C-374/99

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SPAIN v COMMISSION

21 April 1970 on the financing of the writing, after which the two parties common agricultural policy. 4Article 3(1) shall endeavour to reach agreement on provides for financing of measures by the the action to be taken. EAGGF.

4. Article 5(2) of the regulation, as amen- ded by Council Regulation (EC) No 1287/95 of 22 May 1995, 5reads as If no agreement is reached, the Member follows: State may ask for a procedure to be initiated with a view to mediating between the respective positions within a period of four months, the results of which shall be set out in a report sent to and examined by the Commission, before a decision to refuse 'The Commission, after consulting the financing is taken. Fund Committee:

The Commission shall evaluate the amounts to be excluded having regard in particular to the degree of non-compliance (c) shall decide on the expenditure to be found. The Commission shall take into excluded from the Community finan- account the nature and gravity of the cing referred to in Articles 2 and 3 infringement and the financial loss suffered where it finds that expenditure has not by the Community.' been effected in compliance with Com- munity rules.

Before a decision to refuse financing is 5. For the purpose of applying that article, taken, the results of the Commission's relevance also attaches to Article 8(1) of checks and the replies of the Member Regulation No 729/70, 6which requires the State concerned shall be notified in Member States to take the measures neces- sary to satisfy themselves that transactions financed by the EAGGF are actually carried 4 — OJ, Fnghsh Special Edition, 1970 (II, p. 218; now replaced out and executed correctly. by Council Résiliation (HC) No 1258/1999 of 17 May 1999 on the financing of the common agricultural policy (OJ 1999 L 160, p. 103). 5 — OJ 1995 L 125, p. 1; now Article 7(4) of Regulation No 1258/1999. 6 — Now Article 8(1) of Regulation No 1258/1999.

'1. For the purposes of the clearance of (c) at the end of its investigations, to draw EAGGF Guarantee Section accounts, a up a report on the outcome of its efforts at reconciliation, making any remarks it deems useful should all or 7 — OJ 1995 L 158, p. 6. some of the points of dispute remain 8 — OJ 1994 L 182, p. 45. unresolved.

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SPAIN v COMMISSION

2. For the purposes of the subsequent Article 9(3), Article 11(3) and Arti- stages of the accounts clearance procedure: cle 12(1), which read as follows: 10

Article 9(3)

(a) the position of the Body shall be with- out prejudice to the Commission's final decision on the clearance of the accounts and shall not affect the Mem- ber State's right to institute proceedings 'The Member State shall pay the aid within under Article 173 of the Treaty; 150 days of submission of the application for the quantities for which entitlement to aid has been recognised following on-the- spot checks.

9. Finally, attention should also be drawn to Council Regulation (EC, Euratom) No 2988/95 of 18 December 1995 on the If entitlement to the aid is not recognised in protection of the European Communities' respect of all or part of the quantities financial interests. 11 shown in the application, the security shall be forfeit in proportion to the quantities in respect of which the conditions giving entitlement to the aid are not complied with.' Article 1(2) provides:

Article 12(1)

'"Irregularity" shall mean any infringement of a provision of Community law resulting from an act or omission by an economic operator, which has, or would have, the 'For the purposes of the checks..., Member effect of prejudicing the general budget of States shall inspect the stock records of all the Communities or budgets managed by approved undertakings. They shall also them, either by reducing or losing revenue carry out random checks on the financial accruing from own resources collected supporting documents relating to the trans- directly on behalf of the Communities, or actions carried out by these undertakings. by an unjustified item of expenditure.' Each undertaking shall be inspected for this purpose at least once in each marketing year. Inspections shall cover a substantial 11 —OJ 1995 L 312, p. 1.

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SPAIN v COMMISSION

Article 2 provides: shall be governed by the laws of the Member States.'

I - 5949

OPINION OF MR GEELHOED — CASE C-374/99

13. By an application lodged at the Court (2) The representativeness of the verifica- Registry on 7 October 1999, the Kingdom tions carried out by the Commission. of Spain brought an action under the first paragraph of Article 230 EC for the partial annulment of the contested decision in so far as it concerns the flat-rate corrections applied to consumption aid for olive oil and ewe/goat premiums. (3) The procedure for the administration and payment of consumption aid.

