Corruption: Practical Issues in the Mandatory and Discretionary Deselection of Bidders

CORRUPTION: PRACTICAL ISSUES IN THE MANDATORY AND DISCRETIONARY DESELECTION OF BIDDERS

Roger Bickerstaff

Partner, Bird & Bird, London

1. Introduction

Article 45 of the EU Public Sector Procurement Directive set out the rules for the mandatory and discretionary grounds for the exclusionof bidders from EU regulated public procurement processes in the context of convictions for corruption of the bidding entities. (These rules are also available to Utilities under Article 54(4) of the Utilities Procurement Directive and must be applied by Utilities which are contracting authorities).

At first sight, these rules establish clear and unambiguous circumstances when bidders must either be excluded from a procurement process or where the contracting authority has adiscretion to exclude a bidder.In practice, however, in the context of multi-national companies with complex group structures the application of these rules is far from straight-forward. This paper examines some of the complexities that arise when contracting authorities apply the rules set out in the Directives to these practical circumstances.

This paper interprets the law on the basis of the UK implementation of the Public Sector Directive. Reference is made to Regulation 23 of the Public Contracts Regulations 2006 (as amended) (the “Regulations”) and Article 45 of the Public Sector Directive (the “Directive”) which Regulation 23 seeks to implement.[1]

Section 2 of this Paper provides an analysis of the relevant law relating to the exclusion of bidders as a result of corruption. The remaining sections of the Paper comment on the application of the law to particular situations, namely the exclusion of sub-contractors, the offences committed by other group companies, offences committed outside the Member State of the contracting authority, and offences committed by directors of the bidders.

1. The Rules for the Exclusion of Bidders
2. Mandatory grounds for exclusion

Regulation 23(1) provides that a contracting authority shalltreat an economic operatoras ineligible if the contracting authority has actual knowledge that the economic operator[2] has been convicted of any of a list of offences (fraud, money laundering, corruption etc).

In this context.

a)“Economic operator”–in the Regulations the term ‘economic operator’ refers only to the contractor, supplier or services provider. In other words, the term refers to entities that bid for and are then awarded a contract pursuant to a procurement process. The term ‘economic operator’ does not refer to “any subsidiaries or sub-contractors who may be engaged by the economic operator to perform some of the work under the contract.”[3]

This interpretation accords with Article 45(1) of the Directive which states that “Any candidate or tenderer who has been the subject of a conviction … shall be excluded…”Under the Directive ‘candidates’ and ‘tenderers’ are persons who have either submitted a tender or who have sought to take part in a procedure, which would not therefore include sub-contractors[4].

b)‘Actual knowledge’is also required on the part of the contracting authority of the conviction. This requirement of knowledge was a late addition to the Directive during the legislative process leading up to the 2004 Directive. There is no obligation on Contracting Authorities in the Regulations to make any specific enquiries relating to corrupt activities on the part of bidders.

However, the assessment of corruption and, in particular, convictions of bidders for corruption is different from the assessment of most other deselection information. This is because convictions for corruption are in the public domain and are widely publicised in the media. As a result, it would not be easy for a Contracting Authority to argue that it did not have “actual knowledge” of a corruption offence that has been widely discussed in the on-line and offline media.

The UK Office of Government Commerce (OGC) guidance recommended that contracting authorities “should, as a minimum, seek a declaration from all economic operators … confirming that they have not been convicted of any of the offences referred to in Regulation 23(1).”[5] Presumably, the provision is intended to provide protection in circumstances where for legitimate reasons a Contracting Authority has not become aware of any corrupt activity of a bidder from other sources. If there was no such provision, there is risk that through ignorance a Contracting Authority could be in breach of the Regulations by not excluding a bidder which should have been subject to the mandatory exclusion grounds.

c)“Convicted of a Specified Offence” – the Regulations are clear that in order for the mandatory exclusion obligation to be triggered, the bidder or one of its directors must actually have been convicted of one of a range of specified offences. Thelist of offences is specified in Regulation 23(1). In relation to corruption, the relevant offences are:

(i)corruption within the meaning of section 1(2) of the Public Bodies Corrupt Practices Act 1889 orsection 1 of the Prevention of Corruption Act 1906, where the offence relates to active corruption;

(ii)the offence of bribery, where the offence relates to active corruption;

(iii)bribery within the meaning of section 1 or 6 of the Bribery Act 2010;

A conviction for corruption within the meaning of section 1(2) of the Public Bodies Corrupt Practices Act 1889 or section 1 of the Prevention of Corruption Act 1906orthe offence of bribery is not in itself a ground for deselection. In all of these cases, the offence must relate to “active corruption”. This term is defined by reference to Council Act of 1997 or Article 3(1) of Council Joint Action 98/742/JHA on the fight against corruption.

The Council Act deals with corruption involving public officials. “Active corruption” is defined as:

“the deliberate action of whosoever promises or gives, directly or through an intermediary, an advantage for himself or for a third party for him to act of refrain from acting in accordance with his duty or in the exercise of his functions in breach of his official duties” .

The Council Joint Action has a similar definition in relation to private sector corruption.

