Directorate-general for agriculture and rural development

13.4.United Kingdom - Wales

Enquiry No: XC/2008/011/GB -Wales

Legislation: R.1782/2003 and R.796/2004

Date of mission: 08.12-12.12.2008

Observation letter: 7723 of 18.03.2009

Reply of the Member State: CL/392 of 15.05.2009

Bilateral meeting: 02.09.2009

Minutes of the bilateral meeting: ARES 895274 of 02.12.2010

Reply to minutes of bilateral: CL/392 of 03.02.2011

Conciliation/Final letter: ARES 323698 dated 20.03.2012

13.4.1.Main findings

Certain requirements and standards not or inadequately controlled

13.4.1.1.The GAEC standard "Standards for crop rotations where applicable" was not defined and controlled (observation no. 2 of LA 11)

Art.5(1) of R.1782/2003 and Annex IV of the same regulation set the framework on the basis of which the Member State shall define, at a national or regional level, the minimum requirements for good agricultural and environmental condition. Art.3 of the same regulation requires that a farmer receiving direct payments respects the good agricultural and environmental conditions defined in accordance with Art.5. Based on these provisions, the DG for Agriculture and Rural Development ("DG AGRI") is of the opinion that all issues and standards of Annex IV of R.1782/2003 should be addressed in the national legislation and controlled in the framework of cross-compliance, except in justified cases.

The evidence gathered during the audit does not provide sufficient assurance that the standard "Standards for crop rotations where applicable" under the issue "Soil organic matter: Maintain soil organic matter levels through appropriate practices" was defined and controlled effectively in claim years 2006 and 2007.

The UK Authorities confirmed that the standard was not implemented (by means of crop rotation requirement) since it was considered not applicable in Wales due to specific land conditions and farming practices. Instead the farmers were required to undertake an annual soil assessment followed by remediation action in case of a low soil organic matter level. One of the remediation actions envisaged was crop rotation. If soil assessment or remediation action were not undertaken, cross-compliance reductions were applied. The UK Authorities informed that these requirements were verified as from 2008 onwards.

The DG AGRI is of the opinion that the standard was applicable in Wales and, based on the legislation quoted above, should have been effectively implemented. It considers soil assessment requirement as a plausible mitigating control in claim year 2008, taking into account its obligatory character and the application of cross-compliance reductions. It concludes however that the standard was not defined and controlled before, which led to the non-application of regulatory sanctions and created a risk to the Funds in claim years 2006 and 2007.

13.4.1.2.The minimum requirements for fertiliser and plant protection product use were not controlled under cross-compliance (observation no. 5 of LA 11)

According to Art. 51(1) of R. 1698/2005 "(…) where the beneficiaries receiving payments under Article 36(a)(iv) [agri-environment payments] do not respect on the whole holding, as a result of an action or omission directly attributable to them, the minimum requirements for fertiliser and plant protection product use referred to in Article 39(3) [the total amount of their payments to be granted in the calendar year in which the non-compliance occurs shall be reduced or cancelled]".

The analysis of audit evidence leads to a conclusion that the beneficiaries of agri-environment payments ("AEP") were not checked for compliance with the minimum requirements for fertiliser and plant protection product use ("MRFPPP") within the framework of cross-compliance control system.

In particular, it was observed that: firstly, no controls on the MRFPPP were reported in the cross-compliance statistics for claim years 2007 and 2008; secondly, as confirmed by the UK Authorities, the MRFPPP were not implemented "as specific cross-compliance requirements for agri-environment measures"; thirdly, no relevant provisions were included in the cross-compliance control procedures and reports.

The UK Authorities argued that the MRFPPP were addressed by different provisions of national legislation (e.g. the Water Code, the Water Resources Act, various codes of practice, SMR 9) and were verified during controls on the eligibility of AEP. DG AGRI is of the opinion that the MRFPPP should have been implemented under cross-compliance, since not all relevant obligations would necessarily fall within the scope of AEP eligibility checks. The existing cross-compliance requirements, referred to by the UK Authorities (e.g. SMR 9), do not provide a mitigating control as they address different obligations.

DG AGRI maintains that, due to the non-application of cross-compliance reductions for non-compliance with the MRFPPP, a risk to the Funds was created in claim years 2007 and 2008.

13.4.1.3.SMR 11 (Food law) was not adequately controlled (observation no. 8(b) of LA 11)

The requirement "to take account of the results of any relevant analyses carried out on samples taken from primary products or other samples relevant to feed safety", provided for in Annex 1 of R.183/2005 (Part A, Section I, p. 4g), was not included in the control procedures.

Risk to the Fund was generated for claim years 2006, 2007 and 2008.

