C-346/00

UNITĽD K I N G D O M v COMMISSION

OPINION OF ADVOCATE GENERAL TIZZANO delivered on 23 January 2003 1

I — Introduction II — The relevant provisions

2. Article l(2)(b) of Regulation (EEC) No 729/70 of the Council of 21 April 1970 on the financing of the common agricul­ tural policy ('Regulation No 729/70'), 3as amended by Council Regulation (EC) No 1287/95 of 22 May 1995 4 provides that the Guarantee Section of the European Agricultural Guidance and Guarantee Fund is to finance, in particular, intervention 1. By application of 20 September 2000 the intended to stabilise the agricultural mar­ United Kingdom of Great Britain and kets. Northern Ireland brought an action under Article 230 EC for annulment in part of Commission Decision 2000/449/EC 2 of 5 July 2000 ('the contested decision') in so far as it excludes from Community financing under the Guarantee Section of the European Agricultural Guidance and 3. Article 3(1) ofthat regulation provides: Guarantee Fund ('EAGGF') the sum of EUR 5 039 175.46 (equivalent to GBP 2 919 698.26), equal to 2% of the expenditure declared by the United King­ dom in the arable crops sector for the harvesting years 1995 and 1996 (financial years 1996 and 1997) in respect of the Wessex region, on account of the inad­ 'Intervention intended to stabilise the agri­ equate system of supervision of the checks cultural markets, undertaken according to carried out in that region. Community rules within the framework of the common organisation of agricultural m a r k e t s , shall be financed under Article 1(2)(b).' 1 — Original language: Italian. 2 — Commission Decision 2000/449/EC of 5 July 2000 exclud­ ing from Community financing certain expenditure incurred by the Member States under the Guarantee Section of the European Guidance and Guarantee Fund (EAGGF) (notified 3 — OJ, English Special Edition 1970 (II), p. 218. under No C(2000) 1847) (OJ 2000 L 180, p. 49). 4 — O J 1995 L 125, p. 1.

5. Article 8 of the regulation provides:

Before a decision to refuse financing is taken, the results of the Commission's checks and the replies of the Member State concerned shall be notified in writing, after which the two parties shall endeavour to reach agreement on '(1) The Member States in accordance with the action to be taken. national provisions laid down by law, regulation or administrative action shall take the measures necessary to:

If n o a g r e e m e n t is r e a c h e d , the Member State may ask for a procedure to be initiated with a view to mediating — satisfy themselves that transactions between the respective positions within financed by the Fund are actually a period of four months, the results of carried out and are executed correctly;

I - 9296

UNITED KINGDOM v COMMISSION

— prevent and deal with irregularities; application of Council Regulation (EEC) No 729/70 regarding the procedure for the clearance of the accounts of the EAGGF Guarantee Section ('Regulation No 1663/95'), 5in accordance with which:

6. As regards Article 5(2)(c) of Regulation (2) T h e d e c i s i o n s r e f e r r e d t o in No 729/70, as amended, attention must be Article 5(2)(c) of Regulation (EEC) drawn to Article 8(1) and (2) of Commis- sion Regulation (EC) No 1663/95 of 7 July 1995 laying down detailed rules for the 5 - OJ 1995 L 158, p . 6 .

I - 9297

OPINION OF MR TIZZANO — CASE C-346/00

No 729/70 shall be taken after an examin- (b) to try to reconcile the divergent pos- ation of any report drawn up by the itions of the Commission and the Conciliation body according to the provi- Member State concerned, and sions laid down in [Decision] 94/442/EC.'

