship for export to Libya in July 2006
(total export refund value: 268 600 euro). One declaration of
200 tonnes was selected for a physical check (export refund value:
46 840 euro). United Kingdom Customs observed part of the
200 tonnes being loaded onto the vessel. The physical examination
started at 06:20 h and finished at 07:10 h.

Sealing of means of transport and substitution checks

substitution check, unless the seals have been broken or removed
in which case a specific substitution check as foreseen in the regu-
lations should be carried out. Given the value this confers to the
seal, a virtual ‘laissez passer’ for the consignment, then their use
and meaning must be clear and unambiguous.

26.
As part of the normal administrative procedure for vali-
dating export declarations, Customs may also affix customs seals
to containers, trailers or trucks without having carried out a
physical check. This practice was noted in particular, in Belgium,
Germany, Spain, France and Italy. Further, consignments under
the T.I.R. procedure (1) are also customs sealed, again without a
physical check necessarily having been carried out (see Box 3 and
Illustration 1).

Box 3

In 2001, a consignment consisting of 20 tonnes of beef was cleared
for export at Customs in Spain with destination Russia. The consign-
ment, sealed by Spanish Customs, was presented for interim storage
at a coldstore in Hamburg (unloading and intake under Customs con-
trol). The goods were then removed from the coldstore under cus-
toms control for transport by truck to Russia. German Customs,
despite the goods being sealed, took a sample and the analysis resulted
in goods being classified as edible offal of bovine animals for which
no refunds were payable. Based on these results, further investigations
in Spain led to the detection of more irregularities, amounting to
some 497 000 euro — including 56 000 euro of interest — commit-
ted by the same exporter. A recovery notification was issued by the
paying agency end of 2006 finalising the administrative procedures.
The case is currently pending final decision before a national court.
Approximately 80 % of the control copies T5 showed that consign-
ments were Customs sealed at departure without physical checks and
were then — by definition — excluded from the population for pos-
sible substitution checks at various exit points of the Community.

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

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

25.
Where a physical check has been carried out, the means
of transport are usually required to be Customs sealed. Such
consignments are normally not considered for a further

(1) ‘Transports internationaux routiers’.

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Minimum number of substitution checks and their scope

29.
Legislation provides (1), as a general rule, that Customs
offices of exit shall carry out at least one substitution check for
each day on which consignments leave from the various exit
points within the EU. The selection of consignments for checking
should be carried out wherever possible in the light of a risk
analysis.

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

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

from the EU. Therefore consignments with broken, damaged or
missing seals are not always identified and thus may escape spe-
cific substitution checks. Precisely to address this problem, French
Customs have imposed a 2 % additional national check rate on
sealing of consignments.

Quality of substitution checks

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

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

Specific substitution checks

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

32.
Specific substitution checks have to be carried out by the
Customs offices of exit from the EU territory if it is found that
seals affixed at departure had been removed, broken or that a dis-
pensation (2) from sealing had not been granted. Specific substi-
tution checks may entail a full physical check.

33.
The practice observed during the audit was that every
truck/trailer at Customs offices of exit at the eastern border of the
EU (Hungary, Latvia, Poland, Slovenia) is examined which allows
the integrity of seals to be verified. In contrast, consignments
(mainly containers) making their final exit from Community ports
in France, Italy, the Netherlands and the United Kingdom are not
subject to such strict checking. This is because, in these Mem-
ber States, Customs officials do not systematically examine seals
when the consignments arrive at the point of physical exit

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

(2) Dispensation from sealing may be granted due to the characteristics

of the goods exported (eg hatching eggs).

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

37.
A particular problem was found at the Danish Customs
office of Aalborg. Checks carried out by this office revealed a high
incidence of missing seals at the point of exit from the EU. How-
ever, instead of carrying out the required specific substitution
checks, the office refused to certify that the goods had left the EU
territory on the grounds that it was unable to establish the iden-
tity of the goods because the seals were missing. Between
August 2004 and February 2006 this office informed paying
agencies in the other Member States that it could not certify exit
from the EU of 280 (3) consignments because the seals had been

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

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Official Journal of the European Union

26.10.2007

removed. Replies were only received in two cases (1) out of the
280 communicated. According to Danish Customs, paying agen-
cies in France, Greece, Italy and Spain have not replied to any
communication sent by the Danish authorities. In 17 similar cases
relating to exports originating in Denmark, Customs Aalborg sent
the information to the Danish paying agency and export refunds
were subsequently withdrawn.

that the wrong date of exit is confirmed and further, given the
lack of cross checks to commercial documentation, that exit is
confirmed for goods that do not correspond to those declared.

