Do European procurement rules generate or prevent crime?
The Authors
Nicholas Dorn, Cardiff University, Cardiff, UK
Michael Levi, Cardiff University, Cardiff, UK
Simone White, European Commission, Brussels, Belgium
Acknowledgements
The work on which this papers is based was conducted in the context of a European Commission funded study, called MARC, on “legislative crime proofing” otherwise known as part of the security dimension of impact assessment. In funding that study, the European Commission was interested in developing a method for understanding the vulnerability of legislative proposals to exploitation by criminals. The authors gratefully acknowledge financial support to Cardiff University for this and other work within the MARC project and thank project partners for their support and suggestions.
Abstract
Purpose – The purpose of this paper is to explore whether opportunities for fraud and corruption might be reduced or increased by rules governing public procurement. The focus is on specific European legislation – Procurement Directive 2004/18 on the coordination of procedures for the award of contracts for public works, public supply and public services by public bodies within all EU Member States – however similar issues would arise in other jurisdictions.
Design/methodology/approach – The procurement process is examined in relation to three stages of procedure: preparation of specifications, selection of tenderers, and execution of contracts, within each of which some specific risks (red flags) are identified.
Findings – Particular risks that may not have been sufficiently addressed, in terms of research or legislation, arise at the first of these stages; accordingly this paper focuses there. Generally, risks are summarised in terms of insider-driven specifications, low visibility of procurement processes, and ample opportunities for renegotiation of terms. Risks may be increased by innovative procurement practices that have the effect of extending the manoeuvring between tenderers and public bodies, such as competitive dialogue.
Research limitations/implications – Fraud and corruption risk in public procurement is an area deserving detailed and comparative study, with special attention to the pre-contracting stage. Research on this topic within EU Member States should go hand in hand with enquiry into international procurement, and into the EC's own rules as applied by its institutions and bodies.
Practical implications – Suggestions for risk-reduction are put forward in relation to quality standards and pre-award publicity.
Originality/value – After some time as the Cinderella of crime policies, large-scale frauds attract greater interest. This paper gives grounds for asking whether, in relation to procurement fraud, a combination of traditional practices and modernisation may outpace anti-fraud measures.
Article Type:
Research paper
Keyword(s):
Public procurement; Fraud; Corruption; European legislation; European directives; European Union.
Journal:
Journal of Financial Crime
Volume:
15
Number:
3
Year:
2008
pp:
243-260
Copyright ©
Emerald Group Publishing Limited
ISSN:
1359-0790
Introduction
This paper may be read as a scoping study, making a broad scan of important European legislation on procurement of goods and services by public bodies in the EU Member States, seeking to identify some potential crime risks and preventive aspects of the legislation, which might repay more focussed future study than can be attempted in an overview. The directive in question spans 120 pages and governs procedures for the award of public works contracts, public supply contracts and public service contracts (European Union, 2004). This is a consolidating measure, updating and replacing Directives 92/50/, 93/36/EEC 93/37/and 97/52 (the former Directives henceforth), which between them covered the same topics. Directive 2004/18 also takes account of European Court of Justice case law, clarifying certain matters including definition of a public body and what information should be given
Auspices, boundaries and approach
The research was carried out within the context of an EU-funded research consortium aiming to develop the security aspects of EU impact assessment – sometimes referred to as legislative crime proofing
The central question for this work is whether vulnerabilities to fraud may have been increased or decreased by the Directive, which refers to procurement by public bodies in the member states. Procurement by EC institutions and bodies (as distinct from national public bodies) is governed by a parallel but distinct set of rules, the financial regulation (European Union, 2002). Although in our opinion some read-across would be desirable between research on frauds within the member states and on frauds involving the EU Institutions and bodies, the focus here remains on the former. This reflects a preference of the European Commission as conveyed by its directorate-general for research and may, to a certain extend, relate to a division of competences between other directorates-general of the commission. Such institutional boundaries are not unknown in other organisations.
