Setting the Stage for an Enhanced EU Role in Combating Corruption, Broadened Legal Standards, and a More Active Debarment Regime?

On February 3, 2014, the European Commission’s (Commission) Directorate-General for Home Affairs released its first European Union Anti-Corruption Report (Report)[1] as part of a broader policy framework of biannual reviews mandated by the Commission’s Stockholm Programme roadmap. Broadly defining corruption as “abuse of power for private gain,”[2] the Report assessed the 28 Member States’ efforts to curb corruption in the public sector individually and overall, with special emphasis on systemic corruption risks in public procurement, electoral financing and integrity in public office, and foreign bribery. While the scorecard, not surprisingly, was mixed across individual countries, Commissioner Cecilia Malmström described reported levels of illicit activity as “breathtaking” and concluded that there is “no corruption-free zone in Europe.”[3] The Report’s critics were quick to point out the exclusion of EU institutions from scrutiny and the lack of detailed recommendations in the areas of whistleblowing, access to information, and lobbying.

Based largely on previously compiled corruption monitoring information and two public opinion surveys, the Report’s findings showed that three-quarters of EU citizens believe corruption is widespread, and a quarter believe they are personally affected by corruption. Stark regional disparities abound, particularly between northern Europe, where less than 5% of the population polled reported ever having to bribe an official, and southern Europe, where a majority reported personal contact with bribery. While much of the Report’s body is spent describing the problems of graft in “high risk” business sectors like urban development, construction, pharmaceuticals, and healthcare, the analysis and conclusion largely promote a strategy of regulatory uniformity and comprehensive, coordinated action at the EU level. For instance, specific recommendations from the public procurement section include the use of centralized resources such as a central database on detected corrupt practices and conflicts of interest, to be used as a basis for risk assessment and red-flagging. This is intended to address public procurement abuses at the regional and local levels, where significant percentages of public funds are allocated and authorities have broad discretionary power unmatched by sufficient checks and balances. This call for an EU-wide anti-corruption policy and centralized procedures as a means of strengthening the individual Member States’ disparate strategies could have implications for clients with an EU-wide presence if implemented during the next Commission’s term of office, between November 2014 and 2018.

  1. Movement Towards a Stronger Requirement for Integrity in Public Procurement and Stricter Discretionary Sanctions

The Report’s emphasis on public procurement as an area particularly vulnerable to anti-competitive procedures parallels recent legislative efforts that culminated in a strengthened EU debarment and sanctions regime. The Report notes the particular importance of the EU’s exclusion standards to anti-corruption efforts in EU procurement, individual Member State procurement, and procurement within the EU’s International Financial Institutions (IFIs). Up until its replacement with more robust legislation earlier this year, Directive 2004/18/EC of 31 March 2004 on public procurement (the 2004 Directive) contained the debarment and sanction standard applicable at the EU level. The now repealed 2004 Directive required permanent, mandatory debarment of any tenderer convicted by a national court for fraud, corruption, money laundering, or participation in a criminal organization. The 2004 Directive also provided for permissive debarment in specific circumstances, including where “any…economic operator…has been guilty of grave professional misconduct proven by any means which the contracting authorities can demonstrate.”[4] While the 2004 Directive had been applied to only a limited number of cases,[5] fear of its consequences had had a significant impact. In the United States, for example, it had pushed companies to reach settlements of corruption cases on grounds that would not result in exclusion.[6]

In 2011, the EU issued a proposal to revise the 2004 Directive,[7] together with a draft directive on procurement by entities operating in the water, energy, transport and postal services sectors (Utilities Directive), and a draft directive on the award of concession contracts (Concessions Directive). Political agreement on all three proposals was reached early this year and a new directive was adopted by the European Parliament in February 2014 (Final Act), and is awaiting publication in the Official Journal and subsequent transposition into national laws.[8] The Final Act provides for mandatory debarment, subject to a public interest override, in the event of a conviction by final judgment for fraud, corruption, participation in a criminal organization, terrorist offences including terrorist financing and other linked offences, money laundering, and human trafficking.[9] It also retains and expands the concept of permissive debarment based on professional misconduct, including elements focused specifically on integrity. The revised provision governing permissive debarment states in pertinent part:

