EUROPEAN PARLIAMENT
Directorate General for Research
WORKING PAPER

Measures to Prevent Corruption
in EU Member States

Legal Affairs Series
JURI 101 EN
03-1998

ANNEX
Combating corruption in public procurement contracts

Introduction

Public procurement contracts have always been a fertile breeding-ground for corruption.

1.On the one hand they provide considerable opportunities for work for many firms. They represent a total of some 15% of the European Union's GDP, if one includes not only procurement contracts for public authorities (the State, local authorities, public bodies), but also those awarded by public service enterprises. In some sectors this percentage is even higher: building and public works, transport materials, telecommunications materials, energy. Obtaining these contracts is sometimes vital for firms in these sectors, particularly at local level and they may be tempted to stoop to any means to do so.

2.On the other hand, it is no doubt easier to find corruptible elements among public decision-makers than in business. Not that they are fundamentally less honest than businesspeople: it is just that there is a different relationship between the decision-maker and the body he represents. For a business, giving up its freedom to conclude contracts with the best-performing suppliers in favour of a mediocre one who happened to be in favour with the decision-makers would represent a serious risk to its economic and financial interests. Awareness of this interest among business leaders is strong enough to warn them off the temptations or to encourage them to supervise the actions of their subordinates. If they are the owners of the business, this goes without saying; if they are only its employees, it still applies, because they are then subject to supervision by the owners and are themselves dependent, often financially, on the firm's good results. Whether they are owners or employees, their personal financial situation is generally comfortable enough to render them proof against temptation.

In a public body it seems that there are greater risks of the interests of the decision-makers diverging from the public interest. On the one hand the two can never precisely coincide, since decision-makers are never clearly in the position of owners. On the other hand, decision-making power is probably more concentrated and less supervised than in business, particularly at regional and local authority level. Finally, public decision-makers can be regarded as more vulnerable to temptation because their financial circumstances are modest compared to those of business leaders, and it is often politicians who are in need of significant sums of money to finance their lifestyle and the expenses which their career necessitates, usually to contribute to the funding of the party to which they belong.

These long-standing corruption factors were reinforced by the climate of easy money or 'money cult' which inspired the 1980s and 1990s, and it is fair to say that the public procurement contracts sector occupied a prominent place in public awareness of the phenomenon of corruption which developed both at European and national level. At Community level this concern appears in the recent Commission communication on 'a Union Policy Against Corruption' (21 May 1997).

The Council of Europe also devoted a considerable part of its European Conference of Specialized Services in the Fight Against Corruption, held in Tallinn at the end of October 1997, to the public procurement contracts sector. Community legislation on public procurement contracts, which is now a very comprehensive body of law, could play an important role in this area. However, since most powers and instruments remain in the hands of the Member States of the Union, most of the measures taken have been at national level.

A. Opportunities and use of Community law

1. The anti-corruption dimension of Community law on public procurement contracts

Community legislation on public procurement contracts aims principally at applying to this sector the principles of the internal market, namely freedom of movement (goods and services) and competition rules. It does not contain any specific provisions for combatting corruption, which form part of criminal law and are thus the exclusive preserve of the Member States. It can, however, contribute indirectly to combatting corruption.

1.The relevant provisions

a.First of all there are the stipulations regarding the good repute of bidders for contracts. As the aforementioned Commission communication on 'a Union Policy Against Corruption' recalls, the various sectoral directives (on public works, supplies and services) lay down that national legislation may exclude from bidding for contracts persons who:

-have been convicted of a breach of professional ethics

-have been guilty of gross professional misconduct.

b.The obligations imposed on the awarding bodies may also help reduce the scope for potential corruption. The main requirements are:

-that, as a general rule, contracts should be awarded by a call for tenders, with an exception being made for the negotiated procedure (contract by mutual agreement);

-that notices of contract should be published in the Official Journal of the European Communities;

-that the contract should be awarded to the person making the lowest, or most economically advantageous, bid;

-that, following the conclusion of the contract, a written report should be drawn up containing minimum information, a summary published in the Official Journal of the conditions under which the contract was awarded, and each unsuccessful bidder informed of the reasons why his bid was not accepted.

c.Finally the provisions concerning appeals may also play a role. Directives 85/665 of 21 December 1989 (general rules) and 92/13 of 25 February 1992 (rules applying to public service sectors) require the Member States to provide effective and rapid procedures for appealing against decisions for the award of contracts which a bidder regards as harmful to it. It is true that these appeal procedures relate in the first instance to breaches of Community rules, but as such they may serve as a starting point for the detection and prosecution of corruption offences.