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

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

Confirmation of exit from the EU

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

40.
In the United Kingdom, the responsibility for the confir-
mation of the exit of the goods, for goods exported in containers
by sea, has been given to shipping agents and/or port operators.
Legislation requires that such confirmation is made by the ‘com-
petent authorities’ (2). Shipping agents and port operators cannot
be considered as such. Checks carried out by the United Kingdom
Customs on this system revealed that 21 % of the 913 claims
checked contained incorrect data in respect of date of exit. The
procedures seen in the United Kingdom give rise to the risk

(1) Danish Customs did not confirm the exit and informed the Belgium
paying agency (BIRB) about the results of the substitution check in
October 2004. However, BIRB paid the export refund of some
3 200 euro for sugar, based on a proof of arrival from Norway and
informed Danish Customs about the decision taken in August 2005.
In June 2005, Danish Customs refused to certify the exit of the goods
as they were not able to establish the identity because of the seal miss-
ing affixed at departure in Germany. In September 2005, the German
paying agency (HZA Hamburg-Jonas) refused to pay export refunds of
some 21 800 euro for the container of butter to Norway. The Dutch
exporter lodged an appeal against that decision. The case is still pend-
ing before the Finanzgericht Hamburg as per end of January 2007.
(2) Commission Regulation (EC) No 800/1999 (OJ L 102, 17.4.1999,
p. 11), Article 9(1)(a): ‘Where the T5 control copy or the national
document proving that the products have left the customs territory of
the Community has been endorsed by the competent authorities, the
products …’.

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

Results of physical checks and their context

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

(3) European Anti-Fraud Office.

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Values of irregularities detected by physical checks and reported to OLAF

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

Table 4

BE

DK

DE

IE

EL

ES

FR

IT

LU

NL

AT

PT

FI

SE

UK

CZ

EE

CY

LV

LT

HU

MT

PL

SI

SK

Member State

2000

173 999

272 941

2001

66 723

91 724

99 239

14 347

2002

40 875

152 451

89 706

62 974

2003

64 191

7 309

212 440

2004

63 088

2005

57 129

63 309

0

28 378

447 637

120 226

93 026

55 887

135 144

311 035

13 258

8 351

80 443

23 800

165 748

4 300

4 031

13 931

22 481

108 139

4 662

4 021

90 616

22 982

41 685

25 246

(in euro)

Total

228 918

551 880

674 326

105 699

0

567 863

675 535

45 409

0

108 139

320 942

78 761

0

0

0

EU-15

1 060 325

493 616

438 305

549 164

524 450

291 612

3 357 472

0

0

18 327

18 327

0

18 576

18 576

0

0

8 671

50 914

59 585

0

0

EU-10

8 671

87 817

96 488

Total

1 060 325

493 616

438 305

549 164

533 121

379 429

3 453 960

Source: OLAF irregularities database as per December 2006.

44.
The rate of reported irregularities expressed as a percent-
age of the value of the declarations checked (where this informa-
tion has been supplied by Member States) is also relatively small.
According to the Member States annual reports 2005 the overall
rate of reported irregularity found by physical checks is 0,2 % of
the export refund amounts checked (1).

45.
If the value of irregularities detected by physical checks
are compared to those found by other methods then the relatively
low rate of detection may be demonstrated. Table 5 is a compari-
son

of the value of irregularities, as reported to OLAF, detected by
physical checks and those detected by ex post checks (2) of com-
mercial records. The result (a ratio of 11 to 1 in favour of ex post
checks) suggests that ex post checks, carried out after the physical
export has taken place, have to date proved the more effective
instrument in the detection of irregularities. Whilst only some
types of irregularities detected by physical checks can be found by
ex-post checks, both of which are indispensable to the overall con-
trol process, these figures nevertheless may suggest that the physi-
cal and substitution checks could be better targeted.

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

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

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Official Journal of the European Union

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Table 5

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

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

2001

2002

2003

2004

2005

Total

Total

7 711 833

4 655 655

5 638 791

8 044 471

1 695 640

27 746 390

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

2001

2002

2003

2004

2005

Total

Total

493 616

438 305

549 164

533 121

379 429

2 393 635

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

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

Ratio 4045/89 vs 386/90

15,6

10,6

10,3

15,1

4,5

11,6

Source:

Irregularity database of OLAF as of December 1st 2006.

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

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

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

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

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

Table 6

Animal
Welfare

Scheduling
regime (1)

Physical
checks (2)

Substitution
checks

Mission
dates

Delays
in year

27-29/11/2000
8-10/1/2001

26 664 623

14-18/5/2001

3,0

5,7

3,6

3,8

3,4

4,3

13-17/11/2000
23-26/1/2001

23-25/10/2000
5-9/2/2001

3-7/12/2001

June 2001
November 2001

24-28/9/2001
21/6/2002

Netherlands (3) (7)

1 064 627

Germany (4)

13 823 822

France (4)

1 649 756

Belgium (5)

225 713

United Kingdom (6)

369 440

10 772

Denmark

6 616 032

Total

16 538 205

369 440

236 485

33 280 655

Grand total

Percentage
of the total amount
of corrections

32,8 %

0,7 %

0,5 %

66,0 %

50 424 785

(1) Deficiencies in the design of the scheduling system.
(2)
Failure to carry out minimum inspection rates.
(3) Decision No 17 (2004/561/EC); OJ L 250, 24.7.2004, p. 21.
(4) Decision No 18 (2005/354/EC); OJ L 112, 3.5.2005, p. 14.
(5) Decision No 20 (2005/579/EC); OJ L 199, 29.7.2005, p. 84.
(6) Decision No 22 (2006/554/EC); OJ L 218, 9.8.2006, p. 12.
(7) Decision No 24 (2007/243/EC); OJ L 106, 24.4.2007, p. 55.
NB: Exchange rate used:

1 euro = 0,6791GBP (27.7.2006).

