Scandals are forever

Marilyn Mifsud, PKF Partner

Back in 2003, the European Parliament initiated an investigation on financial irregularities that were alleged to be taking place at the European Commission Statistics department Eurostat. The main facts here concerned large amounts of money being moved into a secret bank account, to the benefit of the culprits. From the investigation emanated fictitious and fabricated contracts, whose value had been similarly fabricated. For added emphasis this scandal concerned the official bureau of statistics of the European Union in view of between four and five million Euro that had gone missing. Back in 2003, it was reported that when these concerns first arose, OLAF, the European anti-fraud office, did not react. Elements that were involved also included reported omission - to act on information had by the Commission with regard to these illicit acts.

As people started to come forward post scandal, it was leaked that Eurostat's staff reporting system (CDR) acted to facilitate the termination of careers without risk to the directors or director generals who ordered such termination. This invariably led to the edifice being run as a terrorising one, whose employees lived in fear of losing their jobs, throwing any form of potential whistle-blowing squarely out the window. One report, authored by an ex Eurostat employee, went as far as describing the entity as a political powerhouse where 'only the weak get cut'. Despite all of this, in May 2004 MEPs voted in absolute majority against the motion to censure the Commission over its failure to take political responsibility for the Eurostat affair.

One may be questioning how all of the above is relevant. This is so namely by setting the stage for a local scenario, entirely different but similarly concerning suspicions raised as to the application of the rule of the law in view of a national bulwark institution. This will be examined while bearing in mind that scandals are forever and moreover that they are more often than not found right at the top. It is indeed a small world, but Malta is truly even smaller. In the light of recent goings on one cannot help but wonder whether our miniscule island size has contributed to brewing an ever more tightly knit incidence of nepotism that on some occasions appears to have hardened beyond infiltration.

We invite readers to follow us on the upcoming delineation. The case involves procurement and more accurately Tender No 4/2013: Survey on Household Finance and Consumption in Malta, issued by the Central Bank of Malta in June 2013. Being questioned - the tender award to a bidder at three times the cheapest bid (€93,263) without justified reasons for refusal to the cheapest bidder (€37,000).

The reliability of the Central Bank procurement structure began to be questioned by little things at first, which escalated as time went by. At first almost unimportant things struck a chord like the absence of any fee for lodging an appeal form a decision of the Central Bank (unlike all public procurement appeals which have a clearly defined payment process).

The appeal letter being acknowledged by procurement staff and the numerous letters that were sent to the Governor and went unanswered, at first created an impression of marred transparency and independence. But the impression became very much further contorted in the light of recent rumours that the Governor does not typically enter procurement matters and that the same are handled exclusively by the Deputy Governor and his friends, through the vehicle of the Policy Advisory Committee, which is utilised to endorse his decisions. The same Deputy Governor whose wife works at the very entity that was recently awarded the tender in question issued by the Central Bank at three times the cheapest bid price.

CBM appointed a former employee to act as independent objections officer to handle the cheapest bidder's appeal. On the first count this fact alone greatly hurt the perception of any independence even if the same was there in reality, for how could this appeal be taken seriously when the arbiter had a 40-year-old affiliation with the Central Bank?

In the course of time and throughout the appeal process however, what raised the most suspicion was without a doubt the irrational fervour with which CBM guarded the winning bidder's price, a stance which acted to make the revelation of the same price even more attractive than ever before.

As it turned out, CBM did publish the winning bid price but only once the appeal was finalised so that the award could presumably not be questioned. By then the independent officer's report had been issued, finding in favour of the Central Bank all the way. However, the independent officer declared he was never given the winning bid price throughout the appeal. While this may seem self-explanatory with hindsight, what one cannot help wondering is what the crucial impact of this information could have been on the appeal decision had it not been denied to the independent