Important legal notice

61999C0377

European Court reports 2002 Page I-07421

I - Introduction

This action brought by the Federal Republic of Germany is directed against Commission Decision 1999/596/EC of 28 July 1999 (hereinafter the disputed decision) in so far as it charged to the Federal Republic of Germany (Mecklenburg-Vorpommern), for 1995, instead of a financial correction of 2% a correction of 5%, and hence an amount of DEM 18 236 469.20, for the arable crops sector.

II - Legal framework

The financing of the common agricultural policy is governed by Council Regulation (EEC) No 729/70. Under Articles 1(2)(b) and 3(1) of this regulation, intervention intended to stabilise the agricultural markets, undertaken according to Community rules within the framework of the common organisation of agricultural markets, is to be financed by the Guarantee Section of the EAGGF.

Such intervention includes the compensatory allowances in the arable crops sector involved in the present case, which are made on the basis of Council Regulation (EEC) No 1765/92 and other specific regulations.

Article 8(1) of Regulation No 729/70 requires Member States to satisfy themselves that transactions financed by the EAGGF are actually carried out and are executed correctly, to prevent and deal with irregularities and to recover sums lost as a result of irregularities or negligence.

With respect to the measures which, under this article, Member States must take to satisfy themselves that transactions financed by the EAGGF have been correctly executed, where the arable crops sector is concerned reference should be made to Council Regulation (EEC) No 3508/92, according to which an integrated administration and control system (hereinafter INADCOS) is to be established in each Member State.

In particular, under Article 2 of Regulation No 3508/92, INADCOS includes an alpha-numeric identification system for agricultural parcels. According to Article 3 of Commission Regulation (EEC) No 3887/92, which contains detailed rules for applying Regulation No 3508/92, Member States may also employ a unit other than the agricultural parcel, such as the cadastral parcel or production block.

According to Article 8(1) of Regulation No 3508/92, Member States are to carry out administrative checks on aid applications and, according to Article 8(2), administrative checks are to be supplemented by on-the-spot checks covering a sample of agricultural holdings. For all these checks, Member States are to draw up a sampling plan.

With respect to administrative and on-the-spot checks, Article 6(1) of Regulation No 3887/92 requires them to be made in such a way as to ensure effective verification of compliance with the terms under which aids and premiums are granted. Concerning the implementation of on-the-spot checks, Article 6(3) to (5) stipulates, in part:

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 700 000 per Member State in the calendar year.

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.

Applications subjected to on-the-spot checking shall be selected by the competent authority on the basis of a risk analysis and an element of representativeness of the aid applications submitted. The risk analysis shall take account of:

- the amount of aid involved,

- the number of parcels and the area ... for which aid is requested,

- changes from the previous year,

- the findings of checks made in past years,

- other factors to be defined by the Member State.

On-the-spot checks shall be unannounced and cover all the agricultural parcels ... covered by one or more applications. ...

Should a Member State decide to use remote sensing on all or part of the sample referred to in Article 6(3), then, according to Article 7(1) of the regulation, inter alia, it must check on the spot all applications for which photo interpretation does not verify the accuracy of the declaration to the satisfaction of the competent authority.

If a Member State fails to comply with these control provisions or fulfil its obligations, then, to that extent, the Commission must refuse to charge the expenditure to the EAGGF. According to Article 8(2) of Regulation No 729/70, the financial consequences of irregularities or negligence attributable to the administrations or institutions of the Member States are not to be borne by the Community.

III - Facts and procedure

In financial year 1995, which corresponded to harvest year 1994, the Land of Mecklenburg-Vorpommern was granted aid in the arable crops sector. The use of this aid was controlled under the INADCOS established in Mecklenburg-Vorpommern in accordance with Regulations Nos 3508/92 and 3887/92.

In preparation for the clearance of the accounts for 1995, between 23 and 27 October 1995 the Commission carried out an inspection in Mecklenburg-Vorpommern in accordance with Regulations Nos 1765/92, 2078/92 and 2080/92.

The Commission forwarded its comments to the German authorities in a letter dated 13 February 1996. In that letter it noted, in particular, that with respect to the arable crop regulations deficiencies in checking and administration had been found. More especially, it referred to deficiencies in on-the-spot checking.

The Commission's comments on the findings of its inspection subsequently formed the subject of a sustained correspondence with the German authorities, in the course of which the Commission stood by its objections and gave further explanations.

By letter of 17 June 1997, the Commission informed the Federal Ministry of Food, Agriculture and Forestry of the preliminary conclusions of the inspection of 23 to 27 October 1995 in Mecklenburg-Vorpommern and proposed a correction of 5% of the expenditure.

Following further exchanges, both oral and written, between the German authorities and the Commission, by letter of 12 June 1998 the latter formally notified the German authorities of the conclusions of the inspection in Mecklenburg-Vorpommern, in accordance with Decision 94/442/EC. In that letter, the Commission stated that in view of the explanations provided by the German authorities it had decided not to impose the intended 5% financial correction and now considered a correction of 2% appropriate.

The Commission based its reassessment of the risk of losses to Community funds on several considerations, including the following: According to the Federal Ministry of Agriculture's letter of 3 September 1997, in Mecklenburg-Vorpommern for about 90% of all parcels arable crop use or set-aside, as the case may be, coincides with the agricultural parcel. This statement, whose correctness can be verified when later clearances of accounts are being checked, is of decisive importance in assessing any losses to Community funds. The Commission nevertheless reserved the right to increase the correction rate if in the course of an inspection to be carried out in 1998 the correctness of the information provided by the German authorities which had led to the change in correction rate were to be called into question.