(c) at the end of its investigations, to draw 7. Article 1(1) of Commission Decision up a report on the outcome of its 94/442/EC of 1 July 1994 setting up a efforts at reconciliation, making any conciliation procedure in the context of the remarks it deems useful should all or clearance of the accounts of the European some of the points of dispute remain Agricultural Guidance and Guarantee Fund unresolved.' (EAGGF), Guarantee Section,6 provides that:

8. By virtue of Article 1(2)(a) of Decision 94/442, 'For the purposes of the clearance of EAGGF Guarantee Section accounts, a Conciliation Body, hereinafter referred to as the "Body", is hereby set up in the Commission. Its tasks shall be:

11. On the basis of those guidelines, the Commission applies the various levels of flat-rate corrections as follows: 10. With particular regard to financial corrections connected to deficiencies in the controls carried out by the Member States' authorities, the guidelines distin- guish two categories of control, key con- trols and ancillary controls:

'When one or more key controls are not applied or applied so poorly or so infre- quently that they are completely ineffective in determining the eligibility of the claim or preventing irregularity, then a correction of '— Key controls are those physical and 10% is justified, as it can reasonably be administrative checks required to verify concluded that there was a high risk of substantive elements, in particular the widespread loss to the Fund. existence of the subject of the claim, the quantity, and the qualitative con- ditions including the respect of time- limits, harvesting requirements, reten- tion periods etc. They are performed on the spot, and by cross-checks to inde- pendent data such as land registers.

When all key controls are applied, but not in the number, frequency or depth required by the regulations, then a correction of 5% is justified, as it can reasonably be con- cluded they do not provide a sufficient level — Ancillary controls are those adminis- of assurance of the regularity of claims, and trative operations required to correctly that the risk to the Fund was significant.

I - 9299

OPINION OF MR TIZZANO — CASE C-346/00

15. Consequently, the MAFF ordered the transfer to other duties of the inspector who had carried out the on-the-spot checks in those three cases. Furthermore, it under- 13. Between 30 June and 4 July 1997 the took to repeat the other on-the-spot checks Commission carried out an audit relating to performed by that inspector in 1997 and aid for arable areas in England and Wales. some of the checks carried out by other That audit concerned, inter alia, the Bristol inspectors in the same year, in order to Regional Service Centre ('the Bristol establish the actual extent of the problem. Centre') of the Ministry of Agriculture, As a result of all that, anomalies were Fisheries and Food ('MAFF'), which has revealed in four of the five other inspec- responsibility for the Wessex region. On tions carried out by that inspector in 1997; that occasion, the Commission officials since those anomalies were corrected in selected for more detailed auditing three time the EAGGF suffered no financial loss applications for aid processed at the Bristol for the year 1997. By contrast, re-perform- Centre and which had been the subject of ance of the sample of checks made by the on-the-spot checks all carried out by the o t h e r i n s p e c t o r s did n o t reveal any same inspector. anomalies.

I - 9300

UNITED KINGDOM v COMMISSION

17. T h e United K i n g d o m a u t h o r i t i e s replied by letter of 17 March 1998, stating that, following re-performance of all inspections carried out by the inspector concerned, the value of the irregularities 20. Following the meeting of 16 September detected for 1997 amounted to 9.45% of 1998, by fax of 4 November 1998 the the total of claims for aid checked by that Commission's Agriculture Directorate- inspector and that the potential amount of General informed the United Kingdom that sums paid but not due could be calculated it intended to propose a deduction of by applying that percentage to the total 9.45% of the total amount of the appli- value of the claims for aid checked by that cations for aid for 1995 and 1996 checked inspector in 1995 and 1996. In that letter by the inspector in question, thus applying the United Kingdom authorities informed to those two years, as suggested in the the Commission of their intention to re- United Kingdom's letter of 17 March 1998,

I - 9301

OPINION OF MR TIZZANO — CASE C-346/00

I - 9302

UNITED KINGDOM v COMMISSION

payments and therefore sought to make IV — Legal analysis declarations of areas reflecting as closely as possible the actual areas, running the risk of incurring the consequences of any inac- curacies. 26. In support of its action challenging the contested decision, the United Kingdom puts forward four pleas in law:

24. In its final report of 8 March 2000, the Conciliation Body invited the services of the Commission to re-examine their assess- ment of the system of supervision of on- — first, that Government maintains that the-spot checks applied in the region the contested decision is unlawful covered by the Bristol Centre. In its because the Commission erred in find- opinion, the three on-the-spot checks ing that the supervision of checks audited by the Commission were not rep- carried out in the Wessex Region was resentative of the quality of checks in the inadequate, concluding that expendi- region concerned. Moreover, the fact that, ture was not effected in compliance as the United Kingdom maintains, there with Community rules within the had been no time to carry out supervision, meaning of the first paragraph of since the Commission's actions took place Article 5(2)(c) of R e g u l a t i o n at the beginning of the period in which the No 729/70; on-the-spot checks were made, makes it impossible to draw any general conclusion as to the inadequacy of actual supervision in the region.

