Mr Romano Prodi
President of the European Commission
200 rue de la Loi
B-1049 Bruxelles
Mr President,
On 15 January 1999, I wrote to inform you of the Ombudsman's decision to launch an own-initiative inquiry, in accordance with Article 195 of the EC Treaty, into possible instances of maladministration by the Commission in relation to milk quotas in Italy.
The background to the own-initiative inquiry is that, by letter dated 2 April 1998, Mr Sandro FONTANA, the then chairman of the Committee on Petitions of the European Parliament, informed the Ombudsman that the Committee had decided to close its consideration of certain petitions and to transmit the relevant files to the Ombudsman. The petitions concerned include No 562/97 and No 91/98.
On 8 December 1998, Mr BOARETTO of the secretariat of the Committee on Petitions addressed a note to the Ombudsman containing points previously made by Mr FONTANA at a meeting with the Ombudsman.
After careful consideration of the material referred to above, including the replies given by the Commission to the Committee on Petitions on 19 December 1997 and 27 February 1998 in relation to petition No 562/97, the Ombudsman decided to launch the own-initiative inquiry.
On 27 May 1999, the Commission sent its opinion, which was forwarded to Mr BOARETTO, and to the petitioners together with an invitation to submit observations on the opinion. No observations have been received.
I am writing now to let you know the results of the own-initiative inquiry and the Ombudsman's decision on the case.

THE REASONS FOR THE INQUIRY

The Ombudsman's own-initiative inquiry follows a series of allegations, apparently including reports by official Italian committees of inquiry, concerning fraud and irregularities in the application of the Community regime of milk quotas in Italy.
In summary, as set out in a note sent to the Ombudsman on 8 December 1998 by Mr BOARETTO of the secretariat of the Committee on Petitions of the European Parliament, the substance of these allegations is as follows:
- Italian producers find it profitable to produce (or declare production) of quantities of milk which are above the quotas allocated to Italy. In 1993, Italy obtained an increase of 10% of its quotas against the payment of a fine of 3.620 billion lira, which was paid by the Italian Government;
- From 1995, the producers and in particular the intermediaries used various systems to take advantage of the milk quotas, particularly by declaring quantities of milk produced in, or imported from, third countries to be "products of Italy";
- In addition, Italian producers use subsidised powdered milk intended for animal feeding as a raw material for the manufacturing of other milk products, in violation of Community law;
- Italy has failed to establish a national authority to supervise effectively its milk policy; has been late in transposing the relevant Community provisions into domestic law and has adopted legislative measures which are incoherent;
- The relevant professional associations have dealt with the whole system in an inadequate and improper way;
- The Italian administration at national and regional level has failed in its duty to supervise Italian milk production.
All the above matters concern the activities of bodies which are outside the mandate of the European Ombudsman, because they are not Community institutions and bodies.
It appears, however, that allegations have also been made concerning the responsibility of the European Commission in relation to the situation as characterised above.
In summary, as set out in the above-mentioned note from Mr BOARETTO, these allegations include the following:
(i) The Commission has failed to carry out an inventory of milk production in Italy and is in fact, unaware of the quantity of powdered milk fraudulently used for the production of milk and other derived products;
(ii) The Commission has failed to adopt technical measures to prevent the use of milk powder for products other than animal foods;
(iii) The Commission has failed to exercise the necessary control, which is part of its duty under the Treaty, in relation to the situation of milk quotas in Italy, which it was however well aware of;
(iv) The Commission, having encashed a fine paid by Italy and entered it into the budget of the EC, closed its eyes to the disastrous situation of milk quotas in Italy, which it was however well aware of.
As regards (iv), the Ombudsman understands the term "fine" to refer to levy paid by Italy in respect of deliveries of milk in excess of the total quota available.

