The EU made it a priority in its radical 2003 farm reform to promote agri-environment (AE) projects, such as conversion to organic farming, prevention of soil erosion and reduction of fertiliser use.
Nearly 13.5 billion euros in EU cash is earmarked for AE projects through the bloc's current 2000-2006 budget period.
But the European Commission, the EU's executive arm, has not always checked that this money was being properly spent, compounding already poor controls in a number of EU member states, the European Court of Auditors said in a special report.
"The audit found that the Commission...has not sufficiently verified the correct functioning of AE control systems in the member states," the Court said in a statement.
"The Commission, Council (of EU ministers) and (European) Parliament should consider...how to take into account the principle that if a measure cannot be adequately checked, it should not be the subject of public payment," it said.
AE projects account for up to 40 percent of the EU's rural development spending, itself some 20 percent of the Common Agricultural Policy (CAP) that eats up some 44 billion euros each year -- close to half the entire EU budget.
Part of the problem was that checking up on AE projects on the ground often posed particular technical difficulties and was more of a drain on resources. In these cases, the Commission could not always be sure that rules were being obeyed, it said.
Organic farming was one area where Commission checks had been particularly lax, the report said.
Under EU law, each farmer who wishes to market products as organic must be inspected at least once a year. EU governments must send a report on these inspections back to Brussels -- but not all were doing so, the report found.
The few national reports that arrived back were "incomplete, late and inaccurate", it said.
Commission experts had not always checked whether EU countries were complying with inspection rules, nor verified national audits on numbers of animals and farmland area.
The 2003 reform introduced the idea of cross-compliance, making farmers comply with a raft of EU environmental laws to receive farm subsidies. If they fail in this, some money has to be paid back to Brussels.
EU governments are obliged to include AE projects in national rural development plans, which they must then submit to Brussels for the Commission to approve. So far, Austria, Germany and Finland have been spending the most EU cash in this area. The Court carried out audits inside the Commission itself and in five member states -- Austria, France, Germany, Italy and Luxembourg -- between March and September 2004.