Abstract
While transparent and efficient public sector procurement systems facilitate innumerable opportunities for stakeholders, the scale and scope of the global procurement market has rendered it increasingly vulnerable to corruption. The Organisation for Economic Co-operation and Development estimates that annually US$2 trillion of public funds is lost to corruption, yet governments have failed to respond with robust measures to deter such practice. Through comparing the debarment frameworks and policy goals across five jurisdictions, this article argues that Australia should consider adopting a discretionary debarment regime. By excluding bidders who have engaged in ‘corporate integrity offences’ from procurement contracts, debarment policies offer a potentially important mechanism in the fight against corruption. Debarment would not only protect the government from current threats, but it may also deter potential wrongdoers, encourage contractors to rehabilitate themselves, incapacitate actual offenders and facilitate development of a culture of compliance through the competitive advantage gains enjoyed by law-abiding firms.
I Introduction
Globally, governments spend US$9.5 trillion each year procuring goods and services from the private sector, making public procurement the largest global marketplace. 1 When fair, open and well-functioning, public procurement systems can benefit all stakeholders: governments, private enterprises and citizens. However, ‘…few government activities create greater temptations or offer more opportunities for corruption than public sector procurement.’ 2 The Organisation for Economic Co-operation and Development (‘OECD’) estimates that corruption costs account for approximately US$2 trillion of this annual procurement budget. 3 The potential scope of the problems posed by corruption within this sector and the need for effective solutions is therefore patent, 4 with research demonstrating the negative impact of corruption on investment, 5 business costs, 6 efficient allocation of capital, 7 and public welfare. 8
Corruption in public procurement is not only a concern for the developing world but also exists in developed countries. In Australia, where public procurement is estimated at AUD$200–300 billion, 9 the issue of corruption in government and the political sphere has intensified 10 with several high-profile investigations at both the State and Federal level. In Victoria, an investigation by the Independent Broad-based Anti-corruption Commission into the Education Department’s failed Ultranet software system was found to have been subject to corrupt activity, costing approximately AUD$240 million for a system which did not work. 11 In Western Australia, the Corruption and Crime Commission reported corrupt activity at the North Metropolitan Health Service that went undetected for up to a decade resulting in the gross misuse and fraudulent misappropriation of hundreds of thousands of dollars of public funds. 12 At the Federal level, recent examples of alleged corruption include the Great Barrier Reef Foundation, 13 Parakeelia 14 and Paladin. 15 Indeed, a 2015 PwC report found that procurement fraud has become so prolific that it is one of the ‘Big 5’ economic crimes, ‘…with 33% of Australian respondents experiencing this type of fraud in the past 24 months.’ 16
This growing perception of corruption has led to Australia falling six positions on Transparency International’s Corruption Perception Index since 2012. 17 Transparency International cited inaction by successive governments in dealing with public sector corruption, particularly in relation to foreign bribery scandals, and recommended the introduction of ‘clear rules that prevent a company from tendering for government contracts if it has committed foreign bribery offences and has not self-reported’. 18 Similarly, in its Phase 3 Report on Australia’s response to foreign bribery, the OECD indicated that it was particularly concerned about Australia’s failure to implement rules to ‘debar’ contractors found to have engaged in corrupt behaviour from undertaking government-funded services or procurement. 19 Despite these repeated recommendations, the Australian Government’s current position is that ‘…Australia will continue to consider this recommendation. At present, no specific measures are being progressed to implement [the] recommendation.’ 20
‘Debarment’, also known as ‘blacklisting’ or ‘exclusion’, is an administrative decision by which an individual or firm is ineligible from participating in a public tender for government contracts for specified reasons, such as corruption or other ‘corporate integrity offences.’ Debarment may be mandatory or discretionary. A mandatory measure is one in which the legislation or policy requires the disqualification of a contractor once the contractor has committed a specified offence, unless there is a compelling reason for a state procurement authority to continue contracting with that supplier. 21 A discretionary measure is a measure where there is a general rule that contractors who have committed certain offences may be disqualified, but the regulator retains the discretion in deciding whether the sanction is appropriate.
Used by the World Bank, the United States (‘US’) and to a lesser extent, in the European Union (‘EU’), this article argues that enactment of a discretionary debarment regime could be a potentially important additional remedy to regulate corporate behaviour, combat corruption and educate key stakeholders. 22 This article proceeds as follows. Part II discusses the susceptibility of public procurement to corruption and the type of corrupt activity most observable in public procurement. Part III analyses existing theory and evidence regarding how best to deter corruption. Part IV provides a comparative analysis of debarment regimes in five jurisdictions. Part V assesses the advantages and disadvantages of incorporating a discretionary debarment regime into Australian law and makes recommendations as to key aspects of legislative design. Part VI concludes.
II Public Procurement and Corruption
‘Corruption’ 23 is an elusive concept. However the definition most often cited by social scientists is ‘…behaviour which deviates from the formal duties of a public role because of private-regarding (personal, close family, private clique) pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence.’ 24 The World Bank makes a distinction between two broad categories of corruption. 25 First, ‘state capture’, which refers to ‘…actions by individuals, groups, or organisations to influence public policy formation by illegally transferring private benefits to public officials in an attempt to shape the institutional environment in which they operate.’ 26 Second, ‘administrative corruption’, which refers to the use of the same type corruption and bribes by the same actors to interfere with the proper implementation of laws, rules and regulations. 27
Public procurement is one of the government activities most vulnerable to corruption and, though varying in degree between countries, is universal. 28 In addition to the volume of transactions and the financial interests at stake, ‘…corruption risks are exacerbated by the complexity of the process, the close interaction between public officials and businesses, and the multitude of stakeholders.’ 29 Corruption in public procurement can be initiated by any party in the process: the private sector, the supply side or by a government official. Various types of corrupt acts may exploit the vulnerabilities inherent in public procurement, such as embezzlement, undue influence, bribery of public officials involved in the award process, or fraud in bid evaluations, invoices or contract obligations. However, the most pervasive type of corruption associated with public procurement is arguably bribery of government officials to obtain a favourable contract decision where no right or claim to such a decision exists. 30 For example, the public official may improperly exercise his or her discretion in deciding which firms to invite for tender, by emphasising or designing evaluation criteria that favours a preferred firm 31 or by awarding the contract to that preferred firm, despite rules on competitive procurement procedures. The supplier may also seek other ancillary benefits such as the avoidance of a government cost or requirement such as fees, taxes or production of documents. 32 Bribes can, however, take any form, including gifts, money, favours, jobs and educational opportunities for family members and donations to political parties or charities.