2.Shortcomings of these provisions

Community legislation is first of all inadequate in terms of its scope. It applies only to contracts in respect of sums above a certain very high level. It excludes the arms market, which is a significant sector. Nor, by definition, does it cover the contracting out or delegations of public services, by acts in which the public authorities (the State, local authorities) confer on public or private undertakings responsibility for providing a service in the public interest (electricity, gas and water supplies; railway, urban transport, post and telecommunications services). These acts are not public procurement contracts and it is traditionally considered that they should not be subject to the rules which, in the case of public contracts, narrowly restrict the administration's freedom to choose its contracting party: requirement to open the contract to competition (public notification) and to choose the financially most advantageous bid. It is considered that, since such contracts do not relate to the acquisition of goods and services for the operation of the administration (which is the aim of public procurement contracts) but to the operation of services essential for the public, the public authorities should have the greatest possible freedom to choose their partners.

Community legislation has followed this tradition, with one exception in the case of public works concessions. These concessions are distinct from public works contracts, whereby the public authorities contract out for the construction of buildings and other structures which are not linked to the operation of a public service. The aim of public works concessions is to award to firms the contract not only for building a public structure but also for operating it, which very often consists in providing a public service: for example a motorway, bridge or tunnel which the firm will provide for the public and on which it is able to make a profit by means of its takings from the public (tolls). In spite of this difference in nature, the Community legislation on public works contracts (Directive 71/305 of 26 July 1971) specifically mentions public service concessions, which are subject to two requirements relating to transparency:

-publication in the Official Journal of the Communities of a notice of intention to conclude a concession;

-a 52-day minimum period between the submission of this notice and the deadline for submission of bids.

This is obviously not very binding compared to the requirements of tendering and award to the lowest bidder which apply to public contracts, and it only relates to a single aspect of the public services contracting: public service concessions and leases, in particular, are not affected. The award of such contracts is a happy hunting ground for corruption, as spectacular scandals in several Member States have shown.

These shortcomings in Community legislation itself are compounded by failings in its transposition by the Member States (only three have so far transposed all the directives) and in its application.

The Commission is well aware of all these shortcomings and in its Green Paper of 27 November 1996 on 'Public procurement in the European Union: Exploring the way forward', it envisages the following main remedies:

-lowering the application thresholds;

-increased rate of transposition

-monitoring of enforcement.

II.The Community's measures against corruption

As recalled above, in the absence of any powers in criminal matters, the European Union cannot itself impose any penalti The Commission is well aware of all these shortcomings and in its Green Paper of 27 November 1996 on 'Public procurement in the European Union: Exploring the way forward', it envisages the following main remedies: es in the fight against corruption. However, it has put in place a number of indirect intervention measures, particularly in the public contracts sector.

1.In 1988 the Commission set up a unit for the coordination of fraud prevention (UCLAF). It is true that this body, which now has a staff of 125, cannot act in a completely autonomous manner, particularly since it has no police or judicial powers. These powers remain the preserve of the Member States. However, UCLAF can pursue investigations complementary to those of the national authorities, either at their request or at its own initiative.

2.The Commission Green Paper on Public procurement (27 November 1996) shows that the fair and transparent procedures for the award of contracts and the judicial appeal procedures provided for by Community legislation on public procurement limit the danger of fraud and corruption, even though this is not their primary purpose. One of its most striking proposals is to institute a personal liability for of national officials when they declare that Community public procurement law has been respected.

3. Regulation concerning on- the- spot checks and inspections by the Commission for detection of frauds and irregularities

On 11 November 1996 the Council adopted a 'regulation concerning on-the-spot checks and inspections by the Commission for detection of frauds and irregularities detrimental to the financial interests of the European Communities'. It applies to all budgetary expenditure, thus including public procurement contracts funded from the European Union budget (including those concluded in the context of the trans-European networks and structural funds), but only in the case of serious irregularities, irregularities with a cross-border element or those involving operations by several Member States. Without impinging on the powers of the Member States, it permits the Commission to carry out on-the-spot checks at its own initiative, after first informing the relevant national authorities. In this context, the Commission inspectors have access to all relevant documents under the same conditions as national inspectors, and their reports have the same evidential value in administrative and judicial proceedings. In connection with public procurement, the checks include interviews with unsuccessful bidders.

