Public procurement is an attractive growth platform for the grey economy

Combined, the construction contracts commissioned by public bodies and the procurement of goods and services amount to more than EUR 35 million per annum in Finland, or nearly one-fifth of the GDP. Moreover, public procurement has been steadily increasing. In this context, it is evident that public procurement is an attractive growth platform for the grey economy.

Public procurement is vulnerable to corruption

The grey economy may manifest itself in several ways in public procurement, including criminal practices. The offences that may occur include giving a bribe to an official, acceptance of a bribe, tax fraud and accounting offences. From the perspective of the police, the problems associated with the grey economy manifest themselves most prominently in other financial offences.

Corruption in public procurement can mainly occur in direct procurement, i.e. in projects that are not put to public tender but negotiated with a single supplier. The reason given for such a practice is generally that the matter is urgent or that the supplier in question is the only one who can deliver the procurement. Since the beginning of 2017, the Finnish Competition and Consumer Authority (FCCA) has focused on direct procurement in its supervisory activities. In the experience of the FCCA, unlawful direct procurement is usually due to incompetence or negligence, but there have also been cases of suspected corruption.

A typical example of corruption is a situation where a member of a public procurement organisation is involved in the deal and receives a benefit from an involved party for misusing his/her influence. This may take any number of forms, such as circumvention of competitive tendering, overbilling (with kickbacks to the corruptee), the ‘old boys’ network’, underpriced contracts, use of tax havens and aggressive tax planning.

Aspects of the grey economy in public procurement may include tax evasion or neglecting to pay employer contributions on wages. This enables exceptionally low tenders to be submitted, as the tenderer does not intend to pay taxes or social security contributions. Dealing in receipts and VAT fraud may also be involved and tendering cartels or giving bribes in business. Generally, there is no accurate information on how this phenomenon has changed over the past two years.

Transnational grey economy in public procurement

Public procurement and its underside are transnational by nature, even though most of the cases in our legal practice have been local or at most national in scope. Bribery is widespread in international business, and in some geographical areas, corruption may be far more common than in Finland. The traditional kind of grey economy may make use of companies registered abroad, foreign ownership and foreign bank accounts to minimise the risk of being caught.

Shadow economy risk varies by sector

We do not know exactly how broad the scope of the grey economy in public procurement is. Some sectors are more at risk of grey economy practices than others. At-risk sectors include infrastructure and other construction, local planning, health care services, the pharmaceutical industry, the arms trade and IT services. Naturally, the grey economy may manifest itself in any sector, for instance through direct procurement. Also, framework agreements – in any sector – increase the risk of grey economy practices. In a framework agreement, a procurement unit typically signs an agreement with one or more suppliers, determining the prices at which the unit will procure specific goods or services over a specific period of time.

Statistics on grey economy practices in public procurement are not separately compiled. For example, the FCCA only records general information on the number of cases handled.

The shadow economy biases competition

Shadow economy practices in public procurement cause adverse impacts on various levels of society. On the individual level, the grey economy may hurt underpaid workers who do not receive lawful compensation for their work; on the company level, it hurts competition neutrality on the market; and in society at large, taxes may be lower or services better without the grey economy. Appraising indirect impacts has been found to be extremely difficult. Data on damage caused by this phenomenon have not been systematically collected.

Co-operation between authorities is crucial

Means proposed for combating the grey economy in public procurement include tax audits and co-operation between authorities (Tax Administration), supervision of direct procurement (FCCA), clarity in legislation (Ministry of Employment and the Economy) and networked co-operation among several authorities (the police). Co-operation between authorities is crucial in combating the grey economy in public procurement. For instance, the Tax Administration and the FCCA have entered into preventive co-operation with cities, including training of personnel in procurement organisations to identify various forms of the grey economy, such as corruption and cartels.

It is difficult to assess whether this has been effective, on the one hand because there is no suitable indicator and on the other hand because the legislation concerning the supervisory duties of the FCCA has only been in place for a short time. To submit a tip-off about a suspected unlawful direct procurement, visit the FCCA website [.fi]›