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Document 52011SA0008

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Special Report No 8/2011 ‘Recovery of undue payments made under the common agricultural policy’
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52011SA0008

Special Report No 8/2011 ‘Recovery of undue payments made under the common agricultural policy’


GLOSSARY

AAR : Annual activity report: report by a director-general of the Commission giving an account of the achievements of the key policy objectives and core activities of the directorate-general.

AGRI : European Commission Directorate General for Agriculture and Rural Development

Annex III and Annex IIIA : The overview of amounts to be recovered from final beneficiaries provided by the paying agency to the Commission as part of its annual accounts.

CB : Certification body: public or private legal entity designated by the Member State with a view to certifying the truthfulness, completeness and accuracy of the accounts of the accredited paying agency.

Clearance of accounts : The procedure by which the Commission accepts the accounts of the Member States and thereby the expenditure made by the paying agencies to farmers and beneficiaries. Firstly the accounts of paying agencies are checked for accuracy by certification bodies in the Member States and are then subject to an annual financial clearance decision by the Commission. Secondly the Commission itself then carries out the conformity clearance procedure based on audits which permit it to identify and exclude (in later years) payments not complying with the rules.

EAFRD : European Agricultural Fund for Rural Development

EAGF : European Agricultural Guarantee Fund

EAGGF : European Agricultural Guidance and Guarantee Fund

CJEU (ECJ) : Court of Justice of the European Union

GBP : Pound sterling (£)

Irregularities : "Irregularity" shall mean any infringement of a provision of Community law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the Communities or budgets managed by them, either by reducing or losing revenue accruing from own resources collected directly on behalf of the Communities, or by an unjustified item of expenditure. See Article 1(2) of Regulation (EC, Euratom) No 2988/95.

IT : Information technology

MS : Member State

OLAF : European Anti-Fraud Office

PA : Paying agency: the organisation responsible within a Member State for the proper assessment, calculation, inspection and payment of agricultural subsidies. Part of the work of the paying agency may be done by delegated bodies.

PACA : Premier Acte de Constat Administratif ou Judiciaire. A French acronym commonly used to denote the date that the beneficiary is notified for the first time in writing by an authority in the Member State that an amount of agricultural subsidy should not have been paid. This is the date at which the debt should be recorded in the accounts (Annex III/IIIA tables) but not — in the case of pre-debtors — in the debtors’ ledger of the paying agency. See also Article 35 of Regulation (EC) No 1290/2005.

Pre-debtor : The "pre-debtors" fulfil the criteria of the Commission to be included in the accounts (Annex III/IIIA tables) and are the result of a pre-notification where the debtor has been informed by the PA of a potential debt which may end up in a recovery notification. The time elapsing between informing of a potential debt and the recovery notification can take several months or even years. See also "PACA".

Recoveries vs financial corrections : Recovery of unduly paid amounts from the beneficiary through a recovery notification issued by the PA. Financial corrections to Member States can be imposed by the Commission under (1) the financial clearance (reliability of the annual accounts) and/or under (2) the conformity clearance (legality and regularity of the underlying transactions) of the annual accounts of the PA. Amounts under financial corrections are financed by national budgets.

Recovery rate : The Court has calculated various recovery rates in the report by comparing the amounts recovered to the debt outstanding recorded and expressing this as a percentage.

TFR : The task force recovery was set up in 2002 to examine old cases of debt relating to irregularity as many hundreds of old cases had not been followed up. Its purpose was to decide whether the debt could be written off to the cost of the budget or whether, where Member States had been negligent, the debt should be charged to the Member State concerned.

50/50 rule : As part of the review of European legislation relating to debt and recovery in 2006, the so-called 50/50 rule was introduced which allows the Commission to automatically take back from the Member States 50 % of debts that remain unrecovered in the debtors' accounts after four years, or after eight years where there is a legal case pending for the debt.

EXECUTIVE SUMMARY

I. The European Union spends around 55 billion euro per year on agriculture and rural development, some of which is wrongly paid due to irregular or incorrect claims or errors. This report examines the procedures for recovery of undue payments. In particular it focuses on recoveries by Member State authorities and the monitoring role of the Commission.

II. The Court previously examined the arrangements for the recovery of irregular payments in its Special Report No 3/2004. It found that there were significant weaknesses in the arrangements for reporting, recovery and writing off irregular payments. Subsequently the Commission implemented important changes in the way in which debts are recorded, reported and certified in the Member States. It also transferred the responsibility for financial follow-up to DG AGRI from OLAF. The impact of these changes is also examined in this report. The Court examined both the reporting of recoveries by Member States to the Commission and the presentation of figures on recoveries in the annual accounts of the EU.

III. The Court found that the arrangements introduced in 2006 have improved matters by providing more accurate information and greater detail on debts and recoveries at the level of the Member States and by giving more information in the annual accounts. The recovery rates have also improved in respect of debts raised from 2006 onwards, however, certain weaknesses persist:

- New procedures, which result in the automatic reimbursement to the Commission of 50 % of the amount of old debts, enhance the protection of the EU’s financial interests by "recovery" via the transfer of funds from the Member State budget to the European Union budget. The system has certain shortcomings such as running the risk of encouraging the write-off of debt by Member States as early as possible or reporting debt as late as possible and allowing certain amounts to "escape" from the procedure.

- Differences in treatment between Member States means that debts are recognised at different times, reported figures are not comparable, interest is applied inconsistently and the point in time debts can be written off can vary significantly, leading to a negative financial impact on the EU budget.

- The likelihood of recovery of an undue payment is affected by delays in the Member States’ initiation of recovery procedures, shortcomings in their recovery actions, and their limited enforcement possibilities.

- Where delays in the initial recording of debt occur, the transmission of information relating to irregularities to OLAF can also be delayed.

IV. The Court therefore recommends that the Commission should further improve the way in which debts in the Member States are managed and reported upon and ensure a consistent treatment of those across all Member States by:

- requesting Member States to record the irregularities and other debts once they are legally due, notably at the time the recovery notification has been drawn up;

- clarifying certain key reporting and accounting concepts which have been inconsistently applied thus far by issuing guidelines, in a timely manner;

- introducing a uniform time limit between the discovery of a potential irregularity and the notification of the recovery order to the debtor which would enhance harmonisation between Member States and ensure a more timely transmission of information on irregularities to OLAF;

- introducing explicit rules in relation to the application of interest;

- providing further clarification of the circumstances under which debts can be declared as irrecoverable, in particular in relation to the rules for writing off debt in insolvency cases;

- reviewing the application of the new, automatic 50 % recovery procedure rules to ensure its effective application;

- finalising the follow-up of old "Task Force Recovery" cases, which were supposed to have been finalised some three years ago.

V. During the period 2006–08, covered by the Court’s audit, around 90 % of the amounts reported in the EU annual accounts as "recoveries of undue payments" were those made by the Commission through deductions from the Member States and not actual recoveries of the unduly paid aid from beneficiaries. This undoubtedly protects the financial interests of the EU but without the full deterrent effect of a recovery made from an unduly paid beneficiary.

VI. The Commission should therefore explore methods that permit it to reduce the proportion of its "recoveries" from Member States’ budgets, and increase the proportion of undue payments recovered from the beneficiaries who received them.

INTRODUCTION

1. The EU spends around 55 billion euro per year on agriculture and rural development. Table 1 shows a breakdown of spending between the guarantee fund (EAGF) and rural development for the 2006 to 2009 period.

2. Management of most of this expenditure is shared between the Member States and the Commission. The aid is paid out to farmers and beneficiaries by the paying agencies (designated national authorities), which are then reimbursed by the Commission. Some of these payments are made irregularly or with errors and, if detected, have to be recovered. This report examines the arrangements for such recoveries.

3. In order to safeguard the EU financial interests, Member States are required to "adopt all legislative, regulatory and administrative provisions and to take any other measures necessary to:

(a) check the genuineness and compliance of operations financed by the EAGF and the EAFRD;

(b) prevent and pursue irregularities;

(c) recover sums lost as a result of irregularities or negligence [1]."