Bribery within the meaning of sections 1 or 6 of the Bribery Act 2010 relates to:

(i)Section 1 - the Section 1 offence occurs in situationswhere a person (“B”) bribes another person (“R”). In more detail, B bribes R if:

B offers, promises or gives a financial or other advantage to R (whether directly or through a third person and irrespective of whether R accepts that advantage),

and either

B intends the advantage to induce a person (who may also be R, but could be someone else) to perform a relevant function or activity improperly,

or

B intends the advantage to reward a person (who may also be R, but could be someone else) for the improper performance of a relevant function or activity,

or

B knows or believes that the acceptance of the advantage would itself constitute the improper performance of arelevant function or activity.

(ii)Section 6 - the Section 6 offence occurs in situations if:

(i)B bribes a foreign public official, intending to influence him in his capacity as a foreign public official,

and

(ii)B intends to obtain or retain business, or an advantage in the conduct of business (including a trade or profession).

d)Relevance of the date of the Conviction

There are no specific provisions under the Regulations to take into account the period of time which has elapsed since the offences were committed or since the conviction. This may mean that bidders that have been convicted of an offence identified in Regulation 23(1) must be permanently excluded from UK public sector procurement processes.

The alternative – and preferable view in view of the EU Treaty principle of proportionality - is that Member States have a discretion to decide on the time span of relevance of convictions for the mandatory deselection obligation. In the UK the general rules on the rehabilitation of offenders will be applicable.

These rules depend on the sentence imposed, rather than on the offence committed. The rehabilitation period for a fine is 7 years. For a prison sentence it varies from 5 years for a prison sentence of less than 6 months up to indefinitely for a prison sentence of more than 30 months. (Nb. The rules on the rehabilitation of offenders are changing as from Spring 2013).

e)Territoriality - Although the list of offences in Regulation 23(1) refers to UK legislation, Regulation 23(1)(f) extends the obligation to exclude bidders to any other offence within the meaning of Article 45(1) of the Directive as defined by the national law of any EEA state.[6] As a result, the conviction of bidders or their directors in countries outside the EEA falls outside the mandatory exclusion obligation.

There are specific issues in relation to bribery. The relevant wording in the Regulationis not jurisdiction specific. Regulation 23(1)(c) refers to “the offence of bribery, where the offence relates to active corruption”. However, the definition of “active corruption” in the underlying Procurement Directive in respect of the bribery of public officials is limited to the bribery and corruption of any Community official or the official of any Member State[7]. As a result, although the drafting of Regulation 23(1)(c)is not jurisdiction specific, in respect of the bribery or corruption of public officials it should be interpreted as referring to the corruption of public officials within the EU.

Regulation 23 has been amended to take account of the Bribery Act and a new Regulation 23(1)(ca) has been introduced. Under the Bribery Act, there can be convictions under either of these sections where the bribery or corruption occurred outside the EU. Under both sections 1 and 6, there can be convictions in the UK if any act or omission which forms part of the offence takes place in the UK. Even if no part of the offence takes place in the UK, if a person’s acts or omissions would make up the offence if they had been done in the UK, the Act will still apply if the person in question has a “close connection” with the UK.

A person has a close connection with the UK if, at the time of the relevant acts or omissions, the person was, broadly, a British national, ordinarily resident in the UK, or a body incorporated under the law of any part of the UK.

f)General Interest Derogation - Although the requirement to exclude economic operators is mandatory, Regulation 23(2) provides an exception such that the contracting authority can disregard this requirement “if it is satisfied that there are overriding requirements in the general interest which justify doing so in relation to that economic operator.”

The exercise of the derogation under Regulation 23(2) would need to be appropriate, necessary and proportionate to the objectives sought. The preparatory documents to the Public Sector Procurement Directive indicated as an example that the derogation could be available in public health cases, where the only available medicines are provided by a supplier which would be subject to the mandatory exclusion obligation.

The OGC Guidance also adopted a restrictive interpretation of this provision. It noted that this exception should only be used in the most serious of circumstances, for example in the case of a national emergency.[8]

However, in light of general EU law principles, such as proportionality, the OGC interpretation is arguably overly restrictive. Nonetheless, the derogations from the rules should only be applied in limited circumstances where there are strong grounds to support the exercise of the derogation. Clearly, the fight against corruption is an important EU and UK consideration. There would need to be very strong and objective grounds to support the exercise of the public interest derogation under Regulation 23(2).

2.2Discretionary grounds for exclusion

Regulation 23(4) sets out the grounds on which contracting authorities may decide to exclude an economic operator (the discretionary grounds).Those of particular notein the context of corruption are as follows:

• “has been convicted of a criminal offence relating to the conduct of his business or profession” (Regulation 23(4)(d))
• “has conducted an act of grave misconduct in the course of his business or profession” (Regulation 23(4)(e))

‘Criminal offence’ is not a defined term of the Regulations and there is no guidance as to how broadly Regulation 23(4)(d) may be applied. It would seem to be open to a contracting authority to take into account non-EEA convictions relating to corruption which would not be subject to the mandatory grounds for deselection under Regulation 23(1).