These provisions thus offer the Commission greater scope for action. However, they do have two main limitations:

-generally, intervention is restricted to non-compulsory investigations, completely excluding any police or judicial constraint, such constraints remaining the sole preserve of the Member States;

-in the matter of public procurement, only contracts which receive Community funding are covered; thus national contracts, even those which reach the threshold for falling within the scope of Community legislation, are excluded.

4.A protocol to the Convention on the protection of the financial interests of the European Communities was adopted by the Member States in June 1997 to compensate for the lack in most Member States of an offence of corruption of European Union officials or officials from other Member States. It provides that active and passive corruption involving such officials shall be an offence in all the Member States if it is detrimental to the financial interests of the Union.

B. Some examples of national measures

These have been selected as the measures most clearly reflecting the desire to combat corruption specifically in connection with public procurement contracts, particularly by creating original mechanisms which differ from the usual police and judicial procedures.

I.The British Serious Fraud Office

Set up by the 1987 Criminal Justice Act, this constitutes a clear departure in UK criminal law. It powers are restricted to cases which are out of the ordinary, particularly by reason of their seriousness and complexity. In this sphere it acts on its own initiative both as investigator and prosecutor, roles which are traditionally divided between the police on the one hand and the Crown Prosecution Service on the other. It has special powers to act which are not shared by the ordinary criminal investigation and prevention bodies:

-It may ask anyone who has relevant information to reply to questions or produce documents: refusal to reply to such request or the provision of false or incomplete replies is a criminal offence;

-It may decide to refer to the Crown Court a case which has been brought before the Magistrate's Court, a referral which is normally made by the Magistrate's Court itself;

-Once the case has been transferred to the Crown Court, the court may begin the trial and settle some questions (particularly as to the admissibility of evidence) before the case is put to the jury.

II.The 'clean hands' inquiries in Milan

This vast judicial operation has been going on for almost 7 years (since the end of 1991) and has involved a very wide range of inquiries relating (among many others) to public procurement scandals. The main characteristics have been:

-concentration of investigation and prosecution powers ('pools' of prosecutors and substitutes);

-police placed directly at the disposal of the investigators;

-cooperation of extra-judicial experts;

-chains of confessions obtained, sometimes by plea-bargaining, from 'reformed offenders';

For more details, see the report by prosecutor Borelli for the Council of Europe referred to in the bibliography.

III.Legislative innovations in France

In the past few years two essential Acts have aimed, as their titles clearly show, to strengthen the instruments for fighting irregularities and corruption in connection with public procurement contracts and delegation of public services. These are:

-the Act of 3 January 1991 on the transparency and regularity of procurement procedures, making the award of certain contracts subject to rules of publication and competition;

-the Act of 29 January 1993 on transparency and the prevention of corruption in business and in public procurement procedures.

These acts have brought about substantial innovations in both fields.

1.Creation of the offence of favouritism

The 1991 Act introduced a new offence in the Criminal Code, that of 'granting unjustified advantage', commonly called 'favouritism'. It applies to persons holding public authority, and involves:

-procuring an improper advantage in the award of a public procurement or public service contract,

-an irregular act (contrary to current laws and regulations),

-denying freedom of access and equality of candidates.

2.The interministerial commission of inquiry on public procurement contracts

This commission, set up by the 1991 Act, is responsible for checking the regularity and impartiality of the procedures followed in concluding public procurement contracts. Cases may be brought before it by a variety of administrative authorities, and it carries out inquiries to uncover illegal activities (contravening legislation on public procurement contracts, the Criminal Code, competition law, etc.) in which field it has wide powers:

-administrative inquiries: right of access to all professional premises and documents;

-judicial inquiries (to investigate the offence of favouritism): search and seizure of documents.

However, the interministerial commission does not have the power to impose penalties: it merely draws up reports for the authorities which requested the inquiry. Administrative penalties are for these authorities to impose, and prosecution in criminal cases is the preserve of the public prosecutor.