TABLE 1

AGRICULTURE SPENDING 2006–09 (MILLION EURO) [9999]

| 2006 [8888] | 2007 | 2008 | 2009 |

EAGF | 42116 | 42446 | 43011 | 46120 |

Rural Development | 11543 | 11154 | 10671 | 8992 |

Total | 53659 | 53620 | 53682 | 55112 |

4. Member States are required to undertake checks (generally on a sample basis) on the regularity of individual payments. Some checks take place before the payment is made, in which case the detected irregularities can be deducted directly from the payment to be made. For checks carried out after payment has taken place, Member States are required to record a debt for any undue payments detected and then request repayment of the overpaid amount from the beneficiary.

5. Many beneficiaries repay as requested, but if they lodge an appeal and if the debt is subsequently upheld by the PA, an enforcement action for its recovery is initiated, sometimes involving legal action. Under certain conditions (in the case of insolvency, or the cost of recovery exceeding the amount due), the paying agency can decide to halt recovery and declare the amount as irrecoverable to the EU and the debt is written off.

6. Table 2 sets out the total amount for which recovery is ongoing and amounts recovered as recorded in the Member States debtors’ accounts for the period 2006–09 as follows:

TABLE 2

AMOUNTS RECORDED IN THE MEMBER STATES’ DEBTORS’ ACCOUNTS (MILLION EURO)

EAGF year ending 15 October | 2006 | 2007 | 2008 | 2009 |

Amount for which recovery is ongoing as at 15 October | 1267 [9001] | 1437 [9002] | 1246 | 1115 |

Amounts recovered during the EAGF year | 104 [9003] | 152 | 113 | 111 |

Percentage recovered [9004] | 8,2 % | 10,6 % | 9,1 % | 10 % |

7. As can be seen, the level of amount for which recovery is ongoing in the Member States’ accounts has remained relatively stable with recoveries and write-offs (see Table 4) being largely compensated by new debts raised, Annex I gives a breakdown of the new debts raised between 2006–09. For cases from 2006 onwards however the recovery rates have improved (see Table 3).

8. The arrangements for financing the common agricultural policy (CAP) also provide for the Commission to clear the accounts relating to agriculture and rural development: the Commission accepts the amounts paid out by the Member States and may reduce payments to Member States when it finds that they have misapplied the regulations governing the CAP. Although the Commission has often reported these reductions as "recoveries", most of the transactions involved take the form of corrections which do not recover undue payments from the beneficiaries, rather they shift part of the cost of the CAP onto national taxpayers. In the context of the clearance of accounts, a small part of the Commission’s clearance decisions relate to the recovery of specific debts.

A NEW FRAMEWORK 2006

9. The Court last reported on the recovery of irregular payments in 2004 (Special Report No 3/2004). At that time the Court highlighted a low rate of recovery of reported debt, inconsistencies in the data reported, a large volume of old debts neither recovered nor written off and a lack of clarity in the division of responsiblities between DG AGRI and OLAF.

10. In 2006, the Council introduced a new regulatory framework [2]. The most significant change was the introduction of the "50/50 rule" which shares the financial consequence of non-recovered debt equally between the EU budget and related Member State. The rule helps protect the financial interests of the Union. Member States are charged for 50 % of amounts not recovered four years after the date the debt was recognised, or eight years if the recovery process is being pursued in the courts. The date on which the debt is recognised is therefore important for the application of the rule. However, if a final judicial decision confirms that the debt was not due, the amount charged under the 50/50 rule has to be paid back to the Member State by the Commission.

11. The 50/50 rule is intended to provide an incentive for Member States to ensure a more timely recovery of debts. It represents an improvement over the previous situation whereby unrecovered debt was allowed to remain in the accounts for very long periods, sometimes decades, until ad hoc decisions were finally taken to write them off. There are two main risks to the effective application of the rule: (i) postponement of the date that debts are first recognised, thereby delaying the date that Member States can be charged in case of non-recovery; and (ii) writing debts off as irrecoverable before all recovery possibilities have been exhausted, in order to avoid the application of the rule to a specific debt.

12. Further changes were introduced by the new framework with respect to the communication by Member States to the Commission of irregularities and the progress made in recovering them. Prior to 2006, such information was sent to the EU anti-fraud office, OLAF. Detailed information is now sent to the responsible Commission Service, DG Agriculture and Rural Development, so that debts can be more closely monitored. Also, the threshold for communicating individual irregularities to OLAF was raised from 4000 to 10000 euro.

HOW ARE DEBTS AND RECOVERIES REPORTED?

13. Information on the situation with regard to debts and recoveries in the Member States is reported yearly by the paying agencies to the Commission in separate tables (Annex III and Annex IIIA data) attached to their annual accounts [3]. This information is also used as a source of information on recoveries provided in the Annual Activity Report (AAR) of the Director- General of Agriculture and Rural Development.

14. Based on the information from Member States, the Commission publishes data on the level of debt and recovery of undue payments in notes to the financial statements of the European Union. The amounts reported in the EU accounts are significantly less than the aggregate of the amounts recorded in the Member States’ records to take due account of the Commission’s estimates of amounts considered as recoverable (see paragraphs 59 to 61). The Commission also reports annually to the European Parliament and the Council on the protection of the EU financial interests and the fight against fraud, including recoveries of undue agricultural payments.

AUDIT SCOPE AND APPROACH

15. The Court assessed the effectiveness of the systems established and operated by Member States to recover identified debts, together with the Commission's supervision of the process. The audit addressed the following questions:

(i) Do Member States process and record debts correctly?

(ii) Are Member States successful in recovering identified undue payments?

(iii) Do Member States write off debts as irrecoverable appropriately?

(iv) Does the Commission supervise and monitor recoveries effectively?

16. The audit covered EAGF recoveries for the 2006, 2007 and 2008 financial years, all of which were subject to the new rules introduced in 2006.

The audit involved:

- analysis of a sample of 14 paying agencies in eight Member States, focusing on those with the highest recorded debt;

- testing of a sample of 670 transactions (494 individual debts, 176 other transactions);

- examination of the Commission's guidance, audits and application of financial corrections.

More detailed information on the work done is provided at the beginning of each section in the observations. The audit did not assess the effectiveness of Member States in identifying irregularities for recovery.

OBSERVATIONS

DO MEMBER STATES RECORD AND PROCESS DEBTS CORRECTLY?

17. After identifying irregularities and errors, Member States have a number of obligations to follow in respect of the resulting debt. These include:

- accurate recording of the amount and date of the debt and its reporting to the Commission, inter alia to provide an appropriate basis for the application of the 50/50 rule;

- correct classification of the debt, which can also have an impact on the 50/50 rule; and

- the calculation, charging and recording of interest.

18. The Court examined the implementation of such obligations in the paying agencies selected by an evaluation of the systems in place as well as through the testing of the sample of transactions. It analysed the debtors’ accounts, and checked the accuracy of the tables provided to the Commission. The Court also assessed the extent to which the rules allow for differing interpretations which could lead to different treatment between Member States (including potential impact on the amounts recovered).

INACCURACIES IN THE DEBTORS’ ACCOUNTS

19. Amounts to be recovered may be classified as irregularities, errors in administrative procedures or other amounts recoverable. The rules applicable to each category are somewhat different, as explained in paragraphs 29 and 30. For a sample of transactions, the Court checked the accuracy of the tables reporting debts to the Commission. The main inaccuracies found by the Court related to cases that were incorrectly classified or where no or inadequate supporting documentation existed on file for the recorded amounts [4]. The total amount of errors involved in the Court’s sample was 8,3 million euro and concerned 89 cases out of the total of 670 transactions examined. Where irregularities are concerned, these inaccuracies may have a financial impact since they can affect the normal application of the 50/50 clearance mechanism and directly impact on the amounts corrected by the Commission and recovered from Member States.

20. The debtors accounts in the individual paying agencies are also checked by independent auditors (the certification bodies, CBs) which report to the Commission on the reliability of the accounts presented. However, the certified figures can also be significantly changed in later years by the CBs themselves. For Italy, for instance, the total of outstanding debts at the end of 2006, which was certified by the Italian CB, was adjusted downwards by 182 million euro [5] in 2009, or in the case of Denmark, recovered amounts already certified by the Danish CB for 2008 had also be corrected upwards by 4,7 million euro and those for 2009 downwards by 14,1 million euro in subsequent years. Such large adjustments call into question the reliability of the certified figures. As can be seen in the example presented in Box 1 the CBs also encountered difficulties in certifying the accuracy of the figures recorded in the Member States.