13.4.1.4.There were cases of non-compliance not leading to a reduction (observation no. 17 of LA 11)

According to Art.66(1) of R.796/2004, "where a non-compliance resulting from negligence of the farmer is determined a reduction shall be applied on the overall amount of direct payments […] that has been, or has to be, granted to the farmer concerned following aid applications he has submitted or will submit in the course of the calendar year of the finding. That reduction shall, as a general rule, be 3% of that overall amount.[…] The Paying Agency may, on the basis of the assessment provided by the competent control authority in the control report[…] decide either to reduce that percentage to 1 % or to increase it to 5 % of that overall amount or, in the cases referred to in the second subparagraph of Art.48 (1)(c) not to impose any reductions at all".

The second subparagraph of Art.48(1)(c) foresees that: "where provisions relating to the requirement or standard in question leave a margin not to further pursue the non compliance found, the report shall make a corresponding indication. The same shall apply in the case where a Member State grants a period for the compliance with a new standard as referred to in Art.5 (3) of Council Regulation (EC) NO 1257/1999 of 17 May 1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (EAGGF) or a period for the compliance of young farmers with the minimum standards referred to in Art.4 (2) of Commission Regulation (EC) NO 445/2002 of 26 February 2002 laying down detailed rules for the application of Council Regulation (EC) NO 1257/1999".

The audit revealed that the evaluation system in Wales provided for a non-application of reductions in certain cases of non-compliance, notably where "extent" was assessed as having an "on-farm" effect, "severity" – as "minimum" and "permanence" – as "rectifiable". According to the statistical data submitted by the UK Authorities 29% of applicants found with a non-compliance due to negligence in Wales in claim year 2006 and 28% of respective applicants in claim year 2007 were not sanctioned. In the view of DG AGRI these cases did not correspond to the ones referred to in the second subparagraph of Art. 48(1)(c) of R. 796/2004 therefore reductions should have been applied. The possibility not to apply a reduction where a case of a non-compliance is considered as minor has been provided for in the legislation only since 1 January 2008.

The UK Authorities confirmed that reductions were not applied in certain cases of non-compliance and that there were "no existing statutory agreements to allow such tolerances".

DG AGRI concludes that, due to the non-application of regulatory reductions, a risk to the Funds was generated in claim years 2006 and 2007.

13.4.1.5.The evaluation of non-compliances with SMR 7-8 (Bovine I&R) was too lenient causing loss to the Funds from lower reductions (observations no. 16, 18, 19, 20 and 22 of LA 11)

According to Art. 7(1) of R. 1782/2003 in deciding about the reductions and exclusions "account shall be taken of the severity, extent, permanence and repetition of the non-compliance found". Art. 66(1) of R. 796/2004 provides that "where a non-compliance resulting from negligence of the farmer is determined a reduction shall be applied on the overall amount of direct payments […] that has been, or has to be, granted to the farmer concerned following aid applications he has submitted or will submit in the course of the calendar year of the finding. That reduction shall, as a general rule, be 3% of that overall amount. That reduction shall, as a general rule, be 3% of that overall amount.[…] The Paying Agency may, on the basis of the assessment provided by the competent control authority in the control report[…] decide either to reduce that percentage to 1 % or to increase it to 5 % of that overall amount or, in the cases referred to in the second subparagraph of Art.48 (1)(c) not to impose any reductions at all".

The evaluation system in Wales was designed in such a way that non-compliance with SMR 7-8 triggered either no or 1% reduction, instead of a standard rate of 3%. As reported in the statistics, 90% of cases of non-compliance identified in claim year 2006 entailed reductions below 3%. The corresponding rates in claim years 2007 and 2008 amounted to 74% and 77%. Almost all of them related to SMR 7-8.



Such a wide application of reduced rates cannot be justified by the nature of the non-compliances found but indicates systemic deficiencies. The audit revealed the following weaknesses in the evaluation system:

• 
  Cases assessed as "inadvertent and minor in nature", some of them of relatively serious nature, were not considered non-compliance (e.g. animals unaccounted for in the BCMS cattle register, failures to report movements, births and deaths of livestock).
  
• 
  "Severity" score was arithmetically reduced by linking it only with the size of the herd which, in the case of large farms, led to relatively lenient treatment of public/animal health risks.
  
• 
  In cases of non-compliance with SMR 7&8 (Bovine identification and registration) identified on holdings with less than 50 animals, a "small herd exemption" was applied in determining the sanction. In general, the severity of non-compliance was assessed based on the ratio of animals found with a breach to the total number of animals in herd. In herds below 50 animals, however, the denominator of this ratio was always 50, regardless of the actual number of animals in herd. As a result the penalty threshold was artificially inflated for small herds which led to the non-application or inadequate application of statutory sanctions. DG AGRI considers the use of "small herd exemption" inappropriate because risk to the public health can still be serious, even if the herd is smaller than 50 animals.
  
