The EU rules on public procurement include provisions excluding companies convicted of corruption from EU member states’ governmental procurement contracts. Following recent reforms, there are some new rules pertaining to exclusion (both mandatory and discretionary) and a new regime for “self-cleaning” under a new EU Directive 2014/24. It is widely recognized that there are a number of problems with the one-sizefits-all approach that the EU had adopted on corruption and illegality within public procurement prior to this reform. Firstly, the harshness of exclusion from public contracts made the consequences of a corporate conviction so extreme that governments had sometimes shied away from prosecuting companies for corruption. Secondly, the one-size-fits-all approach did not recognize that companies can change their behavior and provided no incentive for them to do so. Thirdly, different countries may have different rules about corporate criminal responsibility, meaning that employee conduct might render a company criminally liable in one country but not in another. This could lead to inconsistent and unfair results for a company that ultimately faces debarment from public procurement in a jurisdiction with relatively lax standards for prosecution while another company facing similar difficulties elsewhere continues business as usual. In an attempt to address these problems, last year the EU passed Directive 2014/24, which is due to be implemented by all EU member states by April 2016. The “selfcleaning” provisions of the new EU Directive allow firms convicted of corruption to continue bidding for and participating in public contracts if they can prove that they have sufficiently remediated and changed their behavior. Thus, although the penalties that may be applied for an act that could result in debarment may be harsh, companies have a way to avoid debarment and countries have a way to avoid imposing the corporate death penalty on companies. The United Kingdom has already implemented this EU Directive through the Public Contracts Regulations 2015, which entered into force early this year, and other EU member states will follow suit. An ordinance related to its implementation is currently in the consultation stage in France. Continued on page 22 1. The below article was first published at cdr-news.com on August 6, 2015. www.debevoise.com FCPA Update 22 August 2015 Volume 7 Number 1 The overall effect of the new Directive will be two-fold. Firstly, companies across Europe will have a much greater incentive both to self-report violations and to conduct real remediation. Secondly, European governments may find themselves less constrained from prosecuting companies for corruption. Provisions on mandatory and discretionary exclusion from public contracting and the “self-cleaning” cure EU Directive 2014/24 outlines mandatory and discretionary grounds for exclusion from public contracting, sets maximum time lengths for each type of exclusion, and also contains provisions relating to “self-cleaning.” The Directive also introduces provisions allowing public authorities to admit firms which would be otherwise excluded but have taken sufficient corrective “self-cleaning” measures to ensure that the relevant offenses or misconduct that triggered their exclusion will not be repeated. Prior to this EU Directive, only Austria, Germany and Italy had implemented similar “self-cleaning” measures. A business must be excluded from public contracting if it is convicted or a member of its administrative, management, or supervisory body, or a person with powers of representation, decision or control in its organization is convicted of an offense enumerated in Article 57 of the EU Directive. Conviction for some offenses including participation in a criminal organization, corruption, fraud and money laundering has already been listed as cause for mandatory debarment in Directive 2004/18/EC. When implementing the EU Directive, member states may provide that the EU Directive’s mandatory exclusion rules may be derogated from and that public contracts may be awarded, on an exceptional basis, to a company that would otherwise be excluded from a public contracting bidding process where overriding requirements in the general interest make the award of a contract to such a company indispensable. An EU member state may decide to make the discretionary grounds of exclusion truly discretionary at the national level or may require their contracting authorities to exclude based on one of the “discretionary” exclusion grounds provided for by the Directive. According to Article 57, paragraph 4 of EU Directive 2014/24, contracting authorities may exclude or may be required to exclude a business from participation in a procurement procedure when violations of environmental, social or labor law occur, in situations of insolvency or grave professional misconduct that renders Continued on page 23 How Companies Can “Self-Clean” Corruption, Thanks to EU Reforms Continued from page 21 www.debevoise.com FCPA Update 23 August 2015 Volume 7 Number 1 the bidder’s integrity questionable, where there is collusion between bidders aimed at distorting competition, and due to conflicts of interest. A new discretionary ground of exclusion also provides that a bidder may be excluded based on its prior performance. Article 57 of the EU Directive also contains new temporal provisions on exclusion, which include a requirement that EU member states must establish a maximum period of exclusion that may apply if “self-cleaning” measures are not taken by a business to rehabilitate itself and demonstrate its reliability and if a period of exclusion of a company has not been set by a final judgment of conviction. For mandatory exclusions, the maximum period of exclusion that a state may establish is five years from the date of the conviction and, for discretionary exclusions, the maximum period is three years from the date of the relevant event, subject in both cases to the “self-cleaning” provisions described below and other applicable exceptions. The “self-cleaning” provisions of EU Directive 2014/24 are found in Article 57, paragraph 6. Any business that faces exclusion on mandatory or discretionary grounds shall not be excluded from public procurement bidding if the contracting