Bidder Qualification

1. Bidder Qualification Roger Bickerstaff8 July 2019

2. Topics: Comparison of international approachesto bidder qualification: Rationale of bidder exclusions EU, the US and the World Bank Specific issues in bidder qualification Complex corporate structures International issues Sub-contractors Directors and ex-directors "Self-cleaning" What is "grave misconduct"? • page 2

3. Underlying rationale of bidder exclusion

4. Different Exclusion Strategies • Court-Ordered Debarment, After Judicial Proceeding • Performance Risk • Reputation Risk • Source: Yukins

5. The Rationale of the Exclusions: Theories of Punishment(Ack. Sarah Schoenmaekers – EU Debarment: Legal and Economic Rationale) Backward looking: punishment as retribution motive is a key issue: intentionally wrongful actions should be punished more harshly Forward looking - Preventative: Incapacitation - removal of offenders from "society" Deterrence – negative example to others not to offend Rehabilitation – objective is to prevent future wrongdoing by changing behaviour of offenders • page 5

6. What's the Purpose and Intent?(NB. Acknowledgements: Sarah Schoenmaekers) Deterrence Threat of exclusion can deter companies from wrong-doing Only if company intends to do further public sector business? Impact of negative publicity in general But how public are the EU exclusions? Deterrence may be linked to duration of exclusion and reputational harm of exclusion if period of exclusion is not sufficient, there may be little effective deterrence Rehabilitation – exclusion in itself does not have any form of rehabilitation but opportunity for self-cleaning (2014 Directives) by a bidder may be rehabilitative • page 6

7. The Purpose and Intent of Exclusions? Incapacitation: Mandatory exclusions "primarily preventative" 2006 Communication on Disqualifications – to prevent the offender from re-offending Discretionary exclusions operators falling within the listed categories are a higher risk exclusion protects public budgets and other public interests Reduction in competition caused by removal of bidders is justified in order to protect contracting authorities from untrustworthy bidders • page 7

8. What is the Purpose and Intent?(NB. Acknowledgements: Sarah Schoenmaekers) Preventative Mandatory exclusions in Directives are "primarily preventative" 2006 Communication on Disqualifications – to prevent the offender from re-offending Procurement exclusions - operators are a higher risk, exclusion protects public budgets and other public interests Deterrence Threat of exclusion can deter companies from wrong-doing Only if company intends to do further public sector business Deterrence may be linked to duration of exclusion and reputational harm of exclusion Punitive: Arrowsmith/Priess: Exclusion only available as a sanction for discretionary exclusions: Directives give no legal basis for punishment – MS can punish when applying discretionary exclusion But exclusions are punitive in effect • page 8

9. EU: Grounds for Deselection

10. EU: Mandatory De-selection • Contracting Authority must treat a candidate or tenderer as being ineligible if • the Contracting Authority has actual knowledge that the candidate or tenderer • has been convicted (final judgement) of any of a list of offences – participation in a criminal organisation, fraud, money laundering, corruption, terrorist offences and certain immigration offences • Also applies where the person convicted is a member of the administrative, management or supervisory body or has powers or representation, decision or control • 5 year exclusion period from date of conviction • Availability of "self-cleaning"

11. EU: Discretionary De-selection • Bidders may be de-selected from a procurement process if: • it has been convicted of any offence concerning its professional conduct; • has been guilty of grave professional misconductwhich renders integrity questionable • agreements aimed at distorting competition • conflicts of interest that cannot be remedied by other less intrusive remedies • distortion of competition from prior bidder involvement that cannot be remedied by other less intrusive remedies • significant or persistent performance deficiencies in a substantive requirement of a prior contract which led to early termination, damages or other comparable sanctions

12. EU: Discretionary De-selection - 2 • serious misrepresentation in supplying shortlisting information • withholding shortlisting information or not providing supporting documentation • unduly influencing the decision making process of the CA • obtaining confidential information that may give an undue advantage • negligently providing misleading shortlisting information • 3 year exclusion period from date of relevant event • Availability of "self-cleaning"

13. EU: Bidder Exclusion • Mandatory and discretionary ground for exclusion apply throughout the procurement process – not just at the selection stage • Contracts must be terminated if a Contractor if it is found out subsequently later that mandatory exclusion grounds applied at the time of contact award • Bidders can demonstrate that they have "self-cleaned" any Article 57 issues to provide evidence to the effect that the measures taken by the bidder are sufficient to demonstrate its reliability • Eg. Payment of taxes • No EU Sanctions/Blacklist processes

14. US: Grounds for Deselection

15. US: Determination of Contractor "Responsibility" Federal Acquisition Regulations: • Agencies shall solicit offers from, award contracts to, and consent to subcontracts with responsible contractors only • No purchase or award shall be made unless the contracting officer makes an affirmative determination of responsibility. • In the absence of information clearly indicating that the prospective contractor is responsible, the contracting officer shall make a determination of non-responsibility.