BOX 1

MISSING OR UNREADABLE DATA AT THE RURAL PAYMENTS AGENCY (RPA) (UK)

At the RPA, the Court was unable, for 2006 and 2007 [6], to reconcile the figures reported to the Commission with the amounts recorded in the agency’s debtor accounts as the RPA debtor’s data has become corrupted. For 2006, differences amounting to 8,8 million pounds sterling were noted [7], 81 % of them due to corrections. Problems had also been found by the certification body’s audit, and their recompilation of the debtor’s accounts provided only some, but not full, assurance and the certification body concluded that the accuracy of debts recorded was poor for 2007.

INCONSISTENCIES IN THE DATE THE DEBTS ARE RECORDED

21. The date on which irregularities must be recorded in the debtors accounts of the Member States (Annex III) is a key element for the application of the regulation as it determines the initiation of the time limits of four years and eight years for applying the 50/50 rule. The regulation defines this date as, "the first written assessment of a competent authority, either administrative or judicial, concluding on the basis of actual facts that an irregularity has been committed, without prejudice to the possibility that this conclusion may subsequently have to be adjusted or withdrawn as a result of developments in the course of the administrative or judicial procedure." [8] The date of initial recording of debts is thus governed by the concept of the primary administrative or judicial finding more commonly known by its French acronym PACA (Premier Acte de Constatation Administrative).

22. The European Commission has further developed this definition in its guidelines [9] which from 2008 onwards [10], also provide that all irregularity cases should be included in the annual accounts of the paying agencies even if the debt has not been officially notified in the form of a recovery notification [11], in order to record these cases as "potential debtors" or "pre-debtors". Despite the intended harmonisation, the date of the PACA continues to be interpreted differently in the Member States and the Commission’s instructions to individual Member States have not always been consistent. In practice it varies between the date of a check by the control body, at the earliest, and the date of issue of the recovery notification, at the latest. The Court found that there can be a difference of up to six years between these two dates. Although the regulations do not fix a time limit for the notification of a debt following a check, the ECJ Decision in Case C-54/95 requires that the recovery procedure should be initiated within one year after all relevant facts with regard to the irregularity are known.

23. Member States that use the latest possible time and consider the date of the written recovery notification to constitute the PACA gain additional time before amounts are subject to the 50/50 clearance mechanism and do not always register the potential debt as a "pre-debtor" as stipulated in the Commission guidelines. This means that an irregularity detected can be accounted for and be the subject of a correction by the Commission in different years depending upon the policy adopted by the Member State concerned.

24. The Spanish authorities generally consider the PACA date to be the first assessment (acuerdo de inicio) sent to the beneficiary before the recovery notification. However, two PAs (FEGA and AVFGA) [12] audited have taken into account the date of the recovery notification from 2008 onwards which, under the given circumstances, is not in line with current legislation. The French PAs complied with the regulation and guidelines until 2008 but for 2009 they changed their reporting system to use a later operative date, the date of the recovery notification, to overcome disadvantages of an early recording of debts as "pre-debtors". At the end of 2009, the Commission requested the French authorities to change the system back again.

25. A limited number of cases were found in Germany, Belgium, Hungary and the United Kingdom [13] where previous written assessments had been sent to potential debtors which should have constituted the recording date of the debt in the accounts but no such recording was made.

26. The problem of different interpretations of the date of the PACA was raised in the Court’s 2004 report and was accepted by the Commission as requiring attention. However, guidelines issued by the Commission have not yet promoted a harmonised approach to this problem, the significance of which has increased with the introduction of the 50/50 rule.

INCONSISTENCIES AS A RESULT OF DIFFERING INTERPRETATIONS OF SPECIFIC TYPES OF DEBT

27. The Court also found inconsistent interpretations by the PAs of the concepts of irregularity, errors due to administrative procedures, and other types of recoveries. It is important that Member States interpret these concepts in the same way to ensure consistent and comparable reporting; the differences in interpretation can also have a financial impact on the EU budget.

28. In 2006 and 2007, all debt cases (whether they are classified as irregularities, administrative errors or "other") were reported to the Commission [14] in Member States debtors accounts and made subject to the 50/50 clearance mechanism.

29. From 2008 undue amounts paid as a result of administrative errors are no longer included in the Member States debtor accounts (Annex III tables) since they must be repaid to the EU budget at the end of each year in the context of the financial clearance of accounts.

BOX 2

FRANCE PAYING AGENCY ONIEP [15]: "OTHER" DEBT

In 2008, the PA reported a case for the first time — in the part of the accounts not subject to the 50/50 clearance rule — with the justification that the irregularity was covered by bank guarantees. The case dated from 1997, with a potential financial impact of 8,5 million euro. If the case had been classified as an irregularity instead of "other" debt it would have been cleared in 2006 when the 50/50 rule was introduced and 4,3 million euro returned to the EU budget, without prejudice to any subsequent encashment of the guarantees.

30. Furthermore, Member States have applied the concept of administrative error in an inconsistent manner. The Court identified 15 cases with a value of 7 million euro [16] communicated as irregularities that, it considered, should have been classified as administrative errors, and thus credited immediately to the EU budget.

31. PAs have different interpretations of what constitutes an irregularity [17]. For example, cases identified but which are not detected as a result of a scrutiny or cases that are covered by a guarantee are not considered as irregularities and not recorded as such in certain Member States (Germany and France). They are recorded as "other" debts and therefore not considered for the application of the 50/50 clearance mechanism. If eventually such debts are declared as irrecoverable the risk of non-encashment of the guarantee is borne by the EU budget.

Box 2 provides an example of irregularity cases wrongly classified as other recoveries, and shows the impact on the EU budget.

INCONSISTENT APPLICATION OF INTEREST LEADING TO FINANCIAL LOSS

32. Given the sometimes long delays between an undue payment being made and its eventual detection and subsequent recovery, interest on outstanding debt should be charged [18], to protect the financial interests of the EU. With an average of some 1200 million euro of debt outstanding the interest accruing to the EU budget on an annual basis is substantial — based on a conservative rate of 3 % per annum, the annual amount is estimated at 36 million euro. Where interest is fully charged to the EU budget, no loss occurs.

33. The Court found that the application of interest on debt was still not fully harmonised. For the vast majority of measures, the interest rate must be calculated in accordance with national law, but no specific rate is established, although it cannot be lower than the interest rate applicable for the recovery of amounts under national provisions. Annex II shows a summary of the different methods used by the PAs audited by the Court as regards the application of interest.

34. Most of the PAs audited apply an automatic calculation mechanism, based on the interest rate calculated in accordance with national law, although there were wide variations applied in practice.

35. The European Court of Justice supported the Commission’s view that interest is to be included in Annex III even if the principal amount has not been recovered or has not been established in legal proceedings [19]. However, in the current system interest payable is not always communicated to the debtor by sending an updated recovery notification as at 15 October every year, i.e. the year end for EU agricultural payments.

BOX 3

TREATMENT OF ACCRUED INTEREST IN SPAIN

At the Commission’s request, AVFGA (PA Valencia) incorporated accrued interest in Annex III as at 15 October 2008, consequently updating the amount due for 575 cases. The accrued interest calculated by AVFGA on the basis of a compound interest formula until 15 October 2008 amounted to 11,6 million euro. The Court identified errors in the calculation, totalling 1,4 million euro of understatement. The calculation made by the PA was only for the purposes of reporting to the Commission as the debtors were not invoiced.

ARE MEMBER STATES SUCCESSFUL IN RECOVERING IDENTIFIED UNDUE PAYMENTS?

36. When an irregularity is detected, it is important that Member State authorities use all means to recover the amount from the beneficiary. The Court assessed for the years 2006 to 2009:

- the extent to which debts are recovered;

- how quickly Member States initiate recovery procedures after an irregularity is detected;

- how far non-recoveries can be considered as "negligence" by the national authorities, thereby making them liable for the whole amount due; and

- the methods available to Member States to enforce recovery, and how they are used in practice.

RELATIVELY LOW RATES OF RECOVERY BUT SIGNS OF IMPROVEMENT

37. As shown in Table 2 the annual rate of recovery of amount for which recovery is ongoing is rather low, at around 10 % of the total recorded debt. In order to try and assess the impact of the changes to the system, the Court has calculated a year-by-year recovery rate for the new debts established in years 2006–09. For cases from 2006 onwards however the recovery rates have improved (Table 3).