authority considers that the measures taken are sufficient enough after taking into account the gravity and the particular circumstances of the misconduct that would have otherwise resulted in debarment. In order to benefit from “self-cleaning,” the business shall prove that it has paid, or undertaken to pay, compensation in respect of damage caused by the damage/misconduct, clarified the facts and circumstances by collaborating with the investigating authorities and taken concrete measures to prevent further criminal offenses/misconduct. Continued on page 24 How Companies Can “Self-Clean” Corruption, Thanks to EU Reforms Continued from page 22 “In order to benefit from ‘self-cleaning,’ the business shall prove that it has paid, or undertaken to pay, compensation in respect of damage caused by the damage/misconduct, clarified the facts and circumstances by collaborating with the investigating authorities and taken concrete measures to prevent further criminal offenses/misconduct.” www.debevoise.com FCPA Update 24 August 2015 Volume 7 Number 1 If the contracting authority considers the “self-cleaning” measures taken to be insufficient, it shall give the business a statement of the reasons for its decision to decline “self-cleaning.” Notably, EU member states retain a certain amount of discretion in deciding how to implement the “self-cleaning” provisions and the appropriate preventative measures will differ depending on the size of the business concerned. Examples of appropriate “self-cleaning” measures could include the following: immediate dismissal of employees who broke the law, prevention of future misconduct through the introduction of ethical codes of conduct, introduction of principles of good conduct in employment contracts, and adoption of internal regulations on liability and compensation for damages in case of non-compliance with the relevant legal provisions. In order for any of these measures to be credible, they must be monitored. If the business has been excluded for a specific period set by a final judgment of a criminal conviction from participating in procurement or concession award procedures, it shall not be entitled to make use of the possibility to take the “selfcleaning” measures specified above until after that period of exclusion has come to an end. Practical consequences of the new self-cleaning provisions The new “self-cleaning” provisions of EU Directive 2014/24 may promote several desirable policy consequences. These consequences relate to how EU member states regulate, monitor and control compliance with their anti-corruption policies and, perhaps even more importantly, provide companies with strong incentives to comply with the law and to implement preventative compliance programs. The new provisions will provide companies with incentives to improve their anti-corruption policies and other compliance practices that would form part of an appropriate “self-cleaning” response when problems are identified that, absent company-initiated “self-cleaning” measures, could result in mandatory or discretionary debarment. Although some companies may wait until an issue is identified that may potentially lead to debarment before putting into place a reliable compliance program, many companies will view the availability of the “self-cleaning” remedy as a reason to maintain a strong compliance program with the view to preventing any issues that might result in later discussions with authorities about “self-cleaning.” Of course, companies have other incentives to maintain strong compliance programs, because, in some jurisdictions, the very existence of a good compliance How Companies Can “Self-Clean” Corruption, Thanks to EU Reforms Continued from page 23 Continued on page 25 www.debevoise.com FCPA Update 25 August 2015 Volume 7 Number 1 program can be a defense to corporate prosecution or a very strong bargaining card that can lead to a more acceptable negotiated outcome than would have otherwise been available. The “self-cleaning” provisions of the new EU Directive will allow EU member states to pursue policy objectives related to preventing corruption in economic life while avoiding compromising sound economic policy objectives that serve the interests of everyone in society. In particular, the provisions of EU Directive 2014/24 may eventually result in a greater willingness on the part of EU member states to prosecute corporations on charges for which, if they had been prosecuted prior to the implementation of the new “self-cleaning” provisions of the Directive, would have resulted in the companies’ mandatory debarment from public contracting and therefore possibly in adverse economic consequences for society as a whole. As a result of the EU Directive, contracting authorities in EU member states may allow corporations to avoid debarment through implementing “self-cleaning” measures and more prosecutions may, as a consequence, go forward. On a related note, the use of deferred prosecution agreements or other negotiated outcomes that are conditioned on “self-cleaning” measures may likewise increase in those jurisdictions in which the use of such agreements is possible. The actual impact of the “self-cleaning” provisions of EU Directive 2014/24 and any evaluation of their impact on the adoption of compliance programs by companies or the pursuit of prosecution by public prosecutors within EU member states remains speculative. It is, however, certain that the incentive structure behind the EU Directive’s “self-cleaning” provisions is properly aligned with the public interest because the Directive incentivizes compliance by companies with the law and allows EU member states to avoid imposing debarment on companies that “self-clean.” This incentive for states to allow companies to avoid debarment is desirable because its proper operation would provide clear societal benefits by allowing EU member states to avoid penalizing a company to the extent that the jobs and economic benefits created by the company may be endangered. Amanda Lee Wetzel Amanda Lee Wetzel is an associate in the Paris office. She is a member of the Litigation Department and the White Collar Litigation Practice Group. She may be reached at firstname.lastname@example.org. Full contact details for Ms. Wetzel are available at www.debevoise.com.