By Daniele De Oliveira Nunes*
Each time a corruption scandal gains the first page of newspapers, the debate on how to prevent and fight such episodes heats up, and compliance departments proliferate in all types of organizations – although the need to comply with rules is nothing new.
Some organizations might voluntarily decide to implement an effective internal system of control when considering the positive impact on its activities and on its public image. Others, however, might avoid taking that step, delay it as much as possible, or take only superficial actions in that direction. Different reasons could lead an organization to have such behavior, from the investment associated with the implementation of a broad and effective compliance program, to the advantages the organization receives through corruption.
But corruption has costs, significant ones. When involving only private entities, it leads to economic inefficiencies that have a negative impact on the organizations itself and on the market. When involving government officials, it wastes public resources,[i] undermines citizens’ trust in institutions[ii] and helps creating an unstable and unpredictable environment for investments.[iii] Not surprisingly, fighting corruption has been elected a priority by many governments and international organizations.[iv]
According to the World Bank, “successful anti-corruption efforts are often led by a ‘coalition of concerned’ – politicians and senior government officials, the private sector, and by citizens, communities, and civil society organizations.”[v] This “coalition of concerned” becomes a challenge when many in the private sector still see corruption as worth the risk, resisting the adoption of strategies to mitigate the problem. If that is the case, what incentives could inverse this cost-benefit analysis, leading private actors to make serious efforts to fight corruption?
The 2014 Federal Sentencing Guidelines are an example. They consider “the existence of an effective compliance and ethics program” as one of the mitigating factors to be taken into account when defining the sanction for an organization involved in a federal crime.[vi] Nevertheless, 11% of the US organizations still did not have a formal ethics and compliance program in place in 2016. [vii] Worse than that, only half of them strongly agreed that organizational values were clearly stated and well understood.[viii]
A different perspective might contribute to the creation of stronger incentives for companies that still resist the adoption of effective integrity programs. Instead of reducing the sanctions these organizations are subject to, the implementation of such programs could be a necessary measure for them not to lose businesses.
Here a powerful tool can be public procurement, the process by which a government purchases the goods and services required for state activities.[ix] Government procurement is considered as an “untapped source of economic and social prosperity,”[x] accounting in average for 10 to 15% of the GDP of an economy.[xi] Governments are aware of that, and already use public procurement to regulate behavior. From promoting innovation[xii] and sustainability[xiii] to including local content requirements,[xiv] many are the policies implemented through public procurement.
Additionally, prominent companies heavily rely on government contracts as one of their main sources of business.[xv] Therefore, requiring that sellers abide to certain integrity commitments to enter into contracts with the government, or to maintain them, can be crucial to accelerate the decision to implement strategies that truly impact on corrupt practices.[xvi]
Integrity pacts with that goal have been used in countries such as Germany, India, Indonesia, Italy, Korea, Mexico and the United Kingdom.[xvii] An integrity pact constitutes “an agreement between the government agency offering a contract and the companies bidding for it that they will abstain from bribery, collusion and other corrupt practices for the extent of the contract”.[xviii] The process and the commitments are monitored by a third-party, “usually a civil society organization”,[xix] which by its turn commits to regularly disclose reports.[xx] A breach of the pact might trigger several sanctions, from the rescission of the main contract to the payment of financial compensation and the company’s debarment from future tenders.[xxi]
In some countries, these sanctions can be applied regardless the existence of an integrity pact. In the United States, the Federal Acquisitions Regulation System allows the government to suspend[xxii] or debar[xxiii] a contractor for up to one[xxiv] and three years[xxv], respectively. In Brazil, courts and the government are also allowed by statute to ban companies from future tenders within a specific period, if it is demonstrated they engaged in corruption. Courts may also prohibit companies from receiving any incentive from the government, besides holding them liable for damages.[xxvi]
Another alternative is to require that all bidders, or at least the one with the best bid, have a compliance program, or implement one within a certain time upon the signature of the contract.[xxvii] The government may decide to do so only when a contract has a value or term that exceeds a certain threshold, balancing the risk of corruption with the goal of selecting the best bid – the requirement might increase the costs considered by bidders when drafting proposals. Moreover, the requisite might be set forth as a condition for participating in the tender, or as a condition precedent which, if not satisfied, may lead to the termination of the contract.
It is true that many other factors, such as the enforcement of the abovementioned sanctions and consequences, might have a decisive influence on the effectiveness of these strategies. Nevertheless, the great impact that public procurement has on several companies’ revenue indicates it might be a smart move to use it as a tool to further the adoption of serious compliance instruments by such companies. If the main goal of a company is to generate profit, it is only natural to make it their main incentive to commit to an ethical standard of conduct.
*Daniele de Oliveira Nunes is a Junior Editor on MJEAL. She can be reached via email at email@example.com.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
[i] Putting an End to Corruption 2 OECD (2016), https://www.oecd.org/corruption/putting-an-end-to-corruption.pdf (last visited Feb. 28, 2019).
[ii] Id. at 1.