38. Table 3 shows that the largest proportion of the recovery is achieved during the year in which a debt is established. In subsequent years, the recovery rate drops significantly. A more detailed analysis shows that the recovery rates for administrative cases are noticeably higher than cases under judicial proceedings (an overall recovery rate of 54 % in the first case against 8,3 % in the second case over the period 2006–09).

TIMELY INITIATION OF RECOVERY PROCEDURES IMPROVES THE CHANCE OF RECOVERY, BUT SIGNIFICANT DELAYS IDENTIFIED

39. The effectiveness of a recovery procedure is largely dependent on the rapidity of the steps adopted in the early stages. After the detection of a potential irregularity by the control bodies, it is important that a final decision should be taken as quickly as possible as to whether a debt exists and a recovery order should be issued.

40. However, the Court identified the number of PAs, particularly France, Italy and Greece, where debts were recorded unjustifiably late after the detection of the irregularity. Out of 494 cases examined in the abovementioned countries, 39 were affected by unjustifiable delays.

TABLE 3

RECOVERY OF DEBTS RECORDED AFTER THE INTRODUCTION OF THE 50/50 RULE

FY | Debt established concerning year (million euro) | Recovered 1st year | Recovered 2nd year | Recovered 3rd year | Recovered 4th year | Total recovered |

2006 | 155 | 24,1 % | 17,7 % | 6,0 % | 2,7 % | 50,6% |

2007 | 257 | 33,3 % | 12,7 % | 3,6 % | | 49,5% |

2008 | 135 | 33,7 % | 16,8 % | | | 50,6% |

2009 | 135 | 35,5 % | | | | 35,5 % |

WEAKNESSES IN RECOVERY ACTIONS BY NATIONAL AUTHORITIES

41. The Commission is responsible for supervising the diligence of the national authorities in pursuing the recovery of debts. When these authorities are found negligent in this regard, the Member State must reimburse the amount of the debt foregone to the EU budget. The Court identified several such cases where the Commission should determine whether negligence occurred. The most relevant cases identified were:

- cases where the judicial authorities cancelled the recovery procedure because the administrative authorities had failed to comply with one or more legally binding procedures, notably failure to engage in the adversarial proceedings that, depending on the national legislation, the PAs are required to undertake with the beneficiary [20];

- cases where the judicial authorities cancelled recovery proceedings because they considered that the cases were time-barred i.e. administrative procedures had taken too long, and that this was attributable to excessive delays of the administrative authorities in their recovery actions [21];

- cases where the administrative authorities failed to register their debt against the beneficiary in a collective insolvency in good time, effectively excluding the amount to be recovered [22];

BOX 4

UNJUSTIFIED DELAYS IN GREECE AND ITALY

In Greece, the audit found seven cases where there were delays of between four and six years for the assessment of investigation reports. In the same country, for 18 cases, the final ministerial decision to validate the recovery took between two and seven years following the first recovery notification sent to the beneficiary. The value of these cases amounts to 10,3 million euro. In Italy, the audit found seven cases involving a total amount of 2,5 million euro where the delay between the investigation report and the recording of the debt extended to two to four years.

- cases where the administrative authorities had what were deemed to be sufficient grounds to present an appeal or to take the case to a subsequent level but failed to do so [23]; and

- cases where there were excessive delays in the recovery actions once the procedure had already been initiated, particularly concerning the initiation of enforcement recovery actions [24].

LIMITED ENFORCEMENT PROCEDURES AVAILABLE TO MEMBER STATE AUTHORITIES

42. Enforcement procedures fall exclusively under national legislation. An exception to this general principle came into force from financial year 2008 [25], whereby Member States were required, without prejudice to any other enforcement action provided for in national law, to "offset any still outstanding debt of a beneficiary which has been established in accordance with national law against any future payment to be made by the PA responsible for the recovery of the debt to the same beneficiary."

BOX 5

EXAMPLE OF LACK OF DILIGENCE BY THE NATIONAL AUTHORITIES: SPAIN (ANDALUCÍA)

In Spain (Andalucía), between 2006 and 2008, 252 cases were detected by the Court where the prescription period [26] of four years had already elapsed between the discovery of the irregularity and the time when the PA became aware of the facts and could start the recovery process. The PA decided to write off the amount of 5,8 million euro against the EU budget. Any negligence subsequently determined by the Commission would be attributable to the Spanish authorities.

43. However, the Court’s audit found that the effectiveness of the enforcement procedure is limited by the following:

- Since 2008, the PAs audited have applied recoveries through offsetting where this is allowed by national legislation, however, offsets cannot be applied until the debt is legally recognised.

- Beyond offsetting or the calling in of guarantees (where applicable), none of the PAs audited has any other direct enforcement possibilities.

- Only some of the PAs audited [27] have the possibility, through legal means or convention, to enforce the recovery of Community debts through other bodies e.g. the regional or national tax/customs authorities. This possibility increases the chance of recovery.

- In all Member States audited, except Belgium and Greece, the recovery orders notified by the PAs are directly enforceable through a judicial authority.

- The execution of a recovery notification should only be suspended if the amount disputed is sufficiently secured (by a bank guarantee, cash deposit etc.) unless duly justified reasons for such a waiver are presented by the debtor. This principle was, however, not applied in all Member States audited.

DO MEMBER STATES WRITE OFF DEBTS AS IRRECOVERABLE APPROPRIATELY?

44. When debts are deemed to be irrecoverable (if the beneficiary is insolvent or if the cost of the recovery action is likely to exceed the amount recovered), the regulation allows Member States to write them off. In such cases the debts are removed from the debtor accounts submitted to the Commission. If this write-off takes place before the four- and eight-year time limits, then the 50/50 rule does not apply and the amount is effectively charged in full to the EU budget. This creates the risk that debts are written off prematurely — that is before all possible recovery steps have been exhausted — in order to avoid the application of the 50/50 rule and the related charge on Member States.

45. The Court examined a sample of 138 cases written off between 2006 and 2008 with a total value of 176,5 million euro, to assess whether the write-off was appropriate in the circumstances. It also:

- analysed the amounts written off between 2006 and 2009 and established the cost to the EU budget;

- examined the working definition of insolvency, and its impact on write-offs; and

- evaluated the other situations when debts are written off.

46. The Court’s analysis of the figures for debt written off shows that most of the amounts declared as irrecoverable by the PAs were financed by the EU budget (see Table 4). The situation in 2006 is considered to be exceptional as accumulated debts for the past, back to the 1980s, were written off in that year.

TABLE 4

AMOUNTS WRITTEN OFF 2006–09 (MILLION EURO)

| 2006 | 2007 | 2008 | 2009 | Total |

Cases "written off" | 225,8 | 166,0 [8002] | 32,4 | 64,4 | 488,6 |

Borne by the EU budget in total | 207,2 | 154,4 | 25,3 | 42,0 | 428,9 |

Percentage of debts written off borne by the EU budget | 91,8 % | 93 % | 78,1 % | 65,1 % | 87,8 % |

LACK OF CLARITY IN THE CRITERIA TO BE APPLIED TO JUSTIFY WRITING OFF DEBT

47. Concerning the concept of insolvency, which is the reason given for over 90 % of debt written off, the regulatory provision [28] is not sufficiently explicit. In principle, PAs write off amounts under the following conditions.

For cases subject to legal proceedings:

- Insolvency proceedings declared by national courts and handled by liquidators: The Court found that, depending on the PA, the case could be written off at the opening, during or at the end of the insolvency proceedings thereby causing considerable variations in the application of the eight-year period granted before amounts are cleared under the 50/50 rule. The amounts finally recovered through the liquidation procedure are generally relatively low (between 0,14 % and 6 % of the debt).

For non-judicial (i.e. standard) cases:

- Impossibility to trace the debtor, death of the debtor or fruitless seizure (nulla bona) are the reasons generally invoked to justify write-offs: There is no common approach defined for the application of these criteria, leading to differing practices being used by the PAs audited and wide variations in the application of the four-year period granted before amounts are cleared under the 50/50 rule.