16. US: Determination of Contractor "Responsibility" (2) • A prospective contractor must- • (a) Have adequate financial resources to perform the contract; • (b) Be able to comply with the required or proposed delivery or performance schedule; • (c) Have a satisfactory performance record; • (d) Have a satisfactory record of integrity and business ethics; • (e) Have the necessary organization, experience, accounting and operational controls, and technical skills • (f) Have the necessary production, construction, and technical equipment and facilities; and • (g) Be otherwise qualified and eligible.

17. US: Suspension • Grounds for suspension: • (1) Commission of fraud or a criminal offense in connection with- • Obtaining; attempting to obtain; or performing a public contract or subcontract. • (2) Violation of Federal or State antitrust statutes relating to the submission of offers; • (3) Embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, violating Federal criminal tax laws, or receiving stolen property; • (4) Violations of Drug-Free Workplace laws • (5) Intentionally and falsely affixing a label bearing a “Made in America” • (6) Commission of an unfair trade practice

18. US: Suspension • Grounds for suspension: • (7) Delinquent payment of Federal taxes exceeding $3,500 • (8) Knowing failure by a principal to timely disclose to the Government, in connection with the award, performance, or closeout of the contract credible evidence of violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations; or significant overpayment(s) on the contract • (9) Commission of any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor.

19. US: Debarment • Grounds for Debarment - Conviction of or civil judgment for- • (1) Fraud or a criminal offense in connection with- • Obtaining; Attempting to obtain; or Performing a public contract or subcontract • (2) Violation of Federal or State antitrust statutes relating to the submission of offers; • (3) Commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, violating Federal criminal tax laws, or receiving stolen property; • (4) Intentionally and falsely affixing a label bearing a “Made in America” inscription • (5) any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of the contractor • (b) • (1) A contractor, based upon a preponderance of the evidence, for any of the following- • (i) Violation of the terms of a Government contract or subcontract so serious as to justify debarment, such as- • (A) Willful failure to perform in accordance with the terms of one or more contracts; or • (B) A history of failure to perform, or of unsatisfactory performance of, one or more contracts. • (ii) Violations of 41 U.S.C. chapter 81, Drug-Free Workplace, as indicated by- • (A) Failure to comply with the requirements of the clause at 52.223-6, Drug-Free Workplace; or • (B) Such a number of contractor employees convicted of violations of criminal drug statutes occurring in the workplace as to indicate that the contractor has failed to make a good faith effort to provide a drug-free workplace (see 23.504). • (iii) Intentionally affixing a label bearing a “Made in America” inscription (or any inscription having the same meaning) to a product sold in or shipped to the United States or its outlying areas, when the product was not made in the United States or its outlying areas (see Section202 of the Defense Production Act (Public Law102-558)). • (iv) Commission of an unfair trade practice as defined in 9.403(see Section201 of the Defense Production Act (Pub.L.102-558)). • (v) Delinquent Federal taxes in an amount that exceeds $3,500.

20. US: Debarment (2) • Grounds for Debarment - based upon a preponderance of the evidence, for any of the following- • (i) Violation of the terms of a Government contract or subcontract so serious as to justify debarment, such as- • (A) Wilful failure to perform in accordance with the terms of one or more contracts; or • B) A history of failure to perform, or of unsatisfactory performance of, one or more contracts. • (ii) Violations of Drug-Free Workplace laws • (iii) Intentionally and falsely affixing a “Made in America” inscription • (iv) Commission of an unfair trade practice • (v) Delinquent Federal taxes exceeding $3,500.

21. US: Suspension and Debarment process • Target notified in writing of the basis for the violation • At same time, target details posted at www.sam.gov • Target ineligible for new contracts • Target has the right to make a written submission challenging the facts upon which the adverse action is based or demonstrating current responsibility • Target may request and receive a copy of the administrative record containing the facts leading to the suspension or debarment • No additional discovery rights.   • Conference between the SDO and the Contractor often occurs

22. US: Suspension and Debarment process (2) • Suspension based on adequate evidence of the Contractor’s misconduct • Adequate evidence could be an indictment, a civil or criminal judgment for any business integrity issue, or failure to adequately perform a government contract. • SDO determines if the evidence is adequate. • Suspension can last for 12-18 months or until the completion of any ongoing investigation or legal proceedings • Debarment more serious - usually does not exceed 3 years

23. World Bank: Approach to Deselection

24. World Bank: Approach to Deselection – "Eligibility" • The Bank permits eligible firms and individuals from all countries to bid for Bank-financed projects. • Borrower shall not exclude a bidder for reasons unrelated to: • its capability and resources to successfully perform the contract; or • specific conflict of interest situations • Bidders shall be excluded: • If declared ineligible, sanctioned pursuant to the Bank’s Anti-Corruption Guidelines • If requested by the Borrower, Bank may agree that bidders under a judicial sanction of debarment by the proper authorities in the Borrower’s country is ineligible • provided that debarment relates to fraud or corruption

