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Guidance and Guarantee Fund (EAGGF), the audit it conducted, in 1993 and 1994, Guarantee Section, for the financial year of measures for the purchase and sale as 1992 and certain expenditure for the finan- well as the storage of beef and veal for cial year 1993, 1 in so far as, by that intervention, at the Bundesanstalt für land- decision, the Commission charged to the wirtschaftliche Marktordnung (the German Federal Republic of Germany a total sum intervention agency; hereinafter 'BALM') of DEM 19 591 000 (hereinafter 'the in relation to four coldstores, as well as on amount charged'). the basis of the annual inventories of the 107 coldstores in Germany.

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storage and on removal from storage) and 9. On 1 March 1996 and in the light of the not the inadequacies specific to each of the differing positions of the Commission and three stages. The Commission considers the German authorities, the Conciliation that it is the shortcomings in the German Body arrived at provisional conclusions system of control generally that pose a risk and proposed to both sides that they enter for Community resources. Furthermore, into a detailed dialogue with a view to the Commission has confined itself to a reaching agreement on the facts. 2% correction because the Federal Repub- lic of Germany has made an effort to remedy the deficiencies identified and spot checks have actually made it possible to uncover abuses. 10. By letter of 19 March 1996 addressed to the Conciliation Body, the German authorities stated their readiness in princi- ple for fresh discussions with the Commis- sion, but pointed out that discussions aimed at conciliation would be worthwhile only if the Commission was prepared to seek a constructive compromise.

I — The background to the dispute

II — Preliminary remarks involved in this action, namely whether there are in fact deficiencies in the German control system, can be resolved only after detailed analysis of the evidence provided by the German Government in relation to 14. The Federal Republic of Germany the findings on which the Commission denies that the German control system fails based its decision. to meet the requirements of Community law and challenges the accuracy of the findings of the Commission inspections. It considers that the flat-rate reduction is not therefore justified. 18. In that context, I consider it useful to cite immediately a number of points of case-law concerning the burden of proof. The Court of Justice has pointed out inter alia in a judgment of 1 October 1998 6 15. The Federal Republic of Germany also that: maintains that the Commission failed to take account of the arguments and evidence adduced both orally and in writing during the period that preceded the action.

Commission [1990] ECR I-2321, para- had not been remedied and further short- graph 23). comings had emerged. The Commission adds that the fact that it had apparently mentioned only certain imperfections in no way prevented it noting other deficiencies identified during subsequent inspections of the control system and taking them into The Member State, for its part, cannot account in imposing charges. rebut the Commission's findings by mere assertions which are not substantiated by evidence of the existence of a reliable and operational supervisory system. If the Member State is not able to show that they are inaccurate, the Commission's findings 21. In regard to that argument, I share the can give rise to serious doubts as to the Commission's view that the fact that it does existence of an adequate and effective series not draw financial inferences from a find- of supervisory measures and inspection ing of deficiencies pertaining to one finan- procedures (see, to that effect, Case cial year cannot deprive it of the right to C-8/88 Germany v Commission, cited draw such inferences in relation to subse- above, paragraph 28).' quent financial years, particularly where those deficiencies have persisted. Deficien- cies identified subsequently may also be taken into account in determining the level of the flat-rate correction, without there being any need for prior recommendations 19. In support of its challenge, the Federal or warnings to have been issued in relation Republic of Germany also cites the failure to those deficiencies. of the Commission to charge to it any sum during previous financial years for which the German controls were carried out using the same system, even though the Commis- sion had undertaken, or arranged for, detailed inspections. 22. Finally, the German Government claims that its position is borne out by the conclusions of the Conciliation Body.

'[T]he German control system operated during the period in issue, and in particular 26. The Conciliation Body subsequently the use of BALM representatives, could raises the question of whether the German probably have been improved, as suggested control system was sufficiently reliable to by certain comments made by the EAGGF avoid risks should the slaughterhouse and during the 1987 and 1988 verification the coldstore form part of the same group procedures, and as shown by the measures of companies. In that connection, the taken in the meantime for that purpose by Conciliation Body states the following: the German authorities (see their letter No 714/1248/1992 of 6.10.1992). Those measures do not, however, allow of the conclusion that the measures applied pre- viously were insufficient to avoid financial risk for the EAGGF. '[T]he Commission departments maintain that they had no evidence to substantiate the German authorities' assertion that the controls were carried out by BALM offi- cials where the slaughterhouse and cold- As regards the question whether in fact the store belonged to the same group of German control system meets the standard companies. The German authorities have of effectiveness required to avoid such transmitted to the Conciliation Body docu- risks, the Conciliation Body has not yet ments substantiating that assertion, on the been able to make a final assessment.' basis of specific and limited examples. The Indeed, in that connection, 'the assessment Conciliation Body fails to understand why of the facts pertaining to the inspection that vital evidence was not able to be situation differs too greatly, according to entered into in greater detail and clarified whether it is the Commission officials or once and for all during the earlier stages in the German authorities that make the the procedure. It can only invite the parties assessment.' to clarify the issue as a matter of urgency.'