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

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

Whilst the Commission’s own internal standards set a
51.
conciliation)
of
period
and 24 months (with conciliation) as being the time required

between 16 months

(without

between audit visit and final decision, for the audit of physical and
substitution checks these periods have not been fully complied
with.

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

CONCLUSIONS AND RECOMMENDATIONS

53.
In relation to physical checks the Court found that the
interpretation by the Member States of the regulatory framework
had led to many checks at the exporters’ premises being carried
out systematically at the start of the loading process. This has the
effect of rendering the check predictable to the exporter thereby
negating their effectiveness. The regulations clearly state checks
must be frequent, without prior warning and that checks for
which the exporter has received express or tacit prior warning do
not count as checks towards the minimum requirements.

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Official Journal of the European Union

26.10.2007

Recommendation 1

(b) The way in which the minimum required number of substi-
tution checks was established varied between Member States.

The Commission should ensure the regulation is applied properly to
guarantee that checks at exporters’ premises are being carried out in
an unpredictable manner and without tacit prior warning. It should
ensure an effective follow up of the Court’s and its own observations
in this regard with a view to determining whether such checks not
meeting this criteria should be counted towards the 5 % minimum
requirement.

Physical checks were carried out on a significant number
54.
of low value declarations in contradiction with the legislation.
Between 6 % and 13 % of physical checks carried out in 2005
covered only 0,1 % of the total refund value subject to those
checks. This was especially so where Member States did not apply
a risk analysis to the selection of the declarations but even in the
three Member States visited by the Court which applied risk
analysis low value consignments were regularly checked.

Recommendation 2

The Commission should review the method by which Member States
select declarations subject to physical checks; it should consider mak-
ing the use of a risk analysis obligatory and consider increasing the
minimum value of refund for which a declaration is subject to physi-
cal checks. This would make physical checks more cost effective and
help to ensure a more efficient use of customs resources by the selec-
tion of higher value, higher risk consignments.

55.
Physical checks on bulk shipments may result in only a
small part of the shipload being subject to a physical check.
Where this is done in isolation without further verification that
the entire consignment is in accordance with the declarations and
eligible for refund there is a risk that the value of the check is
eroded.

Recommendation 3

The Commission should consider clarifying that, where part of a bulk
shipment is selected for a physical check, the national authorities are
required to verify the entire shipment through, for example, cross
checks with other records and ensuring that not only one part of the
shipment is checked in isolation.

(c) The regulations provide that goods that have been subject to
a physical check and sealed by customs are then exempt
from further substitution checks (except in exceptional cir-
cumstances). The audit found that certain consignments cus-
toms sealed (for other purposes), but not having been
physically checked, were then exempted from the possibility
of substitution checks at the point of exit from the EU
territory.

(d) Specific checks on seals are carried out by the Customs
offices of exit where seals affixed earlier are broken or tam-
pered with. As no explicit rules for checking seals exist, they
were found to be performed in an inconsistent way.

(e) Where consignments of goods are transported between
Member States by sea prior to their exit from the EU by road
or rail there is a possibility that they avoid being selected for
substitution checks at the point of final exit from the terri-
tory of the Community.

(f) Consignments arriving at the point of exit from EU territory
are not accompanied by documentation clearly stating the
value of refund, or even whether or not a refund is payable,
making it difficult for the officials charged with carrying out
such checks to identify which consignments should be
checked.

(g) Where substitution checks detect irregularities these must be
communicated back to the Member State where the goods
originate, a request for information on any follow-up made
may also be included. The Court found that this system was
not operating as foreseen and that follow-up information
was not returned to the authorities carrying out the checks.

Recommendation 4

The Court recommends that:

56.

In relation to substitution checks the Court found that:

The regulatory requirements for substitution checks should ensure
that the entire consignment selected for checking can be visually iden-
tified.

(a) Certain checks carried out were only cursory visual exami-
nations of a part of the consignment that did not fulfil the
intended purpose of the checks.

Consideration should be given to requiring that the number of sub-
stitution checks to be made should be established on the basis of a
minimum percentage of declarations rather than the ‘one per day
rule’.

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Official Journal of the European Union

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The Commission should take steps to ensure that the value of the
seals attached to consignments of goods eligible for export refunds is
clear and unambiguous. Thus ensuring that substitution checks
apply to all exports other than those which have been physically
checked and sealed by Customs at departure.

The Commission reviews the regulations governing substitution
checks — including specific substitution checks — to ensure that
their application is harmonised between Member States and so that
it is clear to the officials charged with these checks at the EU fron-
tiers which consignments should be considered for checking.

