Corruption history does not prevent receipt of a public contract in Europe (Mirella Lechna, IPBA Journal March 2017)

The European Union’s legal regime for public procurement provides the concept for European single market functioning, thus requiring Member States to open government markets to foreign competition. Fundamental rules applicable in this regard derive from the Treaty of the Functioning of the European Union (‘TFEU’), which enforces free movement principles and prohibits Member States from discriminating against other Member States’ firms or products. The second source of regulation is procurement directives:

• Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC (‘Public Contract Directive’);
• Directive 2014/25 of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC (‘Utility Directive’);
• Directive of the European Parliament and the Council of 13 July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security.

They fully regulate award procedures to be conducted in compliance with equal treatment and fair competition rules, transparently and in line with the proportionality principle to prohibit discrimination and abuse of discretion by contracting authorities. As a result, elimination from the public procurement procedure takes place through mandatory or discretionary exclusion, which must be set forth in line with the Directives, whereby the latter significantly limit the discretion of contracting authorities to ensure fair opportunities for participation and prevent contracting authorities from concealing discrimination or favouritism.

Article 57(1) of the Public Contract Directive requires a supplier convicted of corruption to be excluded from participation in a procurement procedure. On the basis of Article 80 of the Utility Directive, the same rules and exclusion grounds as provided in the Public Contract Directive apply toward procurements in the utility sector. The Public Contract Directive at first instance defines the ‘corruption’ notion through its reference to the Convention on the Fight Against Corruption and required involvement of officials of the European Communities or Member States of the European Union.¹ It is also defined in Article 2(1) of the Council Framework Decision 2003/568/JHA.² Moreover, the meaning of corruption for the purpose of determining elimination from procedure is also as defined in the national law of the contracting authority or the economic operator (Article 57(1)(b)). Therefore, any manifestation of corruption that is treated as an offence in the home country of a bidder is taken into consideration for the application of exclusion grounds under Article 57(1) of the Public Contract Directive.³

The requirement already existed in previous 2004 public procurement directives and its main advantage was perceived in such serious sanction, which deprives the common right to compete for a public contract, constituting an incentive to prevent recurrence of corruption.⁴ Another issue was to ensure fair competition, as the bidders involved in corruption might have exercised an unfair advantage against their potential competitors resulting from corruption. The objective of disqualification was also to support the value of fair business conduct in general.

However, it has been noticed in application of the law that strict rules to eliminate bidders from a tender due to their past involvement in corruption may very often not serve proportionality and equal treatment principles, as disqualification also concerns entities who have undertaken structural, organisational or other measures to avoid corruption in their current activities. Also, it has been noticed that disqualification from competition for public contracts simply limits competition on the government market and that such a phenomena is negative from the perspective of the public procurement legal regime and the ‘value for money’ principle that it supports. For all these reasons, the measure has been deemed to have an overly punitive nature and that more focus needs to be placed on creating an incentive for firms to improve their professional conduct.⁵ Therefore, European public procurement rules have offered firms involved in corruption the concept of rehabilitation to defend their exclusion from public procurement proceedings. This concept is called the ‘self-cleaning’ process.
It is submitted that the self-cleaning defence concept was already offered under the previous 2004 public procurement directives as arising from the Treaty on the Functioning of the European Union principles such as proportionality and equal treatment.⁶ Nevertheless, it was well established in only two (out of the present 28) Member States: Austria and Germany. In other Member States of the European Union, the rule for exclusion was very simple: conviction of a corruption offence meant exclusion from a public procurement contract. Therefore, tenderers could not in fact benefit from the self-cleaning defence in those Member States and the law in this respect was not harmonised on the single market.

