to 2.84 The Commission first became aware of problems when its staff noticed the increase in the cultivated

flax areas in Spain from 1994. Consequently DG AGRI Clearance of Accounts undertook a mission in July 1995 which detected anomalies in the flax sector in Spain which could be summarised under the term ‘premium hunting’.

(51_{) Case C-148/99, judgment of 9 November 2000.}

(52_{) Articles 3 to 8 of Regulation (EEC) No 1164/89.}

2.78. In its Annual Report concerning the financial year 1995 (54_{), the Court observed a rapid growth in the}

surface area devoted to fibre flax production and in the related expenditure between 1994 and 1995, and noted the emergence of two new large-scale producer coun- tries, Spain and the United Kingdom. It noted that the quantities produced far exceeded market requirements and recommended that the Commission should take an active interest in this market in order to remedythis market surplus. Between the 1992/1993 and the 1999/2000 marketing years, the total area sown with fibre flax in Spain rose from 0 to 126 000 hectares. In Spain, control of the common market organisation for flax is exerted bythe regional governments.

2.79. The risk of a production for the sake of aid was clearlyhighlighted as earlyas the Commission’s clear- ance of accounts unit’s audit visit to Spain of July1995 (55_{). The audits conducted in June 1997 (}56₎

bythe market division of the Commission responsible for flax, followed bythat of July1998 (57_{), in conjunc-}

tion with OLAF, confirmed this impression (58_{). A flat-}

rate correction for weakness of management of the measure was applied to Spain for the financial years 1994 and 1995 (59_{). This correction was not applied in}

subsequent financial years because the Commission con- sidered, on the basis of the joint audit conducted with OLAFin1998,thattheSpanishauthoritieshadimproved the situation regarding compliance with the statutory requirements.

2.80. The regulations did not require flax straw to be processed, nor did theystipulate a minimum flax straw yield per hectare, a minimum fibre yield per tonne of flax straw processed, or a minimum qualitystandard

This was confirmed by further reports in June. In July 1998 UCLAF participated in a mission in Spain, mainly on hemp, but some verifications were also carried out for flax which showed the presence of anomalies in the flax sector. As a con- sequence of the problems of the sector the Commission took the following legislative measures.

— In February 1996, the Commission made a proposal for a reform of the aid system, which basically consisted in fixing a maximum guaranteed area and different levels of aid for pulled and cut flax. The Council did not adopt that proposal.

— In these circumstances, the Commission made a new pro- posal in December 1996 for processing of the straw to become compulsory. This proposal was adopted by the Council and entered into force in 1997/1998.

— As the areas declared continued to increase, the Commis- sion added a minimum yield requirement as from 1998/1999.

— In November 1998, the legislation was amended so as flax and hemp had to be declared under the IACS and controls and penalties became tighter.

— In November 1999, the Commission made a new pro- posal for a reform in this sector, which was eventually adopted by the Council in July 2000 and will enter into force in July 2001.

(54_{) OJ C 340, 12.11.1996.}

(55_{) Control Report (17-21 July1995) 31.1.1996.}

(56_{) Report on the flax production and processing industryin}

Spain (11 and 12 June 1997), 97/2358a. (57_{) Audit report (27-31 July1997), 26.11.1998.}

(58_{) It was even established that, between 1994 and 1996, it}

was not possible to process anyof the flax straw pro- duced, since Spain did not possess the requisite process- ing capacities. The flax straw appears to have subse- quentlybeen processed into fibre, but this was not marketed because there were no sales outlets for it. More- over, the yields recorded were substantially less than those of the traditional producer countries and the qualityof fibre obtained was verymediocre.

(59_{) 10 % of the expenditure declared bySpain under budget}

item 1400 for the financial years 1994 (PTA 2,3 million) and 1995 (PTA 40,4 million).

for flax straw. As earlyas 1996, the Commission decided to propose amendments to the regulations in force at that time. It attempted to put in place a maximum guar- anteed area system, which would have meant that sur- face areas could be limited, but this proposal was not adopted bythe Council. As from the 1997/1998 mar- keting year, the granting of aid became conditional on the purchaser or the producer providing an undertak- ing to process, and all processors had to be approved. Bylate 1998, it was clear to DG AGRI that the common organisation of the markets (COM) in flax and hemp required a complete overhaul in order to counter the abuses detected in the field, particularlyin Spain but also, to a lesser degree, in other Member States. How- ever, the onlyimmediate measure taken was to set, with effect from the 1998/1999 marketing year, a minimum flax straw yield per hectare which varied according to the harvesting method used. None of these provisions had anyeffect either: surface areas continued to increase, and flax straw was processed but was not marketed.