Procurement processes are particularly vulnerable to collusion, extortion and coercion. 33 Collusion has been defined as ‘a deceitful agreement or compact between two or more persons, for one party to bring an action against the other for some evil purpose, as to defraud a third party.’ 34 Collusion between government officials and bidders ‘…can result in arrangements to inhibit competition by deceiving or depriving others of their rights in order to secure an unfair advantage.’ 35 Extortion is the ‘…act of utilising, either directly or indirectly, one’s access to a position of power or knowledge to demand unmerited cooperation or compensation as a result of coercive threats.’ 36 Extortion occurs when a government official demands something of value in return for assisting a firm to win a bid or for taking a required action, such as making a valid contract payment. Coercion occurs where the relation of the parties is such that one is under subjection to the other, and is thereby constrained to do what his free will would refuse. 37 In procurement, coercion can occur when one bidder threatens another to keep them from bidding.
III Deterring Corruption: Theory and Evidence
There is persistent legal debate as to the purpose and effect of debarment. Some authors have commended the deterrent effect of debarment and advocated for its use as a criminal sanction against large firms. 38 Others have stated that debarment is a mere administrative tool. 39 Such bifurcated views on the purpose and effect of debarment are largely connected to the proponent’s favoured underlying policy rationale for its imposition, which may include (i) to protect the government, (ii) to punish contractors and/or (iii) to maintain the public trust. For example, in the US, debarment is to be imposed ‘not for the purposes of punishment [but] only in the public interest for the government’s protection.’ 40 A similar administrative debarment regime is apparent in the EU. 41 In these jurisdictions, debarment is therefore not used as a sanction forming part of the criminal law system but as an administrative remedy to protect the government from imminent harm that irresponsible bidders may cause. In contrast, the World Bank has designed a debarment regime which more closely resembles a criminal law sanction, although officially qualified as an administrative remedy. 42
Despite differing underlying policy rationales, a common theoretical benefit of debarment in public procurement across jurisdictions is deterrence. The efficacy of incorporating a discretionary debarment regime into Australian law therefore necessarily depends, in part, on whether the remedy could deter corruption in public procurement. A useful starting point for a law and economics approach to deterrence is the ‘optimal penalty’ model of Professor Becker, which argues that potential offenders respond to both the probability of detection and the severity of punishment if detected and convicted. 43 This theory proposes that deterrence may be enhanced through raising the penalty, by increasing monitoring activities to raise the likelihood that the offender will be caught or by changing legal rules to increase the probability of conviction. Professor Becker’s model concludes that there is an ‘efficient’ level of crime, where the marginal cost of enforcement is equated to the marginal social benefit of crime reduction. 44
Following this model, many legislatures appear to accept that the primary cure for insufficient deterrence of corporate misconduct is to increase corporate fines. 45 However, research has demonstrated that there are several discrete problems with relying on increased fines alone as a deterrent. For example, Professor Coffee argues that the ‘optimal’ fine for deterring even minor criminal activity would far outstrip the value of most firms, leading to a mismatched calculus that he refers to as the ‘deterrence trap.’ 46 In any event, Professors Alexander and Cohen’s economic research into corporate crime concluded that ‘…there is little evidence that increasing the magnitude of monetary sanctions has a deterrent effect.’ 47 The deterrence value of a corporate fine is also undermined by one of several principal-agent problems inherent in corporate law. Fines do not optimally deter managers because fines levied on the firm are effectively paid with shareholder money. 48 As Larry Summers observed, ‘[m]anagers do not find it personally costly to part with even billions of dollars of their shareholders’ money…paying with shareholders’ money as the price of protecting themselves is a very attractive trade-off….’ 49 Furthermore, from a socio-cultural perspective, Professor Thomas notes that ‘…the expressive problem with corporate–criminal fines is that there is nothing uniquely criminal’ 50 about them. A ‘…corporation absorbs the cost of a criminal fine in exactly the same way that it absorbs any other business cost — a civil fine, for example, or even just an exogenous shock from a bad investment.’ 51 As a result, ‘…corporations treat fines simply as “the cost of doing business.”’ 52 Therefore, increasing a corporate penalty through fines alone is unlikely to align with Professor Becker’s optimal penalty model and promote increased deterrence.
While in theory increasing monitoring may promote deterrence, the inside nature of corporate misconduct makes it difficult for regulators to monitor and detect. The offences are complex, and the extent, duration and details of offending are difficult to determine. Offences may constitute ‘…“omission” or “commission”, with a long “paper trail” and cover-ups often being involved. Many are highly organised and involve several participants with differing degrees of responsibility.’ 53 In many cases, determining who is ultimately responsible is prohibitive due to opaque organisational structures, where responsibility for particular tasks is often delegated. Accordingly, to identify and deter corporate misconduct, it is necessary to determine how best to structure penalties such that the firm itself has an incentive to monitor its employees. 54 Professor Arlen has noted that if the penalty is too high, firms may prefer to remain ignorant as to their employee’s conduct for fear of paying a high penalty. A lower penalty would reduce this perverse incentive so that firms will continue to monitor their employees. 55 Professors Arlen and Kraakman later proposed an alternative approach, in which a firm is offered a reduced penalty if it effectively monitors, investigates and reports violations to the government. 56
Effective deterrence will therefore depend on a combination of ex-ante corporate internal monitoring and ex-post sanctions when that internal monitoring has failed to prevent corporate misconduct. While it is generally agreed that effective regulatory enforcement is cooperative and responsive, 57 when a conviction for a corporate integrity offence such as corruption has been sustained, an additional discretionary sanction such as debarment could enhance both specific and general deterrence, while expressing societal condemnation. In previous studies, Professors Auriole and Søreide 58 found that debarment will effectively deter corruption in small markets if the probability of debarment is sufficiently high and if bidders sufficiently value contract awards in future procurement auctions. Professors Cerrone, Hermstrüwer and Robalo 59 explored the deterrent effect of debarment by comparing debarment with the benchmark case of no sanction, and then with fines. The authors further analysed a short debarment with a long debarment to explore how the deterrent effect varies with the length of exclusion. They found that ‘…debarments significantly reduce the frequency of collusion and decrease the bids towards the competitive level’ 60 with this deterrent effect increasing with the length of debarment. 61
This potential impact of debarment can be multiplied by cross-debarment, whereby departments, governments or other institutions agree to mutually enforce each other’s debarment actions. 62 A notable example is the cross-debarment agreement between the Multilateral Development Banks (‘MDB’), 63 which states ‘cross debarment creates a formidable additional deterrent to firms and individuals engaged in fraud and corruption in MDB-financed development projects, and possibly provides an incentive for firms to clean up their operations.’ 64
IV Anti-Corruption Measures: A Comparative Analysis
While debarment has gained significant traction in the last decade as a device in the fight against corruption, the rules and rationales differ across jurisdictions and international organisations. Several key differences are apparent. First, jurisdictional limits, such as the nature and type of the misconduct and transactions that are subject to the remedy. Second, whether the regime is ‘automatic’, ‘mandatory’ or ‘discretionary’. Some jurisdictions, such as the United Kingdom (‘UK’) and most EU states, operate hybrid regimes, granting procurement authorities both mandatory and discretionary debarment powers. Third, whether the underlying policy rationale for the system is punitive or remedial. This part will analyse five regimes which address corruption in public procurement to place procurement debarment into context and identify current best practice.