From the onset, one comes up against the question of how to “read” legislation when looking for fraud or other crime risks. Should one simply look at the words within and the structure of the text? Or should one be trying to second-guess 27 national transpositions, related national regulations, sets of guidance, approaches embedding these in “procurement cultures”, contractors' understandings and business practices, administrative/judicial monitoring, remedies and controls
The research process followed was as follows. First, a search was made of academic and professional literature. Discussions were held with a small number of specialists, based in Brussels, Paris (helping to offset the English language bias of most of the literature searches) and Helsinki. As a result, a simple sequential framework of tendering was adopted – preparation, selection of tenderers and finally execution of contracts – within which specific risks (red flags) could be identified on the basis both of specialist experience and the literature. Finally, those known and suspected risks were mapped onto the specific provisions of the Directive. Such linkage was more easily demonstrated and evidenced in terms of the general experience of specialists in purchasing bodies and law enforcement agencies than in terms of court cases, simply because some of the greater risks are not easy to bring to court.
The limitations of information from court cases can be illustrated by making reference to the scope for irregularities at all stages of the procurement procedure. Risks at the pre-tender stage may at least equal risks during selection of bidders or execution of contract. There can be subtle and careful favouring by public officials or technical experts of particular specifications or tenders, when the latter are “friends of friends” or linked by political networks, through which favours later (perhaps much later) may be reciprocated. Such irregularities would usually count as corruption, however tracking their occurrence over time and social space is difficult and proving them even more difficult. Thus, risks may be greatest when direct evidence thereof is least.
The need, therefore, is to look for areas of risk and their possible abatement or exacerbation by regulation. Here, the experience of procurement specialists can be drawn upon. They of course may be rather more concerned with issues of business efficiency and public value than with fraud and/or corruption per se. However, specialist procurement commentaries provided us with one valuable point of departure for understanding some broad risks. For example, Christopher Bovis comments that reform of EU procurement directives has been organised around three themes: “simplification”, “modernisation” and “flexibility” (Bovis, 2005). There are possible implications for understanding fraud risks, for example simplification might reduce the opportunities for fraud if it reduces ambiguities in procurement processes – through removal of scope for criminality to hide behind textual ambiguities, through enhancing legal certainty and by underpinning more robust enforcement. Moving on to modernisation, Bovis observes the introduction in the Directive of a new award procedure called “competitive dialogue”, which enables the public sector to award complex projects such as public private partnerships and trans-European networks more effectively. Notable issues here include:
The discretion of contracting authorities to initiate the procedure (who is to determine the nature of a particularly complex contract and the inability of the contracting authorities to draw precise specifications and the contract's financial and legal make-up). The internal structure and conduct of the procedure (the confusion surrounding the different stages pre-tender and post tender). […] The degree of competition achieved (there is great potential for post tender negotiations) […] (Bovis, 2005).
Here, legal certainty appears to be rather low, with the implication that “wriggle room” may be appreciable. Until the framework is further clarified, “competitive dialogue” may imply fresh opportunities for crime. These and other considerations are taken up below.
An outline of Directive 2004/18
Comparing 2004/18 with the former directives, it consolidates new provisions and in some cases new procurement concepts and procedures can be found in the following areas: framework agreements, competitive dialogues, dynamic purchasing systems, disclosure of weighting of criteria, keeping records and being ready to make reports, environmental and social issues, and electronic auction. Directive 2004/18 does not apply to “secret” or “special security measures” or “protection of the essential interests” of member states, nor to international agreements and contracts in conformity with Treaties between sovereign states, the stationing of troops abroad, work concerning international organisations, or other defined services including independent research. Much other public contracting is caught if involving a price above defined limits
Key terms and procedures include “open procedures”
An innovation in the Directive, “competitive dialogue” is a procedure, applicable in complex cases, in which the contracting authority conducts a dialogue with those candidates admitted to that procedure, with the aim of developing one or more suitable specifications capable of meeting its requirements, on the basis of which candidates chosen are invited to tender. In this process, chosen entities submit ideas and plans, possibly in stages, until the purchaser can identify possible solutions, whereupon it asks all tenderers to submit final tenders. In restricted procedures, negotiated procedures and competitive dialogues, the purchaser may limit the numbers of candidates according to non-discriminatory criteria that must be indicated in advance in the notice. Negotiated procedure, competitive dialogue and framework agreement all imply an extended period of discussion between public officials and representatives of firms. This must open up risks, especially when these procedures are entered into repeatedly. “Framework agreement” will be discussed below.