• 
  Certain cases of non-compliance were assessed in terms of "extent" as having and "on-farm" effect, whereas, in the opinion of DG AGRI, they should have been assessed as having an "off-farm" effect due to a wider implications for public/ animal health / entry into the human food chain. They include: "failure to report movement" (error code FM) with respect to List 1 animals (animals recorded on the Cattle Tracing System (CTS) as being on the farm), "movement details not recorded or incorrectly recorded" (error code MV) and "dead animal not reported to the CTS" (error code DD).
  
• 
  Evaluation of "permanence" did not depend "on the length of time for which the effect lasts or the potential for terminating those effects by reasonable means" (Art. 41(d) of R. 796/2004) but on whether the paperwork could have been fixed after a control. For example, rather than looking at the effects of a breach where a valuable habitat was lost, or groundwater polluted, the Authorities focused on whether a permit could have been obtained a posteriori.
  

The weaknesses listed above contributed to too lenient overall evaluation of cases of non-compliance leading to unjustifiably reduced sanction rates which, in turn, created a risk to the Funds in claim years 2006, 2007 and 2008.

13.4.2.Member State’s arguments

The arguments brought forward by the UK authorities are included in section 1.1 above.

13.4.3.Final Commission position

In line with the document AGRI-64043-2005 on financial corrections in case of shortcomings in the cross-compliance systems implemented by Member States, the non-application of sanctions resulting from the inadequate or non-performance of on-the-spot-checks in the context of the cross-compliance (Statutory Management Requirements and Good Agricultural and Environmental Conditions) and the non- or incorrect application of regulatory sanctions leading to the loss of their deterrent effect is, inter alia, considered as a weakness in a key control.

In the framework of the system of control of cross-compliance, and in line with document AGRI-64043-2005 on financial corrections in case of shortcomings in the cross-compliance systems implemented by Member States, the weaknesses in the risk-analysis are to be seen as a weakness in an ancillary control.

On the basis of the findings and the information and explanations provided by the UK Authorities, the DG AGRI maintains that the weaknesses established created a risk for the Funds. More concretely, the facts that: one GAEC standard was not defined and controlled, the minimum requirements for fertiliser and plant protection product use were not controlled under cross-compliance, SMR 11 was not adequately controlled, there were cases of non-compliance which did not lead to reductions and the evaluation of certain types of non-compliance with SMR 7-8 was too lenient, have led to the non- or incorrect application of regulatory sanctions and are thus considered as weaknesses in the operation of key controls.

According to document AGRI-2005-64043:

• 
  in the case of deficiencies in the operation of one or more ancillary controls in respect of the cross-compliance system, then a correction of 2% is to be applied.
  
• 
  if the cross-compliance conditions laid down in an Act (i.e. each Directive or Regulation laid down in Annex III of R.1782/2003) or Standard (cf. Annex IV of R.1782/2003) are checked but not in the number, frequency, or depth required by the regulations or national legislation (in case of a directive or GAEC) or do not lead to the application of the regulatory sanctions, then a correction of 5% will be applied.
  
• 
  if the cross-compliance conditions are not checked or checked so poorly or so infrequently that they are completely ineffective as to the application of the regulatory sanctions, then a correction of 10% will be applied.
  

The following weaknesses in the operation of key controls have been identified in relation to the claim years 2006, 2007 and 2008:

Claim years 2006 and 2007:

• 
  The GAEC standard "Standards for crop rotations where applicable" was not defined and controlled,
  
• 
  SMR 11 (Food law) was not adequately controlled,
  
• 
  There were cases of non-compliance which did not lead to a reduction (not allowed before claim year 2008),
  
• 
  The evaluation of non-compliances with SMR 7-8 (Bovine I&R) was too lenient causing loss to the Funds from lower reductions.
  

Additionally, in claim year 2007 only:

• 
  The minimum requirements for fertiliser and plant protection product use were not controlled under cross-compliance.
  

On the basis of the above-mentioned weaknesses, having in mind the provisions of document AGRI-2005-64043, a correction of 5% is proposed in the claim years 2006 and 2007.

It is emphasized that each single weakness mentioned above could be sufficient, in isolation, to lead to proposed corrections.

Since the first three weaknesses mentioned above concern the whole population of claimants for direct aids, the financial correction proposed will be applied to the total amount of direct payments in the respective claim years.