30. The summary report indicates that, in accordance with Article 14 of Commission 28. A third extract from the conclusions of Regulation (EEC) No 859/89 of 29 March the Conciliation Body includes a provi- 1989 laying down detailed rules for the sional assessment. After considering whe- application of intervention measures in the ther the incidents of fraud uncovered by the beef and veal sector,7 product takeover German authorities would have been avoi- (that is to say transfer of ownership and the ded had BALM used its own inspectors determining point for payment) occurs on exclusively, the Conciliation Body states the day the products enter the intervention that it is 'inclined to the view that there are centre. The Commission therefore criticised insufficient grounds for that assumption, the frequent use of employees of the given the criminal nature of the irregula- coldstores as BALM representatives for rities.' I shall return to that aspect of the the purpose of weighing and certifying problem below. takeover of the goods. Furthermore, according to the Commission, even though BALM's instructions to its regional offices are specific as to the content of the verifications the inspectors have to make, they are silent as to the timing and fre- quency of controls to be conducted. The controls described could not reasonably be made by means of inspection after the event III — Controls on takeover (entry into because the quarters of meat have already storage) been weighed, frozen, packaged, placed on pallets and put into storage. The EAGGF therefore cast serious doubt on the relia- bility of a control system based on certifi- cates issued by warehouse employees.

32. In order to justify the use of warehouse employees as representatives, the Federal Republic of Germany stresses that there are two phases of control at the point of 35. The Federal Republic of Germany takeover: the first stage takes place in the points out that the controls carried out in slaughterhouse and the second in the cold- the coldstore by the individuals appointed store. as BALM representatives took the same form and were on the same scale as those duly carried out by the BALM inspectors. Furthermore, the inspections carried out by the BALM representatives were subse- 33. In the initial phase, in the slaughter- quently verified by means of ex post house, the German Government stresses inspections based on checks on documen- that the controls are carried out by BALM tation and physical inspections of the goods officials only and not by other persons taken over, carried out by BALM inspec- delegated by BALM; during this phase, the tors, officials from the BALM regional BALM officials undertake comprehensive offices and BALM supervisors. That pro- verification of the intervention require- cedure provided adequate security and ments. effective protection against tampering. According to the German Government, the control system constitutes a whole and has to be viewed in its entirety. Assessing the second phase of controls in isolation 34. In the second phase, in the coldstore, would inevitably lead to the conclusion the applicant maintains that the controls that deficiencies existed, if no account were are carried out, as far as possible, by a taken of the inspections carried out at the BALM official. It does, however, acknowl- slaughterhouse. The German Government edge that BALM has also used representa- further points out that in making its tives employed by the coldstore. In such criticism, the Commission failed to take cases, BALM would, however, always account of the two-tier system and con- select experienced employees to act as its siders that the Commission decision does representatives and give them specific train- not, consequently, provide an adequate ing. Tables and planks, placed in the statement of the reasons on that point.

36. The Commission's response is that it is of correcting at a later stage irregularities in not calling into question the controls at the the controls at the point of takeover and slaughterhouse, which are neither the sub- the conflicts of interest where the slaughter- ject of the sums charged nor, consequently, house and coldstore are in the same own- of this dispute. Those controls cannot, ership. however, compensate for the shortcomings in the German system identified as the stage of entry into storage. In the Commission view, no conclusions on compliance with the control requirements on entry into 39. In regard to the first of those risks, the storage can be drawn from the regularity Commission maintains that the controls of the controls operated at the slaughter- required on entry into storage can only be house. Nor can it be inferred from the carried out at the time the batches of beef regularity of the controls at the slaughter- are delivered to the coldstore. If, at that house that the controls at the coldstore stage, the controls are not carried out or are should be less stringent. Those controls not carried out properly, they cannot have their own crucial importance for the subsequently be corrected on the basis of Community payments system. BALM itself checks on documentation or physical recognised that importance by issuing spe- checks, even if carried out by BALM cial instructions concerning implementa- officials, because the batches of meat at tion of the controls. issue have already been weighed, frozen and packaged, placed on palettes and put into storage. That highlights the special responsibility incumbent on the persons responsible for operating controls on entry 37. In regard to the checks on documenta- into storage. tion and the physical inspections carried out after the event, the Commission con- siders that while they are, admittedly, useful and necessary in relation to the BALM system of representatives, these ex 40. In regard to the risks bound up with post controls are of only limited scope. In conflicts of interest where the slaughter- point of fact, these are basically checks on house selling the meat and the coldstore written documentation which fail to take responsible for storing it form part of the account of factors as important as, for same group of companies, the Commission instance, whether the quarters of meat is of the view that the German system does delivered were properly cut up and dressed, not pay proper attention to that conflict of whether the temperature required at deliv- interest. According to the Commission, it is ery (plus or minus 7°C) was maintained quite obvious and perfectly normal that a and whether the quarters were properly conflict of interest should arise in the weighed. person of the BALM representative because that representative is both an employee of the coldstore and is responsible for verify- ing the regularity of the operations carried out by the coldstore when the meat enters 38. The Commission places particular into storage. If, despite that conflict of stress on the risks bound up with the use interest, the use of BALM representatives is of representatives, namely the impossibility unavoidable, the German authorities