48. It was also noted that certain PAs write off their debts in the Annex III tables although they remain in the debtor’s ledger under national legislation because of further recovery possibilities using national legislation (PAs in Germany). For co-financed measures, this practice leads to a different treatment of debtors, whereby recovery procedures for the national part of the debt are still continuing when the Community part has been written off.

49. Given that the majority of write-off is due to insolvency of the debtor, it is important to clarifiy the criteria applied in the Member States to ensure that the maximum amount is recovered to the EU budget and to ensure equal treatment of similar cases between Member States.

50. Box 6 shows an example of an unjustified write-off and potential negligence on the part of the administrative authorities.

WRITING OFF DUE TO UNECONOMIC RECOVERY COSTS: SMALLER AMOUNTS INVOLVED BUT STILL A NEED FOR CLARIFICATION

51. Paying agencies made limited use of the practice whereby debts were written off because the recovery costs were adjudged to be higher than the amount to be recovered. The Court found that this was used mostly in cases for amounts of less than 100 euro, although, in the UK (RPA), it is generally considered only to be cost-effective to pursue by legal action debts exceeding 2000 pounds sterling [29]. In Germany (PA — Hamburg-Jonas) the threshold set is 1000 euro. The Commission has not provided any further guidance on this issue and differences between Member States remain. Between 2006 and 2009, some 880000 euro was written off by the PAs for this reason.

BOX 6

UNJUSTIFIED WRITE-OFF OF DEBT TO THE CHARGE OF EU BUDGET BY THE GERMAN PA NIEDERSACHSEN

In this case, recovery notifications were issued for an amount of 4,9 million euro on 6 August 2003. Insolvency proceedings were opened on 1 August 2003. The amount was declared as irrecoverable by the PA on 15 October 2006, prior to the application of the 50/50 clearance mechanism, with the result that the entire amount was written off against the EU budget. However, at the time the case was declared as being irrecoverable, legal proceedings concerning the encashment of a guarantee covering the amount of the debt were still pending, meaning that recovery possibilities were not exhausted. The unjustified write-off borne by the EU budget was therefore 4,9 million.

CANCELLED CASES

52. Member States may cancel debts as a result of decisions adopted by an administrative or a judicial authority, normally when a reported irregularity is subsequently not confirmed by a court. This has the effect of writing off the debt and removing it from the debtors’ accounts. In cases where the 50/50 rule has already been applied, then the amount already charged to the Member State has to be reimbursed from the EU budget. Therefore, it is important to follow up such cases and to examine whether the cancellation of the debt as reported by the Member State is fully justified and that the appropriate level of possible appeal has been fully explored by the Member State.

53. The Commission reported that it followed up 23 such cases above 1 million euro each for the financial years 2006 and 2007 [30]. However, the Commission does not, for non-legal cases, assess the basis for the cancellation of the case and, for judicial cases, does not evaluate the possibilities for appeal to higher judicial instances and whether such possibilities were pursued. Whilst the certification bodies in the Member States examine such cases, the scope of their analysis is limited to verifying that a basis exists for the authorities to cancel the cases (e.g. the existence of a decision) and not whether that decision could and should have been appealed to a higher level. The relevant Commission guidelines issued to the certification bodies do not provide sufficient detail in respect of the work to be done. In total, between 2006 and 2009, debts with a value of 455 million euro were cancelled by the Member States, 261 million euro of which related to a relatively limited number of large cases (46) over 1 million euro.

DOES THE COMMISSION SUPERVISE AND MONITOR RECOVERIES EFFECTIVELY?

54. The Commission has the responsibility to supervise Member State management and administration of agricultural spending, including action taken on recoveries. It is required to:

- publish complete and accurate information on debts and recoveries in the annual accounts, based on the data submitted by the national authorities;

- issue clear and unambiguous guidance on the application of the legislation;

- apply effective clearance mechanisms — including the 50/50 rule — to identify non-compliance with regulations, and impose corrections on Member States accordingly;

- finalise the work of the task force on recoveries for pre-2006 debts; and

- make appropriate use of the information provided by Member States on individual debts.

The Court assessed the operation of these various mechanisms, and checked whether they were being applied as intended, and were effective in protecting the financial interests of the Union.

WHAT DOES THE COMMISSION REPORT?

55. The Commission publishes information on the recovery of undue payments in notes to the annual accounts of the European Union. The Commission also reports annually to the European Parliament and the Council on the protection of the EU financial interests and the fight against fraud, including a section on recoveries for agriculture.

56. Information on the situation on recoveries in the Member States is reported yearly by the PAs in separate tables (Annex III and Annex IIIA data) in their annual accounts [31]. This information is also used as a source of information on recoveries provided in the Annual Activity Report (AAR) of the Director-General of DG AGRI.

57. Table 5 shows the figures presented in the annual accounts of the European Union give the following picture with regard to EAGF debt.

58. The amounts presented in the annual accounts are significantly lower than those recorded in the Member States’ debtors’ accounts as they are adjusted downwards in accordance with recognised accounting policies and the principle of prudence. The adjusted figures reflect the fact that Member States may retain 20 % of any recovery, amounts already subject to 50 % clearance and to take account of what the Commission considers will not be recovered. In making this annual adjustment, the Commission applies an algorithm which, inter alia, takes into account the age of the outstanding debts. A table showing the various adjustments made to the figures is incuded at Annex III.

59. Table 6 shows the analysis of the figures published in respect of the "recovery" of undue payments in the annual accounts of the European Union.

TABLE 5

OUTSTANDING DEBT AS SHOWN IN THE ANNUAL ACCOUNTS (MILLION EURO)

Year | 2006 | 2007 | 2008 | 2009 |

EAGF gross receivables outstanding as at 31 December | 1009 | 902 | 684 | 627 |

Write-down | (477) | (483) | (392) | (350) |

Net amount | 532 | 419 | 292 | 277 |

60. There are significant differences between the above figures for debts (see Table 5) and recoveries (see Table 6) as presented in the accounts and the aggregate of those sums in the Member States’ records (see Table 2). This is partly explained by the different dates on which each of the figures is established. While a large proportion of these differences could be explained by the Commission services, important unexplained differences remained due to the absence of a regular reconciliation procedure. In addition, the treatment of certain debts arising as a result of the restructuring of the sugar market resulted in an overstatement of the 2007 accounts by some 104 million euro (see Annex III).

61. The vast majority (some 87 % over the four years) of the "recoveries" of undue payments reported in the annual accounts are the result of corrections by the Commission through the clearance of accounts procedures. These are in the main not linked to individual debts or irregular payments found. These corrections are borne by the taxpayers in the Member States concerned and are not an actual repayment of funds from a beneficiary unduly paid. It was therefore inappropriate to describe them as "recoveries" in the accounts up until 2008.

TABLE 6

"RECOVERY" OF UNDUE PAYMENTS IN THE ANNUAL ACCOUNTS (MILLION EURO)

Financial year | 2006 | 2007 | 2008 | 2009 |

Amounts recovered from beneficiaries and reimbursed by the Member States | 108 (11 %) | 115 (13 %) | 129 (10 %) | 132 (21 %) |

Corrections applied by the Commission and recovered from the national authorities | 839 (89 %) | 739 (87 %) | 1148 (90 %) | 493 [8001] (79 %) |

Total | 947 | 854 | 1277 | 625 |

62. For example, in the notes to the annual accounts of the EU for 2008 (Note 2.10 on receivables and Note 6 on recovery of undue payments) the total debt as regards EAGF was stated at 684 million euro and some 1277 million euro was shown as having been recovered in that year. Analysis of the 1277 million euro shows that 129 million were recoveries from beneficiaries: the remaining portion of "recoveries" — 1148 million euro— comprised corrections imposed on the Member States through the clearance of accounts procedures. However, examination of the Member States’ accounts shows that the amount owed to the various paying agencies was 1246 million euro and the amount actually recovered from beneficiaries was 113 million euro. For 2009, while the Commission distinguishes more clearly between financial corrections and actual recoveries, it is still not possible to determine from the notes to the accounts the precise amount actually recovered from final beneficiaries.

GUIDANCE IS PROVIDED BY THE COMMISSION BUT IS SOMETIMES LATE AND INCOMPLETE

63. The Commission has clarified the application of the legislation in its guidelines to Member States issued in the context of the clearance of accounts. However, the annual updates applicable to the financial years 2006, 2007, 2008 and 2009 did not allow for PAs to fully adapt their systems, which created problems for Member States in ensuring those guidelines were fully complied with.