(4) The control procedures. Pleas in law and arguments of the parties

First plea in law 18. The Commission is of the opinion that the Conciliation Body's task is to facilitate conciliation. If the Member State does not agree with the decision subsequently taken 16. The Spanish Government argues that by the Commission, it is entitled to bring the Conciliation Body is not merely a the matter before the Court. Moreover, the consultative body. On the contrary, it is Commission takes a different view of the clear from Article 1 (1)(b) of Decision Body's report in the present case. 94/442/EC that the Body is 'to try to reconcile the divergent positions of the Commission and the Member State con- cerned'. Article 5(2)(c) of Regulation No 729/90 is similar in tenor. The purpose of the procedure before the Body is to mediate between the parties. The Commis- sion must examine the Conciliation Body's Second plea in law report before reaching a decision and must take account of its reasoning.

19. The Spanish Government claims that the verifications which the Commission 17. The Spanish Government then points carried out at the premises of Spanish to the Conciliation Body's findings in the undertakings were not representative. The present case, and in particular to points 10 Commission carried out verifications at 22 to 14 of its report, which indicate inter alia: plants. Those 22 were not chosen at random but were the plants with regard to which the Spanish authorities themselves had already found irregularities. The Span- ish Government refers to a communication from the Commission, according to which — that the financial risk entailed by the flat-rate reductions should not be applied procedure applied in Spain has not on account of deficiencies which have been demonstrated; already been detected by the authorities of the Member State.

undertakings which between them had the first application for aid during a received almost 50% of the aid. marketing year for olive oil, it draws up a report only after making an on-the-spot check at the premises of the undertaking concerned. For subsequent applications, it draws up its report on the basis of data 21. In its reply, the Spanish Government supplied monthly by the undertakings. claims that it had not been informed of the That method does not present any risk for additional verifications and that its right to the EAGGF. a fair hearing had thus been infringed. According to the judgment in Oliveira v Commission, 12 that procedural defect ren- ders the reduction void. In its rejoinder, the Commission acknowledges that the Span- ish authorities were only informed after the verifications had been carried out, 23. The Commission points out that Arti- although, it claims, the purpose of the cle 12 in its present form was adopted by verifications was merely to check whether Regulation No 571/91 of 8 March 1991 the earlier findings may have been incor- and Article 9 by Regulation No 643/93 of rect. 19 March 1993. 13 The Commission atta- ches importance to the fact that the word- ing of Article 9 is of more recent date. While acknowledging the apparent ambi- guity, the Commission interprets those provisions as follows. Article 12 lays down as a minimum requirement that an under- taking must be inspected at least once every Third plea in law 12 months. On top of that, Article 9 requires an on-the-spot inspection to be carried out for each application for aid. 22. This plea in law relates to an alleged The Commission points out that an on-the- deficiency in the procedure applied in Spain spot check for each application was the for the administration and payment of central element of Regulation No 643/93, consumption aid. The Spanish Government which is aimed at reducing fraud. Spain points in this connection to an inconsis- was aware of that by virtue of its presence tency between Articles 9 and 12 of Regula- on the management committee which tion No 2677/85. Article 9 requires the approved Regulation No 643/93. Member State to pay the aid within 150 days of the submission of an aid application following on-the-spot checks. Under Arti- cle 12 of the regulation, a Member State must inspect each undertaking at least once a year as part of a random check. In view of that inconsistency, the Spanish supervisory 24. The Commission also points out that body applies the following method: after the Conciliation Body has stated that it