ought, according to the Commission, to and that linked undertakings were actually have taken effective steps to ensure that the entering into such transactions with one conflict of interest does not undermine the another. According to the Commission, the quality of the controls that have to be German authorities than declared that, in carried out at the time of entry into storage. the circumstances, the controls had to be tightened. Finally, in the Commission view, the Federal Republic of Germany is now claiming, in its application, that, in the case of linked undertakings, controls have 41. In that connection, the Federal Repub- always been carried out by BALM officials. lic of Germany stresses that whenever, in Those are the reasons why the Commission the context of the intervention purchase of considers those arguments unconvincing. beef, the vendor was a linked undertaking Moreover, they are not mirrored in BALM's (slaughterhouse/coldstore), BALM took instructions to its regional offices. The special care to ensure that, as far as instructions make no reference whatsoever possible, the beef purchased from that to the special problem of linked undertak- undertaking was not put into storage in a ings. The Commission considers that pro- coldstore linked to the vendor (slaughter- duction of the file on the controls carried house). In those rare instances in which, for out in relation to Annuss/Annuss alone logistical and/or organisational reasons, it cannot prove that the inspections were had been necessary to depart from that carried out systematically and entirely by principle, the controls on takeover at the BALM officials. coldstore had been carried out by a BALM inspector exclusively. In that connection, the Federal Republic of Germany cites six examples of linked undertakings and atta- ches, by way of an annex, the file on controls in relation to the undertakings Annuss (slaughterhouse) and Annuss (cold- store). It goes on to say that BALM had stipulated that this was the procedure to be followed (controls to be carried out by BALM officials exclusively) in the case of 2. Specific irregularities identified in the course of certain controls linked undertakings and had transmitted oral instructions to that effect to the regional offices.

stamps on beef had been fraudulently 46. In that regard, the Commission main- changed from 'O' to 'R' to allow 6.7 tonnes tains that the first case is a good illustration of otherwise ineligible goods to enter store. of the shortcomings in the German system. In yet another case, a false BALM stamp Had the controls been carried out regularly was used to allow fraudulent entry of 92 and in accordance with Community law at tonnes of beef to store. That case was not the time the goods were taken over, there detected until after the goods were removed would have been no possibility of pieces of from store. meat being spirited away between delivery and freezing because those controls exten- ded over the whole of that period, with the quarters of meat being subject to control from the time they were delivered until they were frozen. The fact that this fraudulent activity was subsequently detected does not alter the fact that the control on takeover was incomplete and inadequate. 44. The Federal Republic of Germany contends that those three instances in which the rules were breached cannot cast doubt on the security and regularity of the control system. Although indicative of the scale of criminal intent, they were detected 47. In its defence, the Commission main- in full as a result of the controls carried out tains that it has been established that the by BALM and other German authorities number of half-carcases taken over into and those responsible were held to account, storage frequently fails to tally with the with the result that the Community suf- number of half-carcases earlier classified at fered no financial harm. the slaughterhouse.

49. In its rejoinder, the Commission takes the view that the explanations provided by 52. According to the explanations furn- the Federal Republic of Germany in this ished by the Federal Republic of Germany, respect are perfectly plausible. However, it is not possible to introduce a false according to the Commission, it is surpris- takeover report into the payments system ing that those anomalies were not men- unless there is collusion between all the tioned in the reports on quality assessment individuals and authorities involved in the and takeover of the beef, in the instances takeover of the intervention beef and mentioned in the summary report in parti- administrative control (slaughterhouse, cular. Those cases also demonstrate that the BALM inspector/person appointed repre- existence of such irregularities did not sentative by BALM, sworn weigher, cold- necessarily result — as the German Gov- store, BALM regional and central offices), ernment seeks to imply — in rejection of because the requisite controls are always the goods in question. carried out. However, the Federal Republic of Germany points out that no system could provide adequate protection against extensive and large scale fraudulent activity of that kind, involving all of the individuals and authorities. 50. As regards the general risks of tamper- ing, resulting in good quality meat being replaced with meat of inferior quality, the Federal Republic of Germany claims that no complaints were received from purcha- sers in relation to the meat exported (95%). In its opinion, had such tampering occur- red, the third party purchasers would have 53. The Commission retorts that in its complained about it. In regard to the reply to a Commission letter of 13 April portion of stock destined for food aid 1994 stressing the risk that false reports (5%), there was no possibility of swapping might be introduced, the German Govern- the meat because it would be difficult to sell ment stated on 6 July 1994 that 'in order to goods that had been cut up and packaged. guarantee that the takeover reports of the BALM central office, its regional offices and the coldstore tally ... an internal con- trol and adjustment procedure will be introduced parallel to the current control procedure — as suggested by the EAGGF.' 51. The Commission's response here is that According to the Commission, in making there was a real possibility of tampering that declaration, the German Government