Contracting authorities may exclude or may be required by Member States to exclude from participation in a procurement procedure any economic operator in any of the following situations:

  1. where the contracting authority can demonstrate by any appropriate means a violation of applicable obligations referred to in Article 18(2) [environmental, social and labour obligations]; 
  2. where the economic operator is bankrupt or is the subject of insolvency or winding-up proceedings, where its assets are being administered by a liquidator or by the court, where it is in an arrangement with creditors, where its business activities are suspended or it is in any analogous situation arising from a similar procedure under national laws and regulations;
  3. where the contracting authority can demonstrate by appropriate means that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable;
  4. where the contracting authority has sufficiently plausible indications to conclude that the economic operator has entered into agreements with other economic operators aimed at distorting competition;
  5. where a conflict of interest within the meaning of Article 24 cannot be effectively remedied by other less intrusive measures;
  6. where a distortion of competition from the prior involvement of the economic operators in the preparation of the procurement procedure, as referred to in Article 41, cannot be remedied by other, less intrusive measures;
  7. where the economic operator has shown significant or persistent deficiencies in the performance of a substantive requirement under a prior public contract, a prior contract with a contracting entity or a prior concession contract which led to early termination of that prior contract, damages or other comparable sanctions;
  8. where the economic operator has been guilty of serious misrepresentation in supplying the information required for the verification of the absence of grounds for exclusion or the fulfilment of the selection criteria, has withheld such information or is not able to submit the supporting documents required pursuant to Article 59; or
  9. where the economic operator has undertaken to unduly influence the decision-making process of the contracting authority, to obtain confidential information that may confer upon it undue advantages in the procurement procedure or to negligently provide misleading information that may have a material influence on decisions concerning exclusion, selection or award. [10]

The Final Act thus expands the permissive grounds for debarment significantly (including beyond the 2011 proposed revision), to include anti-competitive conduct, conflicts of interest, significant performance failures in prior contracts, misrepresentation, and other types of conduct as well as integrity failures. The maximum period of debarment under Article 57(1) is five years, while the maximum under Article 57(4) is three.[11] 

The Report, being released on the heels of the Final Act, directly supports the latter by explicitly calling for the strengthening of integrity standards as an integral part of an “overall modernisation drive” in public procurement legislation.[12] Noting that implementation of preventive policies, such as clear ethical rules and a culture of integrity, has been fragmented among the Member States, the Final Act presents a coordinated top-down legislative approach which the Commission sees as vital to reinforcing preventive programs even in so-called “clean countries.”[13]

Enforcement of the Final Act’s exclusionary grounds could have significant consequences on tenderers. Long-term exclusion from public contracting in the EU marketplace could deal a death-blow to repeat players in government-dominated sectors such as defense. And even if debarment by the EU does not bankrupt a company, recent experience has shown that such actions have ripple effects in other public procurement markets, such as in the US and with IFIs such as the World Bank.

These risks are mitigated by provisions in the Final Act that will allow a company to avoid debarment under certain circumstances even beyond the public interest override. Unless there is a final judgment that has mandated exclusion, both mandatory and permissive debarment under Articles 57(1) and (4) may be overcome by a showing of contractor “reliability”.[14] The Final Act provides that reliability is to be established by three things: (1) the payment of compensation for any damage caused by the misconduct; (2) cooperation with the investigating authorities; and (3) corrective and remedial actions to prevent future misconduct.[15] If the US experience is any guide, these provisions could create significant incentives for how companies respond to an issue of potential misconduct and their investments in prevention.

  1. Calls for Uniform Criminal Liability for Bribery and Conflicts of Interest Among Elected Officials; Potential Focus on Political Donations 

The Report also calls for stricter legal accountability and higher integrity standards for European elected officials, and tighter regulations on reporting political donations. Wayward Member States may therefore need to bring their corresponding domestic laws in line with EU conventions and anti-corruption policy - in short, a trend towards harmonization of anti-corruption legislation.