64. The Court has identified cases in Member States where the responsible authorities were unclear on how to deal with certain specific circumstances following the application of the 50/50 rule. These circumstances can lead to Member States not being reimbursed [32] or the budget being credited with more than it should have been.

FINANCIAL CLEARANCE: THE COMMISSION ACCEPTS THE DEBTORS ACCOUNTS AND CHARGES MEMBER STATES UNDER THE 50/50 RULE

65. Through the annual financial clearance of accounts decision the Commission has to determine the expenditure it accepts (subject to further audit) in each Member State on the basis of the accounts transmitted by the PAs.

66. The reliability of the PA’s annual accounts, including the debtors’ accounts, is verified by the independent certification bodies, which report to the Commission and issue an audit certificate. This system has been the subject of continuous updating and improvement by the Commission and the debtor’s accounts are now more complete and more rigorously checked than they were at the time of the Court’s previous report.

67. As from the financial year 2006, the financial clearance decision has included the amount to be charged to Member States’ budgets as a result of the application of the 50/50 clearance mechanism [33]. Member States have been charged with the amounts shown in Table 7. The table shows the predominant impact so far of the system was in eliminating old debts from the records. Its impact was greatest at the start of the procedure, where large numbers of old debts were subjected to the 50/50 rule and Member States charged as a result.

TABLE 7

AMOUNTS CHARGED TO MEMBER STATES UNDER THE 50/50 RULE (MILLION EURO)

| For 2006 | For 2007 | For 2008 | For 2009 |

Charged to Member States under the 50/50 mechanism by Commission decisions | 231,9 | 137,6 | 31,4 | 22,8 |

AMOUNTS CAN "ESCAPE" THE 50/50 CLEARANCE PROCEDURE

68. The original amount of the debt may subsequently have to be adjusted upwards once there is a final decision from an administrative or judicial authority. These adjustments should also be subjected to the 50/50 clearance mechanism. However, if the amounts originally recorded as a debt have already been subjected to the mechanism, the adjustment may "escape" or avoid clearance, particularly when they are accounted for under the same case identification number and the same financial year of primary finding of the irregularity. The same applies to any interest calculated on the debt.

69. The Court identified a total of 37,9 million euro as "escaping" or avoiding clearance in the years 2006–09 in this way. If the 50/50 rule had been applied on this amount, it would yield another 18,9 million euro for the EU budget. The Court’s analysis showed that the amounts "escaping" clearance in this way outweigh the potential adjustments in the opposite sense, i.e. where the amount of the debt recorded in the Member State’s accounts is reduced after the application of the 50/50 rule. The lack of clarity in the Commission’s guidelines is partly responsible for these cases escaping the clearance mechanism and, although the Commission is aware of the circumstances, it has not reacted in a timely manner to remedy this situation. These findings were confirmed during the Court’s on-the-spot audits.

TABLE 8

SHOWING THE IMPACT OF THE APPLICATION OF THE 50/50 MECHANISM IN REGARD TO THE MEMBER STATES

Member State | BE | DE | EL | ES | FR | IT | NL | PT | UK | Other MSs | Total |

Amounts (in thousand euro) | 8046 | 31975 | 15954 | 44611 | 43944 | 245963 | 7158 | 9644 | 10618 | 5874 | 423787 |

% | 1,9 | 7,5 | 3,8 | 10,5 | 10,4 | 58,0 | 1,7 | 2,3 | 2,5 | 1,4 | 100,0 |

SPECIFIC AUDITS ON DEBTS BY THE COMMISSION UNDER CONFORMITY CLEARANCE

70. The current legal framework [34] provides the Commission with the possibility to initiate the recovery from Member States through its own audit work during the conformity clearance of accounts procedure for specific reasons related to debt management.

71. The Court examined the work done by the Commission under conformity clearance procedures, but only where the decisions specifically dealt with debt management in the period 2006 to 2009. These procedures have not yet been fully concluded and, consequently, no recoveries from Member States through corrections have been proposed.

72. With regard to the Commission’s audits, they were mainly focused on systems examination, but also covered a sample of 207 cases. For a certain number of them, the initial assessment of the Commission services, communicated to Member States [35], was that certain amounts not recovered could be subject to potential corrections and be recovered directly by the Commission from the Member State. The financial impact is estimated at 27,2 million euro and covers eight Member States (Belgium, Denmark, Germany, Greece, Spain, France, Italy and the UK).

TABLE 9

SHOWING THE MEMBER STATES AFFECTED BY AMOUNTS ESCAPING CLEARANCE

Member State | DE | EL | ES | FR | IT | Other MSs | Total |

Total (in thousand euro) | 535 | 1129 | 17127 | 8070 | 10637 | 381 | 37879 |

% | 1,4 | 3,0 | 45,2 | 21,3 | 28,1 | 1,0 | 100,0 |

THE "BURDEN OF THE PAST", INCLUDING OLD TASK FORCE RECOVERY CASES, NEEDS TO BE LAID TO REST

73. The Court’s previous report, published in 2004, found serious weaknesses in the treatment of debt and recovery. Thousands of old cases had been neglected due to weaknesses in previous procedures. These were to be decided upon by the Commission with the financial burden falling either to EU budget or to the Member State concerned.

74. In 2002, the Commission had set up an OLAF–AGRI Task Force Recovery (TFR) with a view to clearing irregularity cases notified under the old regulatory framework. Because of the large number of pending cases, the Commission decided to concentrate its work on cases above 500000 euro.

- At that time 431 cases were above that threshold and 3227 cases below it. By 3 October 2006 [36], just before the new regulation came into force, 349 cases above the threshold had been cleared.

- All cases outstanding as at 15 October 2006, including the 82 (431–349) TFR cases that had not been treated and the 3227 lower-value cases, were reported as having been cleared under the new 50/50 rule for 2006.

- A further conformity clearance decision of 13 February 2009 covered an additional 22 TFR cases (out of the remaining 82) [37], two of which were recovered twice (under the 50/50 rule and by conformity clearance decision).

- However, seven TFR cases, (Germany 1, Greece 3, France 1, Italy 1 and Portugal 1) worth 16,3 million euro were kept outside the Annex III table and not cleared 50/50 and are the subject of continuing clearance procedures in view of a final Commission decision.

- The Commission requested further information from Member States in 2009 concerning 49 outstanding old TFR cases as these cases could not be identified by the Commission in the Annex III tables. These procedures are still ongoing.

75. In addition to the 49 old task force cases that remain undecided, the Court’s audit also found that the application of the 50/50 rule to cases initially foreseen to be treated by the task force but still open at 16 October 2006 led to inconsistent treatment of debtors relative to those cases already closed. Details of these cases are given in Annex IV.

INFORMATION ON IRREGULARITY IS SENT TO OLAF TOO LATE

76. Following the Court’s previous audit and subsequent to the adoption of the new regulatory framework DG AGRI became responsible for financial follow up and communications relating to debt and irregularity were routed to OLAF through it. The change in procedures was intended to place responsibility for follow-up with DG AGRI, the service that in effect paid out the monies to be recovered, whilst at the same time retaining the flow of information on irregularity to OLAF. The information made available to OLAF is intended for strategic intelligence purposes, namely risk analysis, fraud proofing and prevention, and not for financial follow-up as such.

77. The Court found that the information made available to OLAF is extensively used for reporting purposes, notably in the context of the OLAF annual activity report, the Commission report to the European Parliament and to the Council on the protection of the Communities’ financial interests and the fight against fraud and other publications that are distributed to the Member States. However, at operational level both within OLAF and at the Commission, only limited use appears to be made of the database for analysis and strategic intelligence. This is, in part, due to the long delays which can occur in practice between the detection of a potential irregularity and its notification to the Commission under the new regulatory framework.

78. Currently OLAF, in recognition of the above limitations, is studying the possibility of proposing a modification of Commission Regulation (EC) No 1848/2006 in order to achieve two different objectives:

- to considerably reduce the long delays currently occurring between the detection of an irregularity and its notification to OLAF, from the Member States via DG AGRI;

- to further improve the content of the communications, in particular regarding certain key information necessary for the purposes of risk analysis, fraud proofing and prevention.