THE INQUIRY

The Commission's opinion
In view of its detailed nature, the Commission's opinion on the allegations is quoted here in full:
"The Commission can indicate that an Italian Commission of Enquiry into the milk quota regime made two reports on 26 April and 31 August 1997 respectively. These reports, which were duly notified to the Commission, indicated a range of irregularities in the management of the regime. In the light of the doubts expressed, in particular with regard to the justification of the level of individual quotas and the reliability of data on the level of production, the Italian authorities adopted legislation postponing definitive closure of the 1995-96 and 1996-97 periods(1) and providing for an entire re-examination, at individual producer level, of a) actual production during the 1995-96, 1996-97 and 1997-98 periods and b) the level of individual reference quantities. The procedures are laid down in Law No 5 of 27 January 1998 and Ministerial decree of 17 February 1998. A Guarantee Commission was instituted to control and report on the correct execution of the checks and controls. It reported on 4 February 1999. During 1998, the Italian authorities kept the Commission briefed on the state of advancement of the procedures. The procedures were likewise subject to a Commission control mission in October 1998.
The Commission is satisfied with the conclusion of the Guarantee Commission that the above-mentioned control procedures have led to a close determination of real production in Italy. As demonstrated by the figures notified to the Commission by the Italian authorities, the levels of production initially notified and thereafter called into question by the Commission of Enquiry have in fact been confirmed for the 1995-96 and 1996-97 periods and have even had to be revised upwards significantly for the 1997-98 period(2). There can therefore no longer be any doubt as to the reality of excess deliveries by Italian producers. The allegation that levy which was paid was not in fact due is consequently not supported by the facts. This situation is moreover illustrated by the recent decision to increase the global quantity to be available to Italy from the year 2000 by 600,000 tons.
(2) As to the criticism of the Commission for having failed to carry out an inventory of milk production in Italy, it would remark that this is not a task which it is required or competent to perform.
Under the scheme of the provisions relating to milk quotas, the direct sellers and, in the case of deliveries, the purchasers are required to record all quantities of milk sold or delivered throughout each annual period from 1 April to 31 March. Commission Regulation (EEC) No 536/93 laying down detailed rules on the application of the additional levy on milk and milk products provides for the specific obligations of direct sellers and purchasers on the one hand and for the control obligations of the Member States on the other. The annex to that regulation contains an annual questionnaire to be notified by the Member State to the Commission by 1 September following the closure of a period and by which it informs the Commission inter alia of the exact volumes of direct sales and deliveries.
As to its control of the satisfactory discharge by the Member State of its obligations in this regard, the Commission refers to point 5 below and to the last of the reports to the Council there listed, which is annexed to the present reply.
The Commission can further indicate that in 1993-94, before allocating individual quotas, the Italian authorities carried out an inventory of milk production in the years 1988-89 and 1991-92. Reference quantities were then allocated on the basis of production in those years. The report of the Guarantee Commission to which reference was made under point 1 contains details of the procedures which then applied. These procedures were reviewed and re-verified in the course of the re-determination of the level of individual reference quantities carried out in 1998.
(3) In the context of the inventory of production, the matter of fraudulent use of milk powder is also raised. This matter presents several distinct aspects.
1. Skimmed milk powder (SW) used in animal feed and, as such, benefiting from aid
1.1 Two situations are possible:
- Under the 'normal regime', aid is paid after control of the quantity and quality of SW incorporated in animal feed.- These controls are made in the feed plant and relate to control of the production process, sampling and analysis of raw materials (i.a. SW) and finished products and administrative checks on the registers of the factory. The detailed control procedure is laid down in Article 10 of Regulation (EEC) N' 1725/79. The risk that subsidised SNT would be removed from the feedstuffs after control is extremely limited because such removal is technically very difficult and therefore too expensive to be lucrative.
- Under the 'special regime' (applied by Italy), aid is paid in the Member State where the SNT has been manufactured on the condition that a deposit be lodged. The powder is then transported under administrative control to the Member State where the SW is to be incorporated in animal feed. The controls in the animal feed factory are identical to what is indicated above for the 'normal regime'. The results of these controls are indicated on the documents that accompanied the SMP and are then sent back to the Member State of origin with a view to allowing the release of the deposit which has been constituted. The rules on this specific administrative procedure are laid down in Regulation (EEC) No 1624/76. This procedure involves a greater risk for fraudulent use linked to the possibility of fraud with the administrative documents that are used for the purpose of releasing the deposits.
