CRIMINAL AND COMPETITION INFRINGEMENTS IN PROCUREMENT UTILITIES PROJECTS

Transcription

1 CRIMINAL AND COMPETITION INFRINGEMENTS IN PROCUREMENT UTILITIES PROJECTS Ligia Cecilia Popescu Partner Wolf Theiss Rechtsanwalte GmbH & Co KG

2 TOPICS 1. Current national legal framework for utilities procurement 2. Current EU framework 3. New E.U. legal framework 4. Irregularities and corruption in procurement procedures for the utilities sector 5. Conflicts of interests - the New Criminal Code (NCC) 6. Conflicts of interests - Law 161/ Conflicts of interests - Romanian public procurement legislation 8. Conflicts of interests - Emergency Government Ordinance no. 66/ Conflicts of interests - EU legislation 10. Negative effects of conflicts of interests 11. What is bid rigging? 12. Bid rigging legislation 13. Factors Favouring Bid-Rigging 14. Factors Favouring Bid-Rigging 15. Bid-Rigging Schemes 16. Practices to avoid because they indicate the intention of collusive bidding 17. Investigation and penalties for bid-rigging 18. Case study 1: Bid-rigging 19. Case study 2: Conflict of interests 20. Case study 3: Trading own influence 21. Case study 4: Usage of false documents 22. Case study 5: Irregularities that may occur in the tender proceedings 2

3 Current national legal framework for utilities (water, energy, transport, postal services) procurement Chapter I-VI + Chapter VIII of GEO 34/2006 on the awarding of public procurement contracts, works concession contracts and services concession contracts, with subsequent amendments ( GEO 34/2006 ) is the general legal framework for utilities public procurement in Romania GE0 925/2006 methodological norms implementing GEO34/2006 Order 2266/2012 on standardized documentation for the design and execution of water supply, water sewerage and waste water projects and waste treatment Utilities regime under GEO 34/2006: when a contract refers to several relevant activities the authority must chose the rules applicable to the main (most relevant activity) 3

4 Current EU framework GEO 34/2006 is aligned with the former European legal framework, namely: - Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors ( Directive 2004/17/EC ) - Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts ( Directive 2004/18/EC ) 4

5 New E.U. legal framework On 28 March 2014 Directives 17/2004/EC and 18/2004/EC have been replaced by three new directives (New EU Directives): - Directive 2014/23/EC of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts; - Directive 2014/24/EC of the European Parliament and of the Council of 26 February 2014 on public procurement repealing Directive 2004/18/EC; and - Directive 2014/25/EC of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors repealing Directive 2004/17/EC.! According to the Romanian authorities, the New EU Directives shall be implemented in the Romanian legislation no later than ! For implementing the New EU Directives at least three new laws shall be enacted replacing the provisions of GEO 34/2006 triggering a major change in all aspects of the procurement procedures 5

6 Irregularities and corruption in procurement procedures for the utilities sector In Romania utilities procurement is prone to the same irregularities and corruption issues as the other sectors with a higher incidence of conflicts of interest and criminal activities The exclusion from the procedure and sentences under competition law is applied to infringing bidders and Individual criminal liability may be established on a case by case basis 6

7 Conflicts of interests - the New Criminal Code (NCC) The acts of a civil servant who, during the performance of his/her duties, commits an act or participates in the making of a decision by which a direct or indirect economic benefit is obtained for himself/herself, his/her spouse, a relative up to and including the second degree of consanguinity or affinity or for any other persons with whom he/she has entered into a business or employment relationship in the past 5 years or from whom he/she has received any kind of benefits, are punishable by prison terms of between 1 to 5 years and the prohibition of holding public offices.! A conflict of interests is an offence bordering on corruption and its existence is a preliminary significant indication thereof! A conflict of interests constitutes a malfeasance in office (official misconduct) carring a minimum prison term of 6 months to 1 year 7

8 Conflicts of interests - Law 161/2003 regarding certain measures to ensure transparency in state dignitaries' and civil servants' activity and in the business environment, to prevent and punish corruption, (updated by Law no. 144/2007 for the setting up, organization and operation of the National Agency for Integrity (ANI)): The situation in which the person who is a state dignitary or a civil servant has a personal economic interest that may influence his/her objective fulfilment of his/her duties under the Constitution or other laws 8