Arguments of the parties

29. In support of the foregoing, the United 27. The United Kingdom maintains that Kingdom describes the two elements of the the Commission erred in finding that the system of supervision current at the time of supervision of on-the-spot checks carried the Commission's audit, namely, paper out in the Wessex Region covered by the checks and joint inspections. The first Bristol Centre was inadequate. In the consists of examination by the Field Team applicant's submission, neither of the two Manager, who is responsible for the quality aspects examined by the Commission for of the on-the-spot checks carried out by the that purpose, that is to say, the irregular- inspectors from the Bristol Centre, of a ities in the on-the-spot checks made by an sample of inspection reports drawn up by inspector discovered during the 1997 audit the inspectors themselves. Joint inspections, and the increase in the rate of anomalies in by contrast, consist of the unannounced the applications for aid revealed in 1997 in arrival of the Field Team Manager on the relation to the rate in 1996 for the region site of the on-the-spot check being con- concerned, justifies that conclusion. ducted by an inspector, or of the arrival (whether or not known in advance) of a senior inspector at the inspection being c o n d u c t e d by a n o t h e r inspector. T h e United Kingdom maintains that this system of supervision, applied for the purposes of 28. With particular regard to the defi- the Commission's audit, and therefore also c i e n c i e s of t h e o n - t h e - s p o t c h e c k s in the two preceding years, was compre- uncovered by the Commission's officials, hensive and effective and thus satisfied the the United Kingdom, repeating the argu- requirements laid down by the Community ments it put forward before the Concili- legislation. As an illustration of the oper- ation Body, claims that the present system ation of that system, the United Kingdom of supervision w o u l d certainly have claims that out of 239 inspection reports in

33. In response to all that, the Commission objects that, although serious irregularities were disclosed in 1997 in the checks carried out by just one inspector, there could be no certainty that such irregularities had not been committed in the previous years also, either by that inspector or by others 31. Second, according to the United King- employed by the Bristol Centre. It in fact- dom, Community law requires the intro- emerged from the checks made by the duction, not of detailed and rigid rules, but United Kingdom authorities after the Com- of a coherent and effective system of mission's audit that that inspector had supervising the staff entrusted with on-the- made errors during the 1996 checks, spot checks, such as that in operation at the although they were not as serious as those Bristol Centre at the time of the Commis- discovered in 1997. However, the fact that sion's audit. checks made in 1997 concerning the two

I - 9305

OPINION OF MR TIZZANO — CASE C-346/00

preceding years did not reveal any serious cannot be considered to have established anomalies is not conclusive, since the that the system of supervision applied United Kingdom itself acknowledges that before the Commission's audit mission any errors committed in the past might not was complete and effective. be readily detectable a posteriori.

Assessment

I - 9306

UNITED KINGDOM v COMMISSION

mission's findings, it must support its own in 1997. None the less, it is significant that allegations by evidence of a reliable and nearly all the on-the-spot checks carried out operational supervisory system. 11 by that inspector in 1997 until her transfer to another post contained anomalies, and that some of them were so glaring that, as the United Kingdom itself states, a quick glance at the documents prepared by that inspector would have uncovered them immediately. Given those circumstances, it 37. I shall now consider the present case in seems to me reasonable to consider, subject the light of the judicial guidance cited to proof to the contrary, that the system of above. To that end I think it necessary to supervision current at the Bristol Centre consider whether the Commission has was not capable of detecting such irregu- gathered evidence such as to cast serious larities and was therefore ineffective. and reasonable doubt on the adequacy of the system of supervision and checking applied in the region covered by the Bristol Centre. Secondly, it will be necessary to consider whether the United Kingdom has been able to produce evidence capable of dispelling or at least weakening such doubt. 40. Furthermore, the increase in the pro- portion of irregular applications for aid discovered during on-the-spot checks by inspectors from the Bristol Centre follow- ing the introduction of an improved system 38. With regard to the first point, the of supervision in 1997 would appear to Commission did not, to my mind, commit confirm the effectiveness of the new system an error of assessment when it considered of supervision, compared to the deficiencies that, following the serious irregularities of that in place at the time of the Commis- detected during the audit at the Bristol sion's audit. Centre, the system of supervision at that Centre was incapable of uncovering and correcting any deficiencies and irregular- ities in the on-the-spot checks carried out by its inspectors.

