C-28/94

O P I N I O N OF MR ALBER — CASE C-28/94

OPINION OF ADVOCATE GENERAL ALBER delivered on 17 September 1998 *

A — Introduction eligible for intervention purchase only if it had a minimum salt content, by weight, of 2%. 3 Therefore, unsalted butter only quali- fied for intervention if it was made from sour cream.

1. In the present case, the Kingdom of the Netherlands is contesting a reduction of over N L G 82 million in E A G G F reimbursements in the context of the clearance of accounts for 1990. 1 The Commission, the defendant in the proceedings, justifies the reductions on the ground that, for want of an adequate system of controls, the intervention agencies of the 3. At the end of the 1970s, a new process Netherlands had bought in butter made from known as the NIZO-process, 4 by which sweet cream by a process not authorised for butter could also be made from sweet cream, intervention. was developed in the Netherlands. The acidi- fying agent is added only at a later stage in this process with the result that the butter- milk obtained is sweet.

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NETHERLANDS ν COMMISSION

5. The monitoring of intervention in the erlands, published a report alleging that none Netherlands is shared between three organ­ of the butter which had been offered for isations. The VIB is the authority respon­ intervention in the Netherlands between 1982 sible for intervention for the purposes of the and 1987 had met requirements. All that butter Community rules. It is responsible for the was said to have been produced by the N I Z O buying-in and storage of butter and also car­ process. ries out the corresponding checks in order to ensure, in particular, that the packaging of the butter bears the special marking prescribed for intervention. The VIB has delegated part of its checks to the C O Z 6 , an inspection 8. Following that report, the Commission undertaking governed by private law. The carried out its own investigation in 1989: the main function of that undertaking is to carry findings are set out in its 1993 summary out the inspections, inter alia on the spot. report. 8 According to that report, the Neth­ Lastly, the AID 7 is the ministerial authority erlands authorities had never introduced a with general responsibility for the controls. It system of controls whereby the cream used in is the AID's task to check that the C O Z per­ the manufacture of butter sold into interven­ forms its task conscientiously. The AID also tion. Analysis of the documents available checks the authorisations of the individual showed that the butter brought between 1982 dairies to sell into intervention. and 1987 had been made either by the N I Z O or by the equally unauthorised half-and-half process.

11. In view of the seriousness of the short- — order the Commission to pay the costs. comings, the decision was taken to reduce by 10% all expenditure declared for 1987 in respect of butter bought into intervention since 28 February 1985. As a result, the Com- mission disallowed expenditure in the sum of N L G 82 656 019. 14. The Commission contends that the Court should:

12. The Kingdom of the Netherlands main- tains, to the contrary, that, in particular by introducing additional controls, it had done — dismiss the action as unfounded, everything that can be required of a Member State in that regard. Since those controls had prevented irregularities, it was not under any obligation to inform the Commission.

— order the applicant to pay the costs.

13. Accordingly in 1994, the Kingdom of the Netherlands brought an action before the Court of Justice, claiming that the Court B — Pleas in law and arguments should:

— annul Commission Decision No 93/659/EEC of 25 November 1993 on the 15. The Kingdom of the Netherlands puts clearance of the accounts presented by the forward several pleas in law. First, it claims Member States in respect of the expendi- that the Commission misapplied Article 8(2) ture for 1990 of the European Agricul- of Regulation (EEC) N o 729/70 on the

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financing of the common agricultural policy. 9 17. The Kingdom of the Netherlands main­ Under that provision the Community is not tains that it complied with all requirements to bear the financial consequences of irregu­ prescribed by the Community rules for the larities or negligence attributable to adminis­ checks to be carried out. However, there are trative authorities of the Member States. gaps in those rules making it impossible effec­ tively to prevent the sale into intervention of N I Z O butter. Thus, for example, Article 2(1) of Regulation N o 685/69 requires samples to be taken only from the final product. How­ 16. However, the applicant submits that it ever, the process by which the butter was cannot be held responsible for any irregulari­ made can no longer be determined from the ties or negligence. It did everything — in final product, the butter itself. other words it carried out all the checks which can reasonably be expected of a Member State. Accordingly, the applicant considers that it has fulfilled all the requirements under Article 8(1) of Regulation N o 729/70, which provides: 18. The Commission points out in that respect that the checks prescribed by the Community were laid down at a time when the N I Z O process was still unknown. In its submission, however, the checks prescribed, which also 'The Member States in accordance with apply to the process of the manufacture of national provisions laid down by law, regula­ the butter, make it perfectly possible for the tion or administrative action shall take the Member States to ascertain which production measures necessary to: process was used for the manufacture. Thus the plant used in the traditional manufac­ turing process differs from that used in the N I Z O process. The N I Z O plant needs an opening through which the permeate can be — satisfy themselves that transactions added at a later stage, as well as a special financed by the Fund are actually carried sweet-cream reservoir. There is no need for out and are executed correctly; such a reservoir in the traditional manufac­ turing process since the cream employed is quite different on account of its properties. Therefore, the process by which the butter was made can be established by an on-the- — prevent and deal with irregularities; spot inspection at the dairy.