By letter of 28 July 1998, the German Government requested the initiation of conciliation proceedings.

In August 1998, the Commission's services in Mecklenburg-Vorpommern carried out a further inspection visit (hereinafter the second inspection visit).

In its letter to the German authorities of 24 November 1998, a copy of which was sent to the conciliation body, the Commission described, in particular, the results of the second inspection visit as follows: May I also draw your attention to the following point, which could be important in the context of the conciliation proceedings. In the course of a joint inspection visit by DG VI and the financial controllers in August 1998 it came to light that, in respect of very many aid applications, the area actually farmed differed from the registered area of the parcels, or the area actually farmed had not been fully reported as an agricultural parcel. If the data on the areas of land actually farmed comes not from the land register but from information supplied by the farmer, it is all the more necessary to measure the agricultural parcels in the course of on-site checks. In that case, the German authorities' contention that about 90% of the blocks were under a single crop or completely set aside would lose its force. The matter is currently being investigated and if you have any comments I would be grateful if you would let me have them as soon as possible.

In its final report of 30 December 1998, based on testimony given by the Commission and the German authorities at hearings held on 4 November 1998 and 3 December 1998, respectively, as well as on several written submissions by both parties, the conciliation body took note of the misgivings expressed by the Commission in the letter of 24 November 1998 and the German authorities' reply. The conciliation body referred to the weaknesses of the control system but also to the efforts made by the Land of Mecklenburg-Vorpommern; as this was a new Land its efforts deserved special recognition. It then came to the conclusion that, in any event, there were good grounds for not applying the flat-rate correction of 5% originally envisaged by the Commission.

In its Summary Report of 12 January 1999 on the results of the controls relating to the clearance of the accounts in respect of the expenditure for 1995 of the Guarantee Section of the EAGGF, on the basis of its findings under the checking procedure the Commission proposed a financial correction of 2% instead of 5%. However, this correction was made subject to the reservation that the statement by the German authorities to the effect that in Mecklenburg-Vorpommern about 90% of all parcels were under a single crop or set aside was shown to be correct in the course of a later clearance of accounts control procedure (hereinafter the reservation).

By letter of 27 May 1999, the Commission took a position on the conciliation body findings of 30 December 1998. It explained that although the control system had not revealed any obvious abuse, it had exposed serious deficiencies which justified a 5% correction. The results of the August 1998 inspection had revealed a situation that was worse than had been feared. This had been drawn to the attention of the German authorities by letter of 24 November 1998 but had not been taken into account by the conciliation body in its final report. In particular, 15% of blocks were in multiple use and the parcels located in those blocks accounted for 29% of all agricultural parcels. Almost all the registered parcels consisted of a combination of registered plots and more than half the registered parcels were divided between two or more blocks, which often belonged to the same producer.

The German authorities acknowledge that the supplement was sent to them on 21 June 1999.

By letter of 18 June 1999, referring to the conciliation procedure, the Commission communicated its final conclusions concerning the clearance of the 1995 accounts for the Guarantee Section of the EAGGF, arable crops sector. In substance, these conclusions are generally consistent with the supplement to the Summary Report.

After hearing the views of Member States expressed through the EAGGF Committee on 22 June 1999, the Commission issued on 28 July 1999 the disputed decision charging to the Federal Republic of Germany (Mecklenburg-Vorpommern) a correction of 5% of expenditure, in the sum of DEM 30 394 115.33.

In its action, lodged at the Registry of the Court of Justice on 7 October 1999, the Federal Republic of Germany asks that the disputed decision be annulled in so far as it charges to the Federal Republic the sum of DEM 18 236 469.20 corresponding to the difference between a 5% and a 2% correction.

The Commission requests that the action be dismissed and the applicant ordered to pay the costs.

IV - Preliminary observations concerning the dispute

Before the heads of complaint can be examined in detail, some preliminary explanation is required.

First of all, the situation is unusually complicated because three differently defined units of area and hence three different yardsticks, namely, agricultural parcel, block (Feldstück) and registered parcel (Flurstück) are currently in use.

The agricultural parcel is the unit of area to which INADCOS is linked under Regulation No 3508/92. According to Article 1(4) of that regulation, agricultural parcel shall mean a continuous area of land on which a single crop is raised by a single farmer. Thus, an agricultural parcel is always sown with only one type of crop or set aside (use-related unit of area) and, according to the Commission, represents for its purposes the relevant standard of reference and calculation factor.

On the other hand, in addition to the agricultural parcel, the German Regulation on compensatory payments for arable crops (hereinafter KAV) also recognises blocks and registered parcels. The German system for identifying agricultural areas is primarily based on blocks. According to Paragraph 3(4a) of the KAV, a block is a continuous area of agricultural land, belonging to a producer, sown with one or more crops or set aside, and surrounded by natural boundaries or by land not farmed by that producer. A block may consist of one or more registered parcels or parts of registered parcels. Thus, blocks are position-related units of area.

For its part, the registered parcel is defined by Paragraph 3(3) of the KAV as an area of land demarcated in the land register and hence an ownership-related unit of area.

From these different definitions it follows that the three units of area in question may overlap and be composed of other units of area or parts thereof.

