Opinion of the Advocate-General
1. The Verwaltungsgericht (Administrative Court) Schwerin, Germany, has referred three questions to the Court for a preliminary ruling under Article 177 of the EC Treaty (now Article 234 EC). In essence, it is seeking an interpretation of Article 16 of Regulation (EEC) No 4115/88, (hereinafter Regulation No 4115/88) as amended by Regulation (EEC) No 838/93, which establishes the system of penalties in the event of failure to comply with undertakings made regarding extensification of agricultural production.
2. The term extensification has not so far gained acceptance in the majority of Member States' languages. It appeared for the first time in Community legislation in Section III of the Annex to Council Decision 83/641/EEC of 12 December 1983 adopting joint research programmes and programmes for coordinating agricultural research, as amended by Decision 87/218/EEC. Section III deals with the improvement of animal and plant productivity and paragraph 2 (plant productivity) states under (b) that one of the aspects of the programme will be [i]mprovement in agricultural methods and techniques in terms of the physiological requirements of plants, having due regard to the cost of production techniques and the scope for extensification.
3. Extensification is defined in Article 1a(2) of Regulation (EEC) No 797/85, (hereinafter Regulation No 797/85) as amended by Regulation (EEC) No 1760/87. This term has since come into widespread use in Community legislation on agriculture.
According to that provision, extensification is defined as a reduction in the output of the product concerned by at least 20% without other production capacity within the meaning of paragraph 1 (i.e. surplus products) being increased.
Surplus products are those for which, consistently at Community level, there are no normal unsubsidised outlets.
4. With a view to assisting the adjustment and reorientation of agriculture in the Community, Regulation No 1760/87 required Member States to introduce an aid scheme designed to encourage the conversion and extensification of production.
5. The Court is not unfamiliar with the term extensification, as it has already adjudicated twice on Community rules relating to this process. On the first occasion, in 1993, it interpreted Council Regulation (EEC) 1094/88 in a case concerning the granting of aid to promote the extensification of beef and veal production. On the second, in 1997, it ruled on whether aid to promote the extensification of potato production was subject to value added tax.
I - The facts in the main proceedings
6. The plaintiff in the main proceedings, Landerzeugergemeinschaft (Agricultural Producer Group) eG Groß Godems brought an action challenging the decision of the defendant, the Amt für Landwirtschaft (Office for Agriculture) Parchim (the administrative authority responsible for implementing common agricultural policy measures), withdrawing the aid for the extensification of agricultural production and demanding repayment of the sums paid in previous years.
7. On 15 November 1991 the plaintiff applied for a grant for the extensification of agricultural production and undertook to apply the necessary measures for a period of five years. According to the law of the Land Mecklenburg Vorpommern, which had adopted the production methods method, it was prohibited throughout that period from using synthetic nitrogenous fertiliser. By administrative decision of 24 January 1992, the defendant granted it aid amounting to DEM 298 650 for five years.
8. This amount had been calculated on the basis of an area of 352.95 hectares cultivated with surplus products and an area of 495.49 hectares cultivated with non-surplus products. By decision dated 2 October 1992, the amount of aid was reduced to DEM 290 330 following an adjustment of the area. Aid for the 1991/92 marketing year was paid to the plaintiff. For the 1992/93 marketing year it was reduced to DEM 253 350 because the new legal situation precluded the simultaneous subsidising of set-aside land and areas farmed under an extensification programme. This amount was also paid.
9. For the 1993/94 marketing year the amount of the extensification aid was set at DEM 254 550, but it was never paid.
10. Following an anonymous tip-off, the defendant carried out a check on 17 June 1994 in order to verify whether the plaintiff was in fact complying with the undertakings it had given regarding extensification. During this check, the inspectors found that the plaintiff had that very day spread synthetic fertiliser on an arable area of 56.85 hectares, which accounted for 6.89% of the total cultivated area that had been taken into account for the granting of the aid.
