- The sustainable, green, digital era is well and truly upon us. Vast quantities of taxpayer’s money are set to be spent on all sorts of investments that meet EU and national policies. Public tenders and public procurement rules are in place to make sure that this money is spent in a non-discriminatory transparent way in a market where the level playing field is safeguarded as well.
- Contractors who fall short or have violated competition rules can and indeed in some cases, must be excluded from public tenders. At least until they have compensated for damage suffered and put in place systems to avoid similar mistakes being made.
- To ensure that the Community money is wisely spent and properly accounted for, the EU relies on the application of procurement rules. But what if there is a lack of competition in the marketplace or companies have colluded during the bidding process?
- Then both competition law and the procurement rules apply but not always in an aligned fashion with different authorities taking the lead.
- When advising on competition and procurement law, it is often necessary to consider the differences between the two areas of law and more particularly, the different consequences of their breach. Even where the underlying activity is one and the same (bid rigging is the obvious one) the legal consequences that follow add considerable complexity to advising undertakings.
- This article discusses some of the ways in which these rules diverge and what legal counsel, lawyers and undertakings need to look out for.
When advising on competition and procurement law, it is often necessary to consider the differences between the two areas of law and more particularly, the different consequences of their breach. Even where the underlying activity is one and the same (bid rigging is the obvious one) the legal consequences that follow add considerable complexity to advising clients.
Banning corrupt companies from accessing public funds (also known as debarment) is considered an effective deterrent in terms of procurement. In markets where governments spend trillions on goods and services, few companies can afford being locked out of markets, even for short periods of time.
Successful deterrence is dependent on several factors and these include the chances of being caught and the consequences that follow. The detrimental effects of collusion on public finances may prove even greater in the aftermath of COVID as economic recovery depends greatly on the best possible use of public funds and investment in critical economic sectors. Misuse of spending, such as excessive amounts paid for works, supplies and services contracts, means less public funds for core state business, larger budget deficits, and a greater need for borrowing. This jeopardises financial stability and undermines recovery efforts.
Poised on the threshold of the largest injection of public funds in living memory, it is a good moment to reflect on how these two areas of law converge, diverge and intersect. The potential sanctions for breaching competition or procurement law (or both) are high, both financially, in terms of fines, potential damages actions and legal costs and commercially, through potential market exclusion and reputational damage. The timing of the Commission guidance on fighting collusion in public procurement and on the application of exclusion grounds (March 2021 - see 4 below) is noteworthy even if it falls somewhat short in terms of content.
Reliance on the competition rules to deter collusion
Breaches of competition law cover a wide spectrum of activities and can encompass everything from competitors agreeing to keep off each other’s turf, to price fixing in virtual chat rooms or the more traditional smoke-filled rooms. With fines of up to 10% of worldwide turnover, follow-on private damages actions, reputational damage and defence costs, getting a CEO’s attention is not difficult. To remain relevant, competition law must also evolve with the times. This is clearly evidenced in the recent €875 million ($1 billion) fine on five European car manufacturers for colluding to curb the use of emission cleaning technology in diesel cars over a period of 5 years. Daimler, as the leniency applicant, was awarded immunity from EU fines. In this case, the fines were considerably reduced on grounds of the novelty and the first application of competition law to the delay of innovation. Such reductions are unlikely to apply to similar cases in the future.
In countries where bid rigging is considered a criminal activity, enforcement by public prosecutors and the newly launched European Public Prosecutor Office (EPPO) are set to change the landscape considerably (see 5 below).
Reliance on the procurement rules to deter collusion
There are two sets of disqualification rules aimed at excluding bidders from participating in public tenders. In procurement law, these are referred to as mandatory and discretionary exclusions. The first set aimed at excluding any infringing party and these include criminal activities such as engaging in a criminal organisation, fraud, financing terrorists, money laundering, child labour and human trafficking. Mandatory exclusion rules which contracting authorities must apply and discretionary exclusion rules which remain within the remit of the contracting authority provided general EU principles of transparency, equal treatment and proportionality are met.
Mandatory = Mandatory
Mandatory exclusion rules must be applied by all contracting authorities. In addition, Member States are free to implement discretionary grounds as mandatory. If this occurs, discretionary grounds are treated as mandatory grounds, automatically triggering exclusion. The result however leads to differing approaches across Member States and a need for bidders to have a clear understanding of national measures triggering exclusion.
Prior to the 2014 Directive, tenderers who colluded could be excluded on the basis of Article 45(2) of Directive 2004/18, provided they had been convicted by final judgment for an offence related to their professional misconduct or were guilty of grave misconduct by any means that the contracting authority could demonstrate (including an infringement of competition). Arguments abounded as to what constituted “professional misconduct” and the evidence necessary to exclude on grounds of “grave misconduct”. With legal certainty elusive, the scope for lawyering out of trouble increased.
