The paper is targeted at the private and public sector entities that conduct industrial and commercial activities and provides recommendations on how to detect conflict-of-interest situations, as well as prevent and manage them.
1. Conflict of interest as a corruption risk
The Guide stresses that conflict-of-interest management is an important component of corruption prevention activities both in the public and private sectors. In spite of the fact that a conflict of interest as such is not an offence, it may degenerate into a corruption crime such as bribery of public officials, commercial bribery, abuse of functions, unlawful taking of interest, favouritism etc. in the event that the appropriate measures are not taken to manage it. Moreover, not only public officials and public sector entities can be held liable for the commission of these crimes, but also commercial companies accused of such offences as conspiracy, aiding and abetting, and money laundering can be subject to liability measures. In this context, the management of conflict-of-interest situations is an important line of anti-corruption action both in the public and private sectors.
The authors of the paper highlight, however, that the definition of a “conflict of interest”, as it stands now, is applicable exclusively to the public sector: in particular, Law of 11 October 2013 No. 2013-907 “On Transparency in Public Life” (Loi n° 2013-907 du 11 octobre 2013 relative à la transparence de la vie publique) defines a conflict of interest in the public administration as a discrepancy between public and private interests that affects or may affect an independent, impartial and objective exercise of functions by a civil servant.
With a view to ensuring consistency, AFA introduces the definition of a “conflict of interest” for the commercial organisations in the Guide. It is defined as any discrepancy between the functions that a person exercises in an organisation and his/her personal interest that influences or may influence an independent, impartial and objective exercise of his/her functions. For instance, based on this definition, a person responsible for recruitment will find himself/herself in a conflict-of-interest situation if his/her relative applies for a position in the entity.
Additionally, the authors of the Guide underline the need to take account of such characteristics of a conflict of interest as:
- its direct or indirect character: either the employee or his/her relatives can have personal interest generating a conflict of interest;
- its actual or potential character: in case of an actual conflict of interest the employee is already in a situation where his/her personal interests run counter to the interests of the organisation/the functions he/she exercises; in the event of a potential conflict of interest the discrepancy between the interests of the employee and the interests of the company/the functions he/she exercises may occur in certain circumstances. In particular, a potential conflict of interest is a situation where an employee of the procurement department of an organisation announcing a tender is a relative of the manager of the sales department of a company that will almost certainly participate in the tender, whereas an actual conflict of interest occurs when the company bids for the tender;
- the point in time - past, present or future - when a personal interest arises. This should be the starting point for implementing restrictions and prohibitions for the employees of the organisation; for instance, judicial appointees cannot exercise their functions with regard to the natural or legal persons that have provided them either directly or indirectly with a remuneration over the last five years;
- the scope of personal interests: the Guide stresses that the management should be primarily exercised with regard to the situations where the personal interest is considerable enough to affect (or allegedly affect) the employee and make him/her exercise improperly his/her functions;
- perceived conflicts of interest: the authors of the paper stress the need to expand the regulation to the “perceived” conflicts of interest that can cause reputational damages to and undermine the credibility of the organisation.
2. Conflict-of-interest detection
AFA explores the three key elements of conflict-of-interest management in the Guide: detection, prevention and management.
As regards the first element, i.e. the detection of a conflict of interest, the authors of the paper point out that there is an infinite number of conflict-of-interest situations that arise both internally (for instance, if relatives are employed in the same department) and externally in the interaction with third parties (for example, if an employee of the organisation has financial interest in a competing company). Hence, it is impossible to regulate all potential situations. Therefore, it is recommended that in the first place organisations pay attention to the conflicts of interest concerning:
- “sensitive processes”, i.e. the processes where a conflict of interest will most probably damage the organisation; these include procurement, funding (contributions, loans, grants etc.), investments, preparation of financial statements, human resources management etc.;
- “sensitive functions” meaning the functions whose fulfillment involves heightened risks of conflicts of interest; once these functions are determined, the Guide recommends analysing the situations where the employees fulfilling such functions can put their personal interests first to the detriment of the interests of the organisation;
- “sensitive processes of the operational activities” such as a search for new markets, interaction with the public sector etc.
To this end, the authors of the Guide recommend that organisations map the risks related to conflicts of interest; those organisations that are subject to Law of 9 December 2016 No. 2016-1691 “On Transparency, Fight against Corruption and Modernisation of Economic Life” (Loi n° 2016-1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique) are encouraged to supplement their general corruption risk maps with the information on the risks of conflicts of interest.
In order to ensure that conflicts of interest are detected, the authors of the paper recommend that organisations adopt such measures as:
- implement the procedure of periodic interest disclosure for certain categories of employees such as those conducting lobbying activities, and the submission of interest declarations upon hiring, appointment to a position or to a different position;
- impose the obligation to report a conflict of interest when it arises;
- implement a dedicated register of interest declarations, as well as a register of repeated conflicts of interest based on reporting of conflict-of-interest situations.
