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Judgment of the Court (Sixth Chamber)24 January 2002noteIn Case C-118/99,French Republic, represented by J.-F. Dobelle and K. Rispal-Bellanger and C. Vasak, acting as Agents, with an address for service in Luxembourg,Republic of Finland, represented by T. Pynnä, acting as Agent, with an address for service in Luxembourg,vCommission of the European Communities, represented by P. Oliver, acting as Agent, with an address for service in Luxembourg,THE COURT (Sixth Chamber),composed of: F. Macken (Rapporteur), President of the Chamber, N. Colneric, C. Gulmann, R. Schintgen and V. Skouris, Judges,Advocate General: S. Alber,Registrar: H.A. Rühl, Principal Administrator,having regard to the Report for the Hearing,after hearing oral argument from the parties at the hearing on 25 January 2001,after hearing the Opinion of the Advocate General at the sitting on 8 March 2001,gives the following
Judgment
1By application lodged at the Court Registry on 12 April 1999, the French Republic brought an action under Article 173 of the EC Treaty (now, after amendment, Article 230 EC) for the partial annulment of Commission Decision 1999/187/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 Guarantee Section of the European Agricultural Guidance and Guarantee Fund (OJ 1999 L 61, p. 37; hereinafter ‘the contested decision’), in so far as the decision concerns it.
2The action seeks annulment of that decision in so far as the Commission applied a flat-rate correction of 2% to the expenditure declared in respect of compensatory payments granted for certain arable crops at the time of the 1994 harvest and so decided not to charge the sum of FRF 567733352 against the European Agricultural Guidance and Guarantee Fund (‘EAGGF’).
Legislation
3It is apparent from Article l(2)(b) of Regulation (EEC) No 729/70 of the Council of 21 April 1970 on the financing of the common agricultural policy (OJ English Special Edition, 1970(1), p. 218), as amended by Council Regulation (EC) No 1287/95 of 22 May 1995 (OJ 1995 L 125, p. 1, hereinafter ‘Regulation No 729/70’), that the EAGGF ‘Guarantee’ Section finances, in particular, intervention to stabilise the agricultural markets.
4The fourth paragraph of Article 5(2)(c) of Regulation No 729/70 provides as follows:‘The Commission shall evaluate the amounts to be excluded having regard in particular to the degree of noncompliance found. The Commission shall take into account the nature and gravity of the infringement and the financial loss suffered by the Community.’
5Under Article 8(1) of Regulation No 729/70:‘The Member States, in accordance with national provisions laid down by law, regulation or administrative action shall take the measures necessary to:— satisfy themselves that transactions financed by the Fund are actually carried out and are executed correctly;— prevent and deal with irregularities;— recover sums lost as a result of irregularities or negligence.’
6It is clear from the first paragraph of Article 8(2) of the same regulation that the financial consequences of irregularities or negligence attributable to administrative authorities or other bodies of the Member States are not borne by the Community.
7The specific rules setting up a support system for producers of certain arable crops are laid down in Council Regulation (EEC) No 1765/92 of 30 June 1992 (OJ 1992 L 181, p. 12), Article 2 of which provides that Community producers of arable crops may apply for a compensatory payment fixed on a per hectare basis under the conditions set out in Title I.
8According to the first sentence of Article 10(3) of Regulation No 1765/92, an application for the ‘area’ aid established by that regulation must be accompanied by references enabling the areas concerned to be identified.
9Article 1(1)(a) of Council Regulation (EEC) No 3508/92 of 27 November 1992 establishing an integrated administration and control system for certain Community aid schemes (OJ 1992 L 355, p. 1), provides that:‘Each Member State shall set up an integrated administration and control system, hereinafter referred to as the “integrated system”, applying:(a) in the crop sector:— [to] the support system for producers of certain arable crops established by Regulation (EEC) No 1765/92.’
10Article 2 of Regulation No 3508/92 states:‘The integrated system shall comprise the following elements:(a) a computerised data base;(b) an alphanumeric identification system for agricultural parcels;(c) an alphanumeric system for the identification and registration of animals;(d) aid applications;(e) an integrated control system.’