The new Public Contract Directive introduces the explicit regulation that exclusion from procurement for a past corruption offence is no longer allowed if a bidder provides evidence that its measures are sufficient to demonstrate renewed reliability (Article 57(6)). The scope of measures to be adopted and evidenced is not limited; however, they must respond to the severity and specific circumstances of a committed offence. Recitals (102) of the Public Contract Directive show that such compliance measures must aim at remedying the consequences of the offence and preventing its further occurrence. Measures may, therefore ‘consist, in particular, of personnel and organisational measures such as severance of all links with persons or organisations involved in an offence, appropriate staff reorganisation, the implementation of reporting and control systems, the creation of an internal audit structure to monitor compliance and the adoption of internal liability and compensation rules’. In the case of a corruption offence, a tenderer also probably needs to provide a full explanation of facts, demonstrate cooperation with law enforcement authorities, show dismissal of all persons (shareholders, executives and employees) involved in the corrupt practice, as well as redress of the damage caused. It is important to note that the self-cleaning defence must show that measures remedied a situation prior to the contract award. It is therefore insufficient for the application of Article 57(6) to prove the implementation of prospective remedy measures which will improve the situation as their application progresses. In this sense, the self-cleaning regulation is seen as retrospective.⁷

Submitted evidence is then evaluated and, pursuant to the Public Contract Directive, an individual contracting authority or other domestic authority at a central or decentralised level may make such an evaluation– domestic law will make the determination. Also, Member States determine the exact procedural and substantive conditions applicable to such assessment. In many Member States the contracting authority assesses evidence. However, domestic laws usually have no specific procedural and substantive conditions. Regulations only require that measures be sufficient to prove reliability, thus leaving the issue to the discretion of contracting authorities. In any case, if measures are deemed insufficient, reasons for this must be stated. Usual remedies are available if a tenderer does not agree with a negative decision.

The self-cleaning defence is an option for a bidder and the contracting authority will not seek any such evidence of measures undertaken to remedy corruption on its own initiative. If information appears about the conviction of a bidder for a corruption offence during a contract award procedure and the bidder does not provide relevant evidence at the same time, the contracting authority will exclude him from proceedings under general rules.

It must be underscored that public procurement rules in Europe as of 2014 provide for flexible procedures in order to promote private entity reliability and integrity by motivation to improve and prevent future misconduct rather than punishment for past offences. This regulation specifically concerns the corrupt behaviour of bidders, which can be considered a novelty given that previously one of the reasons for disqualification from public procurement proceedings due to past corruption was the intention of governments to avoid association with such illegal behaviour. Actually, the contracting authority must accept participation of a bidder, despite its illegal corruption practice, if the latter took relevant remedial measures and became reliable again. The only exception is if a bidder was excluded from public procurement contracts for a certain period because of a corruption conviction and such explicit exclusion is imposed by legally final judgment.

Europe, specifically the central-eastern area, is a very attractive market for publicly owned projects, which, with the support of European Union funds, offers an enormous opportunity for foreign contractors. Many firms, specifically from Asia, view an unfortunate experience in any corruption incident as an obstacle to compete for a public contract there. However, at present there is no doubt that European Union law promotes a remedy and rehabilitation in this regard and that any past corruption experience should no longer constitute a basis to retreat from the European public procurement market.

Notes:
¹ OJ C 195, 25.6.1997, p 1.
² Council Framework Decision 2003/568/JHA of 22 July 2003 on combating corruption in the private sector (OJ L 192, 31.7.2003, p 54).
³ Article 57(1) also covers other offences such as participation in a criminal organisation, fraud, terrorism, money laundering, or child labour.
⁴ COM (2006)0073 – Communication of the Commission to the Council and the European Parliament: Disqualifications arising from criminal convictions in the European Union.
⁵ S Arrowsmith, HJ Priess, P Friton, ‘Self-cleaning as a defence to exclusions for misconduct: an emerging concept in EC public procurement law?’, PPLW 2009.
⁶ Ibid.
⁷ P Trepte, Corruption and Collusion in Public Procurement, p 30

The article first appeared in the IPBA Journal March 2017 issue.