A. International Measures
International measures against corruption can broadly be divided into three groups: binding international treaties and conventions; soft law instruments such as OECD recommendations, 65 United Nations and General Assembly resolutions and declarations; 66 and indices such as the Corruption Perception Index 67 and the Global Corruption Barometer 68 compiled by interest groups such as Transparency International. Only multilateral binding instruments are considered below as they are generally regarded as the most important in terms of their geographical significance and number of ratifications.
i. United Nations Convention against Corruption
The United Nations Convention against Corruption (‘UNCAC’) 69 covers four main issues: the prevention of corruption, 70 the criminalisation of corruption, 71 international cooperation 72 and asset recovery. 73 In providing for the criminalisation of corruption, UNCAC demonstrates considerable breadth to include public sector corruption, the bribery of foreign public officials and officials of international organisations, private sector corruption, diversion of public funds or anything of value entrusted to a public official.
Article 9 of UNCAC requires State parties to ‘…establish systems of procurement based on transparency, competition and other objective criteria in decision-making, and which are also effective in preventing corruption.’ The consequences of corruption, which is broad enough to encompass debarment, are set out in Article 34 which provides: With due regard to the rights of third parties acquired in good faith, each State Party shall take measures, in accordance with the fundamental principles of domestic law, to address consequences of corruption. In this context, State Parties may consider corruption as a relevant factor in legal proceedings to annul or rescind a contract, withdraw a concession or other similar instrument or take any other remedial action.
ii. The OECD Anti-Bribery Convention
While the OECD Convention on the Combating of Bribery of Foreign Public Officials (‘OECD Convention’)
74
does not contain articles related to public procurement, Article 3 of the OECD Convention, entitled ‘Sanctions’, provides in paragraph 4 that ‘…each Party shall consider the imposition of additional civil or administrative sanctions upon a person subject to sanctions for the bribery of a foreign public official.’ The intentions behind this provision are set out in paragraph 23 to the Commentary, which states: Among the civil or administrative sanctions, other than non-criminal fines, which might be imposed upon legal persons for an act of bribery of a foreign public official are: exclusion from entitlement to public benefits or aid; temporary or permanent disqualification from participation in public procurement or from the practice of other commercial activities; placing under judicial supervision; and a judicial winding-up order.
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However, because the OECD Convention is not a model for legislation but a set of guidelines mandating an outcome, it does not ‘…require uniformity or changes in the fundamental principles of a Party’s legal system.’
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Therefore, State parties are not required to do much more than to criminalise foreign bribery in order to comply with the OECD Convention.
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To provide more rigor, in 2009, a Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions
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was adopted which suggested further measures to combat foreign bribery. In particular, Article XI provides: Member countries’ laws and regulations should permit authorities to suspend, to an appropriate degree, from competition for public contracts or other public advantages…enterprises determined to have bribed foreign public officials…and, to the extent a Member applies procurement sanctions to enterprises that are determined to have bribed domestic public officials, such sanctions should be applied equally in case of bribery of foreign public officials.
Despite international measures encouraging State parties to adopt a discretionary debarment regime, the Australian Government is currently of the view that existing laws relating to public procurement, discussed below, are sufficient. 79 Despite recommendations from the OECD to improve processes in 2006 and 2012, no action was taken. 80
B. Australia
At the Commonwealth level, the key legislation on government procurement is the principles-based Public Governance, Performance and Accountability Act 2013 (Cth) (‘PGPA Act’), which commenced on 1 July 2014. Official guidance on Commonwealth procurement is primarily contained in the Commonwealth Procurement Rules (‘CPRs’) and the Public Governance, Performance and Accountability Rule 2014, which are issued under the PGPA Act. The Department of Finance is responsible for setting Commonwealth government procurement rules. It issues policies and directions for procurement, such as resource management guides dealing with liability, indemnity, payment terms and other positions to be applied in procurement and contracts. 81 With one exception, 82 the PGPA Act does not contain penalties and sanctions. The intention was to avoid duplicating penalty provisions in existing legal arrangements and legislation, such as the Public Service Act 1999 (Cth), the Criminal Code Act 1995 (Cth) and the Crimes Act 1914 (Cth). 83
State and Territory governments have all enacted legislation regulating how their respective government agencies are to conduct procurement. 84 The approach applied across jurisdictions is broadly similar. States and territories have a central body that sets procurement rules and conducts most procurement. Like the approach at the Commonwealth level, there are Treasurer’s Instructions or similar that provide further policy and guidance on conducting procurement. In addition, Australia became a member of the WTO Agreement on Government Procurement when it entered into force in Australia on 5 May 1999.
Although Australia has yet to implement a debarment regime specific to public procurement, a somewhat analogous regime exists at the State level. In New South Wales, the Crimes (Serious Crime Prevention Orders) Act 2016 (NSW) (‘SCPO Act’) enables the NSW District or Supreme Courts to order ‘…such prohibitions, restrictions, requirements and other provisions as the court considers appropriate for the purpose of protecting the public by preventing, restricting or disrupting involvement by the person in serious crime related activities.’