11. By decision of 2 December 1994, the defendant annulled the decision to grant aid and demanded that the DEM 543 680 already disbursed in that connection be repaid. The reason given for that decision was that by spreading the fertiliser in question, the plaintiff had failed to comply with the undertaking it had given when it agreed to use less intensive production methods and not to spread fertiliser containing nitrogen on the areas covered by the extensification programme.
The defendant considered that the breach of this undertaking was intentional and constituted a serious infringement within the meaning of Article 16(3) of Regulation No 4115/88.
12. As the defendant, by decision of 14 March 1995, dismissed the objection lodged on 4 January 1995, the plaintiff brought an action in the Verwaltungsgericht Schwerin on 12 April 1995.
II - The Questions
13. Because it had doubts concerning the interpretation to be given to Article 16(1) and (3) of Regulation No 4115/88, the national court decided to stay proceedings and refer the following questions to the Court of Justice for a preliminary ruling:
1. Does the penalty laid down by the first sentence of Article 16(1) of Regulation (EEC) No 4115/88, as amended by Regulation (EEC) No 838/93, still apply where the discrepancy between the number of units for which the aid is requested and the number of units measured is not more than 10% of the area but more than two hectares?
2. Does the reduction with regard to aid paid in advance, laid down by the second sentence of Article 16(1) of Regulation (EEC) No 4115/88, as amended by Regulation (EEC) No 838/93, extend back only to the point in time when the areas under cultivation ceased to be farmed extensively or is the discrepancy to be calculated and deducted for the whole period of the undertaking?
3. What are the criteria for determining whether there is a serious infringement within the meaning of Article 16(3) of Regulation (EEC) No 4115/88, as amended by Regulation (EEC) No 838/93?
III - The relevant Community provisions
14. Regulation No 4115/88 laying down detailed rules for applying the aid scheme to promote the extensification of production was adopted by the Commission to give effect to Regulation No 797/85. Under Article 4(1) of the Regulation Member States may provide for two methods of reducing output namely the quantitative method laid down in Article 6 and based on the quantities actually reduced, and the production methods method and laid down in Article 8, and based on the adoption of less intensive sectoral farming techniques.
Under Article 10(1) of the Regulation, the producer is required to undertake, where the quantitative method is applied, to reduce output of the product or products affected by extensification by at least 20% as compared with the annual level of output determined during the reference period and, where the production methods method is applied, to adopt less intensive farming methods.
15. Article 15 of Regulation No 4115/98 requires Member States to take the necessary action to ensure that beneficiaries fulfil their undertakings. To that end, they are required to hold an inspection, each year, of not less than 5% of beneficiary holdings. Under Article 16 they are required to apply financial penalties as a minimum measure in the event of failure to comply with undertakings made.
16. The national court asks the Court of Justice to interpret Article 16, as amended by Regulation No 838/93. The text is as follows:
1. Where checks on the number of units of area (hectares), livestock (LSU), weight (tonnes) or volume (m3) show a discrepancy of at least 2% and 0.2 units up to 10% and two units between the number of units for which the aid is requested and the number of units measured, the aid shall be calculated on the basis of the latter number of units, reduced by the margin of excess. That reduction shall also apply to aid paid in advance, except where the beneficiary can prove that the discrepancy is not intentional or the result of negligence on his/her part.
2. If the excess exceeds the limits given in paragraph 1, no aid shall be due for the period covered by the undertaking to carry out extensification, without prejudice to any additional penalty which may be appropriate. Aid paid for previous years, however, shall not be recovered if the beneficiary can prove that the discrepancy is not intentional or the result of negligence on his/her part.
3. Member States shall impose financial penalties as a minimum sanction in the event of failure to comply with undertakings made, other than undertakings referred to in paragraphs 1 and 2, except in cases of force majeure or failure to comply with undertakings as a result of other factors beyond the control of the beneficiary. In the case of serious infringements of these undertakings and particularly in the case of attempted fraud by the beneficiary or his/her successors, no aid shall be due for the period covered by the undertaking to carry out extensification, without prejudice to any additional penalty which may be appropriate.
