Anti-Corruption Compliance Programs as a Requirement for Contracting with the Public and Private Sectors

Article written by:
• Muriel Sotero. Senior associate at Maeda, Ayres & Sarubbi Advogados. Faculdades de Campinas (LL.B.), Kings College (LL.M).
• Paulo Santos. Compliance Officer at Danske Bank. Pontifical Catholic University of Sao Paulo (LL.B.), IE Law School (LL.M.).
• Diane Valat. President of IE Ethics & Compliance Club. IE University (LL.B. and bache-lor’s degree in International Relations).

Compliance programs are important to foster a more ethical business environment and to protect companies from misconduct. A well-structured compliance program may even be a requirement for doing business, as many governments and private sector organizations are moving towards working with companies that have this mechanism in place.
However, is it a good idea to enforce a legal requirement that obliges companies contracting with the public sector to have a compliance program in order to mitigate corruption? On the same note, should companies engaging with other players require them to have this type of in-house programs to create a more ethical business environment, though without a legal requirement?

Contracting with the public sector

Governments are not self-sufficient. They rely on specific processes, such as public procurement and tenders to purchase goods and services from private-sector firms. This reliance on the private sector is important to ensure the proper functioning of public services and to provide stimulus for economic growth.

Corrupt practices may occur within the different parts of these processes and, although bribery is normally associated with corruption, other forms of misconduct committed by government officials and companies may also exist. These normally occur before a contract is awarded, during the selection process or after a tender has been granted. For instance, those holding public office may enter into illegal agreements with a specific supplier for a product as a result of bribes or influence-peddling to favor this supplier over others. Like-wise, emergency situations may be alleged to undertake direct negotiations, as occurred during the Covid-19 pandemic (DeAses).

However, in theory, companies with effective anti-corruption compliance programs have internal controls and procedures that mitigate the chances of engaging either in domestic or transnational or active and passive corruption when contracting with governments. Their employees allegedly understand that it is unacceptable to gain illicit advantage and that they should blow the whistle on any offer or reasonable suspicion. Consequently, the overall level of corrupt practices should decrease, unscrupulous public officials can be removed from their positions, and public assets will be properly used.

With this in mind, certain countries have passed laws requiring companies contracting with their governments to have a compliance program in place:
i. The United States of America: the Federal Acquisition Regulation is the set of rules and laws that governs the procedures federal government entities must abide by when purchasing goods and services from contractors. In 2008, the regulation was amended to require federal government contractors to have a written code of business ethics and conduct, an employee business ethics and compliance training program and an internal control system for solicitations and contracts expected to exceed USD 5.5 million and with a performance schedule of 120 days or more.

ii. Brazil: Law No. 14133 was passed in April 2021 to bring a new public procurement regime to public administration. This legislation requires bidders winning contracts exceeding BRL 200 million to implement an integrity program within six months of the contract’s execution. In addition, the existence of this program functions as a tie-breaker criterion. Since 2017, the states of Rio de Janeiro, Amazonas, Rio Grande do Sul, Goiás and the Federal District have passed state laws setting forth similar re-quirements.

iii. Spain: Law 9/2017, which governs contracts with the Spanish public sector and transposes EU Directives 2014/23/EU and 2014/24/EU, establishes an incentive that may be granted to contractors that adopt compliance programs, collaborate with authorities and pay compensation for damages caused. The incentive refers to not being suspended or debarred as a result of being involved in certain activities, including corruption, fraud and money laundering.

Contracting with the private sector

Private companies also need to hire services and buy goods from others. They undergo similar procurement processes. But if there is no legal requirement asking them to solely con-tract with other players that have a compliance program encompassing anti-corruption measures, what incentives do they have to implement this kind of strategy?