In this connection, it should first be noted that, by definition, only in the case of an agricultural parcel does the area used for a type of crop always coincide with the area of the agricultural parcel, whereas the block and the registered parcel may be planted with more than one crop, so that the area occupied by a specific type of crop grown on a block or registered parcel may be only part of the total area.

It should also be noted that only in the case of the registered parcel can the actual area be determined directly from the land register.

These two points are relevant to the problem of which checks should have been carried out in Mecklenburg-Vorpommern to ensure that aid was properly allocated and therefore ultimately concern the question of the extent of the area at risk. Thus, it is possible to dispense with measuring blocks, as a position-related unit of area, only if and to the extent that they are entirely planted with a single crop and composed of complete registered parcels, as in that case the area of the block(s) can be determined from the land register in terms of registered parcels and a visual inspection is sufficient to check whether the block is sown entirely, and hence over an area determinable from the land register, with a particular crop.

The Federal Republic of Germany begins by pointing out that in the supplement to the Summary Report the Commission based the increase in the financial correction from 2% to 5% on the following seven findings:

the risk assessment applied not to 10% or to 15% of the blocks but to 29% of the total number of agricultural parcels;

almost all the blocks were made up of more than one registered parcel;

more than half the registered parcels extended over at least two blocks which frequently belonged to one and the same producer. In those cases it was possible that areas declared for agricultural parcels were exaggerated and granted a higher level of aid;

there was a risk in respect of around 50% of the agricultural parcels in Mecklenburg-Vorpommern;

given the lack of comprehensive counterchecking, the risk of exaggeration of the areas declared was very high;

the Schwerin office had carried out fewer checks than indicated and its figures on the on-the-spot checks carried out were inaccurate;

it was doubtful whether the Schwerin office had actually carried out a risk analysis as indicated.

39. The German Government based its case on four heads of complaint: firstly, the Commission's reservation concerning the use of a correction rate of 2% instead of the 5% originally envisaged had already been discharged. Secondly, the disputed decision was tainted with substantive procedural errors, since it was based on arguments - findings 1 to 4 in paragraph 38 above (hereinafter findings Nos 1 to 4) - which, on the one hand, were not the subject of either the written procedure for clearance of accounts or the conciliation procedure and, on the other, were incorrect. Thirdly, the arguments that were the subject of the conciliation procedure - findings 5 to 7 in paragraph 38 above (hereinafter findings Nos 5 to 7) - were of no consequence as far as an increase in the financial correction was concerned. Fourthly and finally, the Commission's risk assessment was wrong.

(a) The findings of the Commission in the light of the different definitions of the unit of area

40. It is necessary to bear in mind the relationship between the three area definitions employed, in order to be able to determine the significance of findings Nos 1 to 4 in the supplement to the Summary Report, especially with respect to their value added as compared with the basic assumptions which, before the supplement was issued, had already been the subject of conciliation proceedings, and with respect to their relationship with the results of the second inspection visit.

41. It must be assumed that multi-crop blocks must be measured because in principle they constitute areas at risk of exaggeration when declared and [because] an extrapolation based on a spot check carried out in connection with the first inspection visit showed that 17.3% of such risk areas were in fact exaggerated when declared (the so-called overdeclaration risk).

42. Findings Nos 1 to 4 can be partly traced back to the results of the second inspection visit, according to which in fact 15% of blocks were sown with multiple crops rather than 10% as asserted by the applicant.

43. The statements by the Commission indicate that it originally assumed for its own purposes a risk-parcel ratio of 18%, corresponding to the 10% of multi-crop blocks mentioned by the applicant. If, on the basis of the second inspection visit, 15% of multi-crop blocks was now to be assumed, the ratio of risk-prone parcels (in multi-crop blocks) would amount to 29%. On the basis of the same overdeclaration risk, that is, 17.3%, for 18% of risk parcels the risk of loss would be 3%, and for 29% of risk parcels more than 5%.

44. Accordingly, the statement in finding No 1 with respect to the percentage of risk parcels represents, for the Commission, a transposition of the original relation, established on the basis of samples whose representativeness is evidently not in dispute, between the proportion of multi-crop blocks and risk parcels to the proportion of multi-crop blocks determined in the course of the second inspection visit. Clearly, then, it is not a matter of a change in the unit of reference which as such would have increased the risk of loss for the Community.

45. Findings Nos 2 and 3 are connected with the Commission's recognition, as a result of the second inspection visit, that single-crop blocks can only be counted as risk-free areas if they coincide with registered parcels. As this is not necessarily true of a certain proportion of blocks, some of the remaining 85% of single-crop blocks should also be considered to be risk-prone (hereinafter the field/registered parcel problem). In this connection, the Commission asserts that almost all blocks consist of several registered parcels. The applicant observes that this correctly describes the situation resulting from the conditions on the spot, which were already known to the Commission. The finding that more than half the registered parcels lie in two or more blocks, which often belong to one and the same farmer, is based on an extrapolation from the aid applications examined by the Commission.

46. Finally, finding No 4, according to which about 50% of all agricultural parcels constitute risk parcels, is a conclusion drawn from the two main findings of the second inspection visit and the previously mentioned findings: according to the Commission in the defence it is calculated, on the one hand, from the 29% of risk-prone parcels attributable to 15% of blocks being multi-crop, and, on the other, from the remaining 71% of parcels which, in the Commission's view, are to be included among the risk areas because of the block/registered parcel problem. The Commission also applies the overdeclaration risk rate of 17.3% it has determined - albeit in relation to multi-crop blocks - which results in about 14% of parcels being added to the 29%. This gives a total of about 43% risk parcels.