IV - The procedure before the Court
17. The plaintiff in the main proceedings and the Commission submitted written observations within the period prescribed for that purpose in Article 20 of the EC Statute of the Court of Justice. Since none of the parties asked to submit oral observations, the Court decided to dispense with the oral procedure, as it is entitled to do under Article 104(4) of its Rules of Procedure.
V - The questions
A - The first question
18. I believe that in asking this question, the national court is seeking to ascertain whether, where the difference between the number of units for which the aid was sought and the number of units measured is greater than two hectares but no more than 10% of the cultivated area, the penalty to be applied is that provided for in the first sentence of Article 16(1) or that provided for in the first sentence of Article 16(2).
I would remind you that the first penalty consists of reducing the future aid by calculating it on the basis of the number of units measured minus the margin of excess, and that the second penalty consists of paying no aid for the period covered by the undertaking to carry out extensification, without prejudice to any additional penalty which may be appropriate.
19. The amendment to Regulation No 4115/88 introduced by Regulation No 838/93 was confined in practice to rewording Article 16 and inserting a new article (16a) setting out the rules governing the repayment of aid paid in error. The first recital in the preamble to the Regulation states that, in order to ensure effective control of the aid scheme to promote the extensification of production established by Regulation No 4115/88, more specific provisions should be adopted on irregularities, penalties and the recovery of sums paid in error.
20. It is important to stress that the old text of Article 16 of Regulation No 4115/88 differed considerably from the text which the national court has asked to have interpreted in this case. Previously, the Regulation left it entirely to the Member States to determine the penalties and did not provide for any gradation according to the seriousness of the infringements.
The new Article 16, on the other hand, consists of two quite separate parts pursuing different objectives. Paragraphs 1 and 2 lay down the conditions under which the aid may be reduced or withdrawn, depending on the seriousness of the infringement, where the inspections carried out in accordance with Article 15 reveal a discrepancy between the number of units for which the aid was requested and the number of units measured. These two paragraphs are therefore applicable only where the undertakings on extensification that have been broken are quantifiable.
All other cases of non-compliance must be penalised in accordance with Article 16(3), which leaves it to the Member States to determine the penalties. I take this paragraph to be an additional rule, intended to deal with residual cases where the undertakings given are not quantifiable, as the Community legislature is unable in such cases to ensure that the severity of the penalty is commensurate with the seriousness of the aid beneficiary's failure to comply with the undertaking he has given and thus to ensure that the principle of proportionality is respected.
21. The beneficiary's obligation to reduce his output if he is applying the quantitative method is unquestionably among the quantifiable undertakings on extensification. I nevertheless consider that paragraphs 1 and 2 of Article 16 may also apply where the beneficiary has failed to comply with undertakings he has given on the basis of the production methods method if those undertakings are defined in terms of quantity.
In this connection I believe that, in its order for reference, the national court was correct in supposing that, in a case such as this, where the beneficiary of the aid has failed to comply with a quantifiable undertaking given on the basis of the production methods method, the penalty to be applied is one of the two provided for in Article 16(1) and (2) of Regulation No 4115/88. I also feel that it would not be correct to consider that paragraph 1 alone applies where the difference between the number of units for which aid was requested and the number of units measured is the result of inaccurate information which was provided by another authority and which the beneficiary has reproduced in his application.
22. It is clear from the wording of the first sentence of Article 16(1) that that provision applies only where the two lower limits (2% and 0.2 hectares) have both been exceeded and that it ceases to apply where the two upper limits (10% and two hectares) have also been exceeded. Consequently, if the discrepancy between the number of units for which aid was requested and the number of units measured remains within the limits referred to in paragraph 1 (that is, between 2% and 0.2 hectares, on the one hand, and 10% and 2 hectares on the other), the aid due for the remaining period of the undertaking is calculated on the basis of the number of units determined by the inspection, the amount corresponding to the margin of excess being deducted from the quantity obtained. Since the ceiling is 10%, the aid requested can never be reduced by more than 20%.
On the contrary, if the margin of excess exceeds the limits laid down in paragraph 1, paragraph 2 provides that the aid will be withdrawn for the whole of the period covered by the undertaking to carry out extensification, so that in the event of a more serious infringement, the penalty is considerably higher than in the previous case.