11It is clear from Article 13 of Regulation No 3508/92, as amended by Council Regulation (EC) No 2466 of 17 December 1996 (OJ 1996 L 335, p. 1), that the integrated administration and control system (hereinafter the ‘integrated system’) applies from 1 February 1993 as regards aid applications, the alphanumeric system of identification and registration of bovine animals and the integrated control system referred to in Article 7 and, from 1 January 1997 as regards the other elements referred to in Article 2.
12Under the first paragraph of Article 4(1) of Commission Regulation (EEC) No 3887/92 of 23 December 1992 laying down detailed rules for applying the integrated administration and control system for certain Community aid schemes (OJ 1992 L 391, p. 36):1. Without prejudice to the requirements set out in regulations on individual aid schemes, [an] “area” aid application shall contain all necessary information, in particular:— the identity of the farmer,— particulars permitting identification of all the agricultural parcels on the holding, with their area, location, use and, where relevant, whether the parcels are irrigated, and the aid scheme concerned,— a statement by the producer that he is aware of the requirements pertaining to the aids in question.’
13Article 6 of Regulation No 3887/92 states:1. Administrative and on-the-spot checks shall be made in such a way as to ensure effective verification of compliance with the terms under which aids and premiums are granted.2. The administrative checks referred to in Article 8(1) of Regulation (EEC) No 3508/92 shall include crosschecks on parcels and animals declared in order to ensure that aid is not granted twice in respect of the same calendar year without justification.3. On-the-spot checks shall cover at least a significant percentage of applications. The significant percentage shall represent at least:...— 5% of “area” aid applications. However, this percentage shall be reduced to 3% for area aid applications numbering more than 700000 per Member State in the calendar.Should on-the-spot checks reveal significant irregularities in a region or part of a region the competent authority shall make additional checks during the current year in that area and shall increase the percentage of applications to be checked in the following year.’
14Article 17(1) of Regulation No 3887/92 provides:‘In cases where, by virtue of Article 13 of Regulation (EEC) No 3508/92, certain features of the integrated system are not yet in application each Member State shall take whatever administrative and control measures are necessary to ensure compliance with the terms on which the aids concerned are granted.’
15According to Article 19 thereof, Regulation No 3887/92 applies from 1 February 1993.
16Finally, it is clear from Article 2(2) of Regulation No 1287/95 that refusals to grant financing referred to in Article 5(2)(c) of Regulation No 729/70 may not relate to expenditure claimed against a financial year prior to 16 October 1992.
Evaluation of corrections (Belle Group Report)
17The Commission's Belle Group Report (document No VI/216/93 of 1 June 1993) lays down guidelines to be followed when financial corrections must be applied in relation to a Member State.
18Besides three principal calculation techniques, the Belle Group Report also sets out three categories of flat-rate corrections for difficult cases:A. 2% of expenditure — where the deficiency 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 regularity of the expenditure, such that it can reasonably be concluded that the risk of loss to the EAGGF was minor.B. 5% of expenditure — where the deficiency 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 of loss to the EAGGF was significant.C. 10% of expenditure — where the deficiency relates to the whole of or fundamental elements of the control system or to the operation of controls essential to assuring the regularity of the expenditure, such that it can reasonably be concluded that there was a high risk of widespread loss to the EAGGF.’
19The guidelines further provide that, where there is doubt as to the correction to be applied, the following points are to be taken into account as mitigating factors:— whether the national authorities took effective steps to remedy the deficiencies as soon as they were brought to light;— whether the deficiencies arose from difficulties in the interpretation of Community texts’.
The facts
20It is apparent from the documents before the Court that, in 1994, the French authorities did not require producers of certain arable crops to enclose systematically with their applications for aid under Regulation No 1765/92 a summary of the ‘areas’, although the producers had received that document from the Agricultural Social Insurance Funds (hereinafter the ‘ASI summary’).
21By letter of 18 May 1994, the Commission complained to the French authorities that, contrary to the rules relating to the integrated system, the files containing applications for aid did not contain particulars permitting all the agricultural parcels to be identified.