27. In this plea in law, which relates to the imposition of penalties, the Spanish Gov- 25. The Spanish Government points out ernment refers to Article 2(4) of Regulation that the control procedures in Spain had No 2988/95, which states that the proce- been improved, as the Commission also dures for the imposition of penalties are to acknowledged. The Commission should be governed by the laws of the Member therefore never have increased the level of States. The procedure for the imposition of the flat-rate correction to 10%, which was penalties is subject to procedural guaran- higher than that applied in previous years. tees for the benefit of persons subject to The question of re-offending did not arise law. However, that does not mean that no here. penalties are imposed. With regard to the severity of the penalties themselves, the Spanish Government claims that they are consistent with the nature and seriousness of the irregularities, the criteria laid down 26. The Commission justifies the applica- in Article 2(3) of Regulation No 2988/95. tion of the 10% rate in three ways. First, There was no intentional act or serious the percentage was based, not on deficien- negligence on the part of the undertakings cies in the checks alone, but on deficiencies concerned. in the Spanish system as a whole, which, in addition to the checks, consisted of admin- istration and penalties. Second, in a sector such as this, which was very susceptible to fraud, a rapid and significant improvement 28. In its defence, the Commission points in procedures could legitimately be out that Article 2 of that regulation also expected. The Commission was entitled to provides that penalties are to be 'effective, proportionate and dissuasive so that they provide adequate protection for the Com- 14 — The reference is to point 10 of the Body's report. 15 — The Commission refers to the judgment in C a s e C-238/96 munities' financial interests' (Article 2(1)) Ireland v Commission [1998] ECR I-5801, paragraph 1 0 3 . and that Article 2(4) applies '[s]ubject to

the Community law applicable'. The Com- would also be taking the expenditure for mission refers in this connection to the 1993 into account, and therefore the Span- judgment in Deutsche Milchkontor, 16 in ish Government always assumed that the which the Court held that the procedures Commission had made a calculation error. laid down by national law must not have the effect of making it impossible in practice to implement Community rules. Moreover, the Commission infers from Article 1(2) of Regulation No 2988/95 that the irregularity is determined by the result, and not by intention or serious negligence. 30. The Commission points out that the Even where there is no intention or serious Community system of ewe/goat premiums negligence, penalties must be imposed. is extremely complex, since the benefici- aries of the premiums receive amounts for one marketing year from different financial years. The payments for the 1993 market- ing year span the 1993, 1994 and 1995 financial years. The Commission's inspec- tion therefore related to the 1993, 1994 and 1995 financial years. The Commission then draws attention to the fact that the Sixth plea in law, concerning the ewe/goat clearance of the expenditure for 1993 was premiums not yet definitive. It cites the penultimate recital in the preamble to Decision 97/333/ EC, 17 by which the accounts presented by the Member States in respect of the expen- diture for 1993 were cleared. 29. The Kingdom of Spain is of the opinion that the amounts taken into account in calculating the correction in respect of 1994 do not correspond to the expenditure for that year. On the contrary, they include expenditure for 1993, which the Commis- sion had already cleared. 'Whereas this Decision is without prejudice to any financial consequences drawn by the Commission, during a subsequent accounts clearance procedure, from investigations under way at the time of this Decision, from irregularities referred to in Article 8 The reservation to which the clearance of Regulation (EEC) No 729/70 or from decision was made subject related purely judgments of the Court of Justice of the to cases where a Member State had referred European Communities in cases now pend- the matter to the Conciliation Body, which ing and relating to matters covered by this the Spanish authorities had not done in this Decision'. case. The Commission had at no time informed the Kingdom of Spain that it 17 — Commission Decision of 23 April 1997 on the clearance of the accounts presented by the Member States in respect of the expenditure for 1993 on the Guarantee Section of the European Agricultural Guidance and Guarantee Fund 16 —Joined Cases 205/82 to 215/82 [1983] ECR 2633. (EAGGF) (OJ 1997 L 139, p. 30).