47. In short, findings Nos 1 to 4 are therefore the numerical expression of the results of the Commission's investigation, according to which the risk of loss was higher than originally assumed, firstly, because 15% rather than 10% of blocks were sown with multiple crops and, secondly, because on account of the block/registered parcel problem single-crop blocks should also have been included among the risk areas.

(b) Analysis of the applicant's complaints

48. It should first be noted that the Federal Republic of Germany's action is clearly based on a distinction between two groups of findings in the supplement, namely findings Nos 1 to 4, on the one hand, and findings Nos 5 to 7, on the other.

49. According to the applicant, findings Nos 5 to 7 formed the subject of the administrative and conciliation procedures and had already been used to justify the 2% correction in the Summary Report. Therefore, in its third claim, the applicant essentially maintains that these findings could not justify an increase to 5% or alternatively that it would be an abuse of discretion to take them into account again in connection with such increase. Moreover, the substance of these findings did not justify a correction of more than 2%. Thus, in the third claim it is argued that, on the one hand, from the procedural standpoint, the Commission abused its discretion by recycling findings and, on the other, that in substance the 5% correction was incorrect.

50. In the applicant's view, findings Nos 1 to 4 stem from the second inspection visit and first appeared in the supplement as justification for increasing the correction to 5%. From this the applicant derives, in its second claim, the procedural complaint of infringement of essential procedural requirements. Specifically, it alleges that the Commission improperly widened the scope of the proceedings through the belated introduction of an increased correction rate and findings Nos 1 to 4, on which that increase was based. More particularly, in so doing the Commission also violated the principles of the conciliation procedure and due process. Moreover, in substance these findings were not capable of justifying the higher charge.

51. The complaint contained in the first claim is also based on the connection between the Summary Report - in particular the so-called reservation in the statement of facts - and the supplement - the finding according to which the second inspection visit showed that in actual fact 15% of blocks were sown with more than one crop. In this connection, the applicant argues that the reservation had been discharged and therefore the Commission - on the basis of the principle that the administrative authorities are bound by a reservation they themselves formulate - had not been justified in deviating from the 2% correction proposed in the Summary Report. Legally, therefore, this is not a question of the discharge of the reservation but of a complaint of violation of a principle, namely that of administrative self-engagement.

52. In its fourth claim, the applicant essentially contests the Commission's comprehensive finding that the entire on-the-spot checking system in Mecklenburg-Vorpommern was defective and was leading to a substantial risk of loss for the EAGGF. It suggests that, at most, the deficiencies established permit the conclusion that there was a minor risk of adverse consequences for the EAGGF.

53. The fourth claim and the complaints concerning the material accuracy of the correction and the findings on which it is based in the second and third claims address the wrongfulness of the 5% correction in general. On the other hand, the applicant, as it confirmed in the oral hearing, does not challenge the 2% correction or the Commission's assumptions and calculations on which it was based.

54. I shall now proceed with a detailed consideration of the procedural complaints, namely, infringement of the principle that the administrative authorities are bound by a reservation they themselves formulate, disregard for the principles of the conciliation procedure and the procedure for clearance of accounts, and abuse of discretion on the part of the Commission. After that, I shall consider whether the correction at issue was defective in respect of the underlying findings and the risk assessment based thereon.

V - Analysis

A - Procedural aspects

55. Council Regulation (EEC) No 729/70 forms the legal basis for corrections of expenditure financed by the EAGGF, Guarantee Section. According to Article 5(2)(c), the Commission decides what expenditure is to be excluded from Community financing where it finds that expenditure has not been effected in compliance with Community rules. Moreover, the first subparagraph of Article 8(2) of Regulation No 729/70 makes it clear that the financial consequences of irregularities or negligence attributable to administrative authorities or other bodies of the Member States shall not be borne by the Community.

56. In this respect, the procedure for clearance of accounts differs fundamentally not only from the procedure for the imposition of a penalty in the event of the unlawful granting of a financial benefit but also from the procedure applicable where a State has failed to fulfil its obligations under the Treaty.

57. Thus, the procedure for clearance of accounts is not a procedure for the imposition of a penalty inasmuch as the acceptance or non-acceptance of specified expenditure is based on an objective consideration of whether the prior conditions on which the aid in question was granted were observed.

58. As far as the difference from the procedure for failure to fulfil obligations is concerned, suffice it to say that under the procedure for clearance of accounts it is not within the discretion of the Commission to approve or refuse to accept unlawfully effected expenditure. Thus, in the view of the Court, the procedure for the discharge of the accounts ... serves to determine not only that the expenditure was actually and properly incurred but also that the financial burden of the common agricultural policy is correctly apportioned between the Member States and the Community. Accordingly, the Commission may not depart from the provisions concerning the apportionment of this burden.

59. In keeping with those objectives, the procedural guarantees provided for under the procedure for clearance of accounts differ from those available under the other procedures referred to.

