On February 3, 2014, the European Commission published its first Anti-Corruption Report (the “Report”). The Report covers all types of corruption, including political corruption, bribery of public officials, and private or commercial corruption.
The Report assesses the extent to which the various Member States’ implemented anti-corruption measures are working and identifies those measures that could be improved. The Report acknowledges that the nature and scope of corruption varies widely among the Member States and notes that the effectiveness of anti-corruption policies and enforcement in each Member State is therefore necessarily different. It also concludes that the issue of corruption generally deserves greater attention in all EU Member States.
This Alert provides a brief overview of the key findings of the Report, describes some of the potential risks of doing business in EU countries from an anti-corruption compliance standpoint and outlines anti-corruption compliance best practices that have been implemented by multinational companies to mitigate such corruption risks.
Eurobarometer survey on perceptions of and experience with corruption
The European Commission carried out a special Eurobarometer survey on the attitudes of Europeans towards corruption to understand the perception of, and experience with, corruption in EU Member States. In general, the survey results show that Europeans believe that corruption remains a widespread problem in EU Member States and that the level of corruption has actually increased over the last three years. The latter result is somewhat surprising given the increasing global spotlight on the deleterious effects of corruption and the numerous anti-corruption enforcement actions that have been brought against leading European companies. However, the perception may be attributable in part to the economic challenges facing Europe over the last several years.
A specific business-focused ”flash survey” was also carried out by the European Commission to understand the level of corruption perceived by European businesses. Key findings are that three quarters (75%) of the companies surveyed believe that corruption is widespread in their country. Almost half (43%) of these European companies view corruption as a problem when doing business and (47%) agree that the only way to succeed in business in their country is to have political connections. Favoring friends and family in business (43%) or in public institutions (43%) are considered the most widespread corrupt practices, followed by tax fraud and non-payment of VAT (42%). Finally, 32% of such European companies that have participated in public tenders believe that corruption prevented them from winning a contract. This is a significant finding that reflects poorly on the public’s perception of the integrity of public procurement proceedings within EU Member States. It must be emphasized, however, that the perception of corruption varies widely among EU Member States, with certain countries (such as Denmark) fairing well and other countries (such as Greece) faring poorly.
Corruption-related trends across the Member States
The Report explains a number of trends across the EU Member States. The main trends include, but are not limited to, the following:
Control mechanisms. There are great differences among Member States with respect to systems in place to prevent corruption (e.g., ethical rules, awareness-raising measures, easy access to public disclosure information). For some countries, effective prevention has contributed to a strong reputation of little corruption, whereas other countries have implemented preventive mechanisms in an uneven way and with limited results. In many Member States, internal controls on procedures within public authorities (particularly at the local level) are weak and uncoordinated. Rules on conflicts of interest vary across the EU, and the mechanisms for checking declarations of conflicts of interest are often insufficient. Sanctions for violations of public procurement rules are rarely applied and often weak.
Prosecution and punishment. The EU Framework Decision 2003/568/JHA on combating corruption in the private sector has been transposed by Member States into national law in an uneven manner. Theefficiency of law enforcement in investigating and prosecuting corruption varies widely across the EU. Procedural rules, including rules on lifting immunities of politicians, obstruct corruption enforcement proceedings in certain Member States.
Political dimension. Integrity in politics remains an issue for many EU Member States. Although many Member States have adopted stronger rules on political party financing, considerable shortcomings remain. Dissuasive sanctions against illegal political party funding are rarely imposed in the EU.
Risk areas. Within Member States, corruption risks are generally higher at regional and local levels than at the central government level. Sectors proven to be most vulnerable to corruption within the EU Member States are urban development and construction, as well as health care. Shortcomings continue to exist regarding the supervision of state-owned companies, increasing their vulnerability to corruption. Petty corruption (involving small amounts) remains a problem only in a few Member States.
Public procurement is an important area for the EU economy, but also remains an area that is vulnerable to corruption. According to the Report, the most frequently occurring corrupt practices in the EU Member States relating to public procurement are: (1) bid rigging (in the form of bid suppression, complementary offers, bid rotation and sub-contracting when the contract is promised to one sub-contractor without the consent of public officials); (2) kickbacks; (3) conflict of interest; and (4) other irregularities including deliberate mismanagement when public officials do not carry out proper diligence checks or follow the required procedures and/or tolerate or ignore overt mismanagement of public funds by public contractors.
The Report calls for stronger integrity standards in the area of public procurement and suggests improvements in control mechanisms in a number of Member States. In particular, the following suggestions were made with regarding to public procurement in the EU:
Need for systematic use of corruption risk assessments within public procurement;
Implementation of high-transparency standards for the entire procurement cycle as well as during contract implementation;
Strengthening of internal and external control mechanisms for the entire procurement cycle as well as during contract implementation;
Ensuring a coherent overview of and raising awareness about the need for prevention and detection of corrupt practices at all levels of public procurement; and
Strengthening sanctions for violations of procurement rules.