32. When applying financial corrections, the Commission pursues a policy which was first adopted in a working document of 1 June 1993, known as the Belle Report. 22 The Commission's policy and the Court's That document has already been referred to case-law on that policy on a number of occasions before the Court. In his Opinion in Greece v Commission, 23 Advocate General Fennelly examines the background to and nature of that docu- ment. In 1992 the Commission established an internal inter-service group which was 31. The Commission's policy with regard charged with developing a method for to the application of financial corrections imposing penalties on Member States and the Court's case-law on that policy are which incorrectly apply Community law. discussed in detail in my Opinion in Spain v The rules drafted by the inter-service group Commission. 19In view of its relevance to were approved by the Commission and by this case, I reproduce below my observa- the representatives of the Member States in tions in that case. 20 There is one point the EAGGF Committee. They do not which merits special attention, namely, the purport to constitute a binding measure. The choice of the level of reduction to be applied should flow from an assessment of 18 — Page 228 or that report; the Commission refers to it in its defence. the risks affecting Community expenditure 19 — Cited in footnote 3. which arise from defects in the supervision 20 — In addition, the Commission refers to a number of judgments which are not cited in this context in my exercised by the Member States. The inter- Opinion in Case C-375/99 Spam v Commission. They are viler aha those in Case 129/84 Italy v Commission [1986] ECR 309, Case C-50/94 Greece v Commission [1996] ECR I-3331 and Ireland v Commission (cited in footnote 15). Those judgments shed no new light on this case, 21 — Cited in footnote 3. although the last-mentioned judgment is certainly relevant 22 — Document No VI/216/93. i n connection with the role of the Conciliation Body. 23 — Case C-50/94 [1996], cited in footnote 20.

service group adopted three levels of flat- controls operated as the quantity of con- rate reduction in reimbursement: 2%, 5% trols effected....' and 10%. The Belle Report has since been replaced by Commission working docu- ment No VI/5330/97 of 23 December 1997, which gives new guidelines for calculating the financial repercussions. That new document does not make any The report proposes three categories of flat- significant changes to the Belle Report rate correction: criteria, but adds a new category: a reduc- tion level of 25% in serious cases. The Commission decision at issue here is based on the guidelines laid down in that working document. 'A. 2% of expenditure —· where the defi- ciency is limited to parts of the control system of lesser importance, or to the operation of controls which are not essential to the assurance of the regu- larity of the expenditure, such that it can reasonably be concluded that the 33. The Commission's Belle Report and the risk of loss to the EAGGF was minor. abovementioned working document thus contain guidelines to be followed when corrections have to be applied vis-à-vis a Member State. For difficult cases they envisage a flat-rate method: 24 B. 5% of expenditure — where the defi- ciency relates to important elements of the control system or to the operation of controls which play an important part in the assurance of the regularity of the expenditure, such that it can reasonably be concluded that the risk 'As the systems audit approach has become of loss to the EAGGF was significant. more widely applied, the EAGGF has had recourse increasingly to an assessment of the risk which a systems deficiency pre- sents. By the very nature of ex-post audit- ing, it can rarely be established at the time of audit whether a claim was valid when C. 10% of expenditure — where the defi- paid... The loss to the Community funds ciency relates to the whole of or must therefore be determined by an evalua- fundamental elements of the control tion of the risk to which they were exposed system or to the operation of controls by the control deficiency, which may con- essential to assuring the regularity of cern as much the nature, or quality, of the the expenditure, such that it can rea- sonably be concluded that there was a high risk of widespread loss to the 24 — The quotation which follows is from the Belle Report. EAGGF.'

37. The Court's approach is then as fol- lows. As is clear from, inter alia, the 35. The Belle Report reflects what was judgment in United Kingdom v Commis- already a long-standing Commission prac- sion, 28 the Commission must establish that tice of applying flat-rate corrections to the a Member State has infringed the rules of reimbursement of expenditure effected by the common agricultural policy by, for Member States for the purpose of imple- example, as in this case, failing to supervise menting the common agricultural policy. In expenditure adequately. Once the Commis- the Commission's opinion, the criteria laid sion has established that, it must act. down in the Belle Report form 'a common However, it has a wide discretion in the basis of agreement in that, if it proves choice of penalties to be applied. It is for impossible to determine the amount of the the Member State concerned to prove that adjustments precisely, a middle way is the facts established by the Commission are chosen by withholding a flat-rate amount, incorrect and that the latter has attached thus making it possible both to respect incorrect consequences to them by, for Community law and the sound manage- example, applying an excessively high ment of Community resources and to flat-rate correction. The judgment in the comply with the understandable wish of the Member States to avoid excessive and disproportionate adjustments'.25 26 — Case C-243/97 [2000| ECR I-5813. 27 — Case C-242/96 [1998] ECR I-5863. 28 — C a s e 347/85 [1988] ECR 1749, paragraph 16. This judgment examines the question of the burden or proof 25 — See Greece v Commission, cited in footnote 20, paragraph at length. See also the indûment in Italy v COMMISSION, 24. cited in footnote 27, paragraph 58.