22By letter of 14 June 1994, the French authorities informed the Commission that, having regard to the latter's observations, it had been decided to carry out at least 10000 additional checks exceeding the ‘significant percentage of applications’, fixed at 5% of applications by the second indent of Article 6(3) of Regulation No 3887/92.
23On 9 July 1997, the Commission complained, in particular, about the French authorities' decision not to require farmers to submit their ASI summaries and stated that the ‘failure ... cannot be wholly offset either by doubling the number of checks or by the other measures taken by the French authorities’. It stated that the shortcomings seemed to it to be limited to certain elements of the control system and that it intended to apply a flat-rate correction of 2%. It added, however, that it could take the view that there were shortcomings relating to important elements of the control system, taking account in particular of the almost complete absence of crosschecks, the poor quality of the on-the-spot checks, which were carried out by inadequately trained staff without significant use of teledetection, and the failure to increase the number of inspections despite the high rate of error in the applications that were checked.
24By letter of 11 May 1998, the Commission officially notified the French authorities of the 2% correction in respect of compensatory payments made to producers of certain arable crops in the course of the financial year in question. It pointed out that, although it had implicitly accepted an increase in the number of checks to make up for the fact that the ASI summaries had not been included with the applications for aid, the quality of the checks seemed to it to be inadequate.
25The French authorities referred the matter to the Conciliation Body, which produced its final report on 23 November 1998. It is clear from that report that the Commission justified its proposed correction on the ground of the ‘inadequate quality of the checks carried out by the French authorities’, an approach which the Conciliation Body regarded as ‘clearly less objective than an approach based on the failure to provide the ASI summaries’. The Conciliation Body found that a financial correction was warranted on account of the inadequacies of the national checks. However, it pointed out that, although the weaknesses were engrained in the system, they did not provide a firm basis from which to make assumptions about the whole of France and that the highest flat-rate correction possible had been applied in this case.
26In those circumstances, the Commission took the view that it was impossible to quantify the actual level of irregular expenditure in the present case and adopted the contested decision.
The application
27In the present proceedings, the French Republic claims that the Court should annul the part of the contested decision concerning it and order the Commission to pay the costs.
28The Commission contends that the application should be dismissed and the applicant ordered to pay the costs.
29By order of the President of the Court of 18 November 1999, the Republic of Finland was granted leave to intervene in support of the form of order sought by the applicant.
30The Republic of Finland claims that the Court should uphold the application made by the French Republic against the Commission.
The first plea
31The French Government complains that the Commission has drawn disproportionate financial conclusions from its finding that the quality of the checks carried out was inadequate.
32In 1994, only eight holdings located in two départements and representing only 2.28% of the applications for aid were checked by Commission staff. Therefore, the extrapolation made by the Commission about the whole of France from such a limited number of checks is flimsy.
33According to the French Government, a 2% flat-rate correction, such as that applied for the 1994 year, corresponds to a finding of irregularities in more than 12% of the areas in which checks had been carried out. However, the percentage accepted by the Commission as representing areas in which checks had been carried out and irregularities disclosed amounted in subsequent years to 0.54% in 1995, 0.93% in 1996 and 0.61% in 1997, which proves that the figure of 12% for 1994 did not reflect the true position.
34In those circumstances, the Commission could, should, have assessed the actual loss caused by the irregularities found in 1994 by extrapolating from the irregularities found between 1995 and 1997. The financial correction should therefore have amounted to only FRF 44.3 million.
35The Commission, on the other hand, contends that, in this instance, the actual loss is not quantifiable, so that the financial correction had to be applied. It does not accept the method of extrapolation put forward by the French Government, since (i) the irregularities found in a given year are not necessarily replicated the following year and (ii) the approach runs counter to the principle that accounts must be presented annually, according to which each year must be assessed separately in relation to preceding or subsequent years.
36In those circumstances, the Commission regards a financial correction as the only measure possible and contends, further, that, since 2% was the lowest rate, it did not act in breach of the principle of proportionality.