The Commission should ensure that the procedures for the commu-
nication and follow-up of reported irregularities discovered by sub-
stitution checks are adhered to and that the required follow-up action
is carried out efficiently by the Member States concerned.

57.
As regards the Commission’s monitoring of the applica-
tion of the regulatory framework and its actions to remedy known
deficiencies in its operation:

(a) The Courts findings are largely mirrored by those of the
Commission’s own audit services. Despite the Commission
being aware of these weaknesses for some considerable time
it has not reacted, with legislative changes or timely financial
corrections.

(b) The fact that ex-post checks on refunds, carried out on records
after the export process is completed, show a significantly
than the physical
irregularities
higher number of

checks, may suggest that physical and substitution checks
could be better targeted.

(c) The Commission monitors the operation of the checks by
audits in Member States and by reviewing the reports Mem-
ber States are required to submit in respect of the export
refund checks carried out. The Commission takes assurance
from the operation of such checks as part of its overall assur-
ance that agricultural subsidies are paid in a legal and regular
manner.

The weaknesses identified by the Court need to be effectively
addressed in order to ensure that the system of physical and sub-
stitution checks provide the Commission with a greater level of
assurance on export refund expenditure.

Recommendation 5

The Court recommends that:

The Commission proposes legislative changes to strengthen the
physical and substitution checks and to ensure the harmonious and
effective application of such checks. This would include ensuring that
checks are not predictable, making selection of checks by risk analy-
sis obligatory and ensuring that substitution checks are applied to
those exports where no physical check has previously been made.

That the Commission particularly reviews the validity of the checks
carried out prior to the loading of goods to determine whether these
checks can be considered as fulfilling the criteria needed to count
toward the minimum number required by the regulation.

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

For the Court of Auditors
Hubert WEBER
President

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ILLUSTRATIONS

Illustration 1

Beef from Spain to Russia via Germany and Latvia, by truck

Export refund value for a consignment of beef: 9 000 euro. Goods on the way to the final destination may be kept in a cold-
store (e.g. Hamburg/Germany) under Customs supervision for a given period before a decision is made by the exporter con-
cerning the final transport means (ship or truck).

Frozen chicken (poultry) from Morlaix (France) to Saudi Arabia (Saudi Arabia) via Brest (France) and
Rotterdam (Netherlands) by feeder and ocean going vessel in containers of 24 tonnes

Illustration 2

Export refund value for a 24 tonne container: 10 800 euro in November 2004.

Office of departure: Morlaix

Office of exit: Brest (transhipment Rotterdam)

The feeder vessel Brest/Rotterdam (although a regular shipping line in commercial terms) has the customs status of a ‘non-
regular’ shipping line in the meaning of the Customs code. The exit of the goods from the EU is therefore correctly con-
firmed by Brest Customs on the day when the vessel is leaving the port of Brest.

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Full Cream Milk Powder from Cookstown (United Kingdom) to Moscow (Russia) via Rotterdam (Netherlands),
Riga (Latvia) and Grebneva (Latvia) by vessel and truck

Illustration 3

Export refund value for a 25 tonne container:13 650 euro in June 2005.

Office of departure: Belfast (inland clearance at Cookstown)

Office of (first) exit: Belfast

Office of (final) exit: Grebneva/Latvia

Depending on ‘regular’ or ‘non-regular’ shipping lines used, the Customs office of exit, responsible for substitution checks
and confirmation of the exit of the goods from customs territory of the Community, may be Belfast/United Kingdom,
Rotterdam/Netherlands or Grebneva/Latvia.

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ANNEX

HOW THE SYSTEM WORKS

The following is a brief outline of the system of physical and substitution checks of export refund consignments and con-
firmation of exit from the EU.

(a)

exporters may present their export refund consignments inland at the place of loading (at commercial premises), or at
customs offices either inland or at the place of exit from the EU;

(b)

the goods must be accompanied by an export declaration which gives i.a. the description and the quantity;

(c) where the goods are presented at an inland loading place, the exporter must, as a general rule, give 24 hours notice of

start and finish of loading times (pre-announcement) (1);

(d) not less than 5 % of export declarations submitted per product sector should be physically checked per annum (2);

(e)

reduced rates of checks per product sector (3) are permitted when risk analysis is used to select declarations to be
checked, however, the overall rate of 5 % of declarations must still be respected. Physical checks in ‘high risk’ product
sectors would compensate for checks at a rate of less than 5 % in ‘low risk’ product sectors;

(f)

low export refund value and low quantity declarations (<200 euro and <500 kg) should not be considered for physical
checks unless there are suspicions of fraud or abuse (4);

(g) physical checks shall not count as checks where the exporter has received express or tacit warning (5);

(h) where the goods physically leave the EU at a different point to where the goods and export declaration were presented,
the means of transport or the packaging must be sealed. Seals are affixed by customs authorities or by exporters them-
selves having been authorised by customs to use company seals (6);

(i)

substitution checks (7) should be carried out on at least as many declarations as the number of days on which
unsealed (8) export refund goods leave the EU through the office concerned (in principle one ‘declaration’ per day as a
minimum);

(j)

in addition, specific checks should be carried out when the seals have been removed or have been broken or dispen-
sation from sealing has not been granted;

(k)

substitution checks are visual checks to ensure that the goods correspond to the customs document accompanying
them;

(l)

export refunds are payable, i.a., on confirmation by customs that the goods have left the territory of the EU (9).