According to Directive 2004/18, evidence of economic stability and technical/professional ability must be provided by tenderers. The directive extended this to quality standards and (where applicable) adherence to environmental standards. An oft-remarked upon safeguard is that exclusion of tenderers is required in the case of their proven participation in a criminal organisation, corruption, fraud or money laundering as defined in EU instruments, bankruptcy, and professional misconduct, failure to pay social security or taxes or related misrepresentation
The preparatory stage of the procurement process
The procurement procedure occurs in stages, which may be represented as follows:
- preparatory stage, when procurement needs, budget and questions of procedure are settled;
- solicitation, bidding and selection; and
- the execution of contract stage, in which the work is done and delivered (however under certain conditions, fine-tuning of terms and/or possible extension of contract may also occur at that stage).
Criminality may potentially arise at any of the stages.
Although there is relatively little literature on risks associated with the preparatory stage, the following paragraphs give reasons to suggest that it is here that the risks may be greatest. Criminality and/or corruption opportunities arise as decisions are made about whether and how the provisions should be applied in the light of the needs of the purchaser, the type and scale of work envisaged, the criteria to be met by successful providers, the availability of potential tenderers, the procedures to be followed, and so on. External parties may be involved in shaping the requirements, either through their prior work and/or through a specific contract for assistance to the purchasing body. The call for tender will be advertised or not, depending on the procedure being followed.
Key decisions made at this stage will decisively shape the scope and terms of the eventual contract. Such decisions include the choice of procedure, justifications for using open, negotiated, competitive dialogue or emergency procedures, the possibility of breaking work into small packages spread across different budget headings and time-frames, and the specifications and pricing for the work/service/products to be delivered. Such decisions may narrow the field to one or a very small number of tenderers (for example in negotiated procedures or in emergencies) or may even place the work outwith the scope of application of the directive (“smurfing”
Drawing upon the experiences of those consulted, some of the crime risks at pre-contracting stage may be summarised broadly and crudely as procurement staff corruption and/or improper involvement of contractors; fixing the specification or criteria so to unduly narrow the field; setting an unrealistically low price so as to discourage tenders and then entering into negotiated procedure with just one favoured (and possibly appreciative) contractor; “surfing” the work, etc. In the following paragraphs, we draw on available sources to give a few practical examples.
Fictitious work
A “requirement” can be entirely fictitious, invented by procurement staff in order to divert money to self, family or others, without any involvement of tenderers. One UK case illustrates the risk of staff fraud occurring within a purchasing environment:
In this […] case, a junior member of staff over a period of two years was able to defraud a department of over £100,000 by exploiting weaknesses in purchasing and payments systems. The junior clerk had been employed by the department for six years in the purchasing directorate. […] He was given a password which enabled him to create and edit records. On completion of this task the junior clerk moved to a purchasing team where he was involved in the processing of purchase orders and the information needed to enable payments to be made to suppliers. Security over the computer system was lax and the junior clerk realised that the password previously given to him to carry out specific tasks still allowed him access. In particular, he was able to access the supplier database and create false supplier records […]. The finance section accepted his signature as authorisation for payment. […] No further checking was carried out by management (Her Majesty's Treasury, 2001).
The provisions of the Directive do not bear upon this issue.
Under and over estimation of specification or price
Turning to cases in which there really is a genuine public requirement, on the basis of experiences of anti-corruption and anti-fraud experts and from the literature, a number of procurement staff-related risks can be identified, including the following.
Purchasers may under-estimate the cost of the work, thus failing to get any bids and allowing them to enter into a negotiated procedure with a tenderer, who may give a bribe (success fee) or find a way of returning favours in future (e.g. employment, consultancy or directorships after retirement from public service).