9 Conflicts of interests - Romanian public procurement legislation Government Emergency Ordinance 34/2006 does not contain a specific definition for conflicts of interests, however it provides measures for avoiding them in Article 69 (1) : any tenderers or candidates whose spouses or relatives up to and including the fourth degree of consanguinity or affinity are members of their board of directors/management or supervisory body and/or are shareholders of their company or who are in a business relationship with any decision-making factors of the contracting authority are excluded from the contract award procedure GEO 34/2006 is supplemented by the provisions of Law 161/2003 and the New Criminal Code, therefore in the context of public procurement, conflicts of interests are understood within the meaning set out by these two legal provisions! Penalty: exclusion from the procedure 9

10 Conflicts of interests - Emergency Government Ordinance no. 66/2011 on preventing, establishing and punishing irregularities in obtaining and using European funds and/or related national public funds Article 10: Individuals or entities participating directly in the verification/evaluation of funding applications may not be applicants themselves and/or may not grant consultancy services to applicants However, there are cases in practice where the companies of the relatives of the civil servants involved in the verification/evaluation of funding applications become beneficiaries of the relevant funding Another practice assimilated to conflicts of interests is for civil servants to resign from the managing authority and to be hired as experts for the project they previously evaluated 10

11 Conflicts of interests - EU legislation (Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014) Article 24: The concept of conflicts of interest shall at least cover any situation where staff members of the contracting authority or of a procurement service provider acting on behalf of the contracting authority who are involved in the conduct of the procurement procedure or may influence the outcome of that procedure have, directly or indirectly, a financial, economic or other personal interest which might be perceived to compromise their impartiality and independence in the context of the procurement procedure.! The penalty is the exclusion from the procedure of the economic operator who is found in any of these situations, if no other remedial action may be applied to correct it! Implementation deadline for Member States: 18 April

12 Negative effects of conflicts of interests Distortion of free market competition and prejudicing the interests of the final consumers (beneficiaries) of the relevant goods and services Allocation of EU funds based on artificial criteria (political, kinship affiliation etc.) which prevents them from being directed to investments that are truly necessary and that have a significant impact Impossibility to recover the products of conflicts of interests even if there are final and binding court decisions in favour of ANI 12

13 What is bid-rigging? Secret agreements between companies that should normally compete against each other and that actually secretly conspire to raise their prices or lower the quality of the products or services offered to their buyers in a tender procedure Bid-rigging is an extremely dangerous practice especially when it affects public procurement procedures. Lower prices, best quality and innovation are obtained in public procurement procedures only when the tenderers compete in real, honest and independent terms! Corruption and anticompetitive practices, including bid rigging, are often complementary 13

14 Bid rigging - legislation Competition Law no. 21/1996, republished as amended and supplemented - Article 5 (1)(f): Agreements between undertakings to participate, in a concerted manner, in tenders or in any other forms of competition of offers by submitting rigged bids are prohibited" The Treaty establishing the European Community - Article 101 (1): The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (c) share markets or sources of supply! The Organisation for Economic Cooperation and Development (OECD) has adopted the "Guidelines for Fighting Bid Rigging in Public Procurement" (2009) 14

15 Factors Favouring Bid-Rigging Small number of companies that are active in a market for certain goods or services sought by a procurement agency at a certain point. The smaller the number of bidders in a market, the greater the risk of bid-rigging conspiracies A limited number of businesses that recently entered or will enter a market due to high costs or entrance barriers. Companies that are already active in the respective markets are protected against competition pressure from new entrants, which encourages conspiracy to rig bids Market-specific conditions such as: the constant and predictable demand in a certain sector may increase the risk of bidding conspiracies. Economic crises also stimulate bidders' willingness to gain profit by collusive agreements to rig bids 15

16 Factors Favouring Bid-Rigging Repeated (recurrent) bidding. High frequency of auctions for similar contracts help the parties to a collusive agreement to share the roles before the auction takes place Limited or no supply of alternate products and/or services that may be substituted for the sold product or service favours agreements to increase prices No technological innovations in a goods or services market favour agreements amongst businesses over long periods of time 16

17 Bid-Rigging Schemes Complementary bidding, also known as courtesy bidding or cover bidding is the most frequent form of bid rigging, and occurs when a bidder tenders at a price known to be too high or includes conditions known to be unacceptable to the beneficiary Bid suppression occurs when a bidder agrees not to submit a final bid, so that another bidder can win the contract. This involves a scheme where a bidder, which is then declared the winning bidder, submits a bid, while another participant abstains from bidding, and a third participant withdraws its initial bid 17