23. For these reasons, I consider that Article 16 of Regulation No 4115/88, as amended by Regulation No 838/93, must be interpreted to mean that the penalty provided for in the first sentence of paragraph 1 of that article is applicable where the discrepancy between the number of units for which aid was requested and the number of units measured exceeds two hectares but is less than 10% of the arable area.
B - The second question
24. The second question referred to the Court for a preliminary ruling by the national court relates to the interpretation of the second sentence of Article 16(1) of Regulation No 4115/88, under which the reduction is also applicable to aid paid in advance, except where the beneficiary can prove that the discrepancy is not intentional or the result of negligence on his/her part.
The national court wants to know specifically whether, if the beneficiary fails to prove that the discrepancy is neither intentional nor the result of negligence on his/her part, the aid already paid must be reduced with effect from the date on which the undertaking to carry out extensification was given or only from the date on which it was broken.
25. The plaintiff in the main proceedings and the Commission do not agree on the reply to be given to this question. The former considers that extensification aid may be reduced only from the date on which the failure to comply with the undertaking was established and that this reduction may not extend back to the point in time when the undertaking was made. The Commission, on the other hand, contends that the reduction must cover the whole period for which the undertaking was made.
26. I share the Commission's view. The second sentence of Article 16(1) applies generally to aid paid in advance and does not contain any time-limit such as that suggested by the national court in the question it has referred for a preliminary ruling.
27. It must also be borne in mind that the check which Member States are required to carry out, in accordance with Article 15 of Regulation No 4115/88, to ensure that beneficiaries fulfil their undertakings on extensification, consists of an inspection, each year, of a representative sample of holdings, which may not be less than 5%. This is a small proportion and, for that reason, the penalties provided for in Article 16 would lose a large part of their deterrent effect if they could only be imposed according to the number of hectares in respect of which failure to comply with the undertaking on extensification had been established. This argument is supported by the fact that in practice it is often impossible to establish, retrospectively, that there has been a failure to comply with the undertaking.
It is therefore logical, as the Commission points out, that the aid should be reduced for the whole of the period covered by the undertaking (paragraph 1) or withheld for the whole of that period (paragraph 2), depending on the extent of the discrepancy between the number of hectares for which aid was requested and the number of units measured, and that, before steps are taken to reduce the amount of the aid or recover sums already paid, the beneficiary should be given the opportunity to prove that he is not responsible for that discrepancy.
28. The reply to the second question referred by the national court should therefore be that the second sentence of Article 16(1) must be interpreted to mean that the reduction of aid paid in advance is applicable from the commencement of the period for which the undertaking was given, unless the beneficiary can prove that the discrepancy is neither intentional nor the result of negligence on his/her part.
C - The third question
29. By this question, the national court asks what the criteria are for determining whether there is a serious infringement within the meaning of Article 16(3) of Regulation No 4115/88, as amended by Regulation No 838/93.
30. I believe that the interpretation of Article 16(1) of Regulation No 4115/88 to be given by the Court is the only one which might be of use to the national court called upon to rule on the merits. The provision contained in paragraph 3 of the article in question is additional to those contained in the preceding two paragraphs and requires Member States to impose financial penalties as a minimum sanction (from which I infer that a criminal law sanction may also be imposed) in the event of failure to comply with undertakings made other than undertakings referred to in paragraphs 1 and 2, except in cases of force majeure or failure to comply owing to unforeseen circumstances. It is in this context that the provision refers to serious infringements, in particular, those resulting from attempted fraud by the beneficiary or his/her successors. The minimum penalty provided for in such cases is that no aid be paid for the period covered by the undertaking.
If that paragraph 3 refers only to serious infringements as distinct from those referred to in paragraphs 1 and 2, there is, in my view, no need to reply to this question, since I have shown in the analysis of the first two questions that the case put by the national court is covered by Article 16(1) in the interpretation that I have proposed. I shall nevertheless examine it, in case the Court should consider that it requires an answer.
