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2. In Decision 1999/18 7/EC of 3 February 1999 on the clearance of the accounts presented by the Member States in respect of the expenditure for 1995 of the Guar- antee Section of the European Agricultural 4. After a number of meetings and Guidance and Guarantee Fund, the Com- exchanges of letters between the Commis- mission disallowed an amount of sion and the French Republic, the Com- FRF 567 733 352 which the French Gov- mission indicated in a letter of 9 July 1997 ernment reported among other expenditure that the treatment of the incomplete appli- in respect of the 1994 harvest. That cations had been the subject of criticism as decision was preceded by the following early as 1993 and that it could not be offset contacts between the authorities. in 1994 by doubling the number of checks, even though that measure had contributed to minimising the risk of losses to the EAGGF. Since the irregularities established were restricted to certain features of the 3. In a letter of 18 May 1994, the Com- system of control, and the risk of loss to the mission objected to the decision taken by

2 - O J 1992 L 181, p. 12. 1 — Original language: German. 3 - OJ 1992 L 391, p. 36.

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5. In a letter of 11 May 1998, the Com- 6. In response to that letter, the French mission gave the French Republic formal Republic referred the Commission's pro- notice of its finding, under Commission posal to the Conciliation Body. In its final Decision 94/442/EC of 1 July 1994 setting report on 23 November 1998, the Con- up a conciliation procedure in the context ciliation Body came to the conclusion that of the clearance of the accounts of the the change of approach by the Commission European Agricultural Guidance and Guar- in its statement of reasons had complicated antee Fund (EAGGF) Guarantee Section.4 consideration of the issue. From 1994 to It accepted the increase in the number of 1997, the complaint of inadequate quality on-the-spot checks, which was raised to of on-the-spot checks had been made only 10% instead of the 5% laid down in as a secondary point, although in this Article 6(3) of Regulation No 3887/92, to matter the Commission had relied on offset the failure to provide particulars of checks carried out in 1994. Although the area. But it criticised the shortcomings in shortcomings established were systematic, the checks conducted on the spot. The extrapolation to the whole of France personnel had not been properly trained, so seemed problematic in as much as those that there was no accurate measurement of shortcomings varied from one holding to parcels, roads and field edges were not another and only a limited number of deducted from such parcels, and the min- holdings had been checked. Subsequent utes of on-the-spot checks were imprecise and more extensive checks had not con- firmed the shortcomings established. The present case highlighted the limits of cal- 4 — OJ 1994 L 182, p. 45. culating the correction on a flat-rate basis.

11. The French Government also com- plains that the Commission formulated its objection to the inadequate on-the-spot checks on the basis of only a limited number of checks carried out by itself. In 9. The deduction is also disproportionate 1994, only eight holdings situated in two in that the lack of returns of area did not Départements were verified, although a frustrate the intention of Regulation total of 11 656 holdings had received aid. 3887/92, namely the introduction of effec- That accounted for only 2.28% of the aid tive controls. Nor, moreover was intro- applications filed in France under Regu- duction of the integrated system of manage- lation No 1765/92, 1.79% of the areas ment and control delayed as a result. Nor, assisted and 3.91% of the aid paid. The finally, was the effectiveness of the checks shortcomings established could therefore carried out in 1994 undermined. not be extrapolated to the whole of France.

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14. By order of the President of the Court, 16. The Republic of Finland supports those dated 18 November 1999, the Republic of claims. Finland was granted leave to intervene in support of the French Republic's claims. In addition to breach of the principle of proportionality, the Finnish Government also alleges inadequacy of the statement of reasons, a breach of the principle of protection of legitimate expectations and 17. The Commission contends that the of the principle of effectiveness. The Finn- Court should ish Government claims that the statement of reasons is inadequate in two ways. Firstly, it is not possible in the contested decision to identify the grounds on which the financial correction has been made and, secondly, it cannot be discerned why the (1) dismiss the action and

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(2) order the French Republic to pay the to be taken separately from the years before costs. and after. Furthermore, the matters estab- lished in respect of irregularities in a given year cannot simply be extrapolated to other years.

18. The Commission considers that the decision appealed against is proportionate. Firstly, identification of the parcels benefit- ing from the system of compensatory 21. Nor is the decision initiated by any payments is of central importance to the defect in the statement of the reasons on integrated system of management and con- which it is based. The Court has consist- trol. Effective performance of on-the-spot ently held that, in regard to clearance of checks is equally important. accounts for the EAGGF, it is sufficient for the State concerned to have been involved in the preparation of the decision and, as a consequence, to be aware of the reasons for that decision.