‘… a minimum rate of 2 % shall be compulsory per product sector.’

(1) Article 5(7) of Regulation (EC) No 800/1999.
(2) Article 3 of Regulation (EEC) No 386/90.
(3)
(4) Article 2 of Regulation (EC) No 2090/2002.
(5) Article 3 of Regulation (EEC) No 386/90 and Article 5 of Regulation (EC) No 2090/2002.
(6) Article 7 of Regulation (EC) No 2090/2002.
(7) Article 10 of Regulation (EC) No 2090/2002.
(8) Substitution checks should not normally be carried out when consignments have been Customs sealed at departure as they are considered

as having been physically checked and in accordance with the declaration.

(9) Where rates of refund vary according to the country of destination proof is required that the goods have been placed on the market in the

declared country of destination.

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THE COMMISSION’S REPLIES

EXECUTIVE SUMMARY

I.
Export refunds used to be a major pillar of the CAP until the 1992 CAP reforms and have lost impor-
tance with successive CAP reforms. The figures in Table 1 illustrate this: from 9,8 billion euro in 1988
to 2,5 billion euro in 2006. Only 1,4 billion euro is budgeted for export refunds in 2007. Most importantly,
the Commission has made a political commitment in the context of WTO to abolish all export refunds
by 2013.

However, until the last export refund is paid, a fully operational control system must remain in place. That is
why the Commission welcomes most of the recommendations, which will be followed up. But any substantial
modification of the control system should not lead to unnecessary complication of the legislation or increase
administrative burdens in a disproportionate manner for the administrations and the stakeholders in order to
counter potential risks. That would be unjustifiable considering that the export refunds regime is being phased
out now and will be abolished.

II.
The physical checks carried out on export consignments are part of the overall comprehensive control
system in place. This also includes ex-ante administrative controls of 100 % of the export refunds claims, ex-post
controls under Council Regulation (EEC) No 4045/89 and the Commission’s verification within the clearance
of accounts.

IV.

(a) The Commission is aware of the risk of predictability of controls and reminded Member States at the meet-
ing of the Trade Mechanisms Committee held on 10 May 2005 of the need to vary the timing of physical
checks in order to maintain an element of surprise.

(b) According to the annual reports submitted by Member States, 6,08 % of all exports for amounts above de
minimis thresholds were physically checked in 2005. These exports accounted for close to 7 % of exports
in value terms demonstrating that the controls were not concentrated on the low value exports.

(c) The method used respects the legislation and policy objectives. Checking a representative sample of a ship-

ment of goods in bulk form is similar to the treatment of other types of goods.

V.

(a) Substitution checks are a visual check that the identity of the goods presented to customs at the office of

exit correspond to those declared to customs at the place of departure (1).

Regarding the numbers of checks being performed, Member States have largely respected minimum
requirements.

VI.

(a) The Commission welcomes the findings in point 46 of this report, in particular the finding that ‘The Court
evaluated reports of (the Commission’s) audits for the period 2001 to 2004 and concluded that there was adequate
coverage of key controls in the system of physical and substitution checks.’

(b) The Commission has communicated relevant findings to Member States in a timely manner. Where jus-

tified, these findings will result in financial recoveries for the EU budget.

Legal modifications of both Council Regulation (EEC) No 386/90 and Commission Regulation (EC)
No 2090/2002 are in preparation in order to address, among other things, the weaknesses pointed out by the
Court of Auditors.

(1) Article 10(4) of Regulation (EC) No 2090/2002.

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VII.

(b) Member States were reminded at the Trade Mechanisms Committee meeting of 10 May 2005 of the need

to vary the timing of physical checks and are expected to have reacted accordingly.

After thorough consideration and consultations, the Commission will in the near future, submit legal propos-
als to the opinion of the Member States in the Trade Mechanisms Committee.

INTRODUCTION

1.
Export refunds used to be a major pillar of the CAP until
the 1992 CAP reforms and have lost importance with successive
CAP reforms. The figures in Table 1 illustrate this: from 9,8 bil-
lion euro in 1988 to 2,5 billion euro in 2006. Only 1,4 billion
euro is budgeted for export refunds in 2007. Most importantly,
the Commission has made a political commitment in the context
of WTO to abolish all export refunds by 2013.

However, until the last export refund is paid, a fully operational
control system must remain in place. That is why the Commis-
sion welcomes most of the recommendations, which will be fol-
lowed up. But any substantial modification of the control system
should not lead to unnecessary complication of the legislation or
increase administrative burdens in a disproportionate manner for
the administrations and the stakeholders in order to counter
potential risks. That would be unjustifiable considering that the
export refunds regime is being phased out now and will be
abolished.