37In that regard, it is appropriate to bear in mind, first, that the management of EAGGF finances is principally in the hands of the national administrative authorities responsible for ensuring that the Community rules are strictly observed. That system, based on trust between national and Community authorities, does not involve any systematic supervision by the Commission, which moreover would in practice be quite unable to carry it out. Only the Member State is in a position to know and determine precisely the information necessary for drawing up EAGGF accounts since the Commission is not close enough to obtain the information it needs from the economic operators (Case C-238/96 Ireland v Commission [1998] ECR I-5801, paragraph 30).
38Second, Articles 2 and 3 of Regulation No 729/70 allow the Commission to charge to the EAGGF only sums paid in accordance with the rules laid down in the different agricultural sectors (see, in particular, Case C-197/90 Italy v Commission [1992] ECR I-1, paragraph 38).
39Third, where it proves impossible to establish with certainty the extent to which a national measure incompatible with Community law has caused an increase in the expenditure entered under a budgetary item of the EAGGF, the Commission has no choice but to disallow all the expenditure in question (Case C-50/94 Greece v Commission [1996] ECR I-3331, paragraph 26).
40Finally, where the Commission, instead of rejecting all the expenditure affected by the infringement, has endeavoured to establish the financial impact of the unlawful action 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, the burden of proving that those calculations are not correct rests on the Member State [Ireland v Commission, cited above, paragraph 37).
41In the present case, it should be observed, first, that the French Government does not dispute the Commission's finding that the quality of the checks was inadequate, but criticises the fact that, in spite of the limited number of checks carried out, the Commission extrapolated results obtained in two départements to the whole of France.
42However, the French Government has neither established nor even alleged that the on-the-spot checks carried out in other departments in 1994 did not suffer from the structural shortcomings found by the Commission (that is to say, inter alia, the use of inadequately trained staff and the failure to use teledetection), but has confined itself to pointing out that during subsequent controls the weaknesses found had not reoccurred.
43In those circumstances, it was reasonable for the Commission to assume that the inspections it made were representative of the situation existing in France in 1994.
44Second, the Commission was right not to take into consideration the percentage of irregularities found in following years.
45In the first place, not only does such a method fail to provide a firm basis for calculation, it is also quite conceivable that, following the observations made by the Commission, there was no repetition of those irregularities in subsequent years.
46Further, the French Government itself acknowledges that in 1994 some difficulties were encountered in setting up the integrated system and then describes the improvements that were made as of 1995, which would show that the number of irregularities was higher in 1994 than in subsequent years.
47Finally, contrary to Article 5(2) of Regulation No 729/70, the method advocated by the French Government disregards the gravity of the infringement.
48As has been observed in paragraph 42 of this judgment, the Commission found that there were structural weaknesses in the control system set up by the French authorities. To the extent to which the files containing applications for aid did not permit the areas concerned to be identified, thereby making administrative checks more difficult, the Member State, in order to make up for that failure, should have made sure that on-the-spot checks were rigorous in order to ensure that no subsidy was unlawfully granted.
49It must therefore be concluded that the inadequate quality of the on-the-spot checks gives rise to serious doubts concerning the establishment of an adequate and effective set of supervisory measures and inspection procedures for the purposes of Article 6 of Regulation No 3887/92 (see, in particular, to that effect, Case C-46/97 Greece v Commission [2000] ECR I-5719, paragraph 58), such as to justify applying a flat-rate correction of the kind provided for by the Belle Report.
50Moreover, where, instead of disallowing all the expenditure affected by the infringement, the Commission has endeavoured to establish rules for treating irregularities differently, depending on the extent of the shortcomings in the checks and the degree of risk to the EAGGF, it is for the Member State to show that those criteria are arbitrary and unfair (see, to that effect, Case C-28/94 Netherlands v Commission [1999] ECR I-1973, paragraph 56). Since the French Government has not done so, its argument on this point must be rejected.
51In those circumstances, the French Government has no grounds for objecting to the 2% financial correction made by the Commission.
The second plea
52The Finnish Government submits that the Commission, by having failed in the contested decision to make clear the basic facts enabling the Court to exercise its power of review, has infringed Article 190 of the EC Treaty (now Article 253 EC). The reasons on which the contested decision was based ought to have been set out plainly and clearly so that even a third party could have understood the decision.