I I I— Applicable legislation 25. Under Article l(2)(b) of Regulation No 729/70, the Guarantee Section of the EAGGF finances intervention intended to stabilise the agricultural markets. In accordance with Article 13 of Council Regulation No 1765/92 of 30 June 1992 24. As provided in Article 5(2)(b) of Coun- introducing a system of support for pro- cil Regulation (EEC) No 729/70 of 21 April ducers of certain arable crops, 8compensa- 1970 on the financing of the common tory payments granted under Article 2 of agricultural policy, 6 the Commission that regulation are also considered to be makes up the accounts for the EAGGF for such interventions. Article 10(3) of this the budgetary year concerned. Under regulation requires the application to be Article 5(2)(c) of that regulation, as modi- accompanied by references allowing identi- fied by Council Regulation (EC) fication of the areas concerned for which No 1287/95 of 22 May 1995, 7the Com- compensatory payment is sought. mission evaluates the amounts to be excluded having regard in particular to the degree of non-compliance found. It takes into account the nature and gravity of the infringement and the financial loss suffered by the Community. Under Article 2(2) of Regulation No 1287/95, 26. This system of aid is implemented in refusal under Article 5(2)(c) of Regulation accordance with the detailed implementing No 729/70 to grant financing may not rules laid down in Commission Regulation relate to expenditure claimed against a No 3887/92. Article 4(1) of the regulation financial year prior to 16 October 1992, requires 'area' aid applications to contain but without prejudice to decisions regard- in particular details to identify all the agricultural parcels on the holding, with their area, location and use. Under 5 — Article 1(2) of Decision 94/442 provides: Article 6(1) of the regulation administrative 'For the purposes of the subsequent stages of the accounts and on-the-spot checks are to be made in clearance procedure: (a) the position of the Body shall be without prejudice to such a way as to ensure effective verifi- the Commission's final decision on the clearance of the cation of compliance with the terms under accounts and shall not affect the Member State's right to institute proceedings under Article 173 of the Treaty;

27. In the light of the facts set out above, it 29. Nor is it disputed that the Commission may first of all be stated that the parties had competence to proceed against this agree that the on-the-spot checks carried infringement on the basis of Article 5(2)(c) out by the French authorities in 1994 were of Regulation No 729/70, by imposing a inadequate and that from that point of financial correction on the expenditure view there has been an infringement of declared by the French Republic. The Article 6 of Regulation No 3887/92. It is matter in dispute is only the amount of true that the French Government points out that correction, which the French Republic that in July 1994 the Commission verified regards as disproportionate. only eight holdings located in two Dépar- tements, but it does not deny that a number of inadequacies were found at that time in the on-the-spot checks conducted by the French authorities. The French Govern- ment is critical of the relatively limited number of verifications made by the Com- mission only because it believes that the Commission has extrapolated the disputed financial correction from those verifi- 30. Under Article 5(2)(c) of Regulation cations. Thus it challenges only the amount No 729/70, the Commission evaluates the of the financial correction and not its amount to be deducted having regard to the justification in principle. degree of non-compliance found. It must

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32. A grant of compensatory payments under Regulation No 1765/92 is a subsidy. Such expenditure by the Community must be duly checked in order to prevent or to detect abuses. In its first letter in this case, the letter of 18 May 1994, the Commission expressly drew the French Government's attention to the importance of the adminis- trative checks, which require a return of area as well as on-the-spot checks. The infringement observed therefore relates to a fundamental aspect of the grant of com- pensatory payments. 34. It therefore remains to examine the second aspect to be taken into account by the Commission in assessing the financial correction, that is to say the financial loss caused to the Community. The French Government considers that the loss could and should have been assessed from an 33. It is also relevant that, while preparing extrapolation of the infringements estab- the contested decision the Commission lished for the years 1995, 1996 and 1997. noted that the French Republic had The Commission confirms the principle infringed Article 10(3) of Regulation whereby as a rule the loss to the EAGGF No 1765/92: it had failed to require the must be calculated specifically and that a production of returns of areas. But a return flat-rate assessment should be made only of the area qualifying for subsidy is of when it is found impossible to quantify the importance in identifying the land involved true loss. But it denies that a precise and in avoiding duplicated payments. The assessment was possible in the present

