Yawn and You’ll Miss It: New EU Debarment Rules, Old Problems

Yawn and You’ll Miss It: New EU Debarment Rules, Old Problems

By Sue Hawley

4 March 2015

Last week, on 26th February, new EU Procurement Directives took effect in the UK. The previous EU Procurement Directives played a pivotal and frankly detrimental role in the prosecution (or rather lack of) overseas corruption offences. Until last week, technically, if a company was convicted of corruption it could face permanent mandatory debarment from public contracts in the EU. The trend towards ending corruption investigations with settlements rather than prosecutions, certainly in the UK, was based partly on an intention to help companies avoid these provisions in the Directive.

The fact that a convicted company might face exclusion under the EU Procurement Directives is for instance given as a public interest factor against prosecuting a company in the UK’s Guidance on Corporate Prosecutions issued in 2011, and also in the Code of Practice on Deferred Prosecution Agreements issued in February 2014. It was cited as a factor by the US Department of Justice in its settlement with BAE Systems in 2010, as shaping which charges BAE would face.

There is little evidence that the few companies convicted of corruption did in fact face any form of exclusion from public procurement contracts. Mabey and Johnson for instance, was the first company to plead guilty to overseas corruption in September 2009, after which it changed its name to Mabey Bridge. Within eight months of being sentenced, the company had won a contract with no competitive tender through the Department for International Development (DFID) to provide emergency bridges following an earthquake in Pakistan and another contract in Austria. It went on to win further contracts in Slovenia and Scotland, and was a subcontractor for Scott Wilson on the building of the East London Line.  Whether or not Mabey deserved to be debarred, having made significant steps at rehabilitation, the point is that the Directives do not appear to have impacted on its business in any significant way.

Following lobbying from the private sector and some governments, the new EU Directives, implemented by the UK’s Public Contract Regulations 2015, have tempered the mandatory permanent exclusion from public tendering in two ways. Firstly, they state that companies convicted may only be excluded for a maximum of 5 years. And secondly, they allow that where a company can provide sufficient evidence of its reliability to a contracting authority following a conviction, the exclusion from tendering for public contracts will no longer apply.  In the UK’s implementation, this process has been called “self-cleaning”. In order to prove it has “self-cleaned”, a company needs to prove that a) it has paid or undertaken to pay compensation in respect of damage caused; b) it has actively collaborated with investigating authorities; and c) it has taken concrete organisational steps to prevent further criminal offending or misconduct. These measures must be evaluated against the gravity and nature of the offending.

The good news is that now, in theory, prosecutors should be able to get on with the job of prosecuting without fearing that they will send a company into oblivion and bankruptcy. The EU Procurement Directives are now proportionate and allow for rehabilitation. They should play no part in public interest assessments of whether to prosecute or not, and ideally all reference to them should be removed from the UK’s Guidance documents. The OECD has already asked the UK to consider removing reference to them from the Guidance on Corporate Prosecutions.

The bad news is that unless the Directives are implemented in a consistent way, the likelihood of any company facing any form of exclusion for a corruption conviction remains exceedingly low.

Exclusion from public contracts is an essential sanction against companies, deployed by the big development banks, such as the World Bank, as well as by various governments around the world including the US. In the commentaries on the OECD Convention against Bribery’s article 3, about adequate sanctions, signatories are asked to consider disqualification from public procurement as an additional administrative sanction against convicted companies. Recommendation XI of the Convention specifically states that members should put in place laws to ensure that companies convicted of corruption can be suspended from competing for public contracts. The UK needs to be doing more than just paying lipservice to the OECD Recommendations and the spirit of the EU Directives. However, without effective implementation of the EU Directives, the UK will be doing just that.

The key area which will essentially let companies off the hook are the “self-cleaning” provisions. The Directives, and the UK have left it to the discretion of contracting authorities to determine whether a company is reliable or has “self-cleaned”. The danger of this is both that there may be lumpy implementation with some authorities accepting a companies’ declaration of ‘self-cleaning’ while others don’t, but also that authorities will feel under pressure to accept companies’ assertions of self-cleaning, particularly in the absence of in depth knowledge about compliance and enforcement.

Smith and Ouzman is a case in point. The company recently attended the Association of Electoral Administrators conference which raises the intriguing possibility that a company convicted of corruption may well bid or have bid for contracts to print ballot papers for the upcoming UK General Election. Since many of these contracts would be below the threshold at which the EU Directives apply (£170,000 for central government and its administrative agencies, and £111,676 for all other authorities), Smith and Ouzman are unlikely to run foul of the EU regulations. However, if they were to tender for contracts over that threshold anywhere in the EU, the company would have to prove that it has self-cleaned.

Clearly Smith and Ouzman have been trying to establish itself as a company that has self-cleaned. As we noted in our adequate procedures blog, the company has got a BS10500 certificate for Anti-Bribery Management systems. It now claims on its website that it cooperated with the Serious Fraud Office. “The extent of our cooperation”, the company claims, “was acknowledged in court on a number of occasions and has not been disputed”. The danger is that Smith and Ouzman may be using assertions by their defence counsel in court that they cooperated as official court acknowledgement of their cooperation.

Public definitions of the Serious Fraud Office’s concept of cooperation by David Green, its Director, require a company to have made an admission of guilt, a prompt notification of the offending to the prosecutor, full disclosure of wrongdoing, compensation to victims and disciplinary action against wrongdoers. If Smith and Ouzman can successfully present itself as a self-cleaned company, despite having contested the charges against it, despite having kept its Directors until a month after they were convicted of corruption, despite having failed to date to make any compensation to victims, then the Directives will truly be rendered meaningless.

What the UK needs is firstly a central database of convicted companies – again suggested by the OECD and currently ‘under consideration’ in the UK National Anti-Corruption Plan. But it also needs a way of establishing a consistent interpretation of what “self-cleaning” means. One way of doing this would be to require procurement officers to cross-check with prosecuting bodies before they accept a company’s evidence of self-cleaning. Ensuring that a centralised database of mandatory and discretionary exclusions is maintained, so that their application can be monitored could also be useful. Implementing the EU Procurement Directives in a coherent and enforceable manner would be a real legacy for the UK government’s anti-corruption drive.

The full submission by Corruption Watch to the Cabinet Office consultation on the implementation of the EU Directives is here