In addition to the controls mentioned by the Court, there
4.
are 100 % administrative ex-ante checks on all export refund
claims as well as a system of ex-post controls under Regulation
(EEC) No 4045/89.

OBSERVATIONS

13.
Regarding the UK, the problem of overrides referred to
by the Court arose from problems with a new computer system
introduced in 2004. Since then the number of overrides has fallen
substantially.

Member States are free to carry out whatever checks they
15.
wish on low value exports provided that they do not include
them when calculating the minimum rates of checks to be car-
ried out. Furthermore Member States are obliged to adopt appro-
priate provisions to prevent fraud and abuses (1). These provisions
might well include performing some physical and substitution
checks on lower value exports, in which case they may be counted
for the purposes of calculating minimum requirements.

Nevertheless, the Commission shares the Court’s view that Mem-
ber States should aim at striking an appropriate balance between
low value and high value consignments selected for checks in
order to target the risks involved most efficiently.

According to the annual reports submitted by the Member States,
6,08 % of all exports for amounts above de minimis tresholds
were physically checked in 2005.

16.
The Commission recalls that low value items may be
included in the calculation of the minimum rate of controls when
they are made to prevent fraud and abuses. See Article 2(3) of
Commission Regulation (EC) No 2090/2002.

The suggestion will be further examined by the

17.
Commission.

18.
The Commission underlines that the exporter should
mention whether or not an export refund applies. Proposals will
be submitted to the opinion of the Trade Mechanisms Commit-
tee regarding mandatory information in documents (control copy
T5) stating whether a refund is requested and an estimation of the
total amount.

19. to 21.
The Commission accepts that the cost of control
(for the exporter) is considerably higher when done at the cus-
toms office of exit than at the premises of the exporter. Condi-
tion for the value of this control system is that the export products
are isolated or identified (2) before the start of loading mentioned
in the notification to customs (Article 5(7) of Regulation (EC)
No 800/1999).

Box 1.
An exporter is not allowed to withdraw his export
refund claim when informed that these goods are selected for a
physical check. To do so would be to undermine the purpose of
such checks. The Commission services will therefore investigate
this finding further.

(1) Article 2 of Regulation (EC) No 2090/2002.

10.5.2005.

(2) As mentioned in Discussion Document D(2005) 12998; TMC

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The Commission shares the Court’s view that steady con-
23.
trol patterns may in some cases lead to predictability, although
this is not necessarily the case. The issue has already been
addressed with the Member States in the Trade Mechanisms
Committee (1).

The system of authorised consignor (2) does not
27. and 28.
exclude the affixing of genuine customs seals instead of company
seals. The accompanying transit document (3) clarifies that it con-
cerns a consignment of an authorised consignor.

The practice of carrying out checks at exporters’ premises has the
advantage of being more convenient for exporters and allowing
customs services full and easy access to the goods selected for
check.

Under correct application of Regulation (EEC) No 2454/93 there
should be no inclarity whether a seal is affixed by customs or by
an authorised consignor.

Moreover, if the export products are isolated or identified before
the start of loading mentioned in the notification to customs
(Article 5(7) of Regulation (EC) No 800/1999) the exporter is
already bound to the identity of the products.

Goods dispatched from an exporters’ premises without a physi-
cal check will later be subject to a selection for a substitution
check at the point of exit from the Community territory, and in
2005 about 13 % of such exports do in fact receive such a check.

The Commission does not consider it a prob-
24. and Box 2.
lem if a complete shipload of one and the same product is cov-
ered by several export declarations and customs check the
products belonging to only one export declaration. The exporter
does not know beforehand which export declaration will be
checked.

Moreover, the current approach has the advantage that more
shipments are inspected, albeit only partially, than would be the
case if an all or nothing approach was to be adopted.

The Court refers to the practice where customs in some
30.
ports execute as many substitution checks as there are days in
which consignments qualifying for such a check enter the port at
the land side; other Member States limit this to the number of
days when such consignments leave the port at sea-side. The legal
provision requires a number of substitution checks not less than
the number of days on which qualifying products leave the Com-
munity’s customs territory through the customs office of exit
concerned (4).

As a sea vessel crossing the sea border carries a higher number of
containers than a truck crossing the land border, thus concentrat-
ing more the number of qualifying days as described before, the
frequency of substitution checks varies accordingly.

31.
The Commission will remind Member States in the Trade
Mechanisms Committee that goods should be selected for substi-
tution checks wherever possible in the light of a risk analysis and
that if consignments covered by multiple declarations are selected,
each item selected to count as a separate substitution check must
be justified.

In addition to the physical controls on the spot, shipping docu-
ments, together with other commercial documentation covering
the whole shipment, should confirm the assurance obtained
for the whole cargo. Furthermore, ex post controls under (EEC)
Regulation No 4045/89 reinforce these assurances.

The multi checks on one consolidated consignment were
executed by the New Member States right after their accession, as
they did not take risks on their understanding of the norm at that
time. They are comfortably exceeding minimum requirements
concerning substitution checks.

25. and 26.
affix seals without preliminary checking of the cargo.