The 2014 Directive amended the exclusion rules and;
- Allowed for exclusion if the contracting authority found there was ‘sufficiently plausible indications’ that the tenderer entered into agreements aimed at distorting competition.
- Included the possibility for economic operators to invoke self-cleaning measures to attempt to avoid exclusion in cases where no final judgment had been issued. It is worth remembering how long competition investigations can take.
- Allowed the Member State to set the maximum duration of exclusion (other than where exclusion is set by final judgment, where the limit is no more than 5 years).
Criminal activities, professional misconduct and similar compliance breaches can render a candidate’s integrity questionable and therefore unsuitable to be awarded a public contract. Exclusion should not last indefinitely. By proving that they have adopted compliance measures remedying the consequences of their past behavior and preventing future misbehavior, companies that have been excluded have the possibility of demonstrating their trustworthiness. EU law sets out specific measures to be taken:
Article 57(6) of the 2014 Directive introduced the concept of “self-cleaning”, a somewhat awkward term (in English at least) that essentially describes measures taken by bidders to demonstrate their trustworthiness to contracting authorities, even though an exclusion ground applies to them. For this purpose, EU law provides that the economic operator must prove that it has -
paid or undertaken to pay compensation in respect of any damage caused by the criminal offence or misconduct,
clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities,
and taken concrete technical, organisational and personnel measures that are appropriate to prevent further criminal offences or misconduct.
On January 14, 2021 in Case C‑387/19 RTS infra BVBA Aannemingsbedrijf Norré-Behaegel BVBA v Vlaams Gewest, the European Court of Justice held that the self-cleaning measures have direct effect and provided that tenderers can be required to provide proof of corrective measures at the time of their request to participate or tender if (i) this requirement is clearly, precisely and unequivocally provided for in the national legislation and (ii) if it is brought to the attention of the economic operators in the tender documents. The Court has thus provided clear guidance on whether or not economic operators should be pro-active in providing underlying evidence of self-cleaning measures. Tenderers should therefore carefully examine these before submitting their request to participate or tender.
Another important point to be considered is whether national legislation entrusts the assessment of the measures undertaken within “self-cleaning” to individual contracting authorities or whether it entrusts other, dedicated authorities (on a central or decentralized level) with that task. This introduces additional legal complexity when rolling out a compliance program.
Recent updated guidance from commission via notice
In March 2021, the Commission adopted guidance on tools to fight collusion in public procurement and on how to apply the related exclusion rules. While this Notice clarifies some issues, it is limited by the fact that the Directive itself allows Member States to classify discretionary exclusion rules as mandatory. This means different rules in different countries and has resulted in national competition authorities (NCAs) being called on to assist in dealing with collusion on specific tenders as well as other questions on the operation of exclusion grounds. There have been a number of cases where contracting authorities have excluded economic operators on suspicion of collusion. In a number of countries, exclusion grounds have also been considered before national courts.
Threshold for ‘sufficiently plausible indications’
The Notice identifies that the Directive offers no guidance on the interpretation of ‘sufficiently plausible’. This allows the contracting authority, unless national law provides otherwise, to include a bidder in the tender even if it considers that there are sufficiently plausible indications of anticompetitive conduct. This has been upheld by the Court.
The Notice gives several examples of potential plausible indications, including evidence of a NCA investigation. It also lists a number of factors to assess, when examining tenders submitted, including the overall market behaviour of the EO, whether the text of any two or more tender documents contain the same typos or terms and the prices offered being excessively high or low. However, it also urges against jumping to conclusions.
The Notice acknowledges that the Directive does not state that the collusion needs to relate to anticompetitive behaviour in this tender and therefore exclusion from another tender can be considered an indication of guilt. Decisions to exclude in other jurisdictions are not binding but may be considered. However, according to the Court, the decision of another contracting authority is not enough per se to exclude. Further, a contracting authority is not bound to accept the tenderer if they were investigated in another instance and cleared.
Participation in leniency/immunity programme
The Notice states that participation in a previous leniency/immunity programme is not per se proof of innocence (settling a case does not include a commitment to refrain from future behaviour). Under competition law, both leniency and immunity applicants must contain an acknowledgment of infringement). But, competition law does not require that those involved in a cartel be excluded, this is where procurement law comes in.
The Notice distinguishes between leniency in the context of collusion in a tender, in which case the Member State can (in its transposing legislation) decide to exempt leniency applications from sanctions with regards to tenders, and leniency in the context of collusion in previous tenders. In the latter case, there is nothing in the Directive to allow Member States to introduce a presumption of reliability, as to do so would contradict the ‘self-cleaning’ measures, which should motivate companies to change.
The following are examples of exclusion rules which have been considered incompatible with EU law as contrary to general principles of proportionality, equal treatment and/or transparency.