Claim year 2008:

• 
  The minimum requirements for fertiliser and plant protection product use were not controlled under cross-compliance,
  
• 
  SMR 11 (Food law) was not adequately controlled,
  
• 
  The evaluation of non-compliances with SMR 7-8 (Bovine I&R) was too lenient causing loss to the Funds from lower reductions.
  

Taking into consideration that in year 2008 the UK Authorities took corrective measures to remediate some of the weaknesses identified earlier and that, as a result, the risk for the Funds was lower than in claim years 2006 and 2007, a correction of 2% is proposed for claim year 2008.

Taken together, the weaknesses mentioned above concern the whole population of claimants for direct aids. The financial correction proposed will therefore be applied to the total amount of direct payments in claim year 2008.

The proposed rate of correction is to be applied to 6% of the total direct payments for claim year 2006 and to 10% of the total direct payments and rural development payments for claim years 2007 and 2008, as foreseen under point 3.2.2. of document AGRI-2005-64043.

Claim year 2006

Paying Agency	Budget line	Correction type	Currency	Gross Amount excluded	Net amount excluded (Effective financial impact)
Financial year 2007
GB07	050301	Flat rate 5% * 6%	EUR	-65,618.29	-65,618.29
GB07	050302	Flat rate 5% * 6%	EUR	-208.49	-208.49
GB07	050303	Flat rate 5% * 6%	EUR	-7,430.58	-7,430.58
Financial year 2008
GB07	050301	Flat rate 5% * 6%	EUR	-3,772.87	-3,772.87
GB07	050302	Flat rate 5% * 6%	EUR	-21.03	-21.03
GB07	050303	Flat rate 5% * 6%	EUR	-270.53	-270.53
Financial year 2009
GB07	050301	Flat rate 5% * 6%	EUR	-507.10	-507.10
GB07	050303	Flat rate 5% * 6%	EUR	-14,44	-14,44
TOTAL EUR				-77,843.33	-77,843.33

Claim year 2007

Paying Agency	Budget line	Correction type	Currency	Gross Amount excluded	Net amount excluded (Effective financial impact)
Financial year 2008
GB07	050301	Flat rate 5% * 10%	EUR	-1,627,758.34	-1,627,057.94
GB07	050302	Flat rate 5% * 10%	EUR	-300.89	-300.89
GB07	050303	Flat rate 5% * 10%	EUR	-15,346.18	-15,346.18
GB07	050405	Flat rate 5% * 10%	EUR	-77,419.70	-77,419.70
Financial year 2009
GB07	050301	Flat rate 5% * 10%	EUR	-5,098.02	-5,098.02
GB07	050303	Flat rate 5% * 10%	EUR	-261.08	-261.08
GB07	050405	Flat rate 5% * 10%	EUR	32.09	32.09
Financial year 2010
GB07	050301	Flat rate 5% * 10%	EUR	-501.39	-501.39
GB07	050303	Flat rate 5% * 10%	EUR	-35.52	-35.52
GB07	050405	Flat rate 5% * 10%	EUR	-70.69	-70.69
TOTAL EUR				-1,726,759.72	-1,726,059.32

Claim year 2008

Paying Agency	Budget line	Correction type	Currency	Gross Amount excluded	Net amount excluded (Effective financial impact)
Financial year 2008
GB07	050405	Flat rate 2% * 10%	EUR	-5,741.43	-5,741.43
Financial year 2009
GB07	050301	Flat rate 2% * 10%	EUR	-636,148.99	-636,148.99
GB07	050302	Flat rate 2% * 10%	EUR	-125.90	-125.90
GB07	050303	Flat rate 2% * 10%	EUR	-6,046.27	-6,046.27
GB07	050405	Flat rate 2% * 10%	EUR	-22,884.24	-22,884.24
Financial year 2010
GB07	050301	Flat rate 2% * 10%	EUR	-621.73	-621.73
GB07	050302	Flat rate 2% * 10%	EUR	-0.71	-0.71
GB07	050303	Flat rate 2% * 10%	EUR	-89.87	-89.87
GB07	050405	Flat rate 2% * 10%	EUR	-31.12	-31.12
TOTAL EUR				-671,690.26	-671,690.26

The total gross amount proposed for financial correction is: EUR 2,476,293.31.

The total net amount proposed for financial correction is: EUR 2,475,592.91.

The financial correction proposed has been adjusted to take into account the impact of the financial corrections applied in the framework of enquiries: AA/2005/53/GB, AA/2005/54/GB, DPU/2007/101/GB and DPU/2008/004/GB. However, if the financial correction decided by the Commission in respect of this enquiry is cancelled in part or in full by the EU Courts, the financial correction under the present enquiry will be executed at a later stage.

The UK authorities did not request conciliation.