18 Bid-Rigging Schemes Bid rotation involves an agreement amongst bidders to take turns being the designated successful bidder based on the lowest price. This conspiracy may be implemented by allocating each bidder an equal share of financial resources from a group of contracts or by allocating financial volumes that are proportional to the size of each company Market sharing (allocation) involves agreements amongst bidders not to compete for certain business or in certain geographic areas. So the competitors will not tender or will submit cover bids for contracts offered by certain classes of potential customers, which in their turns had been allocated to preset companies, which in turn will not tender or will submit cover bids for another designated group of customers! The different forms of bid-rigging presented below are not mutually exclusive, but two or more such schemes may occur simultaneously at the same procurement procedure 18

19 Practices to avoid because they indicate the intention of collusive bidding Communication between bidders - Direct meetings within professional organisations or at other industry events - Tender documents collected by a bidder in the name and on behalf of other bidders - Statements by bidders indicating that they have knowledge of non-public information (prices tendered by other bidders, the fact that their own bids are not the lowest bids etc.) or the answer to certain questions, which could only be obtained from other bidders Post-auction relations amongst bidders - Post-auction sharing of profits by: direct payments; subcontracting works/services within the project; supply of goods 19

20 Practices to avoid because they indicate the intention of collusive bidding Unusual behaviours - The winning bidder does not accept the contract or withdraws before the winner is announced - A submitted bid does not contain details or documents required by the beneficiary, or information about suppliers - The number of bidders is unusually low, and certain constant bidders do not participate Similarities in submitted documentation - The documentation submitted by different bidders contain common elements suggesting bidder collusion (identical spelling and calculation mistakes; reference to competing bidders' bids or even, in extreme cases, use of another bidder's header or phone/fax number; envelopes sent by different bidders have the same postal stamps or marks)! The OECD Guidelines include a Checklist for Detecting Bid Rigging in Public Procurement, which help procurement officials identify anti-competitive practices during the bidding process 20

21 Investigation and penalties for bid-rigging The Competition Council is entitled to start an investigation into a possible breach of Article 5 (f) of the Competition Law During the investigation, the competition inspectors may conduct down raids at the locations of investigated companies, from where they may take evidence consisting in documents, electronic communications etc. The decision of the Competition Council may be appealed to the Bucharest Court of Appeal! If it is found that the bidders have breached the competition law, they may be subject to penalties of up to 10% of their turnover In some OECD-member countries, bid-rigging constitutes criminal offence 21

22 Case study no. 1: bid-rigging Tender for the sale of the majority interest in the company Obcina Rădăuți Background - The state-owned company called Obcina Rădăuți was privatised by FPS though an openauction - The bidders were the company X [1], the company Y and the Employees' Association (PAS) - Y won the auction by tendering the highest price and signed the privatisation contract. Subsequently, the privatisation contract was cancelled because Y failed to pay the price of the shares within the agreed deadline - A second auction was held, with company A and company B as independent bidders - Because neither of the bidders tendered the starting price, the auction was changed into a descending-price auction, as per the law, and was won by B on its first offer. A did not tender at all 22

23 Case study no. 1: bid-rigging Decision of the Competition Council - Both B and its majority shareholder were significant shareholders of A - There were family ties between the executive management of A and the sole shareholder of B - A and B had a long history of business cooperation on both formal and informal bases - The sole shareholder of B was also the sole shareholder of Y, which won the first auction, but failed to pay - Because B was unable to provide the EUR bank guarantee letter required to participate in the auction, A provided real estate properties as guarantees for the issue of the letter in favour of B, for the second auction - Company A had a passive behaviour and did not tender, which enabled B to win at a much lower price than the starting price! The Competition Council decided that companies A and B were in breach of Article 5 (1) of the Competition Law. Both auctions were cancelled. The Bucharest Court of Appeal and the High Court of Cassation confirmed the decision of the Competition Council 23

24 Case study no. 2: conflict of interests Tender in the Olt Water Company for the renewal of the water network Background ( - Olt Water Company (OWC) is a state owned company dealing with the extraction, treatment, pumping and distribution of drinking water, sewerage and wastewater treatment in Slatina municipality - In 2012 two local officials (the mayor and the deputy-mayor of Slatina) were also shareholders of OWC and had powers to decide upon the investment scheme of the company and to draft the qualification criteria for the tenders organized by OWC - In this capacity, in exchange of a bribe from a businessman, they abusively eliminated from the tender book certain eligibility criteria in order to illegally award contracts for the rehabilitation of the water and waste systems in Slatina and other cities to the companies owned by the businessman. The bribe was received in the form of fictitious contracts entered into between the firms of the businessman and firms controlled b the two officials 24