- A national law which automatically excludes certain linked or affiliated economic operators from participating without allowing tenderers to demonstrate that their participation presented no real risk of jeopardising transparency and distorting competition.
- A national law that automatically excludes a permanent consortium and individual consortium members of that permanent consortium from participating in the same tender.
- Situations in which the discretionary grounds for exclusion were not clearly set out in advance by contracting authorities or not applied to all candidates.
A serious deficiency of the Notice is that it ignores the requirement to embed discretionary exclusions in the Member States’ administrative/public law system. This complicates matters as regards burden of proof, the duty to state reasons, the enforceability of exclusion grounds against other tenderers, and the very practical implications of potential compensation in the case of unlawful exclusion.
OLAF - The European anti-fraud office
Who is afraid of OLAF? Rather a lot of important people, as it turns out. The Santer Commission is best remembered in Brussels (somewhat unfairly perhaps) for its en masse resignation in March 1999 following corruption allegations. An independent committee found that the legal framework for combating fraud against the financial interests of the European Communities was incoherent and incomplete. In its wake, the Commission established the European Anti-Fraud Office – OLAF – to deter fraud, corruption, and other illegal activities detrimental to the financial interests of the Union.
OLAF’s primary deterrence instrument is its ability to conduct administrative investigations in the Union’s institutions, bodies, offices, and agencies (during internal investigations) and in the Member States (during external investigations). Initially, OLAF conducted its investigations under the overarching framework of Regulations 1073/1999 (covering the EC) and 1074/1999 (covering Euratom). After a series of lengthy negotiations and three legislative proposals, Regulation 883/2013 replaced both of these Regulations.
Can companies be blacklisted at EU level?
One could perhaps expect the EU to place huge importance on having an effective blacklisting system in place. You might be surprised to discover that, at EU level, this whole process is still quite nascent and under refinement (in particular, as regards the establishment of the European Public Prosecutor’s Office (EPPO)). Back in 2016, the EU replaced its Early Warning System and Central Exclusion Database with an updated Early Detection and Exclusion System (EDES). However, a recent check on this public database reveals few entries.
The EU’s new authority for criminal cases
Unsurprisingly, reaching agreement on a system to tackle criminal matters at EU level was tortuous. The 2019 Commission Anti-Fraud Strategy (CAFS) aimed to improve the collection and analysis of fraud-related data (both at EU level and in the Member States) and reinforce anti-fraud governance across the Commission. OLAF’s CAFS activities form a very important element in the Multiannual Financial Framework (MFF) 2021–2017 (even before the COVID-19 pandemic derailed life as we know it).
The EPPO is the EU’s first independent and decentralised prosecution office and has the power to investigate, prosecute and bring to judgment crimes against the EU budget, such as fraud, corruption or serious cross-border VAT fraud. It began operations in June 2021 with 22 EU countries participating. While the EPPO is responsible for criminal investigations, OLAF continues its administrative investigations into irregularities and fraud affecting the EU's financial interests in all EU countries. Some time will be required before one can fairly evaluate the success of the EPPO.
EU institutions and exclusion
The important distinction between “to blacklist” and to include a blacklisted clause
The term blacklisting means different things in the context of procurement and competition law. In competition law, backlisted clauses are those that are considered to breach competition law if included in certain types of agreements, for example resale price maintenance in supply agreements and price fixing, non-compete or no poaching clauses in agreements between competitors. Unless justified by particular circumstances (a rarity), such clauses are generally considered void and unenforceable if included and may give rise to other risks such as investigations by competition authorities, fines of up to 10% of a company’s worldwide turnover and private damages actions. To add to potential confusion, the term blacklist has also been used to describe a boycott, which is also regarded as a serious infringement of the competition rules.
As Article 57 of the Directive only refers to agreements, whereas Article 101 of the TFEU includes both agreements and concerted practices, some confusion has arisen as to whether involvement in concerted practices could be covered by the exclusion ground. Recital 101 of the Directive specifically includes a breach of competition rules as “grave professional misconduct” for the purposes of the Directive. However, the degree of certainty required is unclear. For collusion, the contracting authority needs only ‘sufficiently plausible indications’ to exclude on this ground. The Notice states that it is up to the contracting authority to decide which ground to invoke, and notes that nothing in the Directive excludes a Member State from allowing exclusion on more than one ground. Not exactly helpful.
Follow my lead?
The current rules on exclusion that apply to EU institutions are found in Article 136 of the Financial Regulation. They provide that the responsible authorising officer shall (i.e. mandatory) exclude a person or entity referred to in Article 135(2) from participating in award procedures governed by the Financial Regulation where that entity is in an "exclusion situation". This caused a recent flurry in the banking sector when several banks were “briefly excluded” from participating in individual syndicated transactions (a €20 billion new debt-issuance program) while the Commission examined whether they had taken the necessary remedial measures to terminate cartel operations in the bond and currency markets.