As this ground is discretionary any exercise of the right to exclude a bidder would have to take into account relevant factors, such as the seriousness of the conviction, the relevance of the conviction for the particular procurement process, and when the conviction occurred.

Regulation 23(4)(e) (act of grave misconduct) appears capable of broad application and in principle it could be used where an economic operator has committed an act of grave misconduct outside of the EEA, such as bribery of a foreign official in a non-EU state.For instance, it is understood that this ground has been considered by contracting authorities that may seek to exclude economic operators who had participated in the construction industry cartel that was investigated and sanctioned in the UK by the Office of Fair Trading.[9]

More generally when applying the discretionary grounds for exclusion contracting authorities are constrained by general EU law principles, in particular the principles of proportionality,transparency and equal treatment. In light of these principles de-barring an economic operator from public procurements for an indefinite period could be considered disproportionate, particularly if the offence is relatively minor.

It may also be disproportionate to debar economic operators who have taken effective measures to deal with the problematic conduct. Although not referred to in the Directive, in some Member States (such as Germany and Austria) there is a concept of ‘self-cleaning’ i.e. certain measures can be taken by the economic operator to remedy a negative situation affecting its eligibility to participate in public contracts.

Further, contracting authorities must carefully consider whether the evidence they will seek to rely on is sufficient to justify exclusion. For instance, where a bidder has not been convicted of an offence in any jurisdiction, but where there are suspicions of wrongdoing, the contracting authority would need to consider whether there in fact exists reliable evidence of wrongdoing. In practice contracting authorities must therefore always carefully consider whether a decision to exclude a particular bidder is justified in light of general EU law principles.[10]

1. Exclusion of Sub-contractors

Regulation 23(1)provides that the mandatory obligation of de-selection applies to “the economic operator or its directors or any other person who has powers of representation, decision or control of the economic operator”. The discretionary ground for de-selection in Regulation 23(3) applies only to “economic operators”, which may be treated as “ineligible” or not selected on the specified grounds.

Opinion is divided amongst EU procurement law experts on the extent to which these provisions apply to the exclusion of sub-contractors.The OGC Guidance considered that the mandatory grounds for exclusion do not apply to sub-contractors. The OGC Guidance did not comment on the discretionary grounds.

An argument can be raised that any sub-contracting will not limit a prime contractor’s liability under a contract. Thus, if a sub-contractor has committed an offence which is covered by Article 45, the sub-contractor should be excluded even though the sub-contractor did not actually bid for the contract. The Directive refers to the exclusion of a convicted “supplier” from “participation in a public contract”. It has been suggested that if the main contractor declares that it cannot perform the contract without the convicted sub-contractor, this should also be regarded as indicating the incapability of the prime contractor to perform the contract[11].

Taking this argument into account, it would appear that here is no independent right to deselect sub-contractors on the basis of the mandatory or discretionary exclusion criteria. Instead, it would appear that contracting authorities have a right to deselect a bidder (both the prime contractor and its subcontractor(s)) if a bidder makes clear that it is not able to proceed to perform the contract without the sub-contractor.

In the context of the mandatory exclusion offences, the contracting authority must exclude the bidder (both the prime contractor and its subcontractor(s)) in these circumstances. If the discretionary grounds apply, the normal rules set out above relating to the exercise of the discretion for the exclusion of the bidder (both the prime contractor and its subcontractor(s)) are applicable.

More generally, it may be possible to include contractual provisions on the prime contractor that have the effect of preventing the prime contractor from appointing sub-contractors that have engaged in corrupt conduct. However, adopting such an approach would need to be very carefully thought through and considered in light of the particular circumstances in issue.

1. Exclusion where the Corrupt Activity relates to another Group Company
2. Mandatory de-selection

Regulation 23(1) applies not just to the economic operator but also to situations where “any other person who has powers of representation, decision or control of the economic operator” commits one of the offences specified in the Regulation.

As a result, the mandatory obligation of de-selection does not apply to offences of subsidiary companies or “sister” companies (ie companies with a common parent). It applies where the offence is committed by a parent company provided that the parent “controls” the bidder. This appears to be a quirk of the Regulations (and the Directive underpinning the Regulations). There does not appear to be any particular rationale for this approach, although it could perhaps be argued that if a parent company is subject to a corruption conviction it is more likely that this will "infect" its subsidiaries, whereas it is perhaps less likely that the reverse will occur.

There is no guidance in the Regulations on the meaning of “control” in this context. For example, it is not clear if a subsidiary will be controlled by a parent if more than 50% of the shares in the subsidiary are owned by the parent company or whether the subsidiary needs to be a fully owned subsidiary.

4.2Discretionary de-selection

The discretionary ground for de-selection in Regulation 23(3) applies only to “economic operators” which may be treated as “ineligible” or not selected on the specified grounds. There is no equivalent extension under Regulation 23(3) to “any other person who has powers of representation, decision or control of the economic operator”.

As a result, it would appear that the discretionary grounds for de-selection in Regulation 23(3) do not apply to group companies and only apply to the bidding company itself.

1. convictions outside the MEMBER STATE
2. Mandatory de-selection

Extraterritorial UK Convictions