56. In the Commission's view, the statistics 54. In its summary report, the Commission show that there were real shortcomings, noted that 'comparison of the statistics even though the bulk of the controls were showed some stark contrasts in regional carried out by BALM officials themselves control activity. For example BALM Ham- (52% overall for the 1992 financial year). burg, with about 40% of national deliveries The Commission does not dispute that in to store over 1991 and 1992, could 52% of cases the controls were carried out demonstrate an official BALM presence by BALM officials, but draws attention to during takeover for more than half of the the regional discrepancies identified in the deliveries in its region (38% in 1991 and summary report which it considers to be 72% in 1992). The least important BALM significant in terms of the control activity regions of Berlin and Weimar showed a of the BALM regional offices. In the case of control rate of 80%. Against these statistics Munich, the differences identified reveal the regions of Mülheim and Mannheim the scale of the deficiencies in the German which accounted for about 2 5 % of control system. national deliveries had controlled at a rate of only 20%. The second most important BALM region of Munich (about 28% of national total) had not conducted any controls at all in 1991.'

57. As regards the assertion concerning the BALM Munich regional office inspectors, in 1991, the Federal Republic of Germany states that it is false and maintains that it 55. In its application, the Federal Republic immediately set the record straight when of Germany claims that it had been demon- the assertion — based on a misunderstand- strated, for the 1992 financial year, that ing — was first made during the concilia- more than half (some 52%) of the 14 000 tion procedure. According to the Federal controls carried out in a coldstore were Republic of Germany, the takeover reports made by a BALM inspector and that, when prove that the Munich regional office had carrying out his inspection, the BALM BALM inspectors carry out 16% of the inspector filled out, in addition to the controls on takeover made in the cold- takeover report (part B), a form called the stores.

4. Documentation concerning verification of takeover First category: reports on the controls on takeover made by the BALM officials themselves at the time the batches of beef are delivered: the reports frequently men- 59. In the summary report, the Commis- tion isolated deficiencies; that is fully in sion states that a close examination of a accord with current practice and what is to selection of control reports showed that be expected, and suggests that the controls they do not necessarily signify comprehen- were exhaustive and punctilious.

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Second category: reports on the ex post which is authentic. The other is a BALM controls on takeover carried out by BALM internal document. officials. These reports confirm that the batches of beef in question were examined only after they had been frozen, and state specifically that, at that stage, it is no longer possible to undertake comprehen- sive controls of takeover.

61. The Federal Republic of Germany 63. In that connection, the Commission explains that this is an incorrect assessment points out that, in its defence, it selected of the documents. According to the Federal just a few examples to substantiate its Republic of Germany, there are two docu- arguments. The German Government alle- ments: the 'Report on the qualitative gation that it was possible to talk in terms assessment and takeover of the beef', which of only a 'very small number of reports' is the Commission describes as the control therefore irrelevant. The Commission report, and the form entitled 'Report on claims that, all in all, it found references control in the receiving undertaking'. In the to deficiencies in about 15% of the control German system, it is only the control report reports analysed after the bilateral meeting

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make it possible to check on whether the objects that, using Article 8 of Regulation temperature of 7°C prescribed for delivery No 729/70 as a pretext, the Commission was maintained. Though the reports con- has applied retroactively to the 1992 finan- firm that temperature, that confirmation is cial year the more stringent requirements of not based on controls by the BALM Regulation No 2456/93. officials.

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73. It is clearly undeniable that, when the BALM representatives contain no nega- controls are carried out at the slaughter- tive comments. That inconsistency is borne house, the BALM officials make compre- out by later controls, carried out by the hensive checks on whether the intervention BALM officials, 15% of which refer to requirements have been met. Those checks shortcomings involving the controls carried cannot, however, compensate for possible out by the representatives. deficiencies in the controls at the time the meat is taken over at the coldstore. It has to be noted that the regularity of the controls at the slaughterhouse is not relevant to an assessment of the regularity of the controls at the time of takeover at the coldstore. In accordance with Article 14 of the above- mentioned Regulation No 859/89, the cri- tical point, particularly in relation to the 76. Germany's argument, according to transfer of ownership of the intervention which the ex post control reports drawn goods and payment, is the point of take- up by the BALM officials are simply a over. The Commission is therefore right to BALM internal document, and only the state that the controls at the coldstore have control report made at the point of take- their own crucial importance for the Com- over is authentic, cannot be accepted. In munity payments system. fact, as the Commission points out, the German authorities themselves put forward those documents to show that their control system was working properly. Conse- quently, if the documents provide argu- ments that strengthen the Commission's case, the Commission is entitled to rely on 74. As regards those controls, it is signifi- them. cant that, as the German Government has itself acknowledged, were they assessed in isolation, the inevitable conclusion would be that deficiencies existed. 9