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The SCPO Act is based substantially on the Serious Crime Act 2007 (UK), adapted to NSW.
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The Explanatory Note for the Bill provided that the object is as follows: to enable the Supreme Court and the District Court to make serious crime prevention orders, on the application of the Commissioner of Police, the Director of Public Prosecutions or the New South Wales Crime Commission, so as to prevent, restrict or disrupt involvement by certain persons in serious crime related activities.
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Serious Crime Prevention Orders (‘SCPOs’) can apply to people aged 18 years and older and to corporations. 88 To make an order, the appropriate court must be satisfied of two facts: (i) the person has been convicted of a serious criminal offence, ‘engaged’ in serious crime-related activity or was ‘involved’ in serious crime-related activity (whether or not the person has been convicted); 89 and (ii) there are reasonable grounds to believe the order would protect the public by preventing, restricting or disrupting the person’s involvement in serious crime-related activities. 90
‘Serious crime-related activity’ is described as anything done by a person that is, or was at the time, a ‘serious criminal offence’, whether or not the person has been charged with, tried for or even acquitted of the offence, and whether or not the person subject to an SCPO was the person who had performed the offence.
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Most relevantly, the SCPO Act adopts the definition of a ‘serious criminal offence’ in the Criminal Assets Recovery Act 1990 (NSW), which includes: an offence that is punishable by imprisonment for 5 years or more and involves theft, fraud, obtaining financial benefit from the crime of another, money laundering, extortion, violence, bribery, corruption, harbouring criminals, blackmail, obtaining or offering a secret commission, perverting the course of justice, tax or revenue evasion, illegal gambling, forgery or homicide.
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While the SCPO Act is instructive in informing debate on the merits of implementing a discretionary debarment regime into Australia, there were several perceived failings surrounding its passing. At the time the SCPO regime was proposed, the ‘extraordinary, unwarranted and dangerous laws’ 93 were vigorously challenged by the legal profession 94 and civil liberties groups 95 on the basis that they allow police to target and control individuals in an extraordinarily wide range of circumstances. Concerns raised by stakeholders were not met by the legislature, with the laws being passed quickly, with little public consultation and almost immediate bipartisan support. 96 As a consequence, the constitutional validity of parts of the SCPO Act are currently being challenged before the High Court in Vella & Ors v Commissioner of Police (NSW) & Anor. 97
In written submissions to the Court, 98 the applicants argue that they were acquitted of the charges upon which the Commissioner relies as the basis for the sought orders, and that the powers contained in s 5 of the SCPO Act are so broad, and the threshold test for ‘serious crime related activity’ so low, that they cannot be considered ‘…“appropriate” to achieve the stated purpose of protecting the public “by preventing, restricting or disrupting involvement by the person in serious crime related activities.”’ This case is demonstrative of the dangers inherent in the grant of broad discretion without appropriate principle-based constraints.
C. The World Bank
Each year the World Bank provides billions of dollars in loans to developing countries to fund large-scale infrastructure projects, implemented through procurements.
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Although the World Bank did not initially implement measures against corruption,
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the growing prominence of corruption as a development inhibitor
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led it to eventually adopt a comprehensive policy. While nation-based debarment systems aim to protect the government from contractors, the World Bank’s system is grounded primarily in the fiduciary duties to its member countries and a desire to deter misconduct and promote development.
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The World Bank’s Articles of Agreement provide that the World Bank shall ensure that the proceeds of any loan are used only for the purpose for which the loan is granted.
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To effect this mandate, it is a condition of financing that the World Bank Procurement Guidelines are followed. The World Bank requires that all parties involved in the procurement process, including without limitation: borrowers and sub-borrowers (and other beneficiaries of Bank Financing); bidders, consultants, contractors, and suppliers; any sub-contractors, sub-consultants, service providers or suppliers; any agents (whether declared or not); and any of their personnel, observe the highest standard of ethics during the Procurement Process of Bank-financed contracts, and refrain from fraud and corruption, as that term is defined in the Anti-Corruption Guidelines.
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Allegations that a company or individual has engaged in ‘sanctionable misconduct’ 105 are initially investigated by the World Bank Group’s Integrity Vice Presidency (‘INT’). 106 If INT believes there is sufficient evidence to substantiate the allegations, the case is referred to the Office of Suspension and Debarment (‘OSD’). The OSD reviews the evidence submitted by INT and determines if the evidence is sufficient to support a finding that the alleged sanctionable practice occurred. If the firm or individual contests the allegations or the recommended sanction, the case is referred to the World Bank Group Sanctions Board. 107
The World Bank’s framework has several policy rationales. The first rationale is protective, like the US and EU approach. Debarment is designed to protect the World Bank’s funds in accordance with the World Bank’s Articles of Agreement by ensuring that funds are not lost to fraud and corruption. 108 The second is policy based, supporting the World Bank’s corruption policy through reinforcing its willingness to punish corruption. 109 Third, disqualification is intended to have a deterrent rationale, through raising the costs of engaging in corruption along with adverse-publicity implications. 110
Although several options are available, 111 the base remedy for all ‘sanctionable misconduct’ is 3-year debarment with conditional release. 112 The purpose of the conditional release is to ‘…encourage the respondent’s rehabilitation, to mitigate further risk to Bank-financed activities.’ 113 Accordingly, the contractor will only be released from debarment after the defined debarment period lapses and the contractor has demonstrated that it has met the conditions set.
As part of the conditional release process, the contractor will usually be required to implement an integrity compliance program to be assessed by the Integrity Compliance Officer. 114 The elements to be incorporated in the compliance program include a prohibition of misconduct; the creation and maintenance of a ‘trust-based, inclusive organizational culture that encourages ethical conduct, a commitment to compliance with the law and a culture in which misconduct is not tolerated.’ 115 Further considerations include the development and maintenance of clear internal policies ‘designed to prevent, detect, investigate and remediate’ misconduct, internal controls, training and communication, incentives and reporting policies. 116
The World Bank has debarred 78 companies and individuals during fiscal year 2018 according to the World Bank Group Sanctions System Annual Report FY18. 117 In addition to the 78 debarments, five firms were sanctioned with conditional non-debarment, which means they remain eligible to participate in World Bank-financed projects but will be debarred if they do not meet certain agreed-upon conditions. 118
D. The United States
Public procurement regulation in the US occurs at three levels: Federal, State and local. At the federal level, procurement regulation is predominantly governed by the Federal Acquisition Regulations (‘FAR’). 119 The FAR explicitly provides that ‘the serious nature of debarment and suspension requires that these sanctions be imposed only in the public interest for the Government’s protection and not for the purposes of punishment.’ 120 Jurisprudence 121 and legislation 122 is consistent with this rationale that debarment in the US is primarily protective.