Alternatively, an underestimated tender price may be accepted, leading to requests for more financing, such additional sums then give an opportunity for payment to officials – who may well have understood that the tender price was unrealistically low in the first place and that it would need additional support.
Overestimated tenders, if accepted, also give scope for “commission” payments. Likewise, contracting for already-existing work (or work that is actually done by the purchaser in-house and then given to the tenderer to deliver) allows considerable excess profit, which can be distributed.
Unnecessarily high-technical specifications, or over-estimates of the materials, effort or time required, allow for the possibility of later “recognition” of the “error”, permitting a saving for the tenderer. Such misspecification may occur:
- through genuine error or uncertainty;
- where procurement staff naively accept technical advice from an interested party (see below);
- where the purchaser is responsible for checking the work and has no intention of requiring the successful tenderer to deliver fully; or
- where the purchaser may have intended the high specification to be delivered but another official, responsible for checking deliverables, decides that she can accept work of a lower standard.
In any of those cases, the tenderer may have cause to be grateful.
Political party financing and procurement
Considerable publicity has been attracted over the years to a series of scandals related to the financing of some European political parties. During 2005, persons implicated attested to a well-established “system” in which public works contracts attract a success fee, sometimes 2 per cent of the total contract price, which goes to fund political parties, networks, staff and expenses of well-disposed individuals ( Le Monde, 2005a). Reports indicate that some of the practices may have been accepted at a high level in several European countries (Samuel, 2005), posing a counterweight to the more usual focus on corruption and bribery in developing countries (Shaxson, 2005):
L'ancien directeur de cabinet de Jacques Chirac à la mairie de Paris, Michel Roussin, a reconnu mardi au procès des marchés publics d'Ile-de-France qu'il était au courant du système de versement des 2% du prix des marchés par les entreprises aux partis politiques. Interrogé par le président du tribunal sur ce chiffre, M. Roussin (65 ans) a déclaré, mardi, “ne pas ignorer cette histoire des 2% ( Le Monde, 2005a).
The custom is also known in other national contexts. The reasons suggested for such behaviour vary. Transparency International (2005) points to cultural and organizational aspects, whilst others commentator has pointed to situations in which there were no (or inadequate) sources for funding of political parties. That takes us way beyond the scope of the procurement directive but could be an important contextual point.
In the view of some of those consulted, amongst the most endemic risks are contractors being involved in drawing up specifications. Contractors may assist purchasers by preparing specifications; the information may then be shared with affiliates, subsidiaries or others; or the spec may be prepared in line with a particular tenderer's capabilities and profile. This may occur in cases in which officials are incompetent, uninterested or lazy – in which case they may allow contacts to assist them in an informal (even purely verbal) manner that does not show up in any record – and/or some may be open to inducement. In that case, the persons involved may be linked though professional, social and sometimes political networks, and may show mutual appreciation over the long term, rather than through any immediate and identified “payoff”. This risk would be greatest in more technically demanding projects.
Open call: a benchmark?
In considering risks of procedures other than open call, the latter is often taken as a benchmark, since it maximises transparency. However, open call procedure is by no means a guarantee of clean procurement: it may be undermined from outside (contractors), from inside (procurement staff) or from both directions. In anti-fraud investigations, data mining techniques are sometimes used. These techniques can be used to bring together scattered records on procurement, searching for repeated patterns of collusion between tenderers, sometimes referred to as “concert parties”. In the following example, a “win/lose” analysis identified unusual patterns in the tendering statistics:
There were two key elements to this: • Suppliers that consistently lost their bids; and • Suppliers that won more than 95% of bids. Suppliers that consistently lose are often referred to as “shadow bidders”. The sole purpose of such bids was to “pad out” the tendering process to ensure that a sufficient number of suppliers had been invited to bid. […] In many cases, jobs that were signed off by a Purchasing Manager as having been completed were never started, in others the technical specification was such that costs could be saved by using different materials, and finally there were instances where the cost of the materials was grossly inflated. This was a classic example of control delusion where, just because the controls stated that each contract needed to have five bidders and there was a tender board to select the winning supplier, it was believed that collusion could not happen (Kusnierz, 2003).