78. If the meat is inspected in the freezer 82. More difficult is the question of the tunnel, it is hard to imagine that, after 24 conclusions to be drawn from the fraud hours has elapsed, the meat is not frozen to detected. As I mentioned at the outset, the such a degree that it is no longer possible to Conciliation Body is 'inclined to the view' verify its quality with sufficient accuracy, to that because of the criminal nature of the say nothing of its temperature on arrival. irregularities, they could not have been avoided even if BALM had used only its own inspectors. That may be so. On the other hand, it seems to me, that the fraudulent substitution of category 'R' stamps for category Ό ' stamps and the 79. If the inspection is made after the meat use of a forged BALM stamp to allow 92 has entered into storage, detailed checks on tonnes of meat into intervention would be its state on entry to the coldstore are still much more difficult if the BALM officials more impossible because the meat has been were in attendance when the goods were completely frozen, packaged and placed on delivered to the coldstore. As the German a pallet in the coldstore. Government points out, these cases of fraud cannot, of course, call into question the security and regularity of the German control system as a whole. But they do reveal the vulnerability of the system resulting from the use of representatives. 80. These subsequent documentary and physical checks are therefore of limited use in establishing the regularity of the transactions.

surprised at the Commission's assertion introduce a procedure designed to guaran- that only in its application did the German tee that the copies of the takeover reports in Government maintain that controls are the possession of the BALM central office, always carried out by BALM officials in its regional offices and the coldstore tallied such cases. In point of fact, the summary in every detail. report itself makes clear reference to the oral instructions given to the regional offices, according to which takeover has exclusively to be checked by a BALM official in cases in which the slaughterhouse 87. Finally, as regards the German Govern- and coldstore belong to the same group of ment's argument criticising the Commis- companies. sion for retroactively applying Article 17 of the a b o v e m e n t i o n e d R e g u l a t i o n No 2456/93, I can only endorse the Com- mission view. That criticism is justified neither in fact nor in law. It is true that Article 17 sets out for the first time, in detail, the procedure for takeover. But even 85. However, the fact that these were if the Community legislation did not yet purely oral instructions — which the Fed- eral Republic of Germany does not dis- contain provisions as specific as this in this pute — is a ground for criticism. Where a area, the fact remains that Article 8 of the coldstore and slaughterhouse are linked, it abovementioned Regulation No 729/70 is crucially important for the regularity of itself required the Member States to take takeover operations that these controls be the necessary measures to: carried out. In issuing its oral instructions, BALM recognised the importance of this but failed to give them the force of written instructions. It can therefore be considered that, because BALM's instructions were — satisfy themselves that transactions oral, they were not as effective as they financed by the Fund are actually could have been and that fact may there- carried out and are executed correctly; fore also be taken into account in assessing the defects of the German control system.

sion of the obligations imposed on the ber State and the Commission, which Member States by Article 5 of the EC implies that the government concerned Treaty, sets out the principles according to has been closely involved in the process which the Community and the Member by which the decision came about and is States are to organise implementation of therefore aware of the reason for which the the Community decisions on agricultural Commission considered that it must not intervention financed by the EAGGF, as charge the sums in dispute to the well as the fight against fraud and irregula- EAGGF. 11 rities in relation to those operations. It imposes on the Member States the general obligation to take the measures necessary to satisfy themselves that the transactions financed by the EAGGF are actually carried out and are executed correctly even if the specific Community act does not expressly IV — Controls during storage provide for the adoption of particular supervisory measures. 10

A — Pleas in law and arguments of the 89. It is in the light of that obligation, parties therefore, that the German authorities were supposed to ensure the effectiveness of the controls at the time the beef was taken over. 92. The applicant's arguments on this issue turn on four points.

90. The above analysis has shown to be unconvincing the arguments the German Government has used to try to prove that the shortcomings on which the Commis- sion based in particular the flat-rate correc- 1. Entry in the inventory tion at issue did not exist.

93. Article 3 of the abovementioned Reg- ulation No 618/90 reads as follows: 91. Finally, as regards the complaint that the statement of the reasons was inade- quate, it has only to be borne in mind that decisions on the clearance of accounts do not require detailed reasons, if they are 'The accounting inventory shall be verified taken on the basis of summary reports as by the storekeeper during the last two well as correspondence between the Mem- months of the financial year.

If, however, the official of the intervention agency is not present, he shall carry out the verification on his next visit, taking account of stock movements occurring in the interval.' 97. The Commission maintains that the disappearance of any pallet or piece inevi- tably results in a weight loss which must be entered in the inventory report. The fact that no such entry exists confirms what employees of the coldstore, whom the 94. The form, a model of which is given in Commission met with during on-the-spot Annex II of the regulation, contains four verification, told the Commission official columns with the following headings: directly, namely that the storekeeper did 'weight entered', 'weight checked', 'weight not verify the physical presence of the verified' and 'observations'. The following goods but directly transposed the data on appear at the bottom of the form: 'weight quantity and weight entered in the cold- checked: establishment of physical pre- store stock account. That, according to the sence of goods (Article 3)' and 'weight Commission, is the real flaw in the inven- verified: batches selected and weighed tory system because the annual inventories (Article 4).' drawn up by the coldstores never indicated any discrepancy between the quantities and weights recorded in the accounts and the quantities and weights checked.