60. It should first be observed that the framework of a procedure for clearance of accounts is not defined by the Community rules infringed. The main consideration is not so much the question of the infringement of those rules as the resulting risks for the Community budget. As distinct from the case of a State failing to fulfil its obligations under the Treaty in which, according to settled case-law, ... a letter giving formal notice is intended to delimit the subject-matter of the dispute ... and ... the subject-matter of an application brought under Article 169 is determined by the Commission's reasoned opinion ..., the procedure for clearance of accounts is not a pre-litigation procedure under Article 226(1) EC. Although the weaknesses of the national control system of which the Commission complains are, in substance, undisputed, the discussions that took place during the procedure for clearance of accounts concerned only the question of the consequences to be attributed to them. Thus, in the present case, whilst the weaknesses of the control system in Mecklenburg-Vorpommern are not seriously contested by the German Federal Government, it disputes the risks they pose for the Community budget.

61. In this connection, it is worth recalling the rule on the apportionment of the burden of proof, according to which although it is ... for the Commission to prove an infringement of the Community rules, the Member State concerned must demonstrate that the Commission committed an error as to the financial consequences to be attributed to it. Thus, new findings concerning the risks for the Community budget made during the procedure for clearance of accounts do not, in principle, constitute an extension of the subject-matter of the procedure.

62. However, the introduction of such new findings is subject to the guarantees arising out of the nature of the clearance of accounts as an inter partes procedure. On this point the Court has held that ... the final and conclusive decision on the annual clearance of accounts is taken at the conclusion of the specific procedure giving effect to the audi alteram partem rule, during which the Member States concerned are provided with all the guarantees necessary for them to present their point of view. In the case cited, these guarantees led to the annulment of the Commission's disputed final decision on the clearance of accounts on the grounds that it was based on the results of an investigation which were not communicated to the Member State in question before the final decision was issued, so that it was unable to express its views on those results.

63. Finally, it is necessary to consider the conciliation procedure. It should be noted first that the procedural principles set out in Article 8 of Commission Regulation (EC) No 1663/95 have no bearing on the present proceedings since under Article 10 the regulation does not apply to the financial year 1995.

64. As is well known, the conciliation procedure in the context of the clearance of the accounts of the EAGGF, Guarantee Section, was set up by Commission Decision 94/442/EC. The aim of the procedure is to reconcile the divergent positions of the Commission and the Member State concerned with respect to the proposed exclusion of certain items of expenditure. However, the conciliation procedure does not replace the bilateral discussions which may take place throughout the duration of the procedure. The conciliation body draws up a report, although the position taken therein is not binding on the Commission.

65. In its first claim, the German Federal Government argues that the findings of the second inspection visit brought about the discharge of the reservation in the formal notification of 12 June 1998. The Commission must abide by the clear text of its reservation.

66. First of all, it should be made clear that the question of the discharge of a reservation is in principle of no significance in deciding whether a decision on the clearance of accounts is lawful. In so far as in a procedure for clearance of accounts the Commission must assess the risk of loss for Community funds due to non-compliance with Community rules, it does so within the framework of an ongoing procedure. Should the Commission take the position that at a certain point during that ongoing procedure it did not have at its disposal all the elements necessary to reach a conclusive decision, it is, in principle, free to make its provisional opinion subject to further checks. If subsequently, however, these checks show that the risks are greater than originally supposed, the question of whether or not the results of the Commission's checks have brought about the discharge of its reservation is fundamentally irrelevant as far as the legal status of the Commission's final decision is concerned. Viewed in this light, the first claim should be dismissed as invalid.

67. However, this does not mean that Commission reservations can escape judicial scrutiny. In this connection, reference may be made to the judgment of the Court in Case 129/84, according to which before the Commission may be allowed to rely on its own interpretation of a reservation it has inserted, it should have been possible [for the Member State concerned] to interpret it in the same way.

68. In the view of the Federal Republic of Germany, it follows from the linking, in the reservation, of the application of a lower correction rate with proof of the correctness of the statement of the German authorities to the effect that in Mecklenburg-Vorpommern about 90% of all blocks are sown with a single crop or set aside that the Commission based its risk assessment on the numerical proportion of multiple-use blocks - and not on their area as a percentage of the total area of all blocks. Against this, the Commission argues that the reservation should be interpreted only in the light of the possible risk for the Community budget; the statement by the German Government to the effect that 90% of blocks were sown with only one crop was to be understood as an indication of a risk area of a certain extent.

69. At first glance, there seems to be nothing wrong with the Commission's interpretation of its own reservation, so that at least, in accordance with the abovementioned case-law, it may be assumed that it should have been possible for the Federal Republic of Germany to interpret it in the same way. It should be borne in mind that the expenditure in question concerned area-related aids. In the context of the Commission's risk assessment, it therefore seems obvious that the reservation - although expressed in use-related terms - was in reality, on the undisputed assumption that prima facie blocks do not constitute risk areas if they are sown with a single crop and consist of whole registered parcels, area-related.

70. At the same time, this argument concerning the content and scope of the Commission's reservation is only of significance if by the reservation the Commission may be presumed to have bound itself with respect to its subsequent risk assessment.

71. However, for the following reasons, this seems not to have been the case. I have already pointed out that, under the rules applicable, new findings by the Commission concerning the consequences of deficiencies in the national control system concerned can, in principle, be introduced into the procedure at any time. It follows that, in the course of the procedure, the Commission can, in principle, modify its risk assessment on the basis of these new findings, provided that the Member State is given sufficient opportunity to express its views. In particular, this may happen after notification of a preliminary risk assessment with a reservation, as in our case.