According to our sources, such practices are widespread. In extreme circumstances, firms that show signs of not “playing the game” may find themselves in difficulty in their commercial relations or their managers may be disappointed in their hopes for career advancement. Whilst firms and managers have to manage reputational risk and on that score seek to steer clear of any suggestion of impropriety, they also have to get on in markets and social networks.
Inexplicable decision making by purchasing bodies' staff
Although no criminal offence has been identified, a catalogue of embarrassments in procurement of the Scottish Parliament building in Edinburgh was laid out in an investigating barrister's report. This report established that those responsible had adopted “construction management” as the basis for purchasing. It is generally acknowledged “construction management” is highly risky, especially when the purchaser is inexperienced, for the following reasons:
[…] greater client risk; the complexity of administering many different trade packages (around 60 in the case of Holyrood [Scottish Parliament]); the requirement for the client to be informed and decisive; the need for a good team and brief; the relative difficulty of managing delay and disruption; and most important of all, the absence of any overall contractual programme or contract sum (Fraser, 2004).
Through the choice of “construction management” instead of a safer mode of purchasing, a client may end up with financial and other responsibility without power of direction. The potential benefit to the contractor can be proportional to the disadvantage to the public purse. The report continues that, in the Scottish Parliament case, officials proceeded to take this more risky procurement route, also they re-instated the most expensive bidder when normally that one might have been expected to have been dropped from further consideration
Remedies?
Legal action ensued as McAlphine's, the tenderer that had offered the lowest price, took action against the UK Government, alleging breach of EC rules. However, as of 2005, legislation of some EC Member States did not adequately provide for a dissatisfied tenderer to stop the tender award process, enabling them to take a complaint over procurement procedure to a court with the power to stay or set aside particular decisions (Denton Wilde Sapte, 2002). Strangely, Directive 2004/18 does not incorporate the relevant judgment of the European Court of Justice in the case of Alcatel
Emergency procedures
Emergency procedures are typically used in humanitarian and security related situations – but not only then. Part of the wider problem is that they may be used in routine situations, following delays caused by the administration itself. The “emergency”, in other words, is one that has been constructed, either by incompetence, by indifference or by even a positive appreciation of the lower level of transparency and checks in such procedures.
It seems well accepted, from the literature and from discussion with procurement and fraud specialists, that emergency procedures, whether they be “real” or constructed, have the effect of bypassing the usual safeguards and open the door to high levels of misappropriation. An example from the UK follows:
[…] £50,000. A contractor performed services for a department and submitted payment requests. Payments began being made on the basis that the payment requests were valid. Further substantiation was requested from the contractor to support the payment requests. Some of the supporting documentation appeared to have been altered and departmental signatures appeared to have been forged. Management controls were not properly applied because the work was carried out during an emergency (Her Majesty's Treasury, 2001, p. 45).
The picture has been clouded further by allegations about private sectors bribes paid to a variety of individuals, private sector bodies and public sector bodies variously in Iraq, elsewhere in the Middle East and in many other countries of the world, including France ( Le Monde, 2005b), where total, formally Elf-Aquitaine, has once again come to the fore in an unfavourable light ( Le Monde, 2005c) in part due to US pressures on European and other companies (Katzman and Blanchard, 2005) One aspect of the affair having relevance for European procurement directives and corresponding national laws is the apparent loosening of scrutiny that often accompanies international, humanitarian or urgent contracting (Independent Inquiry into the United Nations Oil-for-Food Programme, 2005). Such problems may go hand-in-hand with a culture of tolerance in purchasing bodies for helping friends and relatives, as may have been the case in the United National central procurement department ( The Times, 2005; Wikipedia, 2005). The world's largest catering firm, Compass, found its UK subsidiary caught up in that affair ( Financial Times, 2005). Summarising, the emergency-humanitarian-international procurement nexus seems to present particular risks, since it brings together the use of quick and easier procedures with contracts of very large value.