Impact on Business Entities
In line with the standards of the Council of Europe, the United Nations and EU legislation, criminal law rules making corruption a criminal offense are largely in place in the EU Member States. Therefore, companies engaging in corrupt practices, both public and private, are subject to criminal prosecution in the EU Member States. However, as noted in the Report, the consistent enforcement of such criminal laws, and the resources devoted to investigating and prosecuting violations of such criminal laws varies among the Member States. The Report is likely to put some pressure on those Member States that have been identified as having shortcomings in their anti-corruption laws or enforcement records. The periodic reviews by the OECD of the anti-corruption enforcement framework in various jurisdictions have added to the pressure for reform. Companies operating in these countries should pay attention to any changes in local anti-corruption laws or in enforcement priorities that may emerge in the wake of the Report.
With respect to public procurement, suspected cases of corruption and conflict of interest in the management of EU funds, under the applicable EU regulations in force, can lead to interruption and/or suspension of payments until appropriate corrective measures have been taken by the Member State, including the strengthening of the management and control systems. The contractors involved in such activity also may be subject to suspension or debarment from public contracting opportunities, even at the affiliate level in certain circumstances. Therefore, engaging in corrupt practices can have significant consequences for companies involved in public bidding procedures and increased vigilance on compliance with public procurement rules is required. The possibility that corrupt public officials may solicit bribes from companies bidding on public procurements generally does not insulate those companies from liability under applicable anti-corruption laws.
Governments around the world, including in Europe and the United States, have become more aggressive in enforcing anti-corruption laws and continue to increase their investigations of alleged wrongdoing. Generally, companies have focused most of their anti-corruption compliance efforts recently on activities in emerging markets (such as China, Russia, Brazil, and India). This Report reminds us that corruption within Europe, particularly in the public sector, remains problematic and companies need to remain vigilant about such risks. Given the severity of the penalties that can be imposed for violations of the anti-corruption laws, there are several steps that businesses can take to mitigate their potential anti-corruption exposure arising from business activities with foreign governments or business enterprises controlled by foreign governments. These steps include, but are not limited to, the establishment of effective anti-corruption compliance policies and procedures, conducting due diligence on third parties and high-risk transactions, and ensuring swift and thorough responses to possible anti-corruption violations. These steps are described in further detail below.
Mitigating anti-corruption risks
Due to the increasing convergence of global anti-corruption laws and the prevalence of cross-border investigations involving multiple government enforcement agencies from different countries, it is becoming imperative for multinational companies to adopt the following elements of an effective anti-corruption compliance program:
Written and defined anti-corruption policies and procedures, which explain key statutory provisions and risk areas, provide guidance on permissible behavior, and are tailored to specific operating risks. These policies and procedures should be translated into local languages where appropriate.
Internal controls relating to cash handling procedures, internal accounting and financial controls, recordkeeping requirements, segregation of duties, adequate supporting documentation and authorization requirements.
Anti-corruption training and education of internal personnel and commercial intermediaries (including sales agents, distributors, resellers and other consultants) and non-commercial intermediaries.
Anti-corruption compliance monitoring through periodic internal audits, risk assessments, internal investigations and other monitoring mechanisms.
Transactional due diligence in connection with mergers, acquisitions, joint ventures and public procurements. M&A due diligence should include an evaluation of anti-corruption risks and an evaluation of the target’s competence and expertise, management structure, business model, relationships with government officials, family and business relationships, and overall corporate compliance culture. Transactional due diligence, particularly in conjunction with public projects, is becoming a critical part of effective anti-corruption compliance.
Prompt attention to potential anti-corruption violations (including whistleblower reports of improper conduct) through internal investigations involving internal and external resources (as appropriate) while maintaining objectivity, confidentiality, applicable attorney-client and other privileges, and complying with applicable employment and other laws.
Our firm routinely assists multinational companies in developing such anti-corruption compliance policies and procedures, conducting due diligence, risk assessments and internal investigations, and navigating through the challenge of meeting varying anti-corruption legal requirements in multiple jurisdictions. We have represented clients ranging from Fortune 100 companies to smaller public and private entities, operating in a wide range of industries, including natural resources, energy, pharmaceuticals, defense, transportation and logistics, health care, power generation, and financial services. We have handled such matters in the United States, Africa, Latin America, the Middle East, Europe, and Asia.
 The Report is based on data from existing anti-corruption monitoring mechanisms (including the OECD), as well as information from public authorities, civil society, independent experts, and academic research in EU Member States. Information from the European Commission's departments and from EU agencies in connected policy areas (e.g., public procurement, regional policy) was also used to develop the Report. Finally, indicators of, perception of, and experience with, corruption (e.g., the Eurobarometer on corruption) were taken into account.
 The survey was conducted between February 18 and March 8, 2013 in the then 27 EU Member States and Croatia.
 The companies surveyed are in the following sectors: energy; mining; oil and gas; chemicals; health care and pharmaceuticals; engineering and electronics; motor vehicles; construction and building; telecommunications and information technologies; financial services; banking and investment.