42. By contrast, the United Kingdom's B — The amount of the financial correction claims concerning the effectiveness of the applied system of supervision as it existed in the Bristol Centre region before the Commis- sion's audit seem to me not to be supported by actual specific evidence liable to chal- lenge the validity of the 'reasonable doubts' 45. The second and third grounds of the expressed by the Commission. application are designed to challenge the amount of the financial correction applied by the Commission in the contested decision. In particular, by those pleas the United Kingdom accuses the Commission of applying a flat-rate deduction instead of a deduction calculable on the basis of 4 3 . The United Kingdom contents itself criteria which are more specific and more with stating that out of 239 inspection consistent with the anomalies detected, and reports prepared in 1996 100 were re- in any event of acting in breach of the examined by the Field Team Manager and principle of proportionality. Since those that, in that same year, about 46 on-the- two grounds of application are closely spot inspections were made in the presence linked, they may properly be dealt with of the Field Team Manager, while 88 together. others were carried out in the presence of a more senior inspector. It is not, however, clear which or h o w many inspection reports drawn up by the inspector found to have committed irregularities were re- examined by the Field Team Manager in 1995 and 1996, or which or how many of Arguments of the parties the inspections she carried out in those years took place in the presence of the Field Team Manager or a more senior inspector. The applicant Government does not, more- over, explain how the system of supervision could possibly have failed to uncover any 46. First of all, the United Kingdom claims anomaly in the checks made by that that, as is acknowledged by the Commis- inspector before 1997, when merely re- sion itself, the allegedly inadequate super- performing those checks, even with the vision caused no financial losses for the limitations imposed by a posteriori verifi- EAGGF in 1997, thanks to the corrective cation, was sufficient to reveal several measures taken by the national authorities. errors she had made in 1996. With regard to the two previous years, however, the United Kingdom maintains that the possible financial consequences which the Commission inferred from the irregularities found in 1997 and relating to one inspector may quite possibly concern 44. For those reasons I consider, therefore, only the work of that one inspector, since that the first ground of application is there is no evidence that the 12 other u n f o u n d e d a n d m u s t a c c o r d i n g l y be inspectors employed in the Bristol Centre rejected. region committed any irregularities. How-

49. The Commission, on the other hand, defends its decision, referring to the argu- ments it put forward concerning the inad- equacy of the system of supervision. Pre- cisely because it is impossible a posteriori to assess accurately the effect on expendi- 4 7 . Nevertheless, the United Kingdom ture of the deficiencies revealed in the acknowledges that the results obtained on quality of the on-the-spot checks it is re-performing the checks are of limited necessary to apply a flat-rate deduction. value, since the harvests in respect of which the aid was requested in 1995 and 1996 could no longer be seen. If, therefore, for that reason a deduction should be con- sidered justified for those two years, it ought to be calculated solely on the sum equivalent to the overall amount of the aid applications checked by the inspector in 50. As regards the level of that correction, question. It was only for that inspector, in the Commission begins by stating that the point of fact, that the subsequent checks serious deficiencies identified in the carry- performed by the national authorities ing out of the key controls would even have revealed any danger of anomalies. To the justified a rare of 5 % . Nevertheless, it sum so calculated must be applied a considered it appropriate to apply a rate of correction of 9.45%, equal to the propor- 2 % , taking into account the fact that the tion of anomalies detected in the on-the- chief failure laid to the United Kingdom's spot checks carried out by that inspector in charge, namely, the inadequacy of the 1997. Furthermore, adds the applicant system of supervision, related to an ancil- Government, such a deduction corresponds lary control and the national authorities to that originally proposed by the Com- took swift and effective remedial measures mission's Agriculture Directorate-General as soon as the shortcomings in question in November 1998. were discovered.