Exemptions regarding business abroad
Another procurement issue with national/international ramifications is the question of rules and procedures to be followed by European governments and their export agencies when supporting private sector involvement in international development projects. During 2004, this area become noteworthy in at least one EU Member State, the UK, as there was debate on whether it is right for firms to continue to be eligible for government financial support, when they may be involved in bribery and corruption overseas and may admit as much, defending it as normal business practice (UNICORN, 2004; Institute for Public Policy Research, 2004; The Corner House, 2006; ECGD, 2004). That same behaviour in the domestic (EU) setting would result in their exclusion under Directive 2004/18. Private sector lobbyists had not evinced enthusiasm over the possibility of exclusion, saying that though bribery in matters of procurement would be indefensible in any context, all the same it may be essential in many international contexts. A number of think tanks and NGOs put forward the view that such a disparity would not be right.
The point for present purposes is that Directive 2004/18 does not govern the conduct of public bodies when supporting the private sector in procurement abroad (outside the EU). Nor it is clear if it refers to convictions outside the EU. The overall consequence could be that, whilst a public body could not (or should not) do business with a private sector firm whose managers or owners had convictions in an EU Member State, the public body could do business with the same firm if it had offended outside the EU (for example, whilst a public body was politically and/or financially supporting such a firm to gain contracts). It will be interesting to see how much the new UK “National Fraud Strategic Authority” (Attorney General's Office, 2006) would concern itself with behaviour of UK-based firms and persons in relation to bribery abroad, or if it finds its remit restricted to frauds whose recipients are within the UK. The well known case(s) of British Aerospace's alleged payments in connection with armaments for Saudi Arabia come to mind, the UK Government decision to drop the case having prompted legal action for judicial review (Campaign Against Arms Trade and the Corner House, 2007).
Of course, if the objective of 2004/18 is procurement value and probity within the EU only, and if such a restricted notion could be politically “sellable”, then such considerations would be somewhat blunted. Indeed it is possible that a corporation feeling impelled to bribe outside the EU for contracts (for example, if it feels that otherwise it is a certainty that another firm would win the contract by bribery), could behave with integrity within the EU. Businesses, like individuals, may behave differently in different contexts (an everyday observation and an elementary bit of social science). At the same time, not all governments would feel comfortable in reinforcing regulatory arbitrage.
Risks at the stage of solicitation of bids
At this stage of procurement, there is consideration of tenderers and their offers, and selection of a provider (or consortium of providers). Decisions are made about the suitability (or barring) of specific tenderers, checks should be made to see that tenderers are independent (rather than all or some being structurally linked or formally independent but actually working in concert), and the selection criteria should be applied even-handed manner in order to choose a successful tenderer.
It is understood that internal “crime proofing” work on Directive 2004/18 by the European Commission focussed mainly on this stage and, most specifically, on the question of whether particular tenderers may have past criminal involvements and, if so, how that may be established
Past participation of tenderers in crime
The consequences of the directive will depend upon how its rather loose requirements on exclusion
Without detailed guidance on the scope for exclusion, there would be further considerable loopholes that would allow economic operators to evade exclusion on a regular basis. EU economic operators may for instance seek to evade exclusion by using a subsidiary to apply for a contract, getting a “clean” company to front a bid on which it may be a subcontractor or control by covert means such as shadow directors, or by changing corporate identity.
Leaving aside the question of whether safeguards would best be take at national or EU level, the more general observation made in the quotation above seems hard to brush aside. A criminal tenderer could “ride a horse and carriage” through 2004/18. One UK case illustrates the risk of lack of proper checking of tenderers, compounded in this case by the lack of information-sharing between purchasing bodies:
Works contract fraud. […] A new facilities management contract worth some £1.5 million was to be let for a three-year period with possible extensions for a further two years. The contract was advertised in the European Journal and let under EC procurement rules. A short list of four contractors who expressed an interest was drawn up which included one firm which had carried out maintenance work previously at the sites. The contractors were vetted to ensure that they were financially viable and capable of carrying out the work to the standards specified, except the firm which had been used before. This firm went on to win the contract (Her Majesty's Treasury, 2005).