1.2. In the light, inter alia, of some scope for fraud under this special regime, the Commission proposed its abolition to the Council in 1989. The Council, however, failed to adopt this proposal. The Commission only formally withdrew it when it .presented the Agenda 2000 proposals in 1998 which included the repeal of a number of Council Regulations on milk, including Council Regulation No 986/68 which provides for the legal basis of the special regime. This latter proposal having been accepted, the regulation will be repealed in due course on 1 January 2000.
1.3. As to the criticism of the Commission for having failed to adopt technical measures to prevent the use of milk powder for products other than animal foods, two remarks must be made regarding the possibility of using tracers for SW used as animal feed:
· The final use of SW is normally not known when the product is manufactured. Moreover, since under the normal regime aid is claimed and paid after control of the use of the powder, it is difficult to justify the need for a tracer in this case.
· SMP is essentially used in the production of calf feed. It would be extremely difficult to find a suitable tracer that excludes the use of the SW for human consumption while being acceptable for the nutrition of calves.
2. Skimmed milk powder used for the production of drinking milk
Regulation (EC) No 2597/97 prohibits the use of powdered milk for the production of drinking milk. The controls on the production of drinking milk are to be decided by the Member States and are not specified in the Regulation. This is notably due to the fact that until now no reliable analytical control method could be adopted as a European Union reference method.
In the framework of an expert group working for the Milk management committee, analytical methods are being examined that would enable the detection of powdered milk in cheeses or drinking milk. If such methods are found to be reliable, Member States could use them for control purposes. As regards drinking milk, these analytical control methods could then be made obligatory.
It should be emphasised in this connection that there is no clear financial advantage in using powdered milk for the production of drinking milk. On the contrary, there is an additional cost element linked to the drying costs of the powdered milk. Only the use of subsidised powdered milk would make its use financially attractive; hence the Commission's desire to have the 'special regime' abolished since 1989.
3. Measures to detect fraud
The Commission would indicate in this regard that as it follows from article 5 and more specifically 209a of the EC Treaty, it is in the first place up to the authorities of the Member States to combat fraud(3). That the Italian authorities were actively pursuing cases of this nature is made clear by the second report of the Commission of Enquiry, and the actual quantities of irregular products seized between 1993 and 1997 are set out in detail.
Moreover, in December 1997, the Commission received from the Italian Guardia di Finanza a formal request for assistance with its enquiries into allegations of irregularities and fraud regarding milk quota. It was agreed with the Guardia di Finanza that Commission agents would investigate the activities of certain companies in a number of Member States who trade in milk with Italy. During the execution of these controls, the agents of the Commission were accompanied by representatives of the Guardia di Finanza who acted in an observer capacity.
Thus the Commission arranged to conduct, under the provisions of Council Regulation (Euratom, EC) No 2185/96, on the spot enquiries into the milk trading operations of selected companies in Germany, Austria and France. The agreed objectives of these controls were twofold:
(i) to determine if there was any trade by these companies in non-quota milk with Italy; i.e. deliveries to Italy of milk which was not declared for quota purposes in the country of origin.
(ii) to quantify, in respect of the selected companies, the extent of trade with Italy in milk and milk products over a number of years.
It was also agreed in advance with Italy that, in respect of the second objective, the Commission would pass its reported findings in the Member States to the Guardia di Finanza who would subsequently conduct follow-up controls in Italy to determine if any of these milk and milk products from the other Member States were, upon arrival in Italy, declared as being of Italian origin.
This series of on the spot controls were conducted in May and June 1998 in respect of Germany, July 1998 in respect of Austria and September 1998 in respect of France.
- In respect of the first control objective the Commission found no evidence to suggest that the selected companies in the other Member States had traded in non-quota milk with Italian companies.
- In respect of the second control objective and taking into account the data passed to it by the Commission in 1998, the Guardia di Finanza began a parallel series of national investigations in Italy into the possible mis-description of these milk products. The results of this second set of national controls are still awaited by the Commission.
(4) As to the related allegations that the Commission closed its eyes to the situation having encashed the levy and failed to exercise the control which it is its duty to exercise under the Treaty, the Commission would indicate that acting under article 169 EC, it has conducted no less than five different infringement proceedings with regard to the Italian management of the milk quota regime.