The Commission agrees that customs should not

The Commission is examining possible amendments to the leg-
islation to reinforce the rules on sealing by customs. No customs
sealing should be accepted without prior physical check.

Box 3.
has been reported to OLAF.

The Commission is aware of the problem and the case

The

system of Article 10 of Regulation (EC)
33.
No 2090/2002 provides an obligation to execute substitution
checks, and if during such a check anomalies like broken seals are
detected, customs has to change over to a specific substitution
check. Member States are encouraged to apply risk analysis, and
under such rule it may be useful to execute active controls on the
integrity of seals. Nevertheless, the Commission is considering
proposing the introduction of an obligation for customs offices
of exit to actively check the condition of seals.

(2) For control copies T5 of Article 912g(4) of Regulation (EC)

No 2454/93.

(3) Control copy T5, box A and/or box 110; Article 912g(2)(b) or (c) of

(1) Discussion Document D(2005) 12998, discussed in the Trade Mecha-

Regulation (EEC) No 2454/93.

nisms Committee of 10 May 2005.

(4) Article 10(2) of Regulation (EC) No 2090/2002.

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The Commission agrees that ‘tail-gate checks’ are not giv-
34.
ing the best possible assurance on non-substitution, but it has not
the experience that these types of controls, as the Court describes
for relatively small ports with limited activity with goods benefit-
ing from export refunds, are the most common approach.

In major ports, such as Felixstowe, Le Havre and Rotterdam, con-
tainers are taken to a dedicated premises and are unloaded to the
extent needed to gain access to the entire consignment.

37.
The customs office at Aalborg defines all situations where
a specific substitution check is required as irregularities ab initio.

Denmark notified orally that seals were missing because truck-
loads of fruit exports originating in the south of the Community
were reloaded on other trucks during their transport to the cus-
toms office of exit. The Commission asked Member States in the
Trade Mechanisms Committee of 17 November 2006 to pay
attention to this and the Belgian authorities reported that their
customs supervise such re-loadings.

Given the workload these supervisions of re-loadings cause to the
Member States’ authorities, the Commission discussed the issue
again in the Trade mechanisms Committee of
once
17 April 2007 (1).

The presence or absence of company seals has no bear-
38.
ing on the selection of goods for substitution checks or for spe-
cific substitution checks. All export consignments sealed or non-
sealed by authorised consignors qualify for a substitution check
anyway (2).

The situation in the UK is under consideration in the

40.
clearance of accounts procedure.

42.
While there may be risks as indicated by the Court, in
such cases the goods in question remain under customs control
until they physically exit the Community customs territory.
Therefore, the Commission considers that the risks as regards
export refunds are properly managed.

43.
While the relative share of export refunds in the Com-
mission database may be higher than average, the amount
involved comes to less than 0,5 % of total expenditure on export
refunds over the period concerned. 21 % of the amounts involved
have already been recovered.

The Commission’s database
above
the threshold of 4 000 euro (since 1 January 2007 above
10 000 euro) which implies that the database does not contain
all data regarding irregularities.

irregularities

contains

The irregularities detectable by physical checks
44. and 45.
are predominantly concerning aspects like weight and character-
istics of the products. The type of irregularities detectable under
4045/89 scrutinies may include these aspects, but also other
types of irregularities are revealed. Member States shall coordinate
their physical controls and their ex-post scrutinies pursuant to
Article 5 of Regfulation (EEC) No 386/90.

The Commission is further examining these issues and

47.
will take appropriate action.

The final outcome of these cases will only be known
49.
once the entire conformity clearance procedure, including a full
and exhaustive exchange with the Member States to preserve their
right of defence and guarantee fair and equal treatment, has been
completed. At this stage, however, it is expected that not all cases
will result in financial corrections imposed on the Member States
concerned.

On numerous occasions the Commission clarified in the
the Court

50.
Trade Mechanisms Committee
mentioned.

the problems

Moreover, the Commission prepares a proposal for modification
of Council Regulation (EEC) No 386/90. In parallel modification
of Commission Regulation (EC) No 2090/2002 is in preparation
and it will be discussed and brought for an opinion in the Trade
Mechanisms Committee when the Council approves its part.

51.
The Commission services accept this finding and will
take steps to speed up the processing of the audit enquiries which
remain open.

Concrete measures are being taken. The issues raised by
52.
the Court are adequately followed-up in discussions on best prac-
tice in the Trade Mechanisms Committee and by draft legal mea-
sures. However, the preparation of legislation requires thorough
examination in order to strike a balance between increasing
administrative burdens and complicating legislation on the one
hand and the added value of the modified controls on the other.

CONCLUSIONS AND RECOMMENDATIONS

Recommendation 1

The opinion that customs should vary their moment of arrival in order
to prevent predictability of the controls has been discussed with the Mem-
ber States (3). The Commission will take initiatives to lay this down for-
mally by modification of Regulation (EC) No 2090/2002.

(1) Working document D(2007) 8083.
(2) Article 10(2) first subparagraph of Regulation (EC) No 2090/2002.

(3) Working document D(2006) 12818 (TMC of 7 June 2006).