There are three requirements for issuing a debarment. First, a ‘cause for debarment’ must exist. 123 Debarment may be imposed when a contractor is convicted of, or found civilly liable for, any integrity offence. Integrity offences include fraud; 124 antitrust violations; 125 embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion; 126 and ‘other offences indicating lack of business integrity or honesty that seriously affect the present responsibility of a contractor.’ 127 Debarments are ‘…for the most part…based upon criminal actions that had some nexus to the sanctioned contractors’ work for the government.’ 128 As noted by Professor Arrowsmith, this is understandable to some degree. Debarring officials defer to ‘external adjudication’ out of fairness and because they ‘lack the expertise or resources’ to adjudicate such matters themselves. 129 Furthermore, although debarments may be issued either to individuals or to firms, 130 individuals are debarred more frequently. 131
In the absence of a conviction or civil judgment, debarment may be imposed when government officials find, by a preponderance of the evidence, that the contractor committed certain offences, including serious violations of the terms of a government contract or subcontract; 132 delinquent federal taxes; 133 and a knowing failure by a principal to timely disclose to the government credible evidence of violations of federal criminal laws involving fraud, conflict of interest, bribery or gratuity offences; violations of the civil False Claims Act; or significant overpayments on the contract. 134 Furthermore, a debarment may be imposed whenever an agency official finds, by a preponderance of the evidence, that there exists ‘any other cause of so serious or compelling a nature that it affects the present responsibility of a contractor.’ 135 The breadth of this provision affords debarring officials considerable discretion with minimal guidance from case law. 136
Second, a contractor must be ‘presently irresponsible’. 137 Even if a cause for debarment exists, only present responsibility is relevant to the exercise of agency discretion. Past misconduct is of no consequence if a firm has self-remediated. 138 Any circumstance which indicates that a contractor is unlikely to repeat past misconduct, such as changes in personnel or procedures, restitution or cooperation in a government investigation, can potentially weigh an agency’s decision against debarment. 139 The purpose of exclusion is therefore to ensure that awards be made only to ‘responsible’ bidders, offerors or sources. 140 The FAR provides only limited guidance on the notion of ‘responsibility’, stating that a responsible contractor has a ‘satisfactory record of integrity and business ethics.’ 141 While the Court of Appeals for the Federal Circuit has described the concept of responsibility as ‘cryptic’, 142 the historically applied legal definition of responsibility is ‘something more than pecuniary ability; it includes also judgment, skill, ability, capacity and integrity.’ 143
Third, the agency must comply with a series of procedural safeguards. 144 For example, due process requires that contractors receive written notice of, and the opportunity for, a hearing regarding proposed debarments. 145
Importantly, the decision on whether or not to debar is discretionary and rests with officials within each agency, 146 a fact which has been criticised by commentators who favour a principles-based approach. 147 The FAR states that agencies ‘may debar’ a contractor when grounds for debarment exist, 148 but it does not require them to do so. 149 Agency officials are instead required to focus on the public interest when making debarment decisions. 150 Factors to be considered by the debarment official include standards of conduct and internal controls, self-reporting in a timely manner, internal investigation, cooperation with external investigation, payment of any fines, disciplinary actions and remedial measures. 151
Understandably, ‘…many, if not most, large contractors do not have unblemished records because they have thousands of employees to supervise, and they often take on ambitious and risky contracts,’ 152 Pragmatic considerations therefore necessarily play into the exercise of the official’s discretion as to whether to debar, with evidence showing that the government rarely debars contractors with which it will likely deal with in the future, for example, large defence contractors. 153 As the US government is heavily reliant on a small pool of large contractors, 154 a pragmatic, risk-avoidance 155 approach to debarment seems preferable to a strict principles-based approach. To debar indispensable contractors on principle alone would be like ‘cutting off one’s nose to spite one’s face.’ 156 However, practical rather than principled decision-making has led to the appearance of regulatory discrimination, with small contractors being accused of only minor infractions being debarred while large firms are rarely debarred. 157 Noting this inequity, Professor Schooner has argued that ‘…an entire generation of public procurement professionals learned that the suspension and debarment remedies were paper tigers — pretty to look at but not to fear.’ 158
However, in recent years, steps have been taken to increase the transparency and accountability surrounding procurement contracts with Congress passing amendments requiring contractors to disclose unlawful conduct and significant overpayments related to government contracts. 159 In particular, the Department of Defense is required to periodically report the total value of contracts entered into with contractors that have been indicted for, or settled charges of, fraud over the past 10 years. 160
E. European Union
Like the US, the anti-corruption instruments in the EU are focused on the protection of EU finances and seek, ‘…in conformity with the purpose behind the EU, the closer integration of the internal market.’ 161 There are several major conventions that demonstrate this objective. The Convention on the Protection of the European Communities’ Financial Interests (‘PFI Convention’) 162 is designed to criminalise any act which leads to the misapplication or wrongful retention of EU funds and it ensures business leaders can be made liable for the actions of their subordinates where the action constitutes a fraud affecting the EU’s financial interests. Similar to the PFI Convention, the Convention on the Fight against Corruption Involving Officials of the European Communities or Officials of Member States of the EU 163 provides for the criminal liability of business leaders, in so far as a person under their authority committed the corrupt act and person was acting on behalf of the business.
