Two EU directives are about to come into force that penalise firms that have been involved in criminal activity. Before you applaud, read on …
The European Union is steadily increasing its power to impose criminal sanctions and major industries, such as those dealing with infrastructure projects, could be at particular risk. Two directives, which must become law in the UK by 31 January 2006, have to date received little public scrutiny but could have severe economic consequences for any company or professional discipline in this field.
Directives 2004/17/EC and 2004/18/EC contain rules for the procurement of utilities and public sector contracts respectively. Both stipulate that any candidate for these contracts will be ineligible to be awarded the work if it, or its directors, or others exercising control have been convicted of a number of prescribed criminal offences including corruption, conspiracy, fraud and money laundering.
On the face of it, this may seem a reasonable prohibition but on closer inspection it has the potential to impose an unfair penalty on companies that bid for projects. A number of obvious examples immediately come to mind. As the directives stand, a group of companies could be banned because of an isolated activity by an individual company, even if that activity occurred many years ago and had nothing to do with the present business of the company. Equally, a group could again face sanctions as a result of unauthorised actions by a “rogue manager”.
Perhaps most worryingly, if a ban is imposed, it would appear that it could last indefinitely even if the company concerned had previously had an impeccable record.
These anomalies in the directives, and in the draft public contracts regulations that bring them into force, make the directives worryingly open-ended. Infrastructure projects have historically been one of the country’s most significant income generators and we should be in no doubt that the directives have the potential to result in our flagship companies being banned from competing for public sector contracts.
Although the prohibition can be disregarded if “overriding requirements in the general interest exist”, there are again no guidelines as to what would justify that exemption. Similarly, the decision to trigger this exemption clause is left to the discretion of the authorities contacted, which could lead to ambiguity and inconsistency.
There may, however, be some relief on the horizon. The government, through the Office of Government Commerce (OGC), recently held a consultation on how the directives should be implemented. It is urged to adopt a pragmatic approach. In particular, it is essential that the directives are implemented sensibly and proportionately.
It is not suggested that appropriate laws should not punish inappropriate business practices. However, the directives now carry the risk of disproportionate – and therefore inappropriate – penalties. Surely any system of regulation will be most effective if it engages with, and seeks co-operation from, those it is set up to regulate. At present the directives could produce an opposite effect, because companies fearing dire economic consequences may see no benefit in assisting the authorities.
In order to achieve a sensible approach to the directives it is suggested that a central body, most obviously the OGC, should be asked to oversee the directives.
That body should then operate in a way that encourages self-policing and dialogue with relevant industries. Clear and publicised policies should be implemented that, for example, will give credit to companies that self-report and take immediate steps to rectify any compliance shortcomings.
In this way a system will evolve that engages all relevant parties, and therefore encourage good business practices, while at the same time imposing appropriate sanctions on those that fail to adopt them.
It is hoped that the government will react sympathetically to the concerns that have been voiced. However, the directives will become law in January and companies that fail to have full criminal compliance systems in place before then clearly risk severe consequences.
Jeremy Summers is a partner in the fraud and regulatory department at Russell Jones & Walker, London. He can be contacted at J.Summers@rjw.co.uk