24. The Commission bases its position in this matter on a report submitted to it by the applicant itself. In that report it is said that it was above all the difficulties in marketing sour buttermilk that prompted the development of 21. The Commission claims that the second a new process which did not yield that product. means of checking is to analyse the cream and butterfat on the spot. The Commission is referring here to the fact that the N I Z O pro- cess uses sweet cream as a primary product, obtaining sweet butterfat in the course of production, whereas the traditional process uses sour cream from the very outset, with the result that the buttermilk produced is also sour. The Commission maintains that that can 25. As a further point the Commission men- be checked simply by tasting the cream or by tions examination of the production plans and analysing the buttermilk at the dairy. costs. The N I Z O process makes it possible for production to continue without interrup- tion with the result that there are savings in costs. That can be established by examining the books. Finally, the production process can also be deduced from the quantity of N I Z O permeate used. The applicant disputes this. It argues that, firstly, the savings in costs are not 22. The applicant considers that that is also great. Secondly, the production process cannot simply a spot-check method which can only be determined with accuracy from the per- be effective if the checking is carried out meate quantities since the same permeate is regularly. The Commission does not deny also used in making products intended for this. intervention.

C — Analysis

31. Whilst it is debatable whether permeate quantities shed sufficient light on the produc­ tion process, I must agree with the Commis­ sion that a combination of the controls it has proposed constitutes a reliable means of veri­ fying the production methods employed. It is 28. It now falls to be considered whether it therefore not possible to agree with the appli­ is possible to ensure with reasonable certainty cant's assertion that even on the basis of the — if necessary, through a combination of the Commission's proposals it is impossible to checking methods mentioned by the Com­ determine by which process the intervention

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OPINION OF MR ALBER — CASE C-28/94

butter was produced, particularly since the That article thus imposes on the Member applicant itself maintains it had done every­ States the general obligation to take the mea­ thing necessary to prevent the sale of N I Z O sures necessary to satisfy themselves that the butter into intervention. It follows that even transactions financed by the Fund are actu­ the applicant must consider that there must ally carried out and are executed correctly, be some means of checking. even if the specific Community act does not expressly provide for the adoption of par­ ticular supervisory measures (Case C-8/88 Germany ν Commission [1990] ECR 1-2321, paragraphs 16 and 17).' 11

32. N o r can I support the applicant in its attempt to transfer the responsibility for those checks to the Commission. It is settled case-law that the national administrative authorities are responsible for ensuring that 33. It follows that the Member States have a the Community rules are strictly observed. 1 0 general obligation to exercise adequate super­ The scope of that responsibility in the con­ vision even if the relevant rules do not text of E A G G F financing was determined by expressly provide for this in a given situation. the Court in its judgment in Exportslachter- ijen van Oordegem. I n that judgment, the Court stated with regard to Article 8(1) of Regulation N o 729/70:

point in detail, it is first necessary to explain 37. The parties are correct in referring here in general terms how the Court has allocated to Case C-48/91. In that judgment, the Court the burden of proof in a case such as this. stated that: 3'The Commission is required The Commission maintains that it is for the not to demonstrate exhaustively that there are Member States to carry out the necessary irregularities in the data submitted by the checks. For that reason, the Commission Member States but to adduce evidence of cannot, it submits, substitute itself for the serious and reasonable doubt on its part national inspectors and evaluate the checks regarding the figures submitted by the national carried out by the Member State in question. authorities. The reason for this mitigation of The Commission has merely to ascertain that the burden of proof on the Commission is those measures are adequate for the purpose that ... it is the State which is best placed to of preventing irregularities. If it were to prove collect and verify the data required for the that that these were justified doubts, it could clearance of E A G G F accounts; consequently, then take appropriate action at the financial it is for the State to adduce the most detailed level. It would then be for the Member State and comprehensive evidence that its figures to show that the conditions for the expendi­ are accurate and, if appropriate, that the Com­ ture to be allowed by the Commission were mission's calculations are incorrect'. 1 4 fulfilled. The Commission makes reference here to the judgment in Case C-48/91. 1 2