More specifically, the Council of Europe has adopted two anti-corruption conventions. The Criminal Law Convention on Corruption 164 obliges State parties to criminalise a wide range of offences, including active and passive corruption of national, foreign and international officials, active and passive corruption of national, foreign and supranational parliaments and courts, trading in influence and laundering of the proceeds of corruption. 165 The Civil Law Convention on Corruption 166 is aimed at providing civil remedies to citizens of State parties who have suffered damage as a result of corruption and obtain compensation where appropriate. 167 State parties are obliged to provide a private right of action for full compensation against persons who have committed or authorised acts of corruption or failed to prevent them from occurring. 168 State liability can also be imposed for acts of corruption committed by public officials. 169
Public procurement contracts play a significant role in the economies of Member States, estimated at more than 16% of the Union’s GDP. 170 EU public procurement law is based upon general principles derived from the Treaty on the Functioning of the European Union (‘TFEU’) 171 which is aimed at ensuring equal access for all operators within the EU internal market to procurement opportunities in other EU Member States, as well as fair competition in for public contracts. Public procurement in the EU is regulated primarily by a set of three directives that EU member states are required to implement in their domestic legislation (the ‘2014 EU Directives’). 172 The 2014 EU Directives set out the rules on the award of contracts but do not provide a complete public procurement law or code covering all aspects of procurement. Member States have some scope for implementing policy choices in implementing legislation.
Debarment may be either mandatory or discretionary under the EU rules. Mandatory debarment is required when a contractor has been convicted by final judgment for one or more of the following criminal activities: participation in a criminal organisation, corruption, fraud relating to the protection of EU financial interests, terrorist offences or offences like to terrorist activities, money laundering or terrorist financing, child labour and other forms of trafficking human beings. 173 Contractors may also be mandatorily excluded for corporate integrity offences unrelated to public procurement such as being delinquent on tax or social security payments. 174 Discretionary exclusion is broader, incorporating behaviour that create questions about the firm’s integrity or ability to function in a responsible manner. These include failure to cooperate with EU procurement principles, efforts to unduly influence agency decision-making, bankruptcy and significant or persistent deficiencies in prior contract performance. 175
However, any contractor that is subject to mandatory or discretionary grounds for debarment may provide evidence that the measures it has taken are sufficient to demonstrate its reliability, despite the existence of relevant grounds for debarment. 176 Self-cleaning measures can generally be regarded as effective where the economic operator proves that it has paid or undertaken to pay compensation in respect of any damage caused by the criminal offence; clarified the facts and circumstances in a comprehensive manner by actively collaborating with the investigating authorities; and taken concrete technical, organisational and personnel measures that are appropriate to prevent further criminal offences. 177
V Should Australia Adopt a Discretionary Debarment Regime?
This section analyses the advantages and disadvantages of Australia adopting a discretionary debarment regime and makes recommendations on key features that should be incorporated in any debarment framework if the government deems that legislating for debarment is indeed desirable.
A. Advantages and Disadvantages
There are compelling reasons to consider debarring firms with convictions or that otherwise commit fact-based corporate integrity offences. Professor Arrowsmith summarises these eloquently: to avoid associating the government with unlawful behaviour, both to set an example and to avoid public criticism”; as an “enforcement tool for securing compliance with the general law or penalising legal violations, and for reducing the risk that the contractor will violate the law or otherwise behave in an unreliable or damaging manner” during performance; “ensuring a level playing field”; or “to ensure that government funds are not used to support criminal or other undesirable enterprises, which may use government contracts as a means to raise revenue for terrorist or other criminal activities.
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Further advantages are set out below, along with the potential downsides of Australia adopting a discretionary debarment regime.
i. Advantages
Although fines, even large fines, impose a financial impact on earnings and balance sheets, they are a blunt sanction in that they don’t automatically impact field personnel, which is where corporate integrity offences most often occur.
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Debarment regimes do, as they disrupt sales opportunities, income streams, revenue models and compensation-based on incentives. Such disruption ‘in the field’ therefore has the potential to shift thinking towards building a positive corporate culture, including instilling the importance of self-reporting. This policy rationale is reflected in the design of the five debarment regimes examined above, where provisions exist for negotiating non-debarment when a contractor self-reports, self-cleans and proves present reliability. In addition to protecting government resources, debarment regimes are therefore designed to facilitate a shift towards cultural integrity rather than to punish. However, as argued by Professor Schooner …fear serves as a useful motivator. Even when the Government did not impose debarment, the threat of a corporate death penalty provides sufficient incentive for firms to enter into less draconian compliance agreements, and then comply with the terms of those agreements.
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ii. Disadvantages
Disadvantages to debarment can be managed through appropriate rules, guidance and discretion. The most often cited argument against imposing debarment is that it ‘may result in what is effectively a death penalty for a company.’ 182 Many US commentators argue that Arthur Andersen’s collapse showed that a mere indictment can destroy even a large, established firm by causing extreme reputational damage and by triggering collateral consequences. 183 However, despite empirical evidence demonstrating that the corporate death penalty is a myth, 184 the US Department of Justice has implicitly accepted this argument by declining to prosecute many large companies in favour of using negotiated settlements, such as deferred prosecution agreements (‘DPAs’). Similar sentiments are apparent in the UK, where one of the UK Ministry of Defence’s main suppliers, Rolls Royce, recently argued potential debarment as a justification as to why it should avoid criminal conviction under the Bribery Act 2010 (UK).
In opening his judgment, Sir Brian Leveson stated: If Rolls-Royce were not to be prosecuted in the context of such egregious criminality over decades, involving countries around the world, making truly vast corrupt payments and, consequentially, even greater profits, then it was difficult to see when any company would be prosecuted.
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Rolls Royce argued that a criminal conviction may cause it to lose over 30% of its order book, 186 which was accepted by the Serious Fraud Office and the court, resulting in settlement over prosecution. The firm stated: ‘debarment and exclusion would clearly have significant, and potential business critical, effects on the financial position of Rolls-Royce.’ 187 ‘A conviction would undeniably affect the ability of Rolls-Royce to trade in the world…it is well known that many countries operate public sector procurement rules which would debar participation following conviction.’ 188 Yet there was no evidence to suggest that the figures put forth by Rolls-Royce were independently verified. The emotive effect of such arguments is not to be underestimated given that the Attorney-General’s Department has proposed the introduction of a DPA scheme into Australia. 189
Furthermore, at least in the US, there is concern that debarment treats large contractors more favourably than small contractors due to the exercise of agency discretion. 190 For large contractors, such action is generally justified through the inclusion of a legislative derogation provision, allowing the Government to continue to procure from a firm due to overriding requirements in the national interest. ‘Even if large contractors are debarred, they are often granted waivers such that debarment is only restricted to one agency.' 191 However, smaller contractors are routinely debarred and are therefore held to a stricter standard of integrity than larger contractors. 192 While such practice may be justified by agency officials, such patent inequity creates the perception of regulatory discrimination and has the potential to further deepen the public’s distrust in the government.