The Corner House (2005) draws attention to the likelihood that many tenderers with shady backgrounds may not be weeded out because, for example:- there is an area of non-criminal law “in between” past criminal conviction on the one hand and “professional misconduct” on the other, that is not explicitly referred to;
- active checking is not required by the directive; and
- systems for making checks and sharing information across the EU and with international organisations are not required.
Unanswered questions about negotiation and dialogue
Both negotiated procedures and the new competitive dialogue blur the line between the preparatory stage and the solicitation/selection stage. Competitive dialogue goes further, opening up what may be an extended period of “shadow-boxing” between competing tenderers. Overall, competitive dialogue has been welcomed by big contractors for its “flexibility” and by governments for its ability to clarify technically complex and ambitious aspects of large contracts. However, it is something of an unknown factor from a crime and corruption point of view.
Risks in execution of contracts
Once the contract has been agreed in principle, there may be further negotiations on details of scope and price. Depending on the type of procedure employed – a critical issue – these negotiations and their financial and other consequences may be quite considerable. Within certain limits, prolongations or extension of contracts may be agreed, without further competition.
Risks here include “slippage” of work, which either may be inherent in the tender but not anticipated by the purchaser, or alternatively may be engineered by the tenderer in the course of the work in order to obtain an extension. In some circumstances the purchaser may prefer to issue another (differently worded) contract, rather than to admit that things are going badly. In some cases, staff changes may mean that purchasers do not understand that they are being manipulated; in other cases there may be conflicts of interest and corruption. Deliverables should be monitored to assess to what extent they meet the specification: however, if in the specifications themselves or in the checking process there is slackness or corruption, then deliverables may be substandard, replicates of previously provided deliverables, or incomplete or absent (Bueb and Ehlermann-Cache, 2005).
Strengthening the process and encouraging whistle blowing
A contribution to a UK Treasury report by a representative of the firm control risks asks the question, “are there any general principles of fraud control by which organisations can judge themselves?” (Dawson, 2003). Building on this, the present authors offer a compliance matrix (Table I). Scores or 1, 2 or 3 would be allocated (3 being highest level of fraud control). Scores represent whether fraud control policies exist on paper, are whole-heartedly accepted by management, are widely communicated to staff and any subcontractors, and are monitored to ensure compliance; and whether practical controls and procedures exist on each of these points; and whether staff is vetted where necessary; and if appropriate training is given.
It could be for managers within public bodies to require such an approach of all tenderers, and for legal officers (with pubic bodies and/or advising) to ensure such an approach was being implemented. In terms of Directive 2004/18, this might fall within the context of quality standards, which can be taken into account in drawing up and applying specifications and criteria
This could be a way of presenting to what extent an anti-fraud/anti-crime policy may or may not be in place in tendering firms. In order to be effective, there would need to be a power for purchasing bodies to make independent checks and, to make public and accessible (e.g. by www) the self-assessments submitted by all tendering firms, this being done some time prior to award of contracts. Alternatively, and more economically, there could be a requirement for all tenderers themselves to place such information on a public web site as a normal part of the tendering process. This might assist purchasing bodies to solicit, from the public and from industry generally, any information that might bear on questions of accuracy and fairness of tenderers' self-assessments against the quality standards, though such information (e.g. from embittered ex-employees or indirectly from competitors) would have to be managed carefully. It seems to the authors that the quality approach mentioned immediately above – see Table I – could also be applied to purchasing bodies. This might then have value in reducing procurement crime risk. It would be salutatory for checks to be run by independent entities (be they governmental, private consultants, NGOs or academics), since auditing after the event may be insufficient.