51. With regard, next, to the alleged breach (paragraphs 39 to 44 above), that the of the principle of proportionality, the deficiencies disclosed represent evidence of Commission maintains that the financial the general inadequacy of the system of correction which it applied reflects the supervision and control, it cannot but be effect on EAGGF expenditure of the defi- concluded that the Commission was correct ciencies detected. Observance of the prin- in deciding on a flat-rate deduction. ciple of proportionality is, moreover, ensured by the application of a rate of 2% in the contested flat-rate correction, which is the lowest of the rates provided for by the guidelines drawn up in that con- nection by the Commission (see paragraphs 10 to 11 above). 54. The answer to the question in point (b) must also be negative. As the Commission has observed, the flat-rate deduction of 2% is the minimum provided for by the guide- lines it drafted; a lesser deduction is there- fore possible only where the Member State Assessment concerned succeeds in establishing that the maximum probable loss to the Fund is less than that minimum rate. It seems to me that the United Kingdom has not adduced persuasive evidence in that regard. Indeed, not only has it recognised that re-perform- 52. In order to assess the two grounds of ance of the on-the-spot checks carried out application, it must be established: (a) in 1995 and 1996 by the inspector respon- whether the Commission committed an sible for the irregularities uncovered did not error in finding that the financial con- make it possible to find all the irregularities sequences of the deficiencies discovered that she might have committed, it even could not be determined exactly, and there- failed to take steps to re-perform the on- fore in applying a flat-rate instead of a the-spot checks carried out by the other specific deduction; (b) whether, by fixing inspectors in 1995 and 1996, satisfying that deduction at the rate of 2%, it over- itself with doing so for only a dozen or so stepped the bounds of its discretion and of those carried out in 1997 and claiming, violated the principle of proportionality. without however adducing any evidence, that those were checks performed before the Commission's audit.

56. By its fourth ground of application the United Kingdom complains that the Com- 58. The Commission, for its part, contends mission failed to observe the procedural that it observed to the full the formalities conditions laid down in the second para- laid down by Article 8(1) of Regulation graph of Article 8(1) of Regulation No 1663/95. In particular, it duly com- No 1663/95, in so far as it refers to a municated to the United Kingdom the 'bilateral meeting' between the institution irregularities identified during its audit by and the Member State concerned (see letter of 12 December 1997, in which it paragraph 6 above). According to the also mentioned the possibility of a financial applicant Government, in this case the deduction for the purposes of Article 5(2)(c) Commission held that discussion without of Regulation No 729/70. The United 'endeavouring' to come to an agreement on Kingdom therefore was well aware that a the proposed financial deduction which it deduction of 2%, or of a still greater subsequently communicated formally to amount, could be applied. the Member State.

that Directorate-General intended to pro- imposed on itself by implementing regu- pose to the Commission, an opinion that lations', 1 2 on the one hand, 'the Member was not and could not be regarded as the States cannot, in their relations with the institution's final decision. Commission, adopt purely formalist pos- itions, when it is clear from the circum- stances that their rights were fully pro- tected', 1 3 on the other. In any case, still in accordance with the settled case-law of the Court, 'a procedural irregularity will entail the annulment of a decision in whole or in part only if it is shown that in the absence of such irregularity the contested decision 60. Next, the fact that the Commission might have been substantively different'. 14 came to a different decision, finding that the irregularities uncovered justified a more stringent financial deduction does not mean that the procedure was not properly con- ducted or make nonsense of the prior bilateral discussion. On the contrary, that discussion allowed an in-depth exchange of ideas between the parties, which served to clarify the issues and facts. Moreover, adds the Commission, it is obvious that bilateral discussions under Article 8 do not con- stitute a formal mechanism for the resol- ution of disputes, which remains the pre- rogative of the Court of Justice.

62. It follows from those principles that, in order to assess the substance of the fourth ground, it is necessary to examine not only whether the Commission acted in breach of the procedural formalities laid down by Article 8(1) of Regulation N o 1663/95 but also whether, if such a breach should be Assessment established, it had a significant effect on the content of the contested decision.

