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Blacklisting the corrupt: why the EU debarment system does not work

Banning corrupt companies from accessing public funds – also known as ‘blacklisting’ or ‘debarment’ – is not only an important penalty, it is also one of the most effective means of deterring companies from engaging in corruption in the first place. In the European Union, where governments spend about €2.5 trillion a year on goods and services (about 20 per cent of EU GDP) it is a particularly effective deterrent. Few companies can afford being locked out of that market.

The European Commission alone spent €124 billion in 2012 (see page 42 of its annual accounts), even though a large share of this money is co-managed with EU member states. As we know from the recent conference hosted with Transparency International, they are very keen to make sure that all these funds are corruption-proof.

A barely there black list

You would think then that the European Commission would place a huge importance on having an effective blacklisting system in place. Think again.

While carrying out the research for our ‘Integrity of EU institutions’ study – due to be published in April – we discovered that the Commission blacklisting system is not working. That may be understatement. It appears to be completely toothless.

As you can see from the table below, only 6 companies or individuals are blacklisted on the grounds that there has been a conviction for fraud or corruption or money laundering. This may be excusable – such convictions (or ‘definitive judgements’ in the jargon) are sadly very rare. However, the Commission does have the power to blacklist companies on the basis of a lower standard, for example when there is good evidence that corruption has occurred, or in Commission parlance, when someone has been guilty of ‘grave professional misconduct’.

So how many times has this power been used in recent years? Once. That’s one company or a solitary individual. Across all the Commission’s spending programmes.

European Commission blacklistings in recent years

Basis of exclusion, with reference to the EU financial regulation Numbers
Art 106(1) a – bankruptcy and analogous situations 348
Art 106(1) d – non payment of social security contributions or taxes 3
Art 106(1) e – fraud, corruption, involvement in criminal organisation, money laundering - definitive judgment 6
Art 106(1) c – guilty of grave professional misconduct 1
Art 106(1) f – penalty imposed by the Commission because of wrong information supplied to contracting authority or serious breach of contractual obligations 1

Information received from the European Commission’s Directorate General for the Budget on 18 October 2013

To put this into perspective, the World Bank blacklisted 150 companies for fraud, corruption or other misconduct in the first seven months of 2013 alone, as well as what appears to be 100 subsidiaries of one multinational company. You can see the complete list here. Note that there are more than 30 debarred actors from EU countries in the past three years. The EU’s own anti-fraud office (OLAF) made 54 recommendations for judicial follow-up to cases it investigated in 2012 alone (see page 22 of its 2012 report), indicating that quite a number of actors are known to the EU to be potentially fraudulent or corrupt.

The number of debarred entities on the Commission database is hugely disappointing. Precisely because convictions for corruption are so difficult to secure, Transparency International recommended in 2006 that evidence of corruption (but not a definitive judgement) should be grounds for blacklisting a company, a recommendation the Commission accepted.

Despite adopting their guidelines accordingly, the ineffectual nature of the system is plain for all to see. Even OLAF chief Giovanni Kessler acknowledged this at our conference:

Fixing the broken system

That the system is not working has been quasi-public knowledge since 2010, when Member of the European Parliament (MEP) Ingeborg Grässle asked similar questions to ours, and the Commission’s rather sheepish answer indicated the lack of success. Because the Commission does not publish the names or even numbers of companies it has blacklisted, it has been difficult to keep track of progress – or in this case the lack of progress.

Despite evident good intentions, why has the Commission system been so ineffective?

  • First of all, the original procedure was complicated and cumbersome. Once a Director-General initiated a case, the Legal Service, the Directorate-General for Budgetary Affairs (DG Budget) and the Secretariat-General of the Commission all got a say. Then the company or individual had to be allowed to defend itself. Finally, the decision had to be signed off by the entire College of Commissioners. Compare this to the World Bank, where decisions are centralised with a single sanctions committee.
  • Secondly, although the Commission has in theory the power to blacklist on the basis of ‘grave professional misconduct’ which does not need the final judgement of a court, it has been very reluctant to use this discretion. Legal uncertainty and the lack of any written guidelines play a role here, but there also seems to be a general air of caution verging on timidity. Only seven times in the past six years has a case even been initiated for grave professional misconduct.

In fairness, the Commission has acknowledged that the system has been too cumbersome. Last year it streamlined the system, so that now the final decision rests with a Director General, after consultation with the Commission’s legal service and DG Budget. But this does not address a culture of excessive caution. Indeed, by putting individual Directors-General in the spotlight, it may even make them more reluctant to see the procedure through.

So what needs to be done? The Commission needs to have a centralised and well-resourced system. It should be proactive, for example by making use of other blacklisting databases in EU member states. There should be clear written guidelines for staff to reduce uncertainty. But most of all there needs to be the drive and determination at the highest level to make it work. The proof of that determination will be in the numbers in the table above. How will they look in 6 or 12 months time? It will be a very clear test of the Commission’s commitment to preventing corruption in EU funds.

This article originally appeared on the Transparency International EU Liaison Office website

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