39. As I have already stated, it can be inferred from the Court's settled case-law that the Commission has a wide discretion in the application of penalties where a 28 If, then, in its function of clearing the Member State has failed to monitor effec- accounts the Commission, instead of tively its expenditure under the common refusing the entire expenditure, endea- agricultural policy. The Commission may vours to draw up rules to differentiate refuse to refund the expenditure concerned according to the degree of risk posed to in its entirety, or it may apply a percentage the EAGGF by different levels of reduction, as has occurred in the present defective supervision, the Member 30 — Case C-48/91 [1993] ECR I-5611. 31 — See, among others, Case C-242/97 Belgium v Commission 29 — Cited in footnote 20, paragraph 26 et seq. [2000] ECR I-3421, paragraph 104.

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SPAIN v COMMISSION

case. It is self-evident that the reduction Report criteria have arbitrary or unrea­ percentages mentioned in the Belle Report, sonable effects in its particular case; namely 2%, 5% and 10%, constitute a considerably more lenient penalty than a complete refusal to refund expenditure.

(d) the method of applying those criteria.

40. With regard to the burden of proof, the following may be concluded. As is clear from, inter alia, the judgment in Greece v Commission, 32 the burden of proof rests in a number of respects with the Member State which challenges the correctness of As a supplement to my Opinion in Case the penalty imposed on it: C-375/99 Spain v Commission: the Con­ ciliation Body

conclusive for the purposes of the Com- the actual expenditure. The Commission mission's assessment. Nevertheless, it must can do no more than exercise (random) of course be examined whether general supervision, for which purpose it is largely conclusions are to be drawn from the dependent on the data provided by the reasoning of the Conciliation Body. My Member States. Such a system, which is reading of that judgment is that the more vulnerable, calls for wide discretionary specific and directive the Conciliation power for the Commission to impose Body's findings are, the more the Commis- penalties when it finds irregularities. sion is obliged to take account of them. Because the Commission cannot have all the data in its possession, flat-rate reduc- tions are indispensable. On the other hand, arbitrariness in the application of the system by the Commission's departments must of course be avoided. The Commis- sion must act with due care, both when establishing and characterising facts which Assessment of the dispute may give occasion for the application of corrections and when imposing those cor- rections themselves.

47. The foregoing does not apply to the reduction in respect of ewe/goat premiums (sixth plea in law). In that connection, the The dispute itself Kingdom of Spain disputes the Commis- sion's right to take the expenditure for 1993 into account when calculating the reduction.

45. Another prominent feature of the pre- sent dispute is that, in one important respect, the Spanish Government does not deny that it infringed the rules of the common agricultural policy — by failing 48. Finally, I shall forgo separate discussion adequately to supervise the spending on of the breaches of various principles of law consumption aid for olive oil. That failure alleged by the Spanish Government and to alone entitled the Commission to adopt a which I have made reference in point 14 of measure involving the application of a this Opinion. In so far as the Spanish financial correction to the expenditure Government has put forward grounds in effected by the Spanish Government. The support of those allegations, those grounds only point at issue is therefore the size of are directly connected with the pleas in law the reduction applied by the Commission. which are examined in turn below.

46. Since it is established that the Spanish Government failed to fulfil its obligations with regard to the control of expenditure First plea in law under the common agricultural policy, it follows from the above observations that the Commission has a wide discretion in applying the penalty and that the onus is on the Member State concerned to refute the 49. Both the Spanish Government and the Commission's findings and conclusions. Commission have examined the nature of

52. The balanced — and, I repeat, non- binding — conclusions of the Conciliation Body give the Commission latitude to apply a reduction percentage. At the very most, there may be room for doubt as regards the level of the percentage. That doubt is bound up with the assessment of the improvement in the control system in Spain, which is the subject-matter of the fourth plea in law. In my opinion, the question is, in essence, not so much whe- 50. In my opinion, in view of the nature of ther the Commission took account of the the procedure described above, it must first Conciliation Body's opinion, but whether, be ascertained what conclusions can be despite the improvement in the control drawn from the Conciliation Body's find- system, it was entitled to decide on an increase in the reduction percentage. That question is examined under the fourth plea 35 — See also my Opinion in Case C-375/99 Spain v Commis- sion, in particular point 34, and point 44 of this Opinion. in law.