95. In its summary report, the Commission noted that, in the inventories, there were never any differences between the book weight and the checked weight. In the coldstores visited it was confirmed that stocks had not been verified, as required by 98. The Federal Republic of Germany Article 3, but had simply been transposed contends that it is for the Commission to from the stock accounts of the coldstore. prove those allegations and puts forward,

2. Control of the inventories 100. According to the Federal Republic of Germany, at the point at which the physi- cal presence of the goods is ascertained, 102. Article 4 of Regulation No 618/90 there is no need physically to check the provides: weight, by weighing the goods as part of the inspection provided for in Article 3; all that has to be done — in accordance with the definition of the phrase 'weight checked' — is to record the weight which '[0]n the basis of the accounting inven- was verified on the spot as part of the tories, the official of the intervention process of establishing the physical pre- agency shall check on the spot: sence of the goods pursuant to Article 3. Given that there is no further control of weight, by means of a subsequent weight check, the weight that appears in the columns on the form relating to the weight — the procedure used by the storekeeper entered and the weight checked are always to draw up the inventories,

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— the accounting data of the warehouse 103. Annex III, section VI, of the same (entries, removals, balance of stocks) regulation lays down the following meth- and the outcome of the storekeeper's ods for the physical inspection of beef with annual inventory. a view to drawing up an inventory:

The official shall compare the abovemen- tioned data with the quantitative data in his own accounts and with the monthly ' 1 . Selection of batches representing 5% of accounting inventories. the total quantity in public intervention storage. The batches to be checked may be selected prior to the inspection of the warehouse on the basis of the accounting data of the intervention Where there is agreement between the agency, but the storekeeper may not accounts, he shall make a physical inspec- be informed. tion of at least 5% of the quantities stored in accordance with the methods set out in Annex III for each product.

— weighing of 10% of the pallets or containers,

105. In its application, the Federal Repub- — verification, for each cut, of lic of Germany disputes the Commission's 10% of the boxes from each assertion that the controls provided for in pallet or container, Article 4 and Annex III were not duly carried out. It maintains that a certain number of batches, corresponding to at least 5% of the total quantity stored, were selected and that the composition of those batches was verified on the spot. It adds — visual check of the contents of that, in the course of the additional verifi- the boxes and the condition of cation covering 20% of the quantity (5%) the packaging in each box. already checked, weight was checked by the BALM official who selected on the spot the 20% of pieces to be inspected (selecting the pallets). The signatures of the BALM official and the storekeeper on the annual The pallets/containers shall be chosen inventory report — which is accompanied following the different cuts stored. by the relevant stock report that lists separately the batches stored that have been inspected and physically weighed — certify and establish the outcome of the physical inspection of the meat stored. 3. Description in the inventory report of According to the German Government, the batches inspected physically and of further requirements cannot be justified defects noted.' under Community law.

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109. As regards the checks to be made on cards, the beef would have actually to be which pallets had been weighed and how still on the pallet. The Commission points and what pieces they contained, the Federal out that if this is not the case, it is because Republic of Germany points out that, on clear instructions have not been provided. the basis of the stock reports which are an integral part of the annual inventory report, it is possible indisputably to establish which batches of stock have been physically inspected in accordance with the combined provisions of Article 4 and Annex III, sec- tion VI, of Regulation No 618/90. The batches inspected and weights recorded are 3. Lack of specific national instructions entered in the stock reports. According to concerning the physical controls on 5% of the Federal Republic of Germany, the the meat stored pallets inspected may be identified on the spot by the labels attached to them, at any time before the goods are removed from storage because, as part of the inventory procedure, the competent BALM inspectors attach a BALM stamp and/or seal to the 111. In its summary report, the Commis- labels on the inspected and weighed pallets sion states that and because, once they have been weighed, the pallets are not returned to their original location but are stored separately. 'national instructions regarding the execu- tion of the 5% physical controls are not explicit but simply refer to the annex of the governing Community regulation.'

113. In the Commission view that is suffi- coldstore, the 12th quarter was not missing cient neither to guarantee that the physical but had been moved to another pallet inspection required under Community law because putting 12 quarters on one pallet is executed correctly nor to prove that it was considered an overload. Because of an has been executed correctly, if necessary. oversight, the pallet card was not amended. In regard to the second pallet mentioned by the Commission, the change to the weight merely corrected a mistake made when the original card was issued. As regards the three quarters for which no weight was indicated, these were goods that had not been able to be loaded on that day. Even if 4. Specific irregularities identified in the there had been a failure to mark the pallet, course of certain controls the place in which it was stored clearly linked it to the delivery from which it came. As regards the metal hook, the German Government notes that this was the first such incident despite the hundreds of 114. In its defence, the Commission notes thousands of quarters processed. In that that the inspections carried out in two particular case, the hook was removed and coldstores provide a good example of the its weight deducted. anomalies and deficiencies identified in practice. In the first coldstore, serious deficiencies were established in regard to three pallets: whereas the pallet card listed 12 quarters of meat with a gross weight of 1 129 kg, the inspection found only 11 quarters weighing 1 021 kg in total on the pallet. An unattached label, most probably belonging to the missing 12th quarter, was lying on top of the 11 quarters. According to the card of another pallet, it contained 11 quarters with a total weight of 1 104 kg, subsequently amended to 1 094 kg. An unnumbered pallet contained three quar- 116. The Commission also points out that, ters with no indication of weight. Further- pursuant to Article 26(1) of the abovemen- more, in the second coldstore, one of the tioned Regulation No 859/89, the meat is visible pallets held a quarter from which a to be placed and kept in store in easily large metal hook, that had probably been identifiable lots. In the coldstores visited, forgotten and included in the gross weight that requirement had been met in part only recorded at the point of entry into storage, through the use of pallet cards; it was in was protruding. fact noted that the premises were tightly packed, visual inspection was difficult because of the lack of access aisles and there were apparently no storage plans to show where goods were kept. Conse- quently, only the pallets at the front of the 115. The German Government explains warehouse could be properly, that is to say those incidents as follows: in the first rapidly and easily, inspected.