The judgement of the Court of Justice of 17 June 1987 condemning Italy for failure to adopt the measures which were required to implement the regime was rendered in article 169 EC proceedings brought by the Commission. The article 169 letter was sent on 27 November 1984; the reasoned opinion was issued on 18 March 1985. It was moreover only after repeated interventions of the Commission with the Italian authorities and a formal Commission decision to open proceedings under article 171 EC for failure to comply with the judgement of the Court of Justice, that the Italian authorities adopted a series of implementation provisions between March and October of 1989.
Infringement proceedings were again opened on 14 November 1989 (reasoned opinion on 13 March 1991) and 13 August 1991 regarding the failure of Italy to pay the amount of levy due for the 1988-89 and 1989-90 periods respectively. These proceedings, and parallel proceedings which had been opened against other Member States with outstanding levy payments, were discontinued at a later stage. This was made possible by the Court of Justice having confirmed the legality of the Commission's action to recuperate amounts unpaid by reducing advance payments to the Member States.
In 1992 and 1993 the Italian authorities drew up, in consultation with the Commission, the measures which were adopted as Law No 468192 and Presidential decree No 569193. From the start of the 1993-94 period, that is to say from the date of entry into force of Council Regulation (EEC) No 3950/92 which, contrary to the previously applicable provisions(4), did not provide for a role for producer associations and their recognised unions in the milk quota regime, the Commission repeatedly objected to the maintenance by Italy of a central role for these associations, notably in the equalisation of over and under deliveries(5). The observations of the Commission were partially taken into account in that a regime of equalisation of deliveries for producers who were not members of producer associations was introduced by the Italian authorities in December 1994 so that no formal discrimination persisted. The Commission opened infringement proceedings on the remaining points in March 1995. The case did not have to be brought to the Court of Justice as the offending provisions were repealed, this with retroactive effect, after the reasoned opinion had been issued on 20 May 1996.
In January 1998, the Commission opened infringement proceedings with regard to the postponement at the end of 1997 of the definitive closure of the 1995-96 and 1996-97 periods to which reference has been made in point 1 above. These proceedings also cover failures in control obligations which had been revealed by the reports of the Commission of Enquiry. The reasoned opinion was emitted in May 1998. These proceedings are still pending. On 1 March 1999, a decree was adopted providing for the closure of the periods in question on the basis of the results of the control operations referred to under point 1.
The Commission can further indicate that the objections which it raised with regard to a 15% reduction of quotas transferred without the holding under the provisions of article 8 of Regulation N' 3950192 were acted upon by the Italian authorities without the necessity of infringement proceedings. Likewise, its intervention to prevent the relaxation of the restrictions on transfer of quota without the holding was successful. Assurances were also provided by the Italian authorities as to the adequate protection of the interests of landowners whose holdings were leased with quota.
(5) With regard to the conditions under which the increase in the total quantity available to Italy from the period 1993-94 was made by the Council, the Commission can indicate that it was made conditional upon effective application of the regime thenceforth. In this context, the Commission services made numerous control missions to Italy. 18 regions were visited, representing 75% of Italian milk production. Further to these missions, the Commission presented five reports to the Council on the application situation in Italy (COM (93) 109 final, COM (93) 169 final, COM (94) 64 final, COM (94) 150 final and COM (95) 147 final). In proposing that the provisional increase be made definitive in 1995, the Commission reviewed Italy's application of the regime with regard to six objective parameters:
· Adoption of the implementing provisions;
· Calculation of individual reference quantities on the basis of deliveries to purchasers in 1991-92, and of individual fat content references;
· Establishment of a central organism to verify recording of production and collection of levy;
· Adequate recording of production;
· Collection of the levy;
· Sum of allocated reference quantities within the level of the national global quantity as of the 1995-96 period.
The Commission concluded on the basis of its findings during the above-mentioned control missions which are set out in the successive reports that, with the exception of the role of producer associations which was then the subject of infringement proceedings, Italy had globally respected application of the regime."
The Commission also annexed to its opinion a Report to the Council and the European Parliament on the application of the milk quota scheme in Italy and Greece (COM (95) 147 final).
The Commission's opinion was forwarded to Mr BOARETTO of the secretariat of the Committee on Petitions of the European Parliament and to persons who had petitioned the European Parliament concerning milk quotas in Italy, together with an invitation to submit observations on the opinion. No observations were received.