53As far as that argument is concerned, the Court observes that it is settled case-law that the extent of the duty to state the reasons on which a decision is based, laid down in Article 190 of the EC Treaty, depends on the nature of the act in question and on the context in which it was adopted (see Netherlands v Commission, cited above, paragraph 81).
54In the particular context of the preparation of decisions relating to the clearance of accounts, the statement of reasons for a decision must be regarded as sufficient if the Member State to which the decision was addressed was closely involved in the process by which it came about and was aware of the reasons for which the Commission took the view that it should not charge the sum in dispute to the EAGGF (Netherlands v Commission, cited above, paragraph 82, and Case C-242/97 Belgium v Commission [2000] ECR I-3421, paragraph 95).
55In the present case, it is clear, first, from the Commission's letter of 11 May 1998 that the Commission explained why it intended to apply a financial correction and, second, from the exchange of correspondence between the Commission and the French authorities that the latter were involved in the process of preparation of the contested decision. The doubts expressed by the Commission as to the quality and reliability of the checks in the arable crops sector were, on several occasions, brought to the attention of the French authorities in writing, discussions took place and the matter was referred to the Conciliation Body.
56In those circumstances, it must be held that the French authorities were informed that a financial correction would be applied and were involved in the procedure preceding the adoption of the contested decision. Therefore, the plea alleging infringement of Article 190 of the Treaty must be dismissed.
The third plea
57The Finnish Government submits that the Commission, by altering the facts on which it relied as a basis for the contested decision, acted in breach of the principle of the protection of legitimate expectations and that of the protection of the rights of defence. Having initially complained to the French authorities about the absence of ASI summaries in the files containing aid applications, the Commission belatedly adopted a different position and complained about the inadequate quality of the checks. If legitimate expectations and the rights of defence are to be safeguarded, the facts pleaded in support of a financial correction must not be changed while a case is being reviewed.
58As regards that point, it is sufficient to point out that the Commission had already mentioned the inadequate quality of the checks in its letter of 9 July 1997, drawing the French authorities' attention to the ‘poor quality of the on-the-spot checks carried out by inadequately trained staff and the failure to make any significant use of teledetection’. Although the Commission withdrew its complaint concerning the incomplete nature of the files containing aid applications, it did so on the ground that the French authorities had stated that they had increased the number of on-the-spot checks. It was after the French authorities made that decision that the Commission took as its basis the inadequate quality of the checks carried out.
59In those circumstances, this plea must be rejected.
The fourth plea
60The Finnish Government submits that applying an unwarranted flat-rate financial correction undermines the principle of bona fide cooperation between the Commission and the Member States, which is intended to ensure that Community law is effective.
61On that point, it is sufficient to recall that the Court has already held, in paragraph 38 of Italy v Commission, cited above, that, where Community rules authorise payment of aid only on condition that certain formalities relating to proof or supervision are observed, aid paid in disregard of that condition is not in accordance with Community law and the related expenditure may not therefore be charged to the EAGGF.
62It follows that application of a flat-rate financial correction of the kind provided for in the Belle Report does not affect the duty of cooperation between the Member States and the Commission.
63In those circumstances, the plea must be rejected.
64It is appropriate to mention that the Commission, in its observations on the statement in intervention, raised the point that, in its view, the Republic of Finland was questioning facts which had not been challenged by the French Republic, which is not possible under Article 93(4) of the Rules of Procedure of the Court of Justice, which provides that ‘the intervener must accept the case as he finds it at the time of his intervention’.
65Given that the Finnish Republic's submissions have been dismissed on the merits, it is not necessary to rule on that question.
66Having regard to the foregoing, the Court must dismiss the application in its entirety.
Costs
67Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party's pleadings. Since the Commission has applied for the French Republic to be ordered to pay the costs and the latter has been unsuccessful, it must be ordered to pay the costs. Under the first subparagraph of Article 69(4) of the Rules of Procedure, the Republic of Finland, which has intervened in the proceedings, is to bear its own costs.
Operative part
On those grounds,THE COURT (Sixth Chamber),hereby:
1.Dismisses the application;
2.Orders the French Republic to pay the costs;
3.Orders the Republic of Finland to bear its own costs.
Delivered in open court in Luxembourg on 24 January 2002.
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