CONFLICT OF INTEREST AS A FRAUD RISK Conference organized by Transparency International Hungary 19 April 2018 Frank MICHLIK OLAF D.2 Fraud Prevention, Reporting and Analysis

Definition of COI The Organisation for Economic Cooperation and Development (OECD) proposed a definition : "A “conflict of interest” involves a conflict between the public duty and private interests of a public official, in which the public official has private-capacity interests which could improperly influence the performance of their official duties and responsibilities." The European Union law defines the concept for the purposes of implementing the general budget of the EU. In the field of shared management – European Structural and Investment and agricultural funds - the budget is implemented by the Member States and the framework for the implementation is set out in the Financial Regulation. Consequently, EU funded programmes need to be implemented by Member States in accordance with the budgetary principles of the Financial Regulation. Annual Coordination Meetings 2017

Establishing a strong internal control system Strong internal control mechanisms are pivotal in tackling COI and enhancing transparency Usage of available Commission tools serving as risk scoring mechanisms for ESI Funds (e.g. ARACHNE, IMS, Fraud Risk Assessment tool, national tools) Awareness Raising: inclusion of a code of ethics in working procedures manual for red flags validation of process updating risk registers Prevention of conflicts of interest is of paramount importance for the transparency and reputability of the public sector environment. It is also relevant in fostering public confidence in the integrity of public officials and decision-making, in particular in light of the perceived scarcity of sanctions in this respect. Detection of conflict of interest is notoriously difficult, thus prevention should be an area to focus on. It is worth bearing in mind that conflicts of interest can arise at any stage of a procedure, from specification to verification. • Awareness raising Prevention is closely linked to awareness of those involved; if a situation of conflict of interest is anticipated it can be avoided. Thus, raising the awareness with regards to what a conflict of interest actually is and having specific guidelines on the segregation of functions within an organisation is highly recommended. In terms of public procurement, managing authorities are recommended to put in place such policies in order to mitigate a risk and to tackle potential cases of conflict of interest that do arise. Detection of situations of conflict of interest, as early as possible, is of particular importance. If, for example, a serious conflict of interest is identified before the awarding of a public procurement contract, the procedure can be halted. • Transparency : o Declaration of interest A declaration of interests, both current and past, and if applicable a declaration of absence of conflicts of interest are useful tools to enable the detection and management of situations of conflict of interest. o Strong control mechanisms: Checking ownership of bidders and subcontractors The ARACHNE tool is extremely useful in this regard to identify and safeguard against situations of conflict of interest. Annual Coordination Meetings 2017

PO holds a post with, or owns shares in winning company Common Typologies PO holds a post with, or owns shares in winning company PO has family members working with, or owning shares in, the winning company PO has very close, friendly relationships with mgmt/owners of winning company PO has close ties to a political party that itself has a business or a political agenda vis-à-vis any tenderer Some Common Conflict of Interest Typologies • The public official holds a post with, or owns shares in, the winning company. • The public official has family members working with, or owning shares in, the winning company. • The public official has very close friendly relationships with the management/owners of the winning company. • The public official has close ties to a political party that itself has a business or a political agenda vis-à-vis any tenderer. Actual, apparent, potential conflicts of interest As these terms are often mentioned in the context of conflict of interest, it seems useful to give a short explanation. OECD guidelines on 'Managing conflict of interest in the public service' make the following distinction: Actual conflict of interest: ‘… a conflict between the public duty and private interests of a public official, in which the public official has private-capacity interests which could improperly influence the performance of their official duties and responsibilities’. Apparent conflict of interest: ‘… can be said to exist where it appears that a public official’s private interests could improperly influence the performance of their duties but this is not in fact the case’. Potential conflict of interest: ‘A potential conflict arises where a public official has private interests which are such that a conflict of interest would arise if the official were to become involved in relevant (i.e. conflicting) official responsibilities in the future’. Annual Coordination Meetings 2017

Progression of irregularities related to breaches of "Ethics and integrity" Classification Fund 2011 2012 2013 2014 2015 2016 Fradulent CF 1 2 ERDF 7 4 6 12 19 ESF 15 9 EFF Non-fraudulent 5 22 43 13 3 TOTAL 10 47 65 46 Breaches related to "Ethics and integrity" have also been reported in the past. However, it is only since 3/4 years that they have been organised into this specific category. The breaches we are referring to are, mainly, corruption (active and passive) and conflict of interest. Like for all the other categories, we have also included the option of a residual typology (other irregularities linked to Ethics and Integrity) for those cases which may appear borderline. As we will see in a couple of slides, this typology has been used unfortunately very widely. What is interesting in the table in the slide is the "change of pace" that we have observed over the past three years. From 2011 to 2013, the irregularities labelled under this category are absolutely marginal. Since 2014 they pass to a different level, both those classified as fraudulent (criminal procedures ongoing) as those classified as non-fraudulent (only administrative procedures ongoing). Annual Coordination Meetings 2017

Main typologies detected in category "E&I" The main problem with the data at our disposal is, as already mentioned before, the high number of irregularities for which the residual category has been used. In the coming months we will try to understand a bit more what is behind: corruption cases or more conflict of interest? Or what else? Annual Coordination Meetings 2017

% of irregularities linked to Conflict of interest on the total of "E&I" irregularities And here is a simple overview of the share of irregularities clearly defined as "conflic of interest" on the total "Ethics and Integrity" Irregularities. Annual Coordination Meetings 2017

Member States having reported breaches in "E&I" and "CoI" The map on the left shows the number of irregularities reported per country related to Ethics and Integrity while the map on the right focuses on the conflic of interest. As we always recommend, attention should be paid not to assume that the "darker" areas are by default those with the highest problems. We are looking at irregularities detected and reported and, as far as we know, these maps only show that country x detects a certain number of cases. And it is transparent enough to report these cases to the Commission. This maps shows the Member States that are more "active" in contrasting certain phenomena. Maybe this is due to a higher cultural sensitivity to those issues or it may be also that in that Member State there are more problems than in others. From this point of view, also complitely white areas should be regarded as not entirely convincing. Annual Coordination Meetings 2017

Important references Guidance documents under COCOLAF in a collaborative procedure involving experts from the Member States, OLAF and other Commission services : Identifying conflicts of interests in public procurement procedures for structural actions - A practical guide for managers (2013) Identifying conflicts of interests in the Agricultural Sector - A practical guide for funds managers (2015) Annual Coordination Meetings 2017

New element in Financial Regulation Article 61 Conflict of interest 1. Financial actors and other persons, including national authorities at any level, involved under direct, indirect and shared management, including acts preparatory thereto, audit or control, shall not take any action which may bring their own interests into conflict with those of the Union. 2. Where there is a risk of a conflict of interest, the member of national staff in question shall refer the matter to his or her hierarchical superior. Annual Coordination Meetings 2017

Conclusions A growing awareness on the phenomenon Increasing detection and reporting Need to consolidate data Sensitive issue: identification and follow-up Position of PO involved may pose some problems to internal controls mechanisms What to do once the conflict of interest is identified Importance of internal and external controls Annual Coordination Meetings 2017