This is the second of three posts that compile instances of subsidy fraud in the common agricultural policy (although the illegal importation of goods in order to evade customs duties are also considered).
Each case is drawn from the annual reports (2000-2008) of the EU’s anti-fraud office, OLAF. Together, they illuminate the breadth and depth of fraud in the European agricultural market. (Click here to read the first post).
According to Professor Zlata Durdevic of Zagreb University, subsidy fraud involves the false declaration of information relevant for obtaining subsidies — and there are six ways of achieving this [PDF]: (1) fraudulent production or export declaration; (2) fraudulent declaration of the quantity of goods, in number or weight; (3) fraudulent declaration of the kind and quality of goods; (4) false information about the origin of goods; (5) fraudulent information about the country of export; and (6) fraudulent declaration about the purpose of goods.
We examined examples of the first of these categories last week. Below we consider three others.
FRAUDULENT DECLARATION OF THE QUANTITY OF GOODS
This kind of fraud occurs when a larger quantity of goods is reported, in order to attract higher compensation. There are frequent examples of the forgery of date about the weight of livestock reported. Durdevic reports one case [PDF] where the net weight of live cattle in a truck seemed to great for the number of animals present. When the measurements of the truck was deducted from the declared weight of the animals, the truck appeared to weigh just a few kilograms. OLAF has found that this pattern of abuse is a problem throughout the European Community, particularly in the fruit and vegetable and tobacco sectors. Olives and olive oil are also highly susceptible to this kind of fraud.
In 2001, following an outbreak of foot-and-mouth disease, EU inspectors found a major fraud by Irish sheep farmers claiming subsidies on animals they didn’t have. It confirmed long-held suspicions among agriculture officials on both sides of the Irish border that farmers had been defrauding the EU subsidy scheme by moving flocks of sheep from farm to farm and across the Irish border to make bogus claims.
Specifically, farmers in three counties had made claims for around €400,000 for 31 animals under the animal premium scheme. Yet checks showed that over half the farmers had fewer sheep than the number for which they had claimed subsidies. Of the 199 farmers who claimed compensation, 106 had fewer sheep than the total for which they had claimed – and 17 had no sheep at all. The shortfall amounted to 4,741 sheep.
Similarly, in 2005, EU inspectors found that over half the cattle that livestock farmers in Slovenia said they owned didn’t exist (a staggering 48.2 percent). Likewise, almost a quarter of their sheep and goats were bogus (24.1 percent), allowing them to qualify for EU animal premiums all the same.
The same year, EU inspectors rejected as bogus 11.4 percent of suckler cattle in Italy and 10 percent of sheep and goats. Three years earlier, inspectors rejected as bogus over a third of cattle inspected in Portugal (38.1 percent).
The Common Agricultural Policy provides for certain aid payments in order to guarantee a reasonable income for EC banana producers and to ensure satisfactory marketing of the bananas produced which compete with other bananas imported into the European Community.
Photo credit: iirraa // Flickr // Creative Commons
OLAF launched an investigation of banana production aid after receiving allegations of serious irregularities. On-the-spot controls revealed various instances of irregular practices relating to the reception, registration, accounting and payments for bananas delivered to and handled by a certain producer organisation.
OLAF established that banana quantities were being overstated and that false producer names had been used. Moreover, these irregular practices had been conducted in an organised and systematic way over a long period of time.
In 2005, OLAF received information that several fruit producers had received aid for processing quantities of peaches and citrus fruit which did not correspond to the normal yield of the declared production area. The amount of aid is based on the weight of the raw material, irrespective of the end product.
OLAF conducted an investigation in co-operation with the relavant national authorities. They established that several producers had overdeclared their production by using “black” national or imported fruit, and had unduly received aid amounting to more than €3.3m.
FRAUDULENT DECLARATION OF THE KIND AND QUALITY OF GOODS
This kind of fraud occurs when a party declares that cheap goods are in fact expensive, high-value products, in order to obtain higher subsidies. As Durdevic explains, the hardest part of detecting such frauds lies in determining the quality of goods for which specialist knowledge is required, or when goods enter the EC frozen or in containers.
The most infamous example of this kind of fraud involved the importation of vast quantities of hazelnut oil into several EU countries from Turkey. The hazelnut oil was fraudulently declared as sunflower oil in order to avoid the provision of guarantees for the import of hazelnut oil. The hazelnut oil was allegedly being blended with olive oil: hazelnut oil is three times cheaper than olive oil on the world market, and almost impossible to detect. Producers of inferior olive oil have no right to receive subsidies.
OLAF has discovered several cases of illegal trade which negatively affect the financial interests of the EU and also raise concerns for public and animal health. For example, OLAF has investigated trade in adulterated butter containing non-milk animal and vegetable fats and chemicals. The purpose of the fraud was to illegally manufacture a cheap product which maximises profit and thereby obtain EU payments.
Similarly, OLAF has uncovered the import of buffalo meat from India falsely declared as beef from Australia and New Zealand. Importing this kind of meat to the EU is forbidden because food-and-mouth disease is endemic in Indian buffalos. An outbreak in EU cattle could cause serious economic damage to European farmers and, subsequently, have a major negative impact on the Community budget and international trade.
You say tomato…
According to EC law, the importation of particular fruit and vegetables originating in certain Mediterranean countries is subject to additional specific duties which depend on the declared entry price. An association of exporters in country A complained to OLAF that certain importers in country B were incorrectly determining the customs value of the goods (mainly tomatoes). The fraud allegedly involved the companies agreeing to state a false (higher) import price. The products were allegedly sold to various companies, allowing the importer to reduce the amount of customs duties to be paid.
Having informed the customs authorities in country B, where the goods were presented for customs clearance, OLAF gathered information concerning the exports from the country of production, which they shared with the authorities in country B. Meanwhile, in-depth controls at the importers’ premises revealed the importers had ‘speculated’ on the customs value of the goods by using the so-called ‘deductive method’ to avoid the payment of higher complementary customs duties on import.
The importers successfully contested the case before an administrative court in country B. The matter was then brought before the relevant EC committee by the customs authorities of country B. In October 2007 the committee agreed that the importers had used a deductive method to avoid paying duties worth several million euros.
FRAUDULENT DECLARATION ABOUT THE PURPOSE OF GOODS
This fraud occurs most commonly when goods are purchased (or the costs of storing or processing them are borne) on condition that they are used for a specific purpose, but instead they are used for another, unlawful purpose. For example, the fraud occurs when farmers receive a milk subsidy on the condition that they use the milk only for fodder, but they sell the milk to other farmers (who can also claim subsidies on it).
Flax on, flax off
Two EU regulations permit aid for the production and processing of flax. Aid may be paid for flax produced (but not processed) only when the product is declared unfit for processing because of bad weather conditions. Flax produced is processed into linen, paper and internal car padding.
In 2001, OLAF investigated possible irregularities in the production of flax in the UK between 1997 and 2000. The allegations were that flax-processing companies had falsely declared straw to be unsuitable for processing in order to avoid high haulage and processing charges, yet had still claimed the subsidy. Four flax processors accounted for over 80% of the flax processed in the UK.
Following the investigation, one processor was convicted in 2003. Two directors of the company received prison sentences. The other three processors have been the subjects of irregularity notifications under EC law. The total damages were at least €10m.