[iii] The World Bank, Combating Corruption (2018), http://www.worldbank.org/en/topic/governance/brief/anti-corruption (last visited Feb 28, 2019).
[iv] OECD considers “integrity as one of the pillars of political, economic and social structures and thus essential to the economic and social well-being and prosperity of individuals and societies as a whole” (OECD Recommendation of the Council on Public Integrity 3 OECD (2010), http://www.oecd.org/gov/ethics/OECD-Recommendation-Public-Integrity.pdf (last visited Feb. 28, 2019). The Organization promotes several events and studies, and issue guidelines to help fostering integrity. The World Bank views corruption as a major challenge to achieving its 17 Sustainable Development Goals (The World Bank, Combating Corruption (2018), http://www.worldbank.org/en/topic/governance/brief/anti-corruption (last visited Feb 28, 2019)).
[v] The World Bank, Combating Corruption (2018), http://www.worldbank.org/en/topic/governance/brief/anti-corruption (last visited Feb 28, 2019).
[vi] U.S. Sentencing Guidelines Manual §8C2.5(f) (U.S. Sentencing Comm’n 2016).
[vii] PricewaterhouseCoopers, Global Economic Crime Survey 2016: US Results 2 (2016).
[ix] Roundtable on Collusion and Corruption in Public Procurement, OECD DAF/COMP/GF(2010)6 at 9 (2010), https://www.oecd.org/competition/cartels/46235884.pdf (last visited Feb. 28, 2019).
[x] OECD Recommendation of the Council on Public Integrity 3 OECD (2010), http://www.oecd.org/gov/ethics/OECD-Recommendation-Public-Integrity.pdf (last visited Feb. 28, 2019).
[xi] WTO and Government Procurement, WTO, https://www.wto.org/english/tratop_e/gproc_e/gproc_e.htm (last visited Feb 28, 2019).
[xii] Geo Quinot, Innovation, State Contracting and Public Procurement Law 7(1) Trade L. & Dev. 137 (2015).
[xiii] Jedrzej Gorski, The World Bank’s New Procurement Regulations, 11 Eur. Procurement & Pub. Private Partnership L. Rev. 301, 307 (2016).
[xiv] U.N. Dep’t of Pol’y, Res. and Stat., The Role of Public Procurement Policy in Driving Industrial Development, at 10, WP 8 (2017), https://www.unido.org/api/opentext/documents/download/9921981/unido-file-9921981 (last visited Feb. 28, 2019).
[xv] In 2017, for example, Lockheed Martin – which annual revenue reaches billions of dollars – relied on the U.S. government for 69% of its sales. Lockheed Martin, Annual Report (2017), https://www.lockheedmartin.com/content/dam/lockheed-martin/eo/documents/annual-reports/2017-annual-report.pdf (last visited Feb. 28, 2019).
[xvi] OECD Principles for Integrity in Public Procurement 36 OECD (2009), https://www.oecd.org/gov/ethics/48994520.pdf (last visited Feb. 28, 2019).
[xvii] Preventing Corruption in Public Procurement 14 OECD (2016), http://www.oecd.org/gov/ethics/Corruption-Public-Procurement-Brochure.pdf (last visited Feb. 28, 2019).
[xix] Integrity Pacts, Transparency International, https://www.transparency.org/whatwedo/tools/integrity_pacts/5 (last visited Feb. 28, 2019).
[xxi] Integrity Pacts in Public Procurement – an Implementation Guide 8 Transparency International (2013), https://knowledgehub.transparency.org/assets/uploads/kproducts/2013_IntegrityPactGuide_EN.pdf (last visited Feb 28, 2019).
[xxii] 48 CFR § 9.407-1.
[xxiii] 48 CFR § 9.406-1.
[xxiv] 48 CFR § 9.407-4.
[xxv] 48 CFR § 9.406-4.
[xxvi] Different federal statutes establish these sanctions for companies that engage in misconduct within a government tender or contract, such as the Government Biddings and Contracts Act (Lei No. 8.666, de 21 de junho de 1993, Diário Oficial da União [D.O.U.] de 6.7.1994 (Braz.)), the Administrative Misconduct Act (Lei No. 8.429, de 2 de junho de 1992, Diário Oficial da União [D.O.U.] de 3.6.1992 (Braz.)) and, more recently, the State-Owned Companies Act (Lei No. 13.303, de 30 de junho de 2016, Diário Oficial da União [D.O.U.] de 1º.7.2016 (Braz.)).
[xxvii] This strategy has been adopted by some states in Brazil, such as Rio de Janeiro (Lei Estadual No. 7.753, de 17 de outubro de 2017, Diário Oficial do Rio de Janeiro [D.O.E.R.J.] de 18.10.2017), after one of the centers of the biggest corruption scandal in the country’s history was uncovered by the so-called Operation Car Wash. Prosecutors allege that directors of Petrobras, a state-owned company and huge player in the world’s oil and gas industry, received bribes from some of the most prominent companies of the country, in exchange of favoring them in Petrobras’ procurement processes.