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39. The applicant points out first of all that 42. The applicant disputes this. In addition to it defined the terms 'cream' and 'sour' — checking the authorisations of the dairies, the which are not defined under the Community AID also supervised the C O Z . The applicant rules — and that in November 1986 it had submits, moreover, that it is not permissible banned the N I Z O permeate. In response the for the Commission to rely here on third- Commission rightly states that those were no party statements in adducing the evidence more than basic rules which the applicant required of it. Furthermore, the Commis- should have issued when it approved the sion's questions were taken out of context N I Z O process. and its own conclusions were attached to them.

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44. Lastly, the following point should be men­ 47. In response to this, the Commission points tioned. The applicant's statement, already out that those checks too were not carried mentioned, that the production process cannot out regularly. O n this point it should be said be inferred from the checks of the industrial that the applicant itself concedes that such plant carried out by the AID since the plant checks in the course of the manufacturing could be swiftly converted, might suggest that process have no point since the results are those checks were not performed at regular selective. This gives at least some reason for and short intervals. Consequently, there are doubting whether those checks were carried in fact good reasons for doubting whether the out on a regular basis and not merely checks undertaken by the AID in the period sporadically. from 1982 to 1987 were carried out on a regular basis.

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OPINION OF MR ALBER — CASE C-28/94

50. As has already been mentioned, the Com- 54. The reference made by the Commission mission considers, however, that the AID was to the audit reports communicated by the not continuously active and that it was not applicant further strengthens those doubts. until 1987 that it carried out the checks anew. Those reports were drawn up during the As a result, in the period before 1987, the AID's audits in 1987. They show that the C O Z was the only active inspection authority. managers and the staff of the dairies were not If it were now to transpire that the butter informed of the fact that butter made by the approved by the C O Z had actually been made N I Z O process did not qualify for interven- by the N I Z O process, the effectiveness of the tion. The Commission maintains it made system of controls would be placed in serious similar findings during its own inspection in doubt. 1989. Accordingly, it is impossible to be sure that undertakings producing only, or also, by the N I Z O process did not sell that butter to the intervention agencies.

51. The applicant claims, however, that the AID exercised constant supervision over the C O Z . Moreover, in the specific instance in 1987, the AID acted at the request of the COZ. 55. For its part, the applicant maintains that with each invitation to tender the VIB also published the conditions for admission to intervention. Accordingly, the ban on N I Z O butter must have been known. The fact that 52. The fact that the C O Z 15 expressly the dairy owners were nevertheless insuffi- requested the AID, which, moreover, was the ciently informed is not a ground for doubting body which was supposed to supervise it, to the quality of the checks carried out. check the production process suggests that, to say the least, the AID did not carry out its checks on a regular basis.

59. It may thus be seen from the pleadings as 57. The applicant contends, moreover, that a whole as well as from the foregoing con­ the audit reports are not admissible as evi­ siderations that there are at the very least jus­ dence. The fact remains, however, that those tified doubts regarding the effectiveness of reports — which the applicant itself commu­ the system of controls in the Netherlands; by nicated to the Commission — can perfectly putting forward submissions to that effect, well be used to see if they give rise to justi­ the Commission has discharged its burden of fied doubts regarding the effectiveness of the proving the irregularities alleged against the system. applicant.