72.In the present case, in the last analysis, the Commission's reservation concerns the degree of risk for the Community budget. However, it should be borne in mind that a refusal to allow certain expenditure to be taken over by the EAGGF, Guarantee Section, does not constitute a discretionary decision on the part of the Commission if the expenditure has not been effected in accordance with Community law. If it is assumed that - in accordance with the German Federal Government's interpretation of the reservation - the Commission's intention was to make its risk assessment dependent solely on the number of blocks sown with a single crop - and not on the actual percentage of risk areas - then the Commission would be guilty of an abuse of discretion. In other words, it is not within the Commission's discretion to bind itself with respect to the future results of its investigations.

73.It is therefore proposed that the first claim be dismissed as invalid or alternatively as unfounded.

3.On the point at which the results of the second inspection came into the procedure

74.The Federal Republic of Germany deduces the illegality of the decision in dispute from the time at which the results of the second inspection visit came into the procedure. On the basis of the somewhat dubious premiss that the increase in the financial correction from 2% to 5% is based only on findings Nos 1 to 4, the Federal Government considers the decision in question to be unlawful because, in its view, these four findings were not the subject-matter of the written procedure for clearance of accounts or of the bilateral discussions or conciliation procedure.

75.In relation to this argument it should first be noted that the introduction into a procedure for clearance of accounts of new findings that lead to an increase in the risk assessed for the Community budget in the final decision does not, in principle, extend the subject-matter of the procedure. However, the decisive question of whether the Member State concerned had sufficient opportunity to express its views on these findings concerns not so much the regularity of the proceedings as the question of the granting of a fair hearing, which must therefore also be examined in this context.

76.In the present case, the Commission formulated its reservation on 12 June 1998, that is to say, before the Federal Republic of Germany had recourse to the conciliation body. It clearly indicated the provisional nature of its assessment, in particular by giving notice of a second inspection visit. This second visit was made in August 1998, shortly after the request for the initiation of a conciliation procedure made by the German authorities on 28 July 1998. In its letter of 24 November 1998 - written while the conciliation proceedings were still going on - the Commission informed the German authorities of the initial results of the second inspection visit and asked for their views, while simultaneously notifying the conciliation body. On 11 December 1998, the German authorities informed the conciliation body of their position on the Commission's letter of 24 November. The Commission's Summary Report of 12 January 1999 on the results of its monitoring of the clearance of the 1995 accounts of the EAGGF, Guarantee Section, did not take a position either on the reservations expressed in the final report of the conciliation body or on the results of the second inspection visit. These matters were first addressed in the supplement of 27 May 1999 to the Summary Report.

77.From the fact that at the time of its final report the conciliation body did not have at its disposal those findings of the second inspection visit that were subsequently used to justify the higher correction rate the German Government concludes that the procedure for clearance of accounts was tainted by a fundamental procedural defect.

78.It is not possible to share this view. The Federal Government does not deny that the conciliation body was aware both of the Commission's reservation and of the misgivings arising out of a preliminary evaluation of the results of the second inspection visit which the Commission had expressed in its letter of 24 November 1998. This is reflected in the conciliation body's final report of 30 December 1998 where, inter alia, it is stated that: The conciliation body therefore takes the view that in any event there was justification for not applying the flat-rate correction of 5%, as initially envisaged by the Commission (emphasis added). Against this background, the only possible question is whether the Commission is bound by this opinion of the conciliation body, a question to which I have already given a negative reply.

79.There is therefore no need to go more deeply into the fundamental issue of whether the procedure for clearance of accounts should be regarded as being in breach of procedural requirements simply because the Commission's final decision was based on elements that were not part of the subject-matter of the conciliation procedure.

4.Infringement of the right to a fair hearing

80.The procedural lawfulness of the decision at issue therefore depends on whether the German authorities had sufficient opportunity to express their views on all the elements used to justify the application of a higher correction rate of 5%. With regard to the significance of this procedural guarantee, reference should be made to my earlier observations.

81.From the description of the substantive grounds for the Commission decision and their analysis in the light of the background to the case it follows that the disputed decision is essentially based on the increased risk due, on the one hand, to the proportion of blocks sown with multiple crops and, on the other, to the taking into account of the block/registered parcel problem in connection with single-crop blocks.

82.Initially, the proportion of blocks sown with multiple crops was - as the subject of the Commission's reservation - the focus of attention. Accordingly, the German Federal Government had the opportunity to express its views on the relevance of this aspect to the risk assessment both before and during the conciliation procedure.

83.As regards the actual percentage involved, it should be noted that according to the findings of the second inspection visit it was 15%. However, this finding was first made known to the German authorities only in the supplement of 27 May 1999 to the Summary Report. According to the German authorities, they received the supplement on 21 June 1999 - the day before the meeting of the EAGGF Committee.

84.I do not share the Commission's view that the supplement of 27 May 1999 gave no grounds for consulting the German authorities because it did not contain any new arguments. As far as the obligation to grant a fair hearing is concerned, the only consideration should be whether the Commission based its eventual final decision on new findings. It is, however, indisputable that in that decision it based itself largely on the findings from the second inspection visit.

85.With regard to the risk posed by blocks sown with a single crop, the situation is rather different. Thus, the first evidence of the risk posed by blocks of this kind was provided during the conciliation procedure itself in the Commission's letter of 24 November 1998. Regardless of the proportion of blocks sown with multiple crops, the Commission pointed out that on the basis of the results of the second inspection visit some blocks sown with a single crop could be rated as risk areas.