B — Analysis 119. The Commission maintains that two factors contradict that argument:

120. As regards, firstly, the point at issue concerning entry in the inventory, I agree with the German Government that Arti- — The irregularities identified in the first cle 3 of the abovementioned Regulation case were so obvious that the EAGGF No 618/90 does not require that the meat

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be weighed. The Commission has also instances, it is not possible to challenge the acknowledged that. The dispute therefore evidence cited by the Commission accord- simply concerns whether, as the Commis- ing to which there were cases in which the sion maintains, when the annual inventory storekeepers merely transcribed the figures was drawn up, the storekeepers did no in the stock accounts. Moreover, in a letter more than transcribe stock counts or whe- of 6 July 1994 addressed to the Commis- ther, as required by the abovementioned sion's Director General for Agriculture, the Article 3, they actually verified the physical Federal Minister of Finance acknowledged presence of the goods. the following:

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Regulation No 618/90 as regards the obli- will, as you suggest, be fully documented.' gation physically to inspect 5% of the The ministry thus acknowledged that a gap quantities stored. Those documents ought existed here. to show that the physical inspection proce- dure laid down in Annex III of the regula- tion has been followed step by step and in every detail. 13 126. As regards, thirdly, the Commission's complaint concerning the absence of national instructions regarding the proce- dure to be followed by inspectors when carrying out the physical inspection, that procedure, I note, emerges clearly from 124. However, the annual inventory Annex III to the regulation. Since that reports, including the stock reports that annex was attached to the administrative accompany them, do not provide that instructions, I consider that the inspectors information. As the Commission rightly were quite definitely in a position to maintains, the weights recorded in the understand what was required of them. It fourth column of these reports merely has, however, to be noted that the German indicate from which batch or category of authorities ought to have included in their goods the 1% of total stock was selected instructions an obligation to draw up for weight control. detailed reports on the physical inspection of 5% of the meat stored.

normal storage operations carried out in goods in accordance with the intervention accordance with the accepted rules is fixed agency rules on release from storage ...' as a percentage of the actual weight, with- out packing, of the quantities entering storage (Article 1(1) and (2)). According to Article 2 of the regulation, that percen- tage is set at 0.6% for beef. 131. The Federal Republic of Germany gives clear expression to the above provi- sion of Regulation No 2173/79 in para- graph 13.5.1 of Bekanntmachung Nr. 55/87/31 über die Allgemeinen Bedingun- 128. In the case of non-identified losses of gen für den Verkauf von Rindfleisch aus beef, in excess of the tolerance limit of Interventionen of 8 September 1987 0.6% fixed by Regulation No 147/91, the (Notice No 55/87/31 on the general condi- Member States have to credit to the tions of sale for beef from intervention) EAGGF a sum substantially higher than which provides that, in the case of frozen the sales value of the quantities lost. 16 beef, the delivery weight of any category of goods is to be established, on delivery, by a qualified weigher using accurately calibra- ted scales.

129. Furthermore, unboned beef coming from public storage is to be sold, pursuant to Commission Regulation (EEC) No 2173/79 of 4 October 1979 on detailed rules of application for the disposal of beef 132. According to the second paragraph of bought in by intervention offices and section 13.5.1 of Notice No 55/87/31: repealing Regulation (EEC) No 216/69, 17 'weighing records shall be used to indicate according to the gross weight actually gross weight. The total weight entered in ascertained. the weighing record shall be rounded up or down to the nearest kilogram in the case of quarters of meat and to the nearest one hundred grams for cuts. The weigher shall sign and stamp the records.'

135. According to the German Govern- ment, the requirements of Community law — The EAGGF established from its file concerning the removal of the beef were control that the coldstore and purcha- respected. Employees of the coldstore, who ser often belong to the same company. had been selected, trained and appointed by In one case noted from its file audit, the BALM, were also used, alongside BALM EAGGF initially concluded that there inspectors, to carry out the controls on had been no weighing of a particular removal of the beef. Even in those cases in batch of beef removed from a particu- which representatives were used, proper lar coldstore. From documents viewed removal of the beef was guaranteed. More- it appeared that precisely (i.e. to the kg) over, the purchasers would ensure that the the same quantity had been removed as meat auctioned and paid for was properly had entered the previous year. delivered in terms of both the quality and quantity of the beef because BALM's con- ditions of sale do not allow complaints to be made later. In those cases in which removal took place in the coldstores belonging to the same group as the pur- While insisting that there was a 100% chaser, verification was made by BALM weighing of all beef leaving interven- inspectors only.