Publicity
Finally, the lack of a requirement for general publicity about tender awards – who bid, what in outline was the bid, who was successful, against what criteria and why, decided on what grounds, by whom, who advised – is a major fault-line running through both the former Directives and Directive 2004/18? Only in the biggest contracts does such information find its way into the public sphere; in the myriad of smaller and medium-sized procurement contracts, there is a right for competing tenderers to know the outcome but no requirement for wider publicity. This must lessen the possibility that a wide range of observers at local and regional level – be they competitors, other firms in the sector, trade unions, even academics, compliance offices, audit firms, police, or just interested citizens – could give information relevant to tenders. A timely opportunity for supply of such information could add an external dimension to the process of checking tenderers' representations regarding beneficial owners, managers and staff, and capabilities and activities. Publicity is proving its work in related fields, for example in relation to protection of the financial interests of the European community, where:
The arguments in favour of transparency are gaining ground. If public money is being used, then its use should not be private. […] Publication is a useful (and cheap) protection against fraud, since farmers may be dissuaded from making false claims if they know that their neighbours can see what they are receiving (King, 2005).
As the same source reports, some authorities have been:
[…] disapproving of efforts by the European Commissioners Mariann Fischer Boel (agriculture) and Siim Kallas (administration and antifraud) to get national governments to disclose who received what money from EU coffers (King, 2005).
Nevertheless, several member states now publish such lists. It should be required at an EU level.
The argument for public disclosure of information would be stronger still if the information could be made public prior to any final decision on award of the contract/grant. The European Court of Justice has ruled that unsuccessful tenderers who allege that they are unfairly dealt with have a right of challenge in court or similar forum. Since such challenge should involve the possibility of the award being set aside, it follows that, before a tender is awarded, there has to be a “cooling off” period in which the purchasing body communicates its provisional decision to all tenderers, to see if any challenge is forthcoming from them
Conclusion
Fraud risks in public procurement may be summarised in terms of insider-driven specifications, low visibility of procurement processes, and ample opportunities for renegotiation of terms. In order to deepen our understanding the relationships between formal policies, the contexts of their implementation, the cultural and political “climates” underpinning these and outturns in terms of value for money, fairness, fraud and corruption, we need to engage in more interdisciplinary exercises, involving lawyers, purchasers, policy makers, traders and concerned NGOs and criminologists.
As a preliminary view, the authors suggest that Directive 2004/18 does not address many well-known risks – starting with outside contractors formally or informally being involved in drawing up many specifications, continuing with lack of timely and widespread publicity on who has been successful, and progressing through ample possibilities for slippage and re-negotiation of contract parameters (see preceding pages). It's central anti-crime measures, the exclusion of rogue tenderers, may not always be easy to implement in the context of fluidity of European, indeed global, markets; and may be easy to circumvent. Against that troubling background, Directive 2004/18 introduces new procedures that carry new risks, particularly competitive dialogue and framework contracts.
Some of these risks might be mitigated by quite simple measures: suggestions have been made regarding quality standards and publicity. Having said this, it is important to be politically realistic and to bear in mind that neither Directive 2004/18 nor the former directives it consolidates were motivated primarily by the specific objective of reducing fraud risks. Rather, they are seen as an important part of the development of the European single market. Even so, economic growth and market efficiency will hardly be maximised by maintaining opportunities for fraud in procurement and associated corruption in public bodies.
For these reasons we call for fuller study of crime risks in public bodies' procurement procedures, of the extent to which such risks may be increased or decreased by EC rules, and of the broadly corresponding risks facing the European institutions and bodies. There may be a case for more robust input into the policy-making process by the European Commission's Directorate General for Justice, Liberty and Security, and by the EU's anti-fraud body OLAF; even, dare one mention it, more visible cooperation between the two. From an institutional point of view, there may be sensitivity and a perceived need to maintain a boundary between work on frauds against member states and frauds against the EU as such, that boundary corresponding to the procurement Directives and to the EC financial regulation, respectively. This however should be no bar to cooperation on research, given that the risks may be structurally similar, may involve the same modus operandi and sometimes the same personalities, may cause similar economic and political harms, and may be susceptible to similar preventive and enforcement measures.
Table ICompliance matrix
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Corresponding author
Nicholas Dorn can be contacted at: dorn@cardiff.ac.uk