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35. The infringements established in sub- sequent years, that is to say 1995, 1996 and 1997, enable an indication to be given of 37. In the judgment in United Kingdom v the scale on which irregularities were Commission, 11 the Court further stated established in France. But it remains to be that the Commission may, where it does seen whether that factor can be a sufficient not reject all the expenditure affected by basis for calculating a flat-rate correction in the infringement, endeavour to establish the context of clearing the EAGGF the financial impact of the unlawful action accounts. by means of calculations based on an assessment of what the situation on the relevant market would have been if the infringement had not occurred. In such a case, the burden of proving that those calculations are not correct rests on the State seeking to have the disallowance 36. However, in the light of the case-law annulled. That decision has subsequently on the Commission's power to impose a been confirmed, in particular after the correction of the expenditure to be reim- adoption of the 'Guidelines for the calcu- bursed, and on apportionment of the lation of financial consequences when pre- burden of proof in calculating the loss paring the decision regarding the clearance actually caused to the Community, the of the accounts of EAGGF Guarantee', abovementioned factor must be deemed working document VI/216/93 of 3 June insufficient. The Court has consistently 1993 and working document VI/5330/97 held that the provisions of Articles 2 and of 23 December 1997 (hereinafter 'the 3 of Regulation No 729/70 only enable the guidelines').12 Commission to charge to the EAGGF sums paid in accordance with the relevant rules. 'In cases where Community rules authorise 9 — C a s e C-197/90 Italy v Commission | 1 9 9 2 | ECR I-1, paragraph 38 et seq.. Case C-197/91 FAC [1993] ECR payment of aid only on condition that I-2639, paragraph 16, and Case C-50/94 Greece v Com- mission [1996] LCR 1-3331, paragraph 26. certain formalities relating to proof or 10 — Sec Greece v Commission, end of paragraph 26. supervision are observed, aid paid in dis- 11 — Case 347/85 [19881 ECR 1749, paragraph 15 et seq. Sec regard of that condition is not in accord- also the Opinion of Advocate General Darmon in Italy v Commission (cited in note 9), paragraph 42. ance with Community law and the expen- 12 — See Greece v Commission paragraph 7 et seq.

39. Reference to later years likewise con- stitutes no reliable basis for calculation, since it only establishes a theoretical order of magnitude for the infringements estab- lished, but without providing data relating to 1994. The less serious irregularities 40. If the Commission was thus entitled to established in subsequent years do not make a flat-rate correction, the further allow an accurate retrospective calculation question arises as to whether the sum for 1994, but that is what would be assessed at 2% of the expenditure declared, required to determine the loss accurately. that is FRF 567.7 million, is proportionate. It is entirely possible that in subsequent years no further irregularities occurred — or at least that they occurred on a much smaller scale — because, following the exchange of correspondence with the Com- mission, the French Republic had become aware of the inadequacy of the checks. The French Republic itself admits that the introduction of the integrated system of management and control had encountered 41. In the light of the case-law referred to some difficulties at the outset. But that above, under which the Commission is already indicates that it was perfectly poss- entitled to disallow the whole of the ible for the number of irregularities in 1994 expenditure in respect of which checks

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have been found to be inadequate, its may be challenged. 14 This seems an appro- action cannot be said to have been dispro- priate division of the burden of proof. Nor portionate when it has disallowed only 2% has it been questioned by the French of the expenditure instead of the entire Government. sum. In this case, the Commission is applying a measure clearly more limited than what it is entitled to apply.

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must not charge the sum in dispute to the accounting particulars necessary and the EAGGF. 16 The Commission's letter of Commission, in preparing the decision on 11 May 1998 meets those requirements. clearance of the EAGGF accounts, is dependent in this respect on the communi- cations made to it by the Member States, it would not be appropriate to transfer the burden of proof to the Commission.