For details of its operation, we refer to the report by Mr Samuel of the French Ministry of Justice (see bibliography)

3.Some constraints on public service delegation agreements

The 1993 Act supplements the arrangements for public procurement contracts by making some contracts concluded by semi-public companies subject to the requirements of public notification and competition. However, its main departure is in the field of public service delegation agreements. Before then, such agreements conferred complete freedom on the public authority in question (the State, a public establishment or local authority) both in the award and in the duration of contracts. The Act restricts this freedom in two respects:

a.Procedure for the award of contracts

The public authority is now required to public a minimum of information as to its intention of delegating a public service (the decree implementing the Act has stipulated an announcement in a legal gazette and in a specialized publication). Candidates who express an interest after this announcement has been published and who, after their suitability (professional and financial guarantees, ability to manage a public service) has been considered, are permitted to make a bid, must be sent a document setting out the goods or services required.

If the public authority in question is a local authority, it must also:

-put the principle of delegating a public service to a vote of its deliberative assembly;

-instruct a commission, constituted among the members of that assembly in such a way that the political minority is represented, to open the contract to bidders;

-put the final choice of the contractor to a vote of the assembly.

It may negotiate directly with a firm only if no other bid has been submitted or accepted.

b.Duration of contracts

Public service delegation agreements must now be of limited duration. They may be extended only in two cases:

-for reasons of general interest, and then only for a year,

-where the authority has instructed the other contracting party to carry out work which is necessary for the proper performance of the service but which is not specified in the original contract.

Where the authority in question is a local authority, extension must be approved by the deliberative assembly.

In the drafting of this document, the reports of the Council of Europe's Second European Conference of Specialised Services in the Fight against Corruption have been of great assistance, in particular the papers by:

- Mr Borelli(Public Prosecutor at the Milan court)

- Mr Gillanders(Serious Fraud Office, UK)

- Mr Samuel(Ministry of Justice, Paris)

- Mr Kuhl(European Commission)

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SELECTED BIBLIOGRAPHY

Official documents

European Parliament:

*Report of the Committee on Civil Liberties and Internal Affairs on combating international fraud, A3-0346/93, Rapporteur: R. Bontempi, EP Resolution of 16.12.93, OJ C20/94

*Report of the Committee on Civil Liberties and Internal Affairs on combating corruption in Europe, A3-0314/95, Rapporteur: H. Salisch, EP Resolution of 15.12.95, OJ C17/96

European Commission:

*Communication to the Council and the EP on A Union Policy against Corruption, COM(97)192, Brussels, 21.5.97

Council of the European Communities:

*Council Act drawing up the Convention on the fight against corruption involving officials of the European Communities or officials of Member States of the European Union, OJ C362, 2.12.96

Council of Europe:

* Administrative, civil and penal aspects, including the role of the judiciary, of the fight against corruption, proceedings of the 19th Conference of European Ministers of Justice, Valletta, 1415 June 1994

*Papers of the Second European Conference of Specialised Services in the Fight against Corruption, Tallinn, 27-29 October 1997, especially contributions of Mm. Borelli, Gillanders, Kuhl and Samuel.

Organisation for Economic Cooperation and Development:

*Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, adopted by the negotiating conference on 20 November 1997

Articles

-Peterson J., "The EU: Pooled sovereignty, divided accountability", Political Studies (1997), XLV, 559578

-Ruimschotel D., "The EC budget: ten per cent fraud? A policy analysis approach", Journal of Common Market Studies, 32, 1994, 31942

-La Palombara J., "Structural and institutional aspects of corruption", Social Research, 61, 1994

-Sherlock A. And Harding C., "Controlling fraud within the European Community", European Law review, 16, 1991

-Deloitte & Touche, Fraud without frontiers - a study for the European Commission of international fraud within the EU, 1997

-UK House of Commons, European Standing Committee B, "Detection of frauds and irregularities", London, HMSO, 1996

Other

- The fight against corruption: Is the tide now turning?, Transparency International, Berlin, April 1997

-K.A. Elliott, Corruption and the Global Economy, Institute for International Economics, Washington, 1997

-Perry P.J., Political corruption and political geography, Ashgate, 1997, ISBN 1 85521 9018


© European Parliament: March 1998