The EU scheme which enabled the Government to controversially spend more than €800,000 on cheese for disadvantaged people last year is at the centre of a multi-million euro scam.
The revelation came from European Court of Auditors, which analyses the accounts of EU institutions.
It is understood that an Italian company made millions of euro by selling German butter in Germany, when it was supposed to be sold outside of the State.
The butter had been part of a deal in which it was swapped for milk and cheese destined for disadvantaged people under the EU scheme.
While EU export control documents for the German butter were cleared, in preparation for export, the vast bulk of it was returned to the German market, netting millions more than had it been sold abroad.
It is believed the money cannot be recovered due to a legal loophole which is due to be quickly closed.
The Irish Dairy Board, which won the tender to supply the cheese for Ireland, said all of the produce distributed here came from domestic suppliers, rather than foreign sources.
In its report for 2010, the court also found that an accounting error led to Britain's receiving €189m more than it should have from the European Commission in what is known as the UK rebate. The Commission said that what it termed remedial action was underway to correct the matter.
The court would not be drawn on the controversy over Ireland's new nominee, Kevin Cardiff of the Department of Finance.
Outgoing Irish member Eoin O'Shea said: "The court has not role in the appointment of its members. It's an issue for Member States and the European Parliament."
Mr O'Shea said he wished Mr Cardiff well with his parliamentary hearing on November 23, saying he was "a very credible appointment".
The auditors' report found that, in 2010, Ireland remained a net beneficiary from the EU to the tune of €676m. While the State contributed €1,394m, it received €2,070m.
Errors in a third of EU regional funding
The body also identified a €5.7 billion hole in the Commission's accounts between 2009 and 2010, in which money given by Brussels to states to support urban development and small enterprises was judged to be an expense, even though the money had not been spent.
The President of the court Vitor Caldeira told the European Parliament this morning there were "material levels of error" in the Commission's accounts, particularly in the fields of agriculture and the cohesion funds.
Auditors had found that over a third of the €35.5 billion allocated by the EU for regional funding was affected by errors, either unintentional or possibly fraud.
The Audit and Anti-Fraud Commissioner Algirdas Semeta maintained that 95% of payments were free from errors.