46. In the light of this case-law, it is also proper to reject the Finnish Government's argument of a generally defective statement of reasons in regard to the contested decision. The exchange of letters between the Commission and the French Republic from 1994 to 1998 confirms that the French Republic was closely involved in 48. In respect of the guidelines, the French the process by which the contested decision Republic contends, with reference to the came about. In particular, in the letter of Conciliation Body's report, that the present 11 May 1998, the Commission gives the case reveals the limits of a flat-rate assess- inadequate checks as the reason for the ment of the correction. However, the correction. The French Republic knew of French Government does not demonstrate that reason. Even the subsequent abandon- that that is reflected in the present case by a ment of the original objection to the fundamental defect affecting the guidelines. processing of incomplete application files In that regard, the criticism is confined to is not in dispute between the parties. Since the individual case and does not show that in this case no factors can be discerned the guidelines are fundamentally arbitrary which are likely to justify disregard of the or unfair. In the light of the case-law, case-law referred to, it must be assumed therefore, this argument must also be that the reasons for the contested decision rejected. are sufficient. The case-law does not require the background to a decision to be traceable by a third party.

and 10%. 17 At the request of the European correction on the basis that incomplete Parliament, an additional rate of 25% was applications were being processed. But it provided for. In the present procedure, the also stated, as early as the letter of 9 July French Government regards it as dispro- 1997, that the inadequacy of the on-the- portionate to apply the lowest rate of 2%, spot checks might justify a financial cor- and maintains that this case reveals the rection higher than that threatened. After limits of the system of flat-rate corrections. the French Republic had declared that it This is an expression of the French Govern- was prepared to increase the number of ment's conviction that the differential rules on-the-spot checks, the Commission provided for in Guidelines VI/216/93 and dropped the objection concerning the VI/5330/97 must be revised. However, that incomplete applications and, thereafter, review must be attained by political means relied on the defective checks alone. The and not in the context of a review of the contested decision is based only on that legality of a Commission decision. complaint, as is confirmed by the letter of 11 May 1998, which constitutes formal notification within the meaning of Article 1(1)(a) of Commission Decision 94/442. Therefore, the argument alleging breach of the principle of protection of legitimate expectations must be rejected 50. It must also be observed that the Court because the French Government's attention of Justice has consistently held that a was drawn, both orally and in writing, to flat-rate calculation of the financial correc- the various criticisms and there was there- tion is consistent with Community law. 18 fore no expectation worthy of protection In the present case there are no grounds which could have been frustrated. justifying a departure from that position. It follows that a correction at the rate of 2% of the expenditure declared must be regarded as proportionate.

measure is less radical than the action irregularities noted and, from that, the which Community law also allows, of amount of the financial correction. For disallowing the entire sum. In principle that is not to attach to the financial year therefore it is proportionate. 1994 the shortcomings noted during fol- lowing years and their consequences for the EAGGF; it is only — as the French Govern- ment advocates — to take those results as an approximation of the financial correc- tion that also has to be applied in 1994, for the irregularities found in 1994. This 53. Therefore, it is only in the alternative approach, which relates to the expenditure that the second objection by the Commis- incurred in 1994 as well as to the irregu- sion needs to be discussed. To assess the larities established in that year does not call financial correction on the basis of the in question the principle of the annual infringements established in subsequent budget. years is, the Commission contends, contrary to the principle that the budget is adopted annually. Under Article 1(1) of Regulation No 729/70, the EAGGF forms part of the budget of the Communities. The general rules on the budget, including the 55. In the final analysis, however, it has to principle of the annual budget, therefore be observed that Commission Decision apply. 1999/187 is proportionate in providing for a financial correction of 2%, that is to say a sum of FRF 567 733 352, to the expenditure declared by the French Repub- lic in respect of aid granted under Regu- lation No 1765/92. 54. The principle of the annual budget is laid down in Articles 199 and 202 of the EC Treaty (now Articles 268 EC and 271 EC). This means that the budget is to be voted each year. 19 In accordance with this principle, Article 5(1) of Regulation No 729/70 provides that Member States are required to submit to the Commission V — Costs annual accounts accompanied by the sup- porting documents required for making up the balance sheet. It does not seem contrary to the annual principle to refer to the infringements established in 1995, 1996 56. Under Article 69 of the Rules of and 1997 to determine the financial loss Procedure, the unsuccessful party is to be caused to the Community because of the ordered to pay the costs, if applied for in the successful party's pleadings. Since the French Republic has been unsuccessful, and 19 — Case C-284/90 Council v Parliament [1992] ECR I-2277, the Commission applied for costs, the paragraph 26; see also the observations of Advocate French Republic must be ordered to pay General Jacobs in his Opinion delivered on 17 October 1991 in that case (ECR I-2298, point 23). the costs.

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