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SPAIN v COMMISSION

53. My conclusion is that the first plea in Commission carried out additional verifi- law is unfounded. cations at the premises of six large Spanish undertakings. I therefore see no reason to suppose that the Commission's verifica- tions were insufficiently representative.

Second plea in laiv 56. Then there is the question of the importance to be attached to the fact that the Commission did not give the Spanish 54. With regard to the representativeness Government proper notice of the additional of the Commission's verifications, I would verifications. I do not see on what ground draw attention, first, to the need for a that omission could lead to the annulment random approach. As the Court has held, of the Commission's decision. In my opi- inter alia in its judgment in Netherlands v nion, the Spanish Government was not in Commission, 36 the 'system, based on trust, any way harmed by it. The Commission's does not involve any systematic supervision claim that this was merely a matter of by the Commission, which moreover would confirming earlier findings appears to me to in practice be impossible for it to carry be credible. out'.

63. The fourth plea in law concerns an increase in the reduction percentage as compared with the percentage applied in previous years. 60. In my view, the interpretation which the Commission places on the relationship between Article 9(3) and Article 12 of that regulation is plausible. The requirements laid down in both articles with regard to on-the-spot checks apply cumulatively. 64. First, I would draw attention to the judgment in Germany v Commission,38 referred to in point 41 of this Opinion, in which the Court states that 'the fact that the Commission did not take the appro- priate action, on the financial level, on a 61. I note in this regard that the wording of finding of deficiencies pertaining to one Article 9(3) is not entirely unambiguous. financial year cannot deprive it of the right Nevertheless, the Spanish Government to do so in relation to subsequent financial could easily have satisfied itself as to the years, particularly where those deficiencies content and meaning of Article 9(3) in so have persisted. Moreover, deficiencies far as it was not already informed thereof ascertained subsequently may also be taken through its presence on the management into account in determining the level of the committee which adopted that provision. flat-rate correction.' 39 In my opinion, that Moreover, if it was in doubt as to the also applies in this case. The fact that the correct interpretation, it could have ascer- Commission attaches a specific penalty to a tained it from the Commission. In any specific deficiency in respect of one finan- event, in my view, a Member State may not cial year does not deprive it of the right to unilaterally interpret an implementing pro- impose a higher penalty in respect of a vision such as this one, in the adoption of which it has been involved, in a manner which differs from the most obvious inter- 38 — Cited in footnote 34. pretation. 39 — Paragraph 14 of the judgment.

Fifth plea in law

67. This plea in law, which relates to the imposition of penalties for established irre- 69. Since in essence the Spanish Govern- gularities, calls for the following observa- ment relies only on national procedural tions. The system in question is one in guarantees for persons subject to law, on which the Member States effect expendi- that ground alone this plea in law cannot ture which is charged to the budget of the succeed. I therefore conclude that the fifth European Communities, in this case the plea in law also is unfounded. EAGGF Guarantee Section. The imposition of penalties for established irregularities must in those circumstances provide effec- 40 —It also refers to the judgment in Deutsche Milchkontor, tive protection for the financial interests of c i t e din footnote 16.

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OPINION OF MR GEELHOED — CASE C-374/99

72. Nevertheless, I am of the opinion that the Commission did not exceed its powers

73. The sixth plea in law also is therefore 41 — OJ 1997 L 245, p. 20. unfounded.

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SPAIN v COMMISSION

Conclusion

74. In the light of the above facts and circumstances, I propose that the Court dismiss the action and, pursuant to Article 69(2) of the Rules of Procedure, order the Kingdom of Spain to pay the costs.