CONCLUSIONS AND RECOMMENDATIONS

79. The Court’s audit of the systems established and operated by Member States to recover identified debts, together with the Commission's supervision of the process, concludes that overall they have improved since 2004. The systems are now more effective in protecting the EU’s financial interests, particularly through the arrangements introduced for repayment by Member States to the EU of a proportion of unrecovered debts (the 50/50 rule). However, the system needs to be further improved by clarifying the rules, thereby reducing the scope for interpretation and diverging practices adopted by the Member States.

80. For the most part, Member States process and record debts in accordance with the rules and requirements. However, there are sometimes signficant differences in interpretation: debts are recognised at different times; reported figures are not comparable; interest is applied inconsistently and the date and the circumstances whereby debts are written off vary considerably. In general, the margin of interpretation granted to the Member States allow them to take decisions which have a negative financial impact on the EU budget.

81. Member States are now recovering a greater proportion of new debts, although the Court notes that the amounts being recorded as new debts have reduced. The Court found the likelihood of recovery of an undue payment to be adversely affected by the frequent long delays in the Member States’ initiation of recovery procedures, shortcomings in the action they take, and the limited enforcement possibilities available to them.

82. While Member States generally write off debts in accordance with the rules, a lack of clarity in these rules means that there are considerable differences in the circumstances in which this happens. In particular, the point in the insolvency procedure where write-off occurs can differ between Member States. Such issues have particular significance as written-off debt is not subject to repayment to the EU budget within the 50/50 rule.

RECOMMENDATION 1

The Commission should further improve the way in which debts in the Member States are managed and reported upon and ensure a consistent treatment of those debts, across all Member States. In particular, it should:

- request Member States to report irregularities and other recoveries once they become legally due, notably at the time the recovery notification has been drawn up;

- issue guidelines in a timely manner to address current inconsistencies in key reporting and accounting concepts;

- introduce a uniform time limit between the discovery of a potential irregularity and the notification of the recovery order to the debtor, enhancing harmonisation between Member States and ensuring a more timely transmission of information on irregularities to OLAF;

- issue clear and unambiguous rules in relation to the application of interest on outstanding debt;

- clarify the circumstances under which debts can be declared as irrecoverable, in particular in relation to insolvency cases.

83. In relation to the Commission’s supervision and monitoring, the Court found that the information provided in the annual accounts has improved, although the distinction between recoveries from individual beneficiaries — currently only 13 % of the total — and amounts repaid by Member State authorities (financed by national taxpayers) is still insufficiently clear. The Commission does not systematically reconcile the various sources of information, notably the aggregate data in the Member States’ records, with the figures in the EU accounts, which reduces transparency and diminishes the possibility of identifying errors in the data. The Commission now provides more guidance to Member States, but it is sometimes late and incomplete. The task force set up in 2002 to resolve the treatment of previous unrecovered debts has completed its work, however the follow-up of certain cases remains to be finalised.

84. The introduction of the 50/50 rule, a key element of the 2006 framework, was intended to incentivise Member States to speed up the recovery procedures for reported debt. It represents an improvement on the previous situation whereby unrecovered debt was allowed to remain in the accounts for many years. However, the rule also introduces a risk that Member States "manage" the reporting and write-off process to their advantage, notably to avoid or postpone its application (and resultant charge to the national budget). The Court’s work showed this risk to be real in terms of:

- in the case of insolvency, writing off of the debt before it was fully justified to do so;

- delaying the date of recognition of the debt, thereby postponing the application of the rule.

RECOMMENDATION 2

The Commission should therefore:

- review specific aspects of the application of the 50/50 rule, for example amounts that potentially escape clearance, to ensure its effective application;

- ensure that the work of the certification bodies, in their testing of debtors' accounts in the Member States, covers the risks highlighted;

- consider how to recover a greater proportion of undue payments from beneficiaries;

- finalise the follow-up of the old Task Force Recovery cases as soon as possible.

This report was adopted by Chamber I, headed by Mr Olavi ALA-NISSILÄ, Member of the Court of Auditors, in Luxembourg at its meeting of 8 June 2011.

For the Court of Auditors

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Vítor Manuel da Silva Caldeira

President

[1] Article 9(1)(a) of Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ L 209, 11.8.2005, p. 1).

[9999] The amounts are the payments made for Chapters 05 02 and 05 03 (EAGF) and Chapters 05 04 and 05 05 (Rural Development) as included in Volume II, Annex A (ii), pp. 356–379 for 2006 and in Volume II, Annex B: Expenditure (i), pp. 306–315 of the Annual Accounts of the European Communities for 2007 as well as Tables 5.1 and 3.1 of the Annual Report 2008 and 2009 respectively.

[8888] Prior to 2007 there was only a single fund, the EAGGF.

[9001] In its AAR 2009, the Commission corrected its originally reported figure of 1449 million euro for 2006 because of corrections for Italy: AGEA.

[9002] The Court’s analysis showed that an amount of 209 million euro was overstated for FY 2007 because of the inclusion of invoiced amounts for temporary sugar restructuring. If this overstatement was taken into account then the percentage recovered would rise to 12,8 %.

[9003] Based on totals provided by certification bodies for "Table 1 and 2 data".

[9004] This percentage is calculated on the basis of the year-end figures. If the average debt figure is used the percentages would be 6,8 %, 11,2 %, 8,4 % and 9,4 % for the years 2006–09 respectively.

[2] Council Regulation (EC) No 1290/2005, Commission Regulation (EC) No 883/2006 (OJ L 171, 23.6.2006, p. 1) and Commission Regulation (EC) No 885/2006, complemented by Commission guidelines, and Commission Regulation (EC) No 1848/2006 (OJ L 355, 15.12.2006, p. 56).

[3] Cf. Commission Regulation (EC) No 885/2006 of 21 June 2006 laying down detailed rules for the application of Council Regulation (EC) No 1290/2005 as regards the accreditation of paying agencies and other bodies and the clearance of the accounts of the EAGF and of the EAFRD (OJ L 171, 23.6.2006, p. 90).

[4] Example: At RPA (UK), for seven cases out of the sample of 66, underlying documentation could not be presented: amount involved 4,3 million GBP.

[5] In its AAR 2009, the Commission corrected its originally reported figure of 1449 million euro for 2006 because of corrections for Italy: AGEA.

[6] Table 5 of Annex III to Commission Regulation (EC) No 885/2006.

[7] The 8,8 million pounds sterling refers to differences found by the Court’s reconciliation work and not to errors found in the Court’s sample as described in paragraph 19.

[8] Article 35 of Council Regulation (EC) No 1290/2005.

[9] Section 5.3.5 of Guideline No 2.

[10] Guideline No 1: paragraph 2.7: column (g) of Annex III.

[11] Recovery notifications can be regarded as a receivable whereas "potential debtors" are not.

[12] FEGA: Fondo Español de Garantía Agraria.AVFGA: Agencia Valenciana de Fomento y Garantia Agraria.

[13] General confirmation by the German PA (HZA Hamburg-Jonas): "in some cases"; German PA (Hannover): two out of 12 cases; Belgian PA (BIRB): one out of 11 cases; Hungarian PA: (ARDA) one out of 12 cases; United Kingdom PA (RPA): four out of seven cases.

[14] Tables 1, 2 and 5 of Annex III to Commission Regulation (EC) No 885/2006.

[15] ONIEP: Office National Interprofessionnel de l'Elevage et de ses Productions.

[16] Case described in Box 6 is an example.

[17] For a legal definition see Article 1(2) of Council Regulation (EC, Euratom) 2988/95 of 18 December 1995 on the protection of the European Communities’ financial interests (OJ L 312, 23.12.1995, p. 1) as shown in the glossary.

[18] Article 32(1) of Council Regulation (EC) No 1290/2005 provides that "sums recovered following the occurrence of irregularity or negligence and the interest on these shall be made over to the paying agency and booked by it as revenue assigned to the EAGF in the month in which the money is actually received."

[19] Judgment of the General Court of 22 April 2010: Italy v Commission (T-274/08 and T-275/08) where the Commission imposed corrections of 214 million euro relating to the 50/50 clearance mechanism, including interest.

[20] Five cases with financial impact of 2,2 million euro.

[21] Four cases with financial impact of 1,6 million euro.

[22] One case with financial impact of 0,2 million euro.

[23] Six cases with financial impact of 5,3 million euro.