63. As regards the first point, I consider 65. Secondly, unless that provision is to be that the United Kingdom is correct in its rendered pointless, I consider that, in order assertion that the Commission did not, in to comply with the duty to endeavour to the circumstances of the case, observe the come to an agreement as to 'the measures formalities laid down by Article 8(1) of to be taken', the Commission's services Regulation No 1663/95. The second para- cannot merely convene the bilateral dis- graph of that article provides that at the cussion and listen to the arguments of the end of the period allowed for the reply to Member State, without allowing the latter the communication referred to in the first to put forward its comments on the specific paragraph, 'the Commission shall initiate a measures which those services intend to bilateral discussion, and both parties shall propose. endeavour to come to an agreement as to the measures to be taken. The Commission shall then formally communicate its con- clusions to the Member State, referring to Commission Decision 94/442/EC'. 15

67. In the present case, it is apparent from 69. Such breach seems to me all the more the documents before the Court that the significant because not even by the letter of Commission's services, by the fax of 12 December 1997, sent pursuant to the 4 November 1998, communicated to the first paragraph of Article 8(1) of Regu- United Kingdom the amount of the finan- lation No 1663/95, were the United King- cial correction that they intended to pro- dom authorities given the opportunity of pose. At the same time, they invited that expressing their views on the amount of the Government to submit its comments within financial correction which the Commis- six weeks, thus giving it the opportunity of sion's services intended to apply. expressing its point of view. In that respect, the absence of any reply from the United Kingdom must be regarded as tacit accept- ance of the proposal made by the Commis- sion's services, given that the amount of the financial correction proposed in the fax was exactly the same as that proposed by the United Kingdom in a letter sent to the Commission on 17 March 1998. That does not mean, of course, that the Commission's services were bound by that proposal and 70. As I said above, however, it still could not subsequently change their point remains to consider whether all that of view, but they would at the very least amounts to a breach of essential procedural have had to do so in accordance with the requirements such as to warrant annulment same procedure as that followed until that of that part of the contested decision which moment, that is to say, by means of a fresh is challenged by the applicant Government. informal communication to the United Kingdom giving the latter the chance to reply and possibly to come to a new agreement, before the formal communi- cation of the conclusions.

72. I must however remark that the appli- munication of 2 August 1999 of the con- cant Government did in actual fact have the clusions of the Commission's services. As chance to express its own point of view to the documents in the case make clear, the the whole Commission by means of the Conciliation Body's report summarised the conciliation procedure. As everybody positions taken by the parties, including the knows, that procedure, which may be United Kingdom's observations relating to initiated by the Member State only after the amount of the proposed financial cor- the Commission's services have formally rection. In short, that report, as is shown by communicated their conclusions in accord- the third recital in the preamble to the ance with the second paragraph of contested decision, was the subject of Article 8(1) of Regulation No 1663/95, examination by the whole Commission serves a twofold purpose. The first is, and not, as the United Kingdom maintains, through the mediation of the Conciliation by the services of the Agriculture Direc- Body, to make the parties arrive at the torate-General alone. agreement that they ought already to have tried to reach by means of the procedure described above (see paragraphs 64 to 67). The second purpose of the procedure is, where agreement is not reached, to make known to the Commission, as a collegiate body, by means of the report prepared by the Conciliation Body, the latter's observa- 74. If, therefore, despite everything, the tions (if any), and the observations sub- arguments of the applicant Government- mitted by the Member State during the were not sufficient to dissuade the Com- attempt at conciliation. Pursuant to mission from accepting in the contested Article 8(2) of Regulation No 1663/95 the decision the financial correction proposed Commission adopts its decision after exam- by its own services, that cannot be ining the report drawn up by the Con- attributed to the breach of procedure com- ciliation Body. mitted by those services in connection with the bilateral discussion since, as we have seen, that breach did not after all have any significant influence on the United King- dom's rights of defence. In any case, the applicant has not established, as required by the case-law referred to above, that in the absence of that procedural irregularity the contested decision might have been substantively different.

(1) dismiss the application;

(2) order the United Kingdom of Great Britain and Northern Ireland to pay the costs.

I-9316