Additionally, it is recommended that organisations implement additional due diligence procedures to manage conflicts of interest, in particular, by introducing the obligation to disclose conflicts of interest and information about the presence of politically exposed persons among the beneficial owners of the third party in contracts, and by conducting, within the due diligence procedure, the verification of links between employees, managers, directors, beneficial owners etc. of the third party and of the organisation.
The Guide also provides the examples of standard conflict-of-interest situations divided in several groups depending on the offences to which they may lead if there is a lack of their due regulation in the organisation:
- a conflict of interest that may lead to a bribery-related crime: for instance, an official (employee) who takes the decision on the winning bid for the contract for the supply of goods (execution of works, provision of services) favours the awarding of the contract to the company that has promised gainful future employment to the official in spite of the fact that its goods (works, services) are not the best bid for the procurement tender in terms of the interests of the organisation;
- a conflict of interest that may lead to favouritism or undue advantage: for example, the provision of confidential information on the terms of the procurement procedure to the organisation where a relative of the official (employee) of the customer responsible for concluding contracts is employed;
- a conflict of interest that may lead to a crime related to trading in influence: for instance, the use of personal relationships with officials with the aim to win a public contract;
- a conflict of interest that may lead to misappropriation of corporate assets: for example, if the chairman of the board of directors of an organisation is authorised to take decisions on the extinction of debts, whereas his wife is the major shareholder of a borrowing company, acting in the interest of his spouse, he can approve the relief of the debt of the company without its actual payment, which will damage the interests of the organisation depriving it of those funds.
3. Conflict-of-interest prevention
The implementation of the second element, i.e. the adoption of conflict-of-interest prevention measures, should take account of the previously detected risks of conflicts of interest, and specific characteristics of the organisation (the area in which it operates, its organisational structure, location etc.).
The prevention activities include, in particular:
- development and adoption of a corporate policy on the prevention and management of conflict-of-interest situations; its key principles can be incorporated in the code of conduct for the employees of the organisation, whereas the procedural aspects concerning the prevention of conflicts of interest should be enshrined in a separate document;
- development of a gifts and hospitality policy that can also define the procedure for coordinating relevant activities and/or the need to maintain a dedicated register;
- implementation of the procedure for rotating the staff whose functions are considered “sensitive” etc.
Additionally, organisations should create an environment favourable for reporting conflicts of interest also by:
- raising awareness and conducting training of employees, managers and directors, particularly those who hold the positions vulnerable to conflict-of-interest risks;
- appointing a person responsible for monitoring the compliance with the regulations on conflicts of interest who could also provide employees with advice on whether a certain situation constitutes a conflict of interest;
- informing third parties about the obligation (if applicable) to disclose conflicts of interest and notify of the presence of politically exposed persons among their beneficial owners.
4. Conflict-of-interest management
If a conflict of interest is already in place, the AFA experts recommend defining, in the first place, the extent to which the personal interests of the individual outweigh his/her readiness to properly perform his/her functions in the organisation, and then, if necessary, adopting measures to manage the conflict of interest, in particular, by:
- reinforcing the supervision of activities of such person;
- changing the functions, tasks, duties etc. of the individual;
- introducing the possibility of recusal for the employee in a conflict-of-interest situation, which would imply, in particular, his/her refusal to participate in a certain procedure, leaving the recruitment commission or the supplier selection commission;
- delegating the functions whose fulfillment can lead to a conflict of interest to another employee not subordinate to the individual in the conflict-of-interest situation;
- providing the possibility to abandon the interest, in particular, by selling the shares or transferring them to fiduciary management;
- providing the possibility to maintain the interest if it is insignificant or is unlikely to make the employee improperly fulfill his/her functions;
- dismissing the employee.
The paper stresses that even though it is hard to define in advance which measures for managing a conflict of interest will turn out to be appropriate in a certain situation, it is recommended that organisations develop a guidance defining roughly the criteria for selecting certain measures with a view to enhancing the impartiality of the decisions taken.
Furthermore, the AFA experts stress the need to document all the decisions taken, including the recording of information on the management measures adopted along with the relevant supporting arguments in a dedicated register (if applicable).
As indicated above, a conflict of interest as such is not an offence and therefore it should not be punished. However, the actions and decisions taken by the employee in spite of the fact that he/she is in a conflict-of-interest situation, as well as his/her failure to report the conflict of interest can lead to the application of disciplinary or civil penalties. In this context, it will be easier to prove malfeasance if the organisation has implemented a set of conflict-of-interest prevention measures (code of conduct, gifts and hospitality policy, awareness-raising activities, provisions on liability in the employment contract etc.).