2.81. In 1999 some stocks of flax straw and fibre were destroyed by unexplained fires, and the same thing hap- pened again in 2000. These events were symptomatic of serious irregularities in Spain. In July1999, at the request of OLAF (European Anti-fraud Office), the Span- ish public prosecutor responsible for the prevention of fraud opened a criminal investigation into the matter.

2.82. The clearance of accounts unit of the Commis- sion did not conduct another audit in Spain but, on the basis of meetings and information obtained from the Spanish authorities, it suggested that, pursuant to Article 4(3) of Council Regulation (EC) No 2988/95 on the protection of the European Communities’ financial interests, a flat-rate correction of 10 % of the expendi- ture declared bySpain in the financial years 1996 to 1998 (7,2 million euro) be applied for premium hunt- ing. The letter of notification of the correction, submit- ted in March 2000 to the Commission’s legal service, has not yet been sent. In April 2001, the legal service stated that it could not give its approval to the correc- tion because all the conditions stipulated in the regula- tion had been fulfilled, which was true, and the correc- tion could not be made on the basis of criteria that had been ‘added as afterthoughts’ to the regulations. More- over, byvirtue of the 24-month time limit, a correction could onlyrelate to expenditure disbursed from July 1997 onwards, because the letter of notification of find- ings was sent to the Spanish authorities in July1999.

2.83. In July2000, the clearance of accounts unit con- ducted an audit concerning the management of the measure in Spain, and in particular controls on

The problems of the flax sector in Spain became notorious after several fires of stocks of non-processed and processed flax had occurred (in April and May 1999) at the premises of processing companies leading to suspicion of fraud. In conse- quence the control bodies of the Spanish autonomous regions made a comparison between the total declared production of flax for the producers delivering to these processors and the technical capacity of the processors which revealed many inconsistencies. For the financial years 1996 to 1998 the clearance of accounts procedure is still ongoing. For 1999 the financial correction will take into account the findings of an investigation which OLAF launched in 2000. Therefore, in October 1999 the Spanish authorities (FEGA — as coordi- nating body of the paying agency of the autonomous regions) asked for further time (until 30 April 2000) to pay the aid as they had to do further checks onseveral ‘cases of presumed irregularities’. The Commission granted the extension. DG AGRI undertook an audit mission in June 2000 together with DG AUDIT (FEGA and Castile-Leon) in order to verify expenditure in the marketing year 1998/1999. At the same time OLAF performed several audit missions in Spain deal- ing with the presumed fraud cases. In December 2000 the Spanish ‘Fiscalia Anticorrupcion’ informed OLAF of the con- clusions of the inquiry. OLAF finalised its report in March 2001. The clearance of accounts procedure is currently ongo- ing on the basis of these findings. The Commission would like to recall that the 24-month limitation for financial correc- tions does not apply to the financial consequences of irregu- larities and negligence attributable to administrative authori- ties or other bodies of the Member States (Article 8(2) of Regulation (EC) No 1258/1999). Therefore the Commission considers the conclusions of the Court as regards the loss to the EAGGF premature.

The Commission decided on a 10 % correction for weaknesses in the control system for 1994 and 1995. For the financial years 1996 to 1998 the clearance of accounts procedure is still ongoing. For 1999 the findings of the OLAF investiga- tion will be the basis for a financial correction. Therefore the Commission considers that the weaknesses discovered in Spain are and were addressed adequately by the Commission. As explained above (points 2.84 to 2.91) the Commission made efforts to propose changes to the regulation as early as Febru- ary 1996, but these were rejected by the Council.

processors. During this audit, it became apparent that the Spanish authorities had not communicated in good time (60_{), the significant irregularities that had come to}

light at the time of the controls. This observation might have been made a lot earlier and could have served as a firm legal basis for corrections for the financial years 1996 to 1998. Moreover, byvirtue of the 24-month time limit, a correction for this omission could only relate to expenditure disbursed from March 1999 onwards (the letter of notification of findings having been sent to the Spanish authorities in March 2001). 2.84. As a result of the combined effects of particu- larlyweak regulations, indifference to the Court’s rec- ommendations, insufficient follow-up bythe Commis- sion, premium hunting related to flax aid was the order of the dayin Spain between 1994 and 2000 and there are indications that serious irregularities could have become widespread. Had the regulatoryprovisions been adequate, much of the aid to Spain (around 180 million euro) need not have been paid for the EAGGF years 1994 to 2000 (see also paragraph 2.76).