[24] 492 cases with financial impact of 7,3 million euro, mainly in Spain, as shown in Box 5.

[25] Commission Regulation (EC) No 1034/2008 of 21 October 2008 amending Regulation (EC) No 885/2006 laying down detailed rules for the application of Council Regulation (EC) No 1290/2005 as regards the accreditation of paying agencies and other bodies and the clearance of the accounts of the EAGF and the EAFRD (OJ L 279, 22.10.2008, p. 13) introducing Article 5(b) in Commission Regulation (EC) No 885/2006.

[26] Following the prescription period the case is "time barred" and cannot be pursued further.

[27] Paying agencies audited in Germany, Spain, Greece and Hungary.

[8002] Out of the 166 million euro total, 117,1 million euro relates to a single debt declared irrecoverable in Italy.

[28] Article 32.6 of Council Regulation (EC)1290/2005.

[29] "RPA debt recovery — High- level guidance/procedures" (Version 2.4 from 24.11.2008), paragraph 8.1.3.

[30] Commission reply No 632128 of 15 September 2010 to the Court’s observation letter PF-3814 of 2 June 2010.

[31] Cf. Commission Regulation (EC) No 885/2006.

[8001] The marked decrease in corrections in the 2009 accounts is explained by the Commission as being due to 368 million euro of clearance being "non-implemented" at the end of 2008 (see Note 6.2.2 to the Annual Accounts of the EU 2009).

[32] Example: PA Niedersachsen: 508000 euro for amounts cleared twice by the Commission and not reimbursed within 20 months after the PA’s request (situation as at January 2011).

[33] Article 32(5) of Council Regulation (EC) No 1290/2005.

[34] Article 32(4) and (8) of Council Regulation (EC) No 1290/2005.

[35] Formal notification pursuant to Article 11(2) of Commission Regulation (EC) No 885/2006.

[36] Commission Decision 2006/678/EC of 3 October 2006 (OJ L 278, 10.10.2006, p. 24): Approximately 98 % of the amounts charged to the Member States concerned Italy, 311 million euro for 157 cases of irregularities. On 11 December 2006, Italy brought an action against the Commission (Case T-394/06); the case is pending before the ECJ.

[37] On 14.4.2009, Greece brought an action against the Commission concerning 13 cases of irregularity of 13,3 million euro, pleading, inter alia, that Council Regulation 1290/2005 was not applicable for old cases (Case T-158/09); the case is pending before the ECJ.

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ANNEX I

NEW DEBTS RAISED — INCLUDING "PRE-DEBTORS" FOR 2006–09

An average of 199 million euro per year of new debt — including "pre-debtors" mainly recorded in France and Italy — has been reported by Member States for the last four years.

NEW DEBTS RAISED 2006–09 (IN %) TOTAL AMOUNT: 795 MILLION EUR

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Member State | BE | DE | ES | FR | IT | UK | Other MSs | Total |

Amount (million euro) | 52,5 | 55,1 | 157,3 | 150,5 | 121,8 | 69,5 | 188,4 | 795,1 |

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ANNEX II

APPLICATION OF INTEREST IN THE PAYING AGENCIES AUDITED

Code | Authority name | Interest between the date of the undue payment and the date of the recovery order | Interest between the date of the recovery order and the date of repayment | National rules applicable to all measures | Accrued interest at the end of the financial year |

BE01 | BIRB | Not applied | Rare | Yes | No |

BE03 | OP Wallonie | Systematic | Occasional | Yes | No |

DE02 | HZA Hamburg-Jonas | Systematic | Not applicable | Yes | No [1] |

DE12 | Niedersachsen | Not applicable | Systematic | Yes | No |

ES01 | Andalucía | Systematic | Rare | Yes | Yes |

ES17 | AVFGA | Systematic | Rare | Yes | Yes |

ES18 | FEGA | Systematic | Rare | Yes | Yes |

FR14 | ONIEP | Not applied | Rare | No | No |

FR16 | ONIGC | Not applied | Rare | No | No |

GB09 | RPA | Systematic | Not applied | Yes | No |

GR01 | OPEKEPE | Occasional | Systematic | Yes | No |

HU01 | ARDA | Occasional | Occasional | Yes | No |

IT01 | AGEA | Occasional | Systematic | Yes | Yes |

IT02 | SAISA | Occasional | Systematic | Yes | Yes |

[1] Interest calculations are carried out systematically on a three years basis and communicated to the debtors to avoid the amounts becoming time barred.

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ANNEX III

DIFFERENCES BETWEEN DEBTS RECORDED IN MEMBER STATES DEBTORS ACCOUNTS AND THE GROSS RECEIVABLES AS SHOWN IN THE ANNUAL ACCOUNTS

(million euro) |

Year | 2006 | 2007 | 2008 | 2009 |

Amounts recorded in Member State debtor accounts as at 15 October (Table 2) | 1267 | 1437 | 1246 | 1115 |

Add: Adjustment for Italy (see endnote 1 of Table 2) | 182,0 | | | |

Add: Amount of debts outstanding reported by paying agencies in Annex IIIA | | | 39,9 | 59,3 |

Add: Adjustments for year-end Oct – Dec | 18,1 | 31,5 | 2,6 | -2,0 |

Less: Pre-debtors | | | (152,9) | (163,4) |

Subtotal nominal amounts estimated outstanding debts as per 31 December | 1467,1 | 1468,5 | 1135,6 | 1008,9 |

Less: Amounts subject to 50/50 clearance | (274,4) | (330,1) | (288,9) | (233,8) |

Less: 20 % retention allowed to Member States | (203,0) | (227,6) | (163,1) | (148,0) |

Subtotal calculated gross amounts for the balance sheet | 989,8 | 910,8 | 683,6 | 627,1 |

Remaining differences: unexplained [1] | 19,0 | -9,0 | | |

Gross receivables as per annual accounts (Table 5) as at 31 December | 1009 | 902 [2] | 684 | 627 |

[1] The outstanding differences referred to in paragraph 60 are shown in this line of the table.

[2] The figure shown includes the overstated amount in relation to sugar detailed in paragraph 60.

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ANNEX IV

LONGSTANDING UNRESOLVED ISSUES OF INCONSISTENT TREATMENT OF IRREGULARITY AND RECOVERY

Concerning the threshold of 500000 euro that was fixed in the context of the task force recovery, the following example demonstrates the inconsistent treatment of the old cases:

- OLAF Case No DE/92/001: irregularity of 739092 DM (< 500000 euro)

- OLAF Case No DE/92/002: irregularity of 4247763 DM (> 500000 euro).

Although both cases stem from the same irregularity, Case No DE/92/001 was cleared 50/50 for 2006, including interest, and subsequently declared irrecoverable by the Hamburg-Jonas PA. The second case, No DE/92/002, is still pending at the Commission and was not cleared in so far as it was excluded — without a Commission decision — by the PA from its Annex III figures. Whatever the final Commission decision may be, the first case has resulted in 50 % being charged to the EU budget whereas the second case will be either 100 % to the charge of the national or 100 % to the charge of the EU budget.

Furthermore, these two cases, provisionally removed from the 1991 clearance decision, came under a budget line that was 100 % excluded from Community financing, confirmed by a Court of Justice judgment on 21 January 1999. The ECJ’s judgment could be seen as prevailing and should not be circumvented by the reporting provisions of Council Regulation (EC) No 595/91. Hence, the full amounts for the two cases should have already been excluded from Community financing in 1999. The financial impact to the EU budget is calculated as at 2,35 million euro.

EXPORT REFUND CASE IN ITALY

In 1996, the Commission disallowed from Community financing an amount of 118,1 million euro because of negligence on the part of the Italian authorities related to one beneficiary (Commission Decision No 96/311/EC). In 2006, debts of the same beneficiary of 2,9 million euro were cleared 50/50 as not been declared as irrecoverable by the Italian PA (SAISA). This amount is subject to a Commission investigation. In 2007, the Italian PA, contrary to its 2006 approach, has, with the acceptance of the Commission, written off an amount of 117 million euro because of insolvency proceedings for the beneficiary. The Commission’s handling of the case, i.e. to accept a write-off of 117 million euro in 2007 and to investigate further into a smaller amount of 2,9 million euro without considering the negligence element decided upon in 1996, appears to be questionable.

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