86.The supplement of 27 May 1999 to the Summary Report confirmed and expanded upon this suggestion. There is, however, no doubt that even during the conciliation proceedings the German Government could have taken a position on the Commission's letter of 24 November 1998 - and hence on the abovementioned misgivings.

87.Thus, the question of the right to a fair hearing comes down to whether the German authorities had sufficient opportunity to express their views on the further arguments in the supplement of 27 May 1999 to the Summary Report and the Commission's substantially similar final conclusions of 18 June 1999 before the final decision was issued on 28 July 1999.

88.In the present case, the period of about five weeks between receipt of the supplement and the issuing of the final decision appears to have been very tight, especially if the need for the Federal and State authorities to consult is taken into account. At the same time, during the proceedings the German authorities regularly responded to the Commission's individual letters within a shorter period. For example, they had already informed the conciliation body of their position on the Commission's letter of 24 November 1998 by the following 11 December.

89.Thus, all in all, it cannot be assumed that the German authorities had no opportunity to express their views on the findings of the second inspection visit, especially as it was clear from the earlier proceedings that these findings would play a decisive part in the final decision to be taken by the Commission, which is now in dispute.

90.The corresponding complaint of the Federal Republic of Germany should therefore be dismissed as unfounded.

5.On the alleged abuse of discretion due to reuse of the findings used to justify a lower correction rate

91.The Federal Republic of Germany also complains that the disputed decision, which is ultimately concerned with raising the correction rate from 2% to 5%, is based on findings, specifically the abovementioned findings Nos 5 to 7, previously used for justifying the 2% correction. This is said to constitute an inadmissible reuse and hence an abuse of discretion.

92.This argument is based on a misunderstanding of the nature of the procedure for clearance of accounts.

93.Corrections are the legal consequence of the failure by a Member State to ensure the effective and orderly implementation of measures financed by the EAGGF by means of the controls described. In this connection, the Commission applies flat-rate corrections in accordance with internal guidelines (hereinafter the Belle Report), which are supposed to reflect the risk of losses to Community funds as a result of deficiencies in the control system.

94.According to the Belle Report, the following, in particular, should be taken into account:

95.The Belle Report provides for flat rates of 2% and 5%. The 2% rate is used if the deficiency is limited to parts of the control system of lesser importance or to the operation of controls that are not essential to ensure the regularity of the expenditure, so that it can reasonably be concluded that the risk of loss to the EAGGF was minor. The 5% rate is used if the deficiency relates to an important element of the control system or to the operation of controls that play an important part in ensuring the regularity of the expenditure, so that it can reasonably be concluded that the risk of loss to the EAGGF was significant.

96.It is clear from the Belle Report guidelines that in choosing the correction rate to be applied the Commission's main consideration is the degree of risk. However, risk assessment is an integrated procedure based on a review of all the individual determinations and findings.

97.It follows that in principle - subject to verification of their content - the Commission was not barred from reusing findings previously used to justify the 2% correction in order to justify the 5% correction.

98.The corresponding complaint of the Federal Republic of Germany should therefore also be dismissed as unfounded.

B -Aspects relating to substantive law

99.From these considerations it follows that, where the verification of the substance of the correction is concerned, it is not a question of whether there were additional control deficiencies or risks that could have justified the switch to a higher correction rate. The corresponding arguments of the applicant, which it also expounded at length during the hearing, are therefore to that extent irrelevant in the present case. What is more important is whether from an overall point of view the Commission was able to establish, in accordance with the applicable rules concerning the burden of proof, the existence of control deficiencies or a corresponding risk in relation to Mecklenburg-Vorpommern and whether on this general basis a correction rate of 5% should have been applied.

1.The relevant case-law of the Court

100.By way of introduction, it seems useful to recall the settled case-law of the Court in relation to the clearance of the accounts of the EAGGF and the apportionment of the burden of proof in respect of corresponding decisions by the Commission.

101.It is, in principle, for the Commission to prove the existence of an infringement of the Community rules, but it is the Member State that must show, where necessary, that the Commission made an error as to the financial consequences to be attributed to it.

102.In the case-law the content of these aspects of the burden of proof is more precisely defined as follows:

103.First of all, the Commission must give reasons for its decision finding an absence of, or defects in, inspection procedures operated by the Member State in question. The Commission will have discharged this obligation to justify its decision if it can adduce evidence of serious and reasonable doubt regarding the checks carried out or the figures submitted by the Member State concerned.

104.The reason for this mitigation of the burden of proof on the Commission is that it is the Member State which is best placed to collect and check the data required for the clearance of EAGGF accounts, and which is consequently required to adduce the most detailed and comprehensive evidence that its checks are actually carried out and, if appropriate, that the Commission's assertions are incorrect.

105.The Member State concerned can attack the Commission's findings only by basing its assertions on facts that demonstrate the existence of a reliable and functioning control system. If the Member State is not able to show that the Commission's findings are inaccurate, those findings may give rise to serious doubts as to the existence of an adequate and effective system of supervisory measures and inspection procedures.

106.Read in conjunction and consistently, these rules on the burden of proof create a - rebuttable - presumption in favour of the Commission. The Member State must adduce evidence of the existence of a reliable and functioning control system while the Court must consider, within the context of the action for annulment, whether that evidence is well founded.

107.As for the amount of the financial correction, it is clear from the Court's case-law that if the Commission finds that there is no adequate system of controls, it may even disallow the entire expenditure incurred. Accordingly, the Commission must in principle be considered immune to all criticism based on the level of the correction.