Generally, a company would only require another firm to have a compliance program if it has one itself. This mindset should come naturally with maturity and a proper understanding of how much an effective anti-corruption compliance program adds value to one’s business, regardless of size, revenue or market share. Companies with effective compliance programs may also have internal policies and procedures (such as conflicts of interest and business courtesies) with the aim of conducting business with ethical companies. If a business partner also has a compliance program in place, the risks of breaching internal policies are mitigated.

Additionally, companies that verify whether their vendors and suppliers are aware of anti-corruption risks and manage them are, though indirectly or involuntarily, introducing Corpo-rate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) concepts into their business model. These can generate risk mitigation activities and improve overall business results.

De facto effectiveness

In a survey carried out by the Organization for Economic Co-operation and Development (OECD) and published in 2020, out of a total of 124 respondents from 28 countries operating in a variety of industries whose companies had anti-corruption compliance programs, 44 (35.5%) indicated that an interest in obtaining government contracts was a significant or very significant factor in their decision to establish a program, while 59 (47.6%) indicated that an interest in obtaining private-sector contracts was a significant or very significant factor (OECD 2020).

At the same time, survey respondents indicated that their main reason for establishing a program was to avoid legal action which could lead to debarment from key markets, not their desire to win government contracts. Regarding private-sector contracts, it was pointed out that pressure to maintain business relationships with large companies was a strong motivator in the case of SMEs, given that large companies end up requiring smaller players to abide by their policies (OECD, 2020).
If governments and private-sector firms wish to raise the bar and require others contracting with them to focus on corruption, they need to ensure that their actions are actually effective and not only strong on paper.

If one simply asks a supplier to abide by an anti-corruption policy, does it mean that the supplier is really looking into its exposure to corruption risks? When assessing a company’s compliance program, enforcement authorities will not only investigate its formal aspects, but will also look closely at how the program is working in terms of actually detecting, preventing and mitigating risks.
When it comes to governments imposing this requirement on contractors, there are still some key issues that need to be addressed: how are compliance programs evaluated? Who is responsible for this evaluation? Do all countries have specially qualified staff to evaluate these programs properly? Is there any type of ongoing monitoring or regular assessment?

One thing is sure: no compliance program ensures total compliance. These programs will always need to evolve as companies grow and new risk areas are identified. However, if a program is to have a positive effect on a company’s culture, deterring wrongdoing, making non-compliance far less likely, and, in the unfortunate event of some kind of breach, enabling the company to start off from a better position in potential dealings with regulatory authorities, then anti-corruption compliance needs to be taken seriously, properly implemented, well monitored, and amended as necessary (Loughman and Sibery).

Bibliography
DeAses, Anne Janet. “Developing Countries: Increasing Transparency And Other Methods Of Eliminating Corruption In The Public Procurement Process.” Public Contract Law Journal, vol. 34, no. 3, 2005, pp. 553–572. JSTOR, www.jstor.org/stable/25755330.
Loughman, B. P., Sibery, R. A., & Loughman. Bribery and Corruption: Navigating the Global Risks, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook Central, pp. 47-73. https://ebookcentral.proquest.com/lib/bibliotecaie-ebooks/detail.action?docID=817413.
OECD (2020), Corporate Anti-Corruption Compliance Drivers, Mechanisms, and Ideas for Change. https://www.oecd.org/corruption/Corporate-anti-corruption-compliance-drivers-mechanisms-and-ideas-for-change.pdf
Lei Nº 14.133/ 2021 – Lei de Licitações e Contratos Administrativos. http://www.planalto.gov.br/ccivil_03/_ato2019-2022/2021/lei/L14133.htm
Federal Acquisition Regulation (FAR). https://www.acquisition.gov/browse/index/far
Plan Nacional de Integridad, Transparencia y Anticorrupción 2021-2025. http://www.oas.org/es/sla/dlc/mesicic/docs/mesicic6_pry_anex65.pdf
Ley 9/2017 – Contratos del Sector Público – https://www.boe.es/buscar/act.php?id=BOE-A-2017-12902
Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts. https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32014L0023
Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0024