61. The Commission argues for its part that 63. According to the Commission that argu- the expenditure presented by the applicant ment is incorrect. Moreover, it would mean for 1987 was considered on the occasion of that it is impossible for the Commission to this clearance of accounts. That expenditure take appropriate action, on the financial level, also concerned butter which had been admitted on irregularities which are only detected some to intervention in the preceding years. Since years later. The clearance of accounts for a that was done without proper checks, the financial year simply means that in clearing Commission could not allow the expenditure accounts for subsequent financial years the concerning that butter for 1987. As the Commission can no longer make a decision accounts in respect of the expenditure declared on the expenditure relating to that year. In for 1985 and 1986 had already been cleared, a other words, the clearance of accounts is final. correction for those years was inappropriate. It does not mean, however, that the Commis- However, the issue in the context of the clear- sion has accepted activities which were car- ance of accounts for 1987 was not just the ried out in the year in question but the expen- expenditure in respect of the butter bought diture on which is declared only — as in this into intervention in 1987 but rather the expen- case — in later years. N o r can it prevent the diture declared for 1987. That expenditure Commission from taking appropriate action, could also concern the purchases carried out on the financial level, on irregularities which in previous years. are detected only a few years later, provided that the correction is applied in respect of a financial year the accounts of which have not yet been cleared.

Section provides that the decision to make ditures not incurred in accordance with the up the accounts is to cover: 'the determina Community rules. That requirement does not tion of the amount of expenditure incurred in disappear merely because the accounts are each Member State during the year in ques cleared after the expiry of the period pre tion, recognised as chargeable to the EAGGF, scribed in Article 5 of Regulation N o 729/70. 17 Guarantee Section'. That simply means that

It compliance with the Community rules. would be inconsistent with that aim if, for the reason that irregularities had gone unde tected, expenditure which not yet established for that year could be declared later and expenditure which was already established could engender subsequent costs, for example storage costs, in the following years without its being possible for the Commission — despite the fact that the accounts for the fol 65. According to the case-law of the Court, lowing years had not yet been cleared — to however, the essential purpose of the decision take appropriate action of a financial nature on the clearance of accounts is 'to ensure that on irregularities detected in the meantime in expenditure incurred by the national author respect of the expenditure declared for the ities is in accordance with the Community following years. In this regard, the Commis rules'. 18 The Court also stated that until the sion must be allowed to extend the correc accounts are duly cleared, Article 2 of Regu tions made on the ground of insufficient con lation N o 729/70 requires the Commission to trols also to the expenditure which was refuse to charge to the E A G G F those expen incurred in respect of the butter bought into intervention and stored after 28 February 1985 and which was declared by the applicant

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68. In response, the Commission rightly agencies on the ground that they had not been points out that, according to the case-law of manufactured in accordance with the pre­ the Court, it could also have refused to charge scribed requirements. That corresponds to all the expenditure in question. Thus, the 40% of all the butter offered for intervention Court has held that, where it proves impos­ in 1987. For that reason, a 10% reduction sible to establish the extent to which a national cannot be regarded as too high. measure which is incompatible with Commu­ nity law has caused an increase in the expen­ diture entered under a budgetary item of the EAGGF, the Commission 'has no choice' but to disallow all the expenditure in question, not just a percentage thereof. 19 Since it is not possible, in the absence of adequate checks, to establish accurately the extent of the damage 70. The applicant replies that the Commis­ caused, it follows that the expenditure could sion is basing its contention here on a quan­ be disallowed in its entirety. The Commission tity of butter which — thanks to the appli­ itself makes reference here to a judgment in cant's checks — was, specifically, not sold which the Court stated: 'Since it follows ... into intervention. However, as shown above, that the inspections carried out... do not con­ these are good reasons for doubting whether regular and effective checks were carried out stitute thorough scrutiny ..., the Commission in the preceding years. It may, therefore, be could have disallowed charging to the E A G G F assumed that for want of effective supervision of the whole of the sums in question'. 2 0 in the preceding years the intervention agen­ cies also brought in butter which should not have qualified for intervention. It must be noted in this regard that none of the butter offered for intervention in the preceding years was rejected. However, it cannot be ruled out that no N I Z O butter was offered for inter­ vention in the preceding years before and that, all of a sudden, in 1987, 40% of all the butter offered was produced by the N I Z O process.