THE DECISION

The Ombudsman's own-initiative inquiry examined four allegations made against the European Commission in relation to the system of milk quotas in Italy:
1 The allegation that the Commission failed to carry out an inventory of milk production in Italy
1.1 It was alleged that the Commission failed to carry out an inventory of milk production in Italy and is in fact, unaware of the quantity of powdered milk fraudulently used for the production of milk and other derived products.
1.2 The Commission remarked that it is neither required nor competent to perform this task. It referred to the obligations in this respect of producers, sellers and Member States and to control missions carried out by the Commission services.
1.3 The Commission also referred to the establishment by the Italian authorities of a Guarantee Commission to control and report on the correct execution of checks and controls in the milk quota regime, which confirmed the reality of excess deliveries by Italian producers.
1.4 The Ombudsman notes that, according to the applicable Regulation, Member States shall take all the verification measures necessary to ensure payment of the levy on excess quantities of milk and milk equivalent. Furthermore, the same Regulation provides that Member States shall physically verify the accuracy of the accounting with regard to the quantities of milk and milk equivalent marketed(6). The Regulation does not provide for the Commission to carry out an inventory of production. It therefore appears that the Commission's responsibility is to control the verification activities of the Member States. The Commission's performance of the latter role is examined in section 4 below.
1.5 This aspect of the Ombudsman's inquiry has therefore revealed no evidence of maladministration by the Commission.
2 The allegation that the Commission failed to use technical measures to prevent fraudulent use of milk powder
2.1 It was alleged that the Commission failed to adopt technical measures to prevent the use of milk powder for products other than animal foods.
2.2 The Commission firstly explained that two distinct regimes exist for the payment of subsidy; the 'normal' and 'special' regimes. In Italy, the special regime operates. Considering that the special regime involves a greater risk of fraud, the Commission proposed its abolition to the Council in 1989. The Council, however, failed to adopt the proposal, which was eventually replaced by another proposal under the Agenda 2000 programme. The Commission envisaged that the special regime would finally be abolished by the Council with effect from 1 January 2000.
2.3 As regards technical measures, the Commission considered them to be unnecessary as regards the normal regime. Furthermore, it would be extremely difficult to find a solution that would exclude the use of milk powder for human consumption whilst being acceptable for animal nutrition.
2.4 The Ombudsman notes that the special regime was abolished by Council Regulation 1255/1999 with effect from 1 January 2000(7). As regards the normal regime and the difficulties of a technical solution, the Ombudsman has received no evidence contrary to the views expressed by the Commission.
2.5 This aspect of the Ombudsman's inquiry has therefore revealed no evidence of maladministration by the Commission.
3 The allegation that the Commission failed to exercise the necessary control
3.1 It was alleged that the Commission failed to exercise the necessary control, which is part of its duty under the Treaty, in relation to the situation of milk quotas in Italy, which it was however well aware of.
3.2 The Commission provided the Ombudsman with details of on-the-spot checks which it carried out during 1998 into the milk trading operations of selected companies in Germany Austria and France, following a request for assistance made by the Italian Guardia di Finanza. The Commission also referred to control missions by the Commission services to 18 regions of Italy, representing 75% of Italian milk production and to the reports, which it had submitted to the Council as a result.
3.3 In view of the above, it appears that the Commission has been active in carrying out controls. The Ombudsman notes that the level of resources allocated to controls and the operational details are matters for the Commission to determine. No evidence has been submitted to the Ombudsman which could indicate that the Commission has acted outside the boundaries of its legal authority. The Ombudsman's inquiry has therefore revealed no evidence of maladministration by the Commission.
4 The allegation that the Commission closed its eyes to the situation in Italy
4.1 It was alleged that the Commission, having encashed a fine paid by Italy and entered it into the budget of the EC, closed its eyes to the disastrous situation of milk quotas in Italy, which it was however well aware of.
4.2 The Commission pointed out that it has initiated five infringement proceedings under Article 169 (now Article 226) EC in respect of Italy's management of the milk quota regime. The first proceeding was begun in November 1984 and led to a judgement of the Court of Justice of 17 June 1987 condemning Italy. Further infringement proceedings were begun in 1989, 1991, 1995 and 1998.
4.3 The Ombudsman recalls that Article 211 of the EC Treaty establishes the duty of the Commission to ensure that the provisions of the Treaty and the measures taken by the institutions pursuant thereto are applied. As regards Member States, the powers and duties of the Commission as "Guardian of the Treaty" are specified in Article 226 (ex Article 169) EC.
4.4 The Ombudsman considers that in view of the use which the Commission has made of the Article 169 (now Article 226) EC procedure, the allegation that it has closed its eyes to the situation in respect of Italy's management of the milk quota regime is unjustified.
4.5 This aspect of the Ombudsman's inquiry has therefore revealed no evidence of maladministration by the Commission.
5 Conclusion
The Ombudsman's own-initiative inquiry has revealed no evidence of maladministration by the European Commission in relation to the allegations concerning milk quotas in Italy. The Ombudsman therefore closes the case.
The Chairman of the Committee on Petitions of the European Parliament, Mr GEMELLI will also be informed of this decision.
Yours sincerely
Jacob SÖDERMAN