Furthermore, debarring a contractor may adversely affect competition within the industry in question. Less competition results in higher prices, less innovation and less value.
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At worst, even the potential for a firm to be debarred may dissuade contractors from entering the government market.
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In turn, by reducing market size, it may facilitate anti-competitive behaviour among non-debarred bidders
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causing debarment to trigger the very behaviour it seeks to deter. To mitigate against such impact, …the general practice has not been to suspend or debar entire companies or divisions, but to narrow the impact to specific individuals or a particular business segment (possibly on the assumption that a company with questionable ethics is restored to health simply by surgically removing one or more bad actors.
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B. Designing a Debarment Regime
A pragmatic discretionary debarment programme must foster an environment that will encourage cooperation, self-investigation and voluntary disclosure by using inducements to potentially shorten any imposed debarment period. This will necessarily require a delicate balance of remediation, rehabilitation and cooperation achieved through a combination of rules, discretion and oversight.
i. Purpose and Goals
Whether debarment should be designed as punitive or protective is perhaps the most controversial consideration. Few countries explicitly state the purpose of their suspension and debarment framework. However, there appears to be consensus among commentators and officials of the World Bank, the US and the EU that, in theory, debarment does not serve a punitive purpose and is instead intended to serve the public interest. The World Bank system is primarily an administrative process that ‘does not purport to “punish” or find Respondents criminally liable.’ 197 In the US, ‘the serious nature of debarment and suspension requires that these sanctions be imposed only in the public interest for the Government’s protection and not for purposes of punishment.’ 198 However, the FAR does little to clarify what the expressions ‘public interest’ or ‘punishment’ mean. 199 The opacity of the ‘public interest’ renders it impossible and impractical to define. In addition to competing agency interests, Professor Yukin has suggested that the public interest includes consideration of ‘…competition, integrity, transparency, efficiency, customer satisfaction, best value, wealth distribution, risk avoidance, and uniformity.’ 200 Similarly, debarment in the EU ‘…does not serve a punitive objective.’ 201
US Courts have repeatedly stated that while debarment may feel like punishment to those companies and persons depending on government contracts, it does not alter the fact that the sanction is not punitive per se. 202 That is, ‘whether a sanction constitutes punishment is not determined from the defendant’s perspective, as even remedial sanctions carry the “sting of punishment.”’ 203 For example, in United States v Ursery, 204 the Court stated that debarment is not punitive merely because it collaterally serves some of the purposes of punishment, which traditionally include retribution, deterrence, rehabilitation and incapacitation. 205 While debarment may deter future misconduct, encourage contractors to rehabilitate themselves and incapacitate those that do not reform, 206 the overarching purpose of debarment is to protect the government from current threats.
As not every debarment system is predicated on the same policy goals or approaches, if Australia is to implement a discretionary debarment system, it must first articulate the purpose and objective the system is intended to achieve, prior to extrapolating best practices from other jurisdictions. The UK Ani-Corruption Forum’s four primary objectives for a contractor exclusion framework 207 is a pragmatic starting point for consideration to deter companies from committing corrupt acts; to punish companies that commit corrupt acts; to encourage companies to implement effective anti-corruption policies; and to encourage companies to deal promptly and openly with any instances of corruption and to cooperate with regulators in the investigation and prosecution of the acts.
ii. Offences Captured
Some argue that as the primary intent of debarment is to protect the integrity of the procurement system, it is only misconduct which somehow relates to procurement that should be the cause for debarment. However, this view fails to recognise that misconduct unrelated to procurement may still erode an agency’s confidence that a firm would be a responsible contracting partner. The US and EU debarment regimes appear to recognise this disparity. In the US, causes for debarment include acts that may or may not be procurement related such as antitrust violations, false statements, tax evasion and ‘any cause so serious or compelling that it affects the corporation’s present responsibility.’ 208 Similar causes exist in the EU, including failure to cooperate with EU procurement principles, efforts to unduly influence agency decision-making, bankruptcy and significant or persistent deficiencies in prior contract performance. 209 It is argued that Australia should adopt similarly broad integrity offences. While it is understandable that broad provisions invoke initial unease given the severity of debarment, they should always be subject to overarching agency discretion. When exercising such discretion, the essential question for any agency official should be whether, on a risk-based analysis, 210 the contractor poses a current threat to the government.
iii. Standard and Burden of Proof
In the US, the standard of proof for debarment is ‘preponderance of the evidence.’ 211 The preponderance standard means ‘…proof by information that, compared with information opposing it, leads to the conclusion that the fact at issues is more probably true than not.’ 212 The Government has the burden to prove that there is cause for debarment. 213 A conviction, whether by trial or a guilty plea, or a civil judgment meets the standard under the regulations. 214 A similar standard is applied by the World Bank. Section 8.02 of the World Bank Sanctions Procedures requires assessment as to whether ‘…it is more likely than not that the Respondent engaged in a Sanctionable Practice.’ 215 The expression ‘more likely than not’ is defined as, ‘upon consideration of all the relevant evidence, a preponderance of the evidence supports a finding that the Respondent engaged in a Sanctionable Practice.’ 216 Both the standard and burden of proof are therefore purposefully low to capture the broadest range of offences but are ultimately subject to agency discretion.
iv. The Bounds of Discretion
The Australian government, like the US government, relies heavily on a small number of contractors. 217 Therefore, like the US, it is arguable that Australia should consider adopting a risk-based approach to debarment, where the agency ‘…carefully consider any favorable evidence of responsibility to ensure that all findings of responsibility are based on the presence of a realistic and articulable threat of harm to the government’s proprietary interest’ 218 and there is a nexus between the contractor’s offence and the purported threat to government interests. 219 While agency discretion is desirable, broad discretion vested in agency officials without accompanying comprehensive guidelines can lead to ad hoc decision-making, resulting in perceived illegitimacy of the regime. Discretion that ‘…allows officials to pick and choose among an endless stream of facts and impressions creates the clear potential for whim, arbitrariness, or prejudice.’ 220 Furthermore, ‘as discretion grows, there is less opportunity for adjudicative bodies to conduct meaningful oversight, since discretionary guidelines cannot be enforced in the same manner as rules.’ 221 To avoid overreach, any discretionary debarment regime therefore needs to include a combination of rules and guidelines which incorporate appropriate due process considerations, 222 mitigation factors based on satisfactory evidence of ‘self-cleaning’ and reporting requirements mandating agencies to submit a written rationale justifying any decision not to impose a proposed debarment. By encouraging self-reporting, debarment can facilitate a culture of compliance by encouraging companies to take control of their own risk management and remediation.