Public blacklists (exclusions from tendering)
The Commission operates a warning system, designed to protect the financial interests of the Union and inter alia to provide a mechanism to exclude bidders that fall into one of the exclusion situations set out in Article 136(1).
One of the grounds for exclusion in Article 136(1)(c) of the Financial Regulation is where a person or entity is guilty of grave professional misconduct, including in particular entering into agreement with other persons or entities with the aim of distorting competition. Under this ground, a final judgment or a final administrative decision is required.
Publication of exclusion decisions
After the decision on exclusion and/or financial penalty has been taken in the cases referred to under points (c) to (h) of Article 136(1) of the Financial Regulation, and in order to reinforce their deterrent effect, the Commission publishes on its internet site the relevant information relating to the exclusion decision (subject to a decision of the authorising officer under Article 140 of the Financial Regulation). Special provisions apply if this content includes personal data.
Thus, once an entity is listed, it must be excluded from tenders governed by the Financial Regulation. However, there are important procedures to be applied, including rights of the defence, before an entity can be placed on this system. These include the right to challenge such a decision before the General Court.
In Vossloh Laeis which concerned the application of the utilities rules rather than the Financial Regulation but are similar in effect, the General Court considered the aftermath of an investigation into bid rigging practices by the Bundeskartellamt (German national competition authority), which fined Vossloh Laeis €3.5 million in 2016. Stadwerke München, a utility covered by Directive 2014/25/EU, sought to exclude Vossloh Laeis from its qualification system because of its participation in the cartel.
The relevance of the cartel for Stadwerke München was not merely theoretical as it had been a victim of the anticompetitive practices carried out by Vossloh Laeis. This led Stadwerke München to seek compensation in damages from Vossloh Laeis in civil litigation, as well as to exclude it from its list of approved contractors. The Court considered that the contracting authority could request evidence of the cartel proceedings (Vossloh Laeis did not want to provide evidence to the party suing it for damages) unless the facts or circumstances followed sufficiently clearly from other documents provided by the bidder, in particular from the decision establishing the infringement of the competition rules. This solution was also justified (particularly as the existence of conduct restrictive of competition may be regarded as proved only after the adoption of such a decision, which legally classifies the facts to that effect).
Where EU funds are involved, the ultimate remedy – our money back please
When it comes to EU financed programmes (full/partial), the consequences of breaching the procurement rules may be felt long after the contract has been signed, the building built and/or the services provided. And yes, it is possible to have the entire funding clawed back due to lack of compliance with procurement rules. Remember those grant funding provisions that obliged you to keep records for [x] number of years? There is a reason for that. It’s called an audit.
Red flags can be anywhere (even a robot might be sent looking) and so obvious issues (such as justifications for single source tenders, extensions of contracts, contractor changes) need to be fully reasoned at the time the decisions are taken (external Counsel support can be useful), not with hindsight.
For consultants, project managers, finance and accounts, a procurement audit is the equivalent of a competition dawn raid. The only way to survive is to ensure that from the very outset of the project, the procedure, record-keeping and procurement rules are fully complied with. And fully, really does mean fully. With audits running years after completion, those in charge at the time may be a few career hops down the line. So, project managers need to be drilled on ensuring that all records are scrupulously kept in a manner that allows for (relatively painless) retrieval.
Competition and procurement law intersect and overlap but they remain distinct areas of law, with different legal and policy objectives as well as quite different consequences, remedies and sanctions. While the 2009 OECD guidelines clearly inspired collusion prevention and detection measures, national competition authorities (primarily responsible for carrying out such policies) have stepped up the pace with helplines for reporting cases, awareness training and advice on the use of technology to assist in detection. While this article highlights a few of these issues, there are many more that may need to be taken into account, depending on the particular facts of the case.
Hefty fines are now being imposed by national competition authorities for bid rigging activities (e.g. Spanish fines of €127.3 million for sharing public contracts in rail signaling and €61.2 million for bid rigging in roadworks €5.76 million for bid rigging in the supply of radiopharmaceuticals to hospitals, French fines of €435,000 for bid rigging in a public tender for building maintenance in the city of Lille, German fines totalling €110 million for bid rigging in construction contracts) as well as large Commission fines (€992 million - lifts and elevators (2007), €875.189 million - on German car manufacturers for limiting technology (colluding rather than competing to supply the best clean emission technology 2021). Private damages actions are on the rise. Is the tide beginning to turn? With competition violations clearly included as grounds for exclusion from public tendering since 2014, the risk of non-compliance has increased. At the same time, there has been a proliferation of national leniency programs running alongside the Commission’s leniency programme. As most countries have entrusted the task of exclusion to individual contracting authorities, the potential of different approaches to exclusion across the EU adds to the challenge and complexity of advising clients across different jurisdictions.