Last week, the government failed to back key amendments to the new Procurement Bill (which had strong cross-party support) that would have significantly strengthened the UK’s ability to tackle fraud and corruption in public contracts. This leaves some significant loopholes in the new procurement regime which risk undermining efforts to keep fraudsters out of the system.
The threat of losing public contracts is a powerful but underappreciated (and underutilised) way to fight fraud and corruption and to incentivise companies to engage in honest business practices. There is strong anecdotal evidence that the sanction that companies fear more than any other when it comes to fraud and corruption is losing access to public contracts, and in the case of the UK, its lucrative £300 billion a year public procurement regime.
There is little doubt that we need all the tools available to us given that we are currently losing the fight against fraud. The fraud epidemic costs UK consumers £6.8 billion every year, equivalent to £100 for every UK citizen. But while headlines focus on consumer fraud, public sector fraud arguably imposes a far bigger cost to the UK public, with estimated costs to the public purse of £21 billion per year.
A significant chunk of this fraud occurs within public procurement, resulting in government departments and local authorities overpaying for products and services. As the National Audit Office’s recent report on fraud and corruption against government highlighted, in 2021/22 alone, £1.1 billion of NHS spend was vulnerable to fraud, while around £1.3 billion of Ministry of Defence spending was “exposed” to fraud loss.
Local government also face significant fraud risks. Nearly a quarter of local councils (23%) that responded to a survey experienced fraud or corruption in 2017-2018, while procurement fraud costs local government up to £876 million a year, making it the biggest cause of financial loss in local government.
When the public sector is defrauded it means government departments have less to spend on vital public services than they would otherwise.
So what are the loopholes
The first loophole that the amendments were meant to address was making sure that government departments and local authorities could act on credible evidence of fraud and corruption rather than waiting for a conviction.
While the Bill will allow authorities to do so where they have evidence of modern slavery, human trafficking or cartel offences, somewhat inexplicably it does not allow for it where they have evidence that a company has engaged in fraud, corruption or other economic crime. The government’s argument was that to do the latter would be “a new burden on those investigating suppliers…and on suppliers themselves”.
The trouble with the government’s line on this is that waiting for a conviction for fraud or corruption is way too late. Fraud prosecutions are at a record low. And it is well known that investigations of fraud and corruption can take many years to conclude, and prosecutions even longer. Just last week the Criminal Bar Association highlighted that the average number of fraud cases in the courts last year was nearly two thirds lower than in 2014 and that these cases took double the amount of time to go through the courts than in 2014.
The second loophole is that crucial economic crimes offences have been left out of the mandatory exclusion grounds from public procurement. This means that government and local authorities won’t have to consider whether a company should be given contracts when they’ve been convicted for these offences.
The Bill contains some real anomalies on this. While it includes the ‘failure to prevent tax evasion’ offence as a ground for exclusion, ‘failure to prevent bribery’ – the main corporate offence under the Bribery Act – is not. Key money laundering offences such as the criminal offences under the Money Laundering Regulations (used for instance against NatWest), are also missing.
The final loophole is the very broad and extensive grounds on which authorities can decide whether and when bad actors can continue to win contracts following wrongdoing.
As it stands, the Bill massively widens the discretion for authorities to make these decisions from what were, under existing rules, quite strict criteria. Currently companies have to show they’ve cleaned up their act by getting rid of management that oversaw wrongdoing, making compensation and cooperating with authorities. Under the new rules companies don’t even need to have taken concrete steps to clean up their act, but can just commit to doing so. It’s hard to see how authorities will have capacity to monitor this when the government claims they don’t have capacity to investigate credible evidence of wrongdoing.
In an even broader twist, authorities can consider “any other evidence, explanation or factor” they consider “appropriate” to let a potential supplier previously convicted of fraud or other wrongdoing continue to bid. As Nigel Mills MP put it in the debate: ‘A factor could be, “They’re the cheapest bid, so we’ll go ahead with them”’.
Given the government rejected these amendments, several things need to happen to make sure these loopholes do not undermine the new debarment regime that the Bill introduces.
Local authorities and government departments need to be empowered to act on serious and credible evidence of wrongdoing and misconduct, including when it comes to the new ‘failure to prevent fraud’ offence being introduced in the Economic Crime and Corporate Transparency Bill.
That means the government should consult and come forward with some robust guidance for how credible evidence of fraud and corruption can be considered by authorities under the ‘professional misconduct’ clause in the Bill, and how authorities should interpret their discretion when it comes to allowing bad actors to win contracts again. It should also work with the Public Sector Fraud Authority to help upskill government departments and local authorities to spot such evidence and support them when they do so.
The new debarment regime in the Bill offers the opportunity for the UK to be a real global leader on using exclusion and debarment to protect the public purse and drive up corporate governance standards. The government needs to show it’s willing to tackle the loopholes so it doesn’t leave the debarment register standing empty for years. That would seriously undermine the UK’s credibility on tackling economic crime.