25 Case study no. 2: conflict of interests Decision of Craiova Court of Appeal - For illegally awarding eighteen (18) the two officials were convicted for trading of own influence to four (4) years of imprisonment, with the suspension of the penalty Decision of the High Court of Cassation and Justice Moreover, in , the two officials were investigated by the National Anticorruption Department ( DNA ) with charges based arising form the provisions of Law no. 78/2008 on preventing, discovering and sanctioning acts of corruption ( Law 78/2008 ) In 2015, both officials were taken into house arrest for a thirty days period (Case no. 1372/1/2015 registered on the dockets of the High Court of Cassation and Justice) 25

26 Case study no. 3: trading own influence Influence to dismiss a challenge submitted before CNSC by one of the other competitors ( Background -In 2012, the Regional Water Company Bacău (RWCB) organized a tender to renew a water treatment plant - The winner of the auction was an association formed by two companies. A losing bidder challenged the award with the National Council for Solving Challenges ( CNSC ) - A director of one of members of the winning association claimed money from the other member in order to influence the judges of the CNSC in order to reject the challenge of the losing bidder - The criminal case is still ongoing; it is expected that the practices of the above mentioned bidder be considered trading of own influence is sentenced with imprisonment ranging between two (2)-seven (7) years 26

27 Case study no. 4: usage of false documents A. EU financed project regarding the building of a water supplying system and of a sewerage system and wastewater treatment plant in Iaşi County having as beneficiary Dăgata Local Council (DLC) Background - Two representatives of a private company from Iasi County submitted false documents during the tender organized by DLC in order to prove that the company did not have pending debts to the Romanian state at the date when the tender was organized. The bidders won the tender based on the forged documents and drew partially the funds - The court ordered the seizure of their assets and subsequently established the existence of forgery of documents and false statements and sentenced both representatives to imprisonment with the suspension of the penalty. The case in appeal is still ongoing 27

28 Case study no. 4: usage of false documents B. EU financed project in relation to building of wastewater collectors and treatment plants and building of a water adduction system in Brasov County, having as beneficiary Braşov Water Company (BWC) ( Background - In 2012 BWC organized a tender where Romanian companies were registered as participants in the auction, as well as a Spanish consortium and a German company and the winner of the auction was the Spanish consortium - The German company, challenged the result of the auction at CNSC stating that the Spanish consortium submitted false documentation in order to prove they have similar experience 28

29 Case study no. 4: tender winning due to the usage of false documents - CNSC accepted the challenge but BWC challenged this result at Brașov Court of Appeal maintaining that the tender was legally organized - The Court of Appeal accepted the BWC challenge and issued a definitive decision ruling that the proceedings were legally performed (Decision no. 70/R/2012 issued in case no. 1101/64/2011) - Nevertheless, in 2014, a criminal case was registered on the dockets of Brașov Tribunal the case is still ongoing 29

30 Case study no. 5: Irregularities that may occur in the tender proceedings Lack of similar experience Decision no. 579/CA/2009 issued by Constanța Court of Appeal Background According to article no. 170 of OUG 34/2006, the bidder must issue the offer in accordance with the tender documentation The object of the auction was extension and rehabilitation of a water treatment plant located in [T] Commune The bidder did not submit certificates of final reception of the works as provided by the tender specifications, but only minutes attesting the finalization of the works; therefore its offer was rejected by the authority Against this background, the bidder challenged the result to CNSC obtaining a favourable decision, but it was changed by Constanța Court of Appeal According to the Court of Appeal, the express requirements in the tender documentation were not complied with; therefore the decision of the beneficiary to reject the offer was legal 30

31 Case study no. 5: Irregularities that may occur in the tender proceedings The obligation of the authority to give specific grounds for dismissing an offer Decision no. 2320/ issued by Cluj Court of Appeal Background According to art. 206 (2) letter b) from OUG 34/2006, the authority is obliged to specifically indicate the grounds for dismissing a challenge The object of the auction was rehabilitation and extent of adduction pipes, water tanks, pumping tanks, as well as of the water distribution network and used water network in in Maramureș County The authority appointed the winner of the auction without specifying what were the irregularities of the other offers One of the competitors challenged the result of the tender before CNSC and obtained a favourable decision; the decision was upheld by the Cluj Court of Appeal Both the Council and the court ruled that the authority did not specifically point out the grounds of dismissing the bidder's offer; in light of this, the offers were re-evaluated 31

32 THANK YOU FOR YOUR TIME! Ligia Cecilia Popescu Wolf Theiss Rechtsanwalte GmbH & Co KG Tel