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The current criteria of 5 % minimum is respected even

54.
without taking into account the low value exports.

(b) The Member States concerned were compliant with the legal

requirements.

Nevertheless, the Commission shares the Court’s view that Mem-
ber States should aim at striking an appropriate balance between
low value and high value consignments selected for checks in
order target the risks involved most efficiently

However, the Commission considers that some low value exports
should continue to be checked.

Recommendation 2

The Commission is considering to introduce obligatory use of risk analy-
sis in line with initiatives already laid down in Regulation (EC)
No 1875/2006 (Customs Code Implementing Provisions).

The Commission already provided a considerable incentive to Member
States to apply risk analysis by permitting those who do to reduce the rate
of checks on non Annex 1 goods (mainly processed goods) from 5 %
to 0,5 %.

Furthermore the Commission will propose to the Council to give Mem-
ber States an option to set the control rate to 5 % per Member State
instead of per customs office if risk analysis is applied.

55.
Physical controls on the spot, shipping documents,
together with other commercial documentation covering the
whole shipment, should confirm the assurance obtained for the
whole cargo. Furthermore, ex-post controls under Regulation
(EEC) No 4045/89 reinforce these assurances. The Commission
also refers to its reply to paragraph 24.

Recommendation 3

The Court’s findings concern:

— Teething problems of the New Member States, which in

the meantime have been solved.

— The practice at seaports of exit which all fulfil the legal
minimum requirements, but some execute more than
the required minimum. The Commission is of the opin-
ion that this should not be discouraged.

(c) The practice identified by the Court is in line with existing
legislation, which requires that substitution checks are car-
ried out on goods not sealed by Customs.

However, the Commission is considering proposing the alter-
native to introduce mandatory customs’ pre-clearance checks
before seals are affixed by customs authorities, in which case
the customs office of exit may treat consignments with sound
customs seals with confidence.

(d) The Commission is considering proposing the introduction
of an obligation for customs offices of exit to actively check
the condition of seals.

(e) While there may be risks as indicated by the Court, in such
cases the goods in question remain under customs control
until they physically exit the Community customs territory.
Therefore, the Commission considers that the risks as regards
export refunds are properly managed.

(f) The Commission underlines that the exporter should men-
tion whether or not an export refund applies (2). Proposals
will be submitted to the opinion of the Trade Mechanisms
Committee regarding mandatory information in documents
(control copy T5) stating whether a refund is requested and
an estimation of the total amount.

The Commission is considering issuing guidelines on controlling bulk
shipments in point 1 of Annex I to Commission Regulation (EC)
No 2090/2002.

(g) The Court informed the Commission of these findings and
the Commission requested Member States in the Trade
Mechanism Committee on 11 November 2006 to pay more
attention to this aspect.

56.

Recommendation 4

(a) The Commission agrees with the Court’s observation that
‘tailgate inspections’ (see also the Commission’s reply to
point 34) as such are not sufficient enough to cover the
requirement that a visual check should clarify that the goods
are covered by the documents accompanying them. The
Commissions’ services are examining modification of the rel-
evant legislation (1) to address the issue.

(1) Article 10(2) first subparagraph of Regulation (EC) No 2090/2002.

The Commission is preparing a modification of Regulation (EC)
No 2090/2002:

— taking into account the principles of cost-effectiveness of controls

(2) In the third copy of the export declaration accompanying the prod-
ucts to the customs office of exit (Article 793 of Regulation (EEC)
No 2454/93), or in the control copy T5.

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— with a percentage expressing the norm for substitution checks

replacing the ‘one per day rule’.

— introducing mandatory pre-clearance checks before customs affixes
seals, thus ensuring that other consignments really qualify for selec-
tion for substitution checks.

so that the legal provisions express what already has been explained in
working documents to Member States in this respect.

The Commission will continue carefully checking the Member States’
Annual reports on this issue, as has been provided in point 2.7 of
Annex III to Regulation (EC) No 2090/2002.

57.

Moreover, the relevant findings of the Court have been taken
up with the Member States concerned under the clearance of
accounts procedure.

(c) The physical checks under Regulation (EEC) No 386/90 form
part of an overall comprehensive system of controls, which,
in addition to the physical checks, consist of 100 % ex-ante
administrative checks of refund payment claims, of ex-post
controls under Regulation (EEC) No 4045/89 and of the
Commission’s own audits within the clearance of accounts. It
is on the basis of this chain of controls that the Commission
obtains reasonable assurance on the expenditure concerned.

Recommendation 5

(a) The Commission has acted on the findings of the audi-
tors. They were discussed with Member States in the Trade
Mechanisms Committee and addressed in different working
documents to Member States. In addition, the Commission is
preparing changes to the relevant legislation.

The Commission is preparing a modification of Regulation (EC)
No 2090/2002 on the issue of predictability. Initiatives will be taken
to introduce mandatory application of risk analysis in conformity with
Article 3 of Regulation (EC) No 1875/2006 regarding risk analysis in
customs import and export procedures. Regarding the selection for sub-
stitution checks, see third part of fourth recommendation.