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137. Even if — as the German Government maintains — the storage contracts entered into with the coldstores lay down control requirements, that such a requirement exists does not, in the Commission's view, 139. As regards the exhaustive description mean that it is always complied with to the of the controls on removal from store that extent necessary. Furthermore, the German the German Government provides in its Government has still to prove that the rejoinder, the Commission maintains that conditions contained in the storage con- this is largely confined to general observa- tract met Community control requirements tions on the 'normal' progress of the in full. Moreover, as regards the subsequent control procedure but fails to address the controls carried out by BALM, the Com- specific deficiencies on which the Commis- mission considers that these merely involve sion bases its findings. inspection of documents and are insuffi- cient to replace the on-the-spot controls required. As regards the particular problem of the linked undertakings, the Commission would refer back to the pleas and argu- ments it made in relation to the controls on entry into storage. 140. The Commission draws attention to the findings of the summary report, accord- ing to which, in several instances, the EAGGF established that there was not a kilogram's difference between the weight recorded on removal from store and the 138. As regards the risk of manipulation, weight of the goods that had entered into the Federal Republic of Germany maintains store the previous year, which is unusual in

141. According to the Federal Republic of Germany, once BALM had looked into the cases cited by the Commission, in which exceptionally, in its view, no difference in weight appeared between entry into and removal from storage, there were only two 144. I would first draw attention to the instances in which it was established that undisputed fact that neither the Commu- weight on removal from storage was the nity legislation applicable in 1992 nor the same as weight on entry into storage. Those legislation that replaced it require that particular cases were explained to the employees of the national intervention Commission. According to the Federal agency be present when goods are removed Republic of Germany, the explanation from store. There can therefore be no was that this anomaly was the result not question of automatically concluding from of manipulation when the weight was the total or partial absence of such employ- recorded or a failure to weigh the goods ees a deficiency in the control system but of the fact that two different categories capable of justifying a refusal to charge of beef and veal were accounted for toge- 2% of expenditure to the EAGGF. ther by mistake, so that there was in fact no weight loss. According to the Federal Government, it is perfectly possible that, in specific cases, weight on entry into storage is exactly the same as weight on removal from storage. 145. However, one can only endorse the Commission's view that BALM employees must always be present in cases where the coldstore and purchaser of the meat belong 142. According to the Commission, this to the same group of companies. Further- attempt at an explanation is unconvincing more, that principle has not been chal- and has not, moreover, been substantiated. lenged by the Federal Republic of Germany. The Commission therefore continues to The latter has merely objected that, in such consider the cases that have arisen to be situations, a BALM official was always in clear evidence of shortcomings in controls attendance. For its part the Conciliation on removal from storage in Germany, Body concluded that the documents trans- though these specific cases are not in mitted to it by the German authorities themselves the basis for the 2% flat-rate confirmed that claim 'on the basis of correction of expenditure. specific and limited examples.'

148. In regard to all the other cases, that is to say those in which removal from store takes place under the supervision of BALM representatives (in the absence therefore of BALM officials), the Commission has iden- tified cases in which the weight of the 150. The ex post documentary controls goods delivered was exactly the same as carried out by BALM in those cases in that of the goods taken over. An example of which it used representatives to carry out this appears in a report by EAGGF inspec- the control on removal from storage cannot compensate for the irregularities which tors, transmitted by the Commission to the may have occurred on removal from sto- German authorities by letter of 13 April rage. 1994 (No VI/014852, annex 3 of the application), page 10 of which states that 273 pieces of meat were weighed on entry at 26 591 kg and weighed exactly the same on removal. It is, however, clear from the legislation that, when they are entering storage, the pieces of meat have to be weighed before being packaged, whereas 151. In that regard, the mere assertion that on removal from storage their gross weight the purchasers made no complaint cannot has to be recorded, that is to say including be considered conclusive, if only because the packaging. Now it is hardly likely that BALM's conditions of sale preclude the packaging will make up exactly for the loss lodging of complaints after the event.

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152. I therefore find that the German undertook to remedy those shortcomings, Government has provided only very partial proving that they did indeed exist. proof that the deficiencies cited by the Commission in regard to the controls to be carried out when intervention beef is removed from storage do not exist. 156. In the light of the assessment of the controls carried out at each of the three stages, I therefore conclude that the appli- cant has not succeeded in demonstrating the inaccuracy of the Commission's find- ings. VI — Final considerations

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that should trigger a flat-rate correction of disputed that the deficiencies found to exist 2%, in accordance with the scale of correc- on conclusion of this analysis are likely to tion adopted by the Commission, my result in a minor risk of loss to the EAGGF. conclusion would have been the same. A correction of that nature applies 'where the deficiency is limited to parts of the control system of lesser importance, or to the operation of controls which are not essen- 161. Furthermore, the question whether tial to the assurance of the regularity of the the application, in such cases, of a correc- expenditure, such that it can reasonably be tion amounting to 2% of the expenditure is concluded that the risk of loss to the incompatible with the principle of propor- EAGGF was minor.' Now it can hardly be tionality was not raised in the instant case.

VII— Conclusions

162. In the light of the foregoing I propose that the Court:

— dismiss the application; and