v. Jurisdictional Issues
The implementation of a discretionary debarment regime raises the question as to whether it is appropriate for a firm to be debarred if it is found guilty of integrity offences in a foreign court. This raises several questions the answers to which are beyond the scope of this article. First, are all foreign judgements viewed equally or should Australia view judgements from countries where the rule of law is weak less favourably? Alternatively, should debarment from a foreign jurisdiction merely constitute a trigger for local agency investigation? While the latter is clearly a preferable view, the downside to this approach is that it may cause tension if Australian authorities subsequently investigate and reach a different view.
vi. Transparency and Accountability
To ensure transparency, a publicly available register should be established with details of debarred firms, the relevant offence, the length of the debarment and the reasons therefor. The US uses a consolidated electronic database, the ‘excluded parties’ system list’, with information on all firms or individuals excluded from receiving Federal contracts. Procurement officials must check the database to ensure they do not award a contract to an excluded bidder. The ‘System for Award Management’ contains various security levels of clearance, the most basic of which is publicly available and provides information on company name, company identifier, address, whether the company is debarred and expiration of debarment period. Similarly, the World Bank website lists the firms and individuals that are ineligible to be awarded a World Bank-financed contract, because they have been sanctioned under the World Bank’s fraud and corruption policy. Details are similar to the US with the addition of grounds of debarment.
There are, however, perceived downsides to a publicly available register. For example, in the US, several commentators have noted that the Federal Awardee Performance and Integrity Information System, established in 2009 as a consolidated source for contractor responsibility information,
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…has caused concern in the contractor community because some believe this could result in the [G]overnment: (i) making it nearly impossible to work with certain contractors due to public pressure to influence the bid review process, or (ii) improperly blacklisting certain contractors.
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vii. Basic Rights
Any public procurement process that may potentially lead to the debarment of a contractor must be open and fair, and it must comply with basic safeguards ensuring non-discrimination, transparency and proportionality in the process and in decision-making. Contracting authorities must be able to assess the particular circumstances in each case. ‘Non-discrimination’ requires that the process must operate in a manner that ensures that contractors are not treated differently. As noted above, government agencies must ensure that discretion is not exercised such that some firms are effectively ‘too big to debar’. ‘Transparency’ requires that the process must be determined with absolute certainty and made public so that contractors understand how and in what circumstances they may be debarred.
The effect of debarment must be reasonable and proportionate to the nature and seriousness of the grounds for debarment. Some breaches may be very minor in nature, and it may therefore be disproportionate to exclude a contractor on that basis. Mitigating circumstances, such as ‘self-cleaning’ actions taken by the economic operator to remedy the breach, internal compliance and self-reporting, must be taken into account.
Due process must be applied to the process as a whole, including ensuring that contractors are notified of the initiation of the process or of the proposed decision to exclude them; the grounds and evidence upon which the process or proposed decision is based; the timing for decision-making and right of appeal; have the opportunity to deny, correct or clarify the statement of facts; are informed of a decision and the reasons for a decision; have the right to apply to be removed from debarment in accordance with clear criteria, rules and procedures, taking into account mitigating circumstances; and have the right to an effective independent review of a decision to debar them. Any regime should consider meaningful appellate procedures to legitimise any debarment determinations. It will reaffirm that the facts were carefully reviewed, the law was properly applied and the outcome was proportionate to the offence. In an environment of increasing distrust of public institutions, a meaningful appellate process demonstrates government commitment.
viii. The Impact of Negotiated Settlements
In the US, agencies can use administrative agreements as alternatives to debarment. 225 The agency reserves the right to impose additional sanctions, including debarment, if the contractor fails to abide by the agreement or engages in further misconduct. 226 Such agreements are not explicitly provided for within the FAR but are within agencies’ general authority to determine with whom and on what terms they contract. 227 However, as noted by Professor Koehler, these administrative agreements ‘have become the dominant way for the DOJ to resolve corporate FCPA scrutiny and serve as an obvious reason for the general increase in FCPA enforcement over the past decade.’ 228
In the years since these administrative agreements were introduced in 2004, they have been used to resolve 70 allegations of foreign bribery, or 85 per cent of DOJ corporate foreign bribery enforcement actions. 229 The OECD Foreign Bribery Report found that of 427 foreign bribery enforcement actions between 1999 and 2014, only two had resulted in debarment. 230 This is despite the fact that the OECD recommends that firms convicted of corruption should be debarred. Some have questioned whether settlements comply with Article 3 of the OECD Convention, which requires parties to ensure that bribery of foreign officials is ‘punishable by effective, proportionate and dissuasive criminal penalties’ and in 2010, concerns were raised in the US House of Representatives that ‘settlements of civil and criminal cases by the DOJ are being used as a shield to foreclose other appropriate remedies such as suspension and debarment.’ 231 Consideration of the impact of negotiated settlement agreements is unlikely to be academic given current proposals to introduce DPAs into Australia. 232
VI Conclusion
Debarment is, and should be, an extreme measure taken by the government only under circumstances where internal monitoring has failed to prevent corporate misconduct, when a conviction for a corporate integrity offence such as corruption has been sustained, and when the company has failed to rehabilitate itself. In such circumstances, an additional discretionary sanction such as debarment could enhance both specific and general deterrence, while expressing societal condemnation. As companies are becoming increasingly multinational, governments must adopt the most pragmatic policies to combat foreign corruption. In pursuing integrity, debarment regimes are beneficial in encouraging companies to do business with ongoing responsibility. From the Government’s perspective, debarment allows the Government to ensure that it only contracts with ‘responsible’ contractors or those contractors that have not otherwise been excluded due to the exercise of a risk-based agency discretion. From the company’s perspective, the threat of debarment encourages internal monitoring, preventive measures and a strong response to any questionable behaviour brought to the business’s attention thereby facilitating a culture of compliance.