25. World Bank: Sanctions Processes Allegations of sanctionable misconduct investigated by Integrity Vice Presidency (INT) If evidence of sanctionable misconduct is found the evidence is presented to the Evaluation and Suspension Officer (EO) EO evaluates whether the evidence is sufficient to support a finding of sanctionable misconduct If so – Notice of Sanctions Proceedings issued to Respondent with recommended sanction may be a temporary suspension from eligibility for new Bank funded projects Respondent can provide written explanation EO may withdraw the Notice, reduce the sanction, or lift the temporary suspension • page 25

26. World Bank: Sanctions Processes (2) If Respondent does not provide a written explanation, sanction recommended by the EO is imposed If Respondent contests INT's allegations or the EO's sanctions, the case is referred to the Sanctions Board Sanctions Board may hold an administrative hearing to hear the parties Sanctions Board carries out a full de novo review of each case Board decides whether "it is more likely than not" that Respondent engaged in sanctionable misconduct If so – sanctions are: reprimand, conditional non-debarment, debarment for a fixed or an indefinite time, debarment with conditional release, restitution or other remedy Decisions are final and non-appealable • page 26

27. Applying the EU deselection rules – considerable complexities in practice

28. Issues Considerable complexities in practice: • Complex corporate structures • International issues • Sub-contractors • Directors and ex-directors • "self-cleaning" • What is "grave misconduct"?

29. Complex Corporate Structures Consequences of convictions/grave misconduct by other entities within a corporate group? • Mandatory ground for deselection extends to "members of the administrative, management, or supervisory body… or has powers of representation, decision or control" • If offence committed by a parent having control, de-selection is mandatory • If offence is committed by a sister or subsidiary company, mandatory de-selection is not available • Nb. Discretionary ground does not have a similar extension to controlling entities

30. International Groups • Similar issues for international corporate groups: • Mandatory ground: if bidder convicted of one of the specified offences anywhere within the EU, the bidder must be de-selected • E.g. UK implementation: UK Regulation 57(1)(n) – "any other offence within the meaning of Article 57(1) of the Public Contracts Directive" • Extraterritoriality: sections 1 and 6 of the UK Bribery Act 2010 – companies can be convicted in the UK for acts of bribery outside the UK • Discretionary grounds - do not appear to be limited to EU: • conviction of any offence concerning its professional conduct; • guilty of grave professional misconduct

31. Corruption by Sub-contractors • What if the bidder itself is "clean" but there are corruption issues with a sub-contractor? • Differences in opinion: • UK (OGC) Guidance – mandatory exclusion is not required, no comment on discretionary grounds • Other commentators (Williams): Directive refers to the exclusion of a bidder (ie. Including a sub-contractor) from "participation in a public contract" • Can prime contractor perform the contract without the sub-contractor? • Ie. If mandatory grounds apply to sub-contractor the bidder must be deselected; if discretionary grounds apply then CA must apply discretion

32. Corruption by Directors and Ex-Directors • Mandatory de-selection ground: • Applies to convictions of directors of bidder and its parent company • if convicted director is "member of the administrative, management or supervisory body or has powers or representation, decision or control powers of representation, decision or control" • If conviction is of an ex-director: • director no longer has "powers of representation…" • Discretionary de-selection ground: • No reference to Article 57(2) applying to persons with "powers of representation…."

33. Self-Cleaning • Directive, Art 57(6): bidder may demonstrate that measures have been taken which are sufficient to demonstrate its reliability – if sufficient the bidder shall not be excluded • Applies to mandatory and discretionary grounds • Mandatory ground: MS may provide for a derogation for over-riding requirements in the general interest • Discretionary ground: exercise of discretion is subject to principle of proportionality: • If conviction/grave misconduct is some time ago and/or bidder can show that it has taken steps to overcome the problems then it would not be proportional to de-select the bidder

34. Self-cleaning • Much of the EU Directive approach to self-cleaning reflects the German experience • Self cleaning actions will generally be regarded as effective if they: • Provide compensation for any damage caused • Demonstrate active collaboration with the investigating authorities • Provide for concrete measures to prevent future misconduct • NB. Case C-124/17 (VasslohLaeis v StadtwerkeMunchen) • National law can require collaboration with the contracting authority as well as the investigating authorities

35. What is "Grave Misconduct" • Commission Communication (Com (2001) 566 final) - what is grave professional conduct is a matter for national law • Forposta(Case C-465/11) – grave misconduct covers: • "all wrongful conduct which has an impact on the professional credibility of the operator at issue" • not just violations of ethical standards which are established by a professional disciplinary body or by a judgement. • a failure of an economic operator to abide by its contractual obligations can in principle be considered as professional misconduct • the requirement of 'gravity' denotes a "wrongful intent or negligence of a certain gravity". 

36. Key Take-aways

37. Key Take-aways • Lack of clarity on nature of exclusions: preventative; deterrence or punitive • Differences in approach: • Need for suspension and debarment in EU? • Apparent simplicity of EU exclusion rules masks considerable complexity in their practical application

38. Thank you Roger Bickerstaff Partner Tel: +44 20 7415 6160 Roger.bickerstaff@twobirds.com