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(1) Advances on the levy due had been withheld by the purchasers from producers over quota in conformity with the national provisions. The postponement measures took the form of freezing the funds at purchaser level instead of requiring them to be made over to the competent authority. An amount judged to be in excess of levy due to the Community was reimbursed. Cf. Infra point 4 on infringement proceedings in this regard.

(2) According to the latest data available to the Commission, production was of the order of 10. 190.813 t. in 1995-96, 10.303.365 t. in 1996-97 and 10.325.326 t. in 1997-98. The initial notification for 1997-98 was 9.433.912 t.

(3) With the entry into force of the Amsterdam Treaty on 1 May 1999, the fight against fraud affecting the financial interests of the Community became a joint responsibility of Member States and the Community.

(4) Council Regulation (EEC) 857184 had been amended by regulation N' 1305/85 to provide for such a role. The Commission would emphasise that it had not proposed this amendment.

(5) The Commission refers to its communications with the Italian authorities dated 1 April 1993, 23 August 1993, 3 November 1993, 18 February 1994 and 4 August 1994 and to a bilateral meeting with the Italian authorities of 26 March 1993.

(6) Article 7 (1) and (3) of Commission Regulation (EEC) No 536/93 of 9 March 1993 laying down detailed rules on the application of the additional levy on milk and milk products 1993 OJ L57/12.

(7) Council Regulation (EC) No 1255/1999 of 17 May 1999 on the common organisation of the market in milk and milk products 1999 OJ L160/48, repealing Council Regulation (EEC) No 986/68 of 15 July 1968 laying down general rules for granting aid for skimmed milk and skimmed milk powder for use as feed OJ L 169/4.