72. In view of the deficiencies in the system of controls and considering the fact that the butter offered unlawfully for intervention rep­ resented up to 40% of all the butter offered for intervention, a 10% reduction cannot be regarded as being unfair. 75. The Commission, on the contrary, sub­ mits that the term 'irregularity' must be inter­ preted broadly. It refers here to a working document of its own drafting according to which it is to be assumed that there is an irregularity when a Community rule is disre­ garded with the aim of wrongfully obtaining sums to the detriment of the EAGGF, whether 73. The applicant's objections against the cal­ or not the E A G G F actually suffers a financial culation of the reduction must therefore be loss as a result. The words 'primary admin­ held to be unfounded. istrative or judicial findings of fact' must also be interpreted broadly. They mean the first report of findings drawn up and signed by a competent national authority and concerning a case where it may properly be assumed that the rules have been infringed. That report is not subject to any particular formal require­ 74. In the context of its first plea in law, the ments. applicant also claims that another regulation was infringed. In its summary report, the Commission had alleged that the applicant had infringed Articles 3 and 5 of Regulation N o 283/72 2 1 . Article 3 requires Member States to communicate to the Commission a list of the irregularities which have been the subject 76. The Commission also maintains that, in of primary administrative or judicial findings this case, the possibility of fraud in earlier of fact. Article 5 concerns the recovery of years cannot be ruled out. Moreover, it is not just the financial effects of conduct which are important under the system established by Regulation N o 283/72, but also their serious­ 21 — Regulation (EEC) No 283/72 of the Council of 7 February 1972 concerning irregularities and the recovery of sums ness. This case concerns 40% of all the butter wrongly paid in connection with thefinancingof the common offered in one year. The Netherlands author­ agricultural poliev and the organisation of an information system in this field (OJ L 036, p.1). ities should have been able to conclude from

79. Consequently, it is clear from the very 77. If one looks to the wording of Article 3, wording of the regulation that both terms are one will find in paragraph (2) that the infor- to be construed broadly and, consequently, mation to be communicated must indicate the applicant can be charged with infringing which provision has been infringed. That the regulation. That is all the more true in could be understood as meaning that only that it must have realised that there had indeed infringements of Community rules must be been cases of fraud in preceding years. The notified. Article 4, however, requires each fact that the working document to which the Member State to communicate without delay Commission refers was drawn up only in to the other Member States and to the Com- 1989 is irrelevant. mission any irregularities which are liable to have effects outside its territory. That applies also to irregularities which disclose the exist- ence of a new fraudulent practice. This sug- gests that the primary concern is to prevent new cases of fraud as far as possible. In this connection, it is important — as the Com- 80. The arguments put forward by the appli- mission has submitted — for the Commis- cant in connection with its second plea in law sion also to be informed of any instances of — infringement of general principles of law, attempted fraud. Accordingly, Article 7(3) such as the principle of care and legal cer- provides that the Commission is to organise tainty — largely concern the issues already meetings at Community level to examine the examined in relation to its first plea in law. information obtained 'in particular with regard Thus, the applicant claims that the Commis- to the lessons to be learned from it in con- sion infringed the principle of care inter alia nection with irregularities'. Lastly, the third by failing to take account the applicant's recital also requires irregularities to be com- efforts to introduce an effective system of

82. The applicant also makes the point that, 84. It can be taken as accepted that the 1989 following an inspection carried out by the inspection was specifically directed to estab­ Commission in 1987 in the context of the lishing whether or not the applicant had car­ clearance of accounts for 1986, the Commis­ ried out effective checks to ensure that only sion had found no fault whatsoever with the butter made from sour cream was sold into system of controls in the Netherlands. The intervention. In that respect, it is hard to see applicant claims that it was therefore entitled why the Commission, having found deficien­ to assume that the Commission also consid­ cies in the course of a specific inspection, ered its system of controls to be effective and should not take appropriate action of a merely adequate. Consequently, it is not possible that financial nature because those deficiencies had the Commission could have come to the oppo­ not yet been detected in an earlier inspection.

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OPINION OF MR ALBER — CASE C-28/94

86. By its last plea in law the applicant claims that the Commission infringed Article 190 of 88. Under the first sentence of Article 69(2) the E C Treaty because it did not give adequate of the Rules of Procedure, the unsuccessful reasons for its decision. O n the one hand, the party is to be ordered to pay the costs. applicant here again puts forward consider- ations which in fact relate to the first plea in law. O n the other hand, as regards the ques- 22 — See Case 347/85 (cited in footnote 19), at paragraph 60.

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NETHERLANDS ν COMMISSION

D — Conclusion

89. I therefore propose that the Court should:

(1) dismiss the application;