31. The plaintiff in the main proceedings submits that there is a serious infringement only if the beneficiary had fraudulent intent or, at the very least, acted with the intention of benefiting from the infringement. In its own case this would require the proportion of nitrogen contained in the fertiliser that was spread to have been significantly higher than the average quantities commonly used per cultivable hectare, without there being any need to take the cultivable area in question as a basis, as is the case in paragraphs 1 and 2 of Article 16.
32. The Commission, however, points out that the concept of irregularity is defined in Article 1(2) of Council Regulation (EC, Euratom) No 2988/95 of 18 December 1995 on the protection of the European Communities' financial interests, and it advises the Court to base its interpretation of the second sentence of Article 16(3) of Regulation No 4115/88 on this definition.
33. The purpose of Regulation No 2988/95 is to ensure the protection of the European Communities' financial interests by means of general rules relating to homogeneous checks and to administrative measures and penalties concerning irregularities with regard to Community law.
Article 1(2) of the Regulation in fact defines irregularity as any infringement of a provision of Community law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the Communities or budgets managed by them, either by reducing or losing revenue accruing from own resources collected directly on behalf of the Communities, or by an unjustified item of expenditure.
34. In my view the Commission's suggestion, which seeks to standardise the interpretation of the concepts, is a laudable one. It does not, however, resolve the problem as Regulation No 4115/88, on which the national court is seeking an interpretation in this case, does not speak of irregularity but of serious infringement and provides, as a minimum, for withdrawal of the aid for the whole of the period for which the undertaking on extensification was given if such a serious infringement is found to have occurred.
35. As this penalty is very severe and corresponds to that provided for in the first sentence of Article 16(2), the Commission proposes that the Regulation be interpreted to mean that, in order to determine whether a serious infringement within the meaning of this provision has been committed, the failure to comply with the undertaking must be comparable to the infringements referred to in paragraph 2 and the beneficiary of the aid must also have been guilty of serious negligence.
36. I have already pointed out that paragraph 3 of Article 16 is additional to paragraphs 1 and 2, since it refers only to infringements that are not covered by the first two paragraphs. It cannot therefore be merely a matter of major or minor discrepancies between the number of hectares for which the aid was requested and the number of hectares measured, whether or not such discrepancies result from intention or negligence; these infringements must also have been perpetrated within the context of other breaches of the undertakings on extensification and, furthermore, be accompanied by serious negligence or fraudulent intent.
37. Should the Court deem it necessary to reply to the third question referred to it for a preliminary ruling, I believe that the criteria for determining whether there is a serious infringement within the meaning of Article 16(3) of Regulation No 4115/88 are, first, whether it occurred in the context of cases of failure to comply with undertakings given, as distinct from the cases referred to in Article 16(1) and (2) and, second, whether it was accompanied by serious negligence or fraudulent intent.
VI - Conclusion
38. Having regard to the foregoing considerations, I propose that the Court should reply as follows to the questions submitted to it for a preliminary ruling by the Verwaltungsgericht Schwerin:
(1) Article 16 of Commission Regulation (EEC) No 4115/88 of 21 December 1988 laying down detailed rules for applying the aid scheme to promote the extensification of production, as amended by Commission Regulation (EEC) No 838/93 of 6 April 1993, must be interpreted to mean that the penalty provided for in the first sentence of paragraph 1 of that article is applicable where the discrepancy between the number of units for which aid was requested and the number of units measured exceeds two hectares but is less than 10% of the arable area.
(2) The second sentence of Article 16(1) of Regulation No 4115/88, as amended by Regulation No 838/93, must be interpreted to mean that the reduction of aid paid in advance is applicable from the commencement of the period for which the undertaking on extensification was given unless the beneficiary can prove that the discrepancy is neither intentional nor the result of negligence on his/her part.
(3) The criteria for determining whether there is a serious infringement within the meaning of Article 16(3) of Regulation No 4115/88, as amended by Regulation No 838/93, are, first, whether it occurred in the context of cases of failure to comply with undertakings given, as distinct from the cases referred to in Article 16(1) and (2) and, second, whether it was accompanied by serious negligence or fraudulent intent.
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