Parliamentarians and members of legislative bodies have long been an area of inadequate coverage in European countries’ anti-corruption laws. For example, in December 2013, the Romanian parliament removed the country’s president, senators, members of the lower chamber and lawyers from the national anti-corruption law’s definition of “public officials” – effectively exempting top politicians from criminal liability and placing Romania’s anti-corruption law in contravention of the Council of Europe’s Criminal Law Convention on Corruption and the United Nations Convention Against Corruption (UNCAC), ratified in 2002 and 2004, respectively. Germany’s criminal law also fails to fully criminalize elected officials for corruption in the private sector – the main reason that Germany has yet to ratify the UNCAC. Though declining to name either country, the Report criticized the absence of uniform criminal laws against bribery of elected officials throughout the EU.

The Report promotes a harmonized definition of public official and notes that such definition was rejected in a 2012 proposal for a directive. Weak or absent sanctions on conflicts of interest among elected officials, which are not criminalized in all but one Member State, also received significant attention.

The focus on political campaign financing may also prove to be significant. While the US Foreign Corrupt Practices Act (FCPA) covers payments to political parties, party officials and candidates for political office, none of the international anti-corruption treaties to date, including the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, cover these persons. The fact that the EU is acknowledging the problematic nature of this area may be a harbinger of future openness to changes in international norms that would bring greater harmonization of standards.

Lastly, while noting the general presence of domestic criminal laws against corruption, the Report chastises Member States’ uneven implementation of the Framework Decision 2003/568/JHA on combating corruption in the private sector into national law.

Like the assessment of public procurement, the Report’s centrally-oriented critique of domestic criminal laws governing elected officials and electoral finance may also be setting the stage for enlarging the scope of the EU’s policies within these areas. 

  1. Diverging Politics and Cultures of Anti-Corruption Partially to Blame

Though rarely naming specific Member States, the Report expresses concern about the greater risks of state, regional and local corruption than national corruption, and cites the role of political and cultural differences as partially accounting for the variation of experiences across the EU. For instance, the Report points out the history of collusion between politicians and business communities in certain Member States such as Italy, where regional and local authorities are working to prevent mafia infiltration in public bodies. On the other hand, the Report praises the United Kingdom’s number of foreign bribery sanctions relative to other Member States and its adoption of the UK Bribery Act as a comprehensive legal and procedural tool for preventing and prosecuting corruption – specifically commending the UK’s use of extra-territorial jurisdiction to prosecute foreign-based offenders. While UK enforcement is commendable across the EU and expected to rise further with the recent adoption of US-style Deferred Prosecution Agreements, it is important to note that the Serious Fraud Office has yet to conclude a prosecution under the Bribery Act, and has only recently, in August 2013, charged its first case under the statute. Furthermore, it is anticipated that UK enforcement rates will continue to be dwarfed by FCPA prosecutions.

Urging other Member States to learn from the UK, the Report highlights deficient enforcement levels on the Continent and advises increased supervision of state-owned entities, which may also signal a new direction for country-specific enforcement. The Report specifically criticizes state-owned enterprises in some Member States for failing to follow similar transparency, competition and supervision procedures as private entities in public tenders. Also noted were above-market purchase contracts with “favored partners” and the lack of widespread contractual publication.

  1. Conclusion

While showing that the Commission appreciates the serious impact of corruption on public resources and the EU economy, perhaps the Report’s main accomplishment is to raise the Commission’s own legitimacy as a key player in the EU’s fight against corruption by contrasting its performance with that of national and local authorities. In any case, the Report offers a problem-oriented assessment and a sign of political will for developing a strategy that moves beyond national criminal justice systems and institutions alone, to increasing prevention and transparency, as well as sanctions, throughout the EU from the top down. Some authorities—for example, Brazil, with its now in force Clean Company legislation—have taken a leaf out of the competition book in their recent initiatives to combat corruption. Given the EU’s strong role in the competition arena, and the links between competition and corruption, this would seem to be a natural approach for the EU.

Time will tell what direction the EU takes and whether the Report will result in a real change in behavior or the balance of power on this issue in the EU. Clearly, this and future Reports are only as valuable as their implementation – a point that Commissioner Malmström stressed in her March 11, 2014 briefing on plans to replace the soon-to-expire Stockholm Programme.[16] With the current Commission’s term of office ending in November, prioritizing the Report’s centralized policy approach to anti-corruption will soon become the new Commissioner’s ponderous task.