108.However, the Court has held that if, rather than refuse the entire expenditure, the Commission endeavours to draw up rules to differentiate according to the degree of risk posed to the EAGGF by different levels of defective supervision, the Member State may argue that these criteria are arbitrary and unfair.

109.As already explained, according to the Belle Report, the most important criterion for deciding the rate at which a financial correction should be imposed is the degree of risk of losses to Community funds. Whether the risk is minor, significant or high depends, in turn, on what parts of the control system are found to be deficient.

110.In the mean time, the Court has endorsed the use of flat-rate financial corrections in accordance with these Belle Report criteria and is taking them into account in its own decisions.

111.Consequently, a Member State can prove that, in relation to the financial consequences attributable to an infringement of Community rules, the Commission has made an error in respect of the level of correction only if it can show that the correction criteria of the Belle Report, which in themselves have been approved, have been applied arbitrarily or unfairly.

2.Application to the specific case

112.It will now be necessary to examine, in the light of the procedure for the apportionment of the burden of proof described above, whether the applicant has in fact demonstrated that the 5% correction in question was wrong.

113.First of all, although in its reply the applicant denied that there were significant deficiencies in its system of controls, it did not entirely deny their existence. Thus, not least during the oral procedure, it clearly acknowledged that there had been deficiencies that could justify a correction of 2% and only disputed the existence of further deficiencies or a risk greater than that assumed in the Summary Report.

114.In particular, the applicant at least acknowledged that 10% of blocks were sown with multiple crops and that for these blocks there was a risk of overdeclaration. However, it also accepted the Commission's figure of about 15% of blocks as the (multi-crop) risk area, attributing the difference to the fact that, as distinct from the Commission, it had not taken subsidy-neutral deviations into account in its data. The applicant disputed only the level of the Commission's estimate of 17.3% for the percentage of overdeclared areas in the risk area and itself proposed a risk factor of 2.4%.

115.Secondly, the applicant did not deny that in the Schwerin office no comprehensive risk analyses that would have satisfied the requirements of Community law were carried out for at least six on-the-spot checks. Moreover, its argument that this had already been taken into account by the conciliation body and by the Commission in the results of the Summary Report is irrelevant as far as the question of proof of the infringement of Community rules is concerned.

116.Thirdly, in connection with the on-the-spot checks, measurement deficiencies may be assumed, in so far as in Mecklenburg-Vorpommern blocks do not coincide with registered parcels.

117.Thus, the applicant expressly denied the need to carry out measurements in the context of on-the-spot checks if blocks were sown with only one type of crop and assumes that only blocks sown with multiple crops are to be counted as risk areas and measured. The Commission, on the other hand, justified the need for measurements on the grounds that single-crop blocks could be checked by visual inspection only if their boundaries coincided with those of registered parcels.

118.This assumption seems to be objectively correct since if a block extends beyond a registered parcel or forms only a part of such a plot, and only the boundaries of the registered parcel are recorded in the land register, the exact area of that block cannot be determined by reference to the register.

119.Therefore, contrary to the views of the applicant, a proper INADCOS on-the-spot check should also have included measurements of blocks sown with a single crop that did not coincide with registered parcels.

120.However, the Commission maintained, with reference to the second inspection visit, that, generally speaking, this had not been the case. True, the applicant did insist, without giving any further details, that blocks sown with single crops had also been measured but, on the other hand, made clear that it only regarded blocks sown with multiple crops as risk areas and that these had been measured on a priority basis. However, the applicant did not state that, as a rule, it had also measured blocks sown with a single crop in so far as they did not coincide with registered parcels and indeed denied that, in principle, there was any need for such measurements.

121.In the application the applicant also acknowledged that the Commission's finding in the supplement that in Mecklenburg-Vorpommern almost all blocks consisted of several registered parcels was correct. It is also accepted that about 90% of all blocks are sown with a single crop.

122.All this goes to show that there was at least a certain percentage of blocks sown with a single crop which, contrary to INADCOS requirements, was not measured.

123.From these findings it follows that, at the very least, the applicant was not able to adduce evidence of a reliable and functioning control system.

124.Accordingly, the Commission's findings constitute considerations that cast serious and reasonable doubt on the system of controls in Mecklenburg-Vorpommern. Thus, the Commission has discharged its burden of proof in respect of the irregularities with which it charges the Federal Republic of Germany.

125.As far as the level of the correction is concerned, it has already been established that the Commission was able to make a prima facie case for the defectiveness of the on-the-spot checks that had to be carried out in accordance with INADCOS.

126.On-the-spot checks - together with administrative checks - undoubtedly constitute an important element of INADCOS, without which compliance with the requirements for the granting of aids and premiums cannot reliably be verified. Accordingly, on the basis of the Belle Report rules, the Commission, in the light of its findings and the incorrect on-the-spot checks, was justified in assuming a risk of losses to the EAGGF.

127.The application of a 5% correction therefore seems neither arbitrary nor unfair and therefore not unlawful.

128.Under Article 69(2) of the Rules of Procedure, the unsuccessful party has to pay the costs. Since the action brought by the Federal Republic of Germany is unsuccessful and the Commission has applied for costs, the Federal Republic of Germany should be ordered to pay the costs.

129.In the light of these considerations, it is proposed that the Court rule as follows:

(1) The action is dismissed.

(2) The Federal Republic of Germany is ordered to pay the costs.