This is the third and final part of a series compiling instances of subsidy fraud in the common agricultural policy (although the illegal importation of goods in order to evade customs duties are also considered). Part one was published last week, part two earlier this week.
FRAUDULENT INFORMATION ABOUT THE ORIGIN OF GOODS
The EU grants preferential access to its markets to some countries and regions. Consequently, so-called origin fraud is a significant problem. It occurs when an importer falsely declares that certain goods have originated outside the European Union. As a rule, subsidies are only available for goods originating within the EU.
The fraud also occurs when an importer falsely declares that goods have originated from one country within the EU in order to circumvent volume quotas set for the production of those goods from the actual country of export. For example, in 1998, after the European Commission had set national quotas for tobacco production, Spain exceeded its quota, while Portugal was below its own. Through middlemen, Portuguese tobacco planters bought up Spanish surpluses and declared them as their own, in order to obtain subsidies.
Milking the system
The milk-quota regime was introduced by the Common Agricultural Policy in order to steer EU-wide milk production. Milk produced in excess of the quota is subject to an extra levy when put on the market. A common fraud involves the creation of several cooperative companies by milk producers. The aim is to make them appear to be the “first purchaser” of the milk, obliging them to pay the levy on extra-quota milk.On paper, the sale of the extra-quota milk appears to involve the cooperative companies and the dairies. In practice, the cooperative companies do not conduct any business; the sale takes place between the producers and the dairies, allowing the producers to sell the extra-quota milk to the dairies without paying the levy.
In 2003, OLAF received information about an alleged fraud by a federation of dairy producers. The case involved the sale of milk outside the quota system between producers in one member state and those in another, to avoid paying the levies. The trade was in both directions and involved full milk, skimmed and semi-skimmed milk.
OLAF established that certain dairies had recorded a higher quantity of milk purchased from producers than the quantity declared to national control bodies. OLAF also identified trade operations which involved what was described as “concentrated milk” sold at a low price which could also serve to disguise milk quantities produced outside national quotas. The estimated financial impact of the alleged fraud was €31.8m.
Sugar originating in certain African countries can be imported into the EC free of import duty within the framework of a quota system. Imports under this arrangement are subject to the presentation of an import license and proof of origin. In 2004, British customs authorities informed OLAF of a possible irregular importation of sugar declared as originating in Malawi.
OLAF launched an investigation and established that over 4,000 tons of raw cane sugar, originating in South America and processed in Bulgaria before being imported to the UK and Malta, were falsely declared as originating in Malawi, Zimbabwe and Zambia.
False movement certificates had been presented at import to disguise the origin of the goods, the importer having already been involved in similar irregularities relating to the import of sugar from the Balkans. This resulted in the evasion of about €2m in duties.
All the garlic in China
Import of fresh Chinese garlic to the EU is subject to the payment of a 9.6 % ad valorem duty and of a specific amount of €1,200 per ton net weight. This amount is not applicable for import within an annual quota of 13,000 tons. Furthermore, in the framework of preferential trade arrangements, fresh garlic can be imported duty free and without quantitative restrictions, on condition that the goods originate in those countries for which the EU provides preferential treatment.
As the production capacity for garlic in China is very high and production costs are low, the illegal import of fresh garlic is an attractive business for smugglers. A single container carries an average of 20 tons of garlic; if smuggled successfully, it can result in €24,000 of illegal benefit if import duties are evaded.
In 2005, OLAF launched an investigation to verify whether some 3,400 tons of fresh garlic imported to two Member States in 2003 and 2004 had originated elsewhere. OLAF established that at least 135 container loads of Chinese fresh garlic had been shipped to a third country before being imported to the EU, where the loads were cleared by customs as originating from the third country. The falsification of origin meant the special levy of €1,200/ton on Chinese fresh garlic had not been paid.
OLAF later established that all shipments to the EU in 2003 and 2004 under false origin had in fact originated in China. Most of the certificates of origin were forgeries; others had been issued in error, following the presentation of misleading information. OLAF estimates the evaded customs duties to be €4.3m.
However, the financial damage caused by the cases under investigation is estimated to be around €60m. Indeed, among all OLAF investigations into illegal trading with agricultural products with third countries, cases involving Chinese garlic alone ranks third in degree of incidence (with 17 cases), just behind sugar (21 cases) and meat (20 cases).
Garlic smugglers use the following methods to import their merchandise to the EU:
(1) Shipping garlic through a third country (such as Bulgaria, Jordan, Mynamar and Russia) and reloading it into new containers to make this country appear to be the country of origin;
(2) Falsifying certificates of origin, without the garlic ever passing through the purported country of origin, or giving authorities misleading information and receiving certificates of origin in error;
(3) Misdeclaring fresh garlic to authorities as dried or frozen garlic, for which much lower customs duties apply;
(4) Misdeclaring common garlic as elephant garlic, which is not subject to specific import restrictions.
FRAUDULENT INFORMATION ABOUT COUNTRY OF EXPORT
This fraud occurs when an exporter in a Member State falsely reports the export of goods to a third country, in order to obtain subsidies, yet the goods actually remain within the European Union. For example, in 1968, a German exporter obtained a 78,950 deutschmark subsidy for exporting 360,000 kg of powdered milk to Switzerland, when in fact the milk had been sold to Italy.
Fraud is perpetuated in the EU in a variety of ways, from smuggling and violence, to sham transactions and false documents. As this paper has tried to illustrate, the most common method is the fraudulent declaration of information that affects the application of certain customs or subsidy norms. Still, as many observers have pointed out, member states carry the financial burden of reporting to the Commission cases of misallocated or misemployed subsidies. As a result, member states face a conflict of interest between detecting and reporting these cases and protecting their own financial resources. Until this inherent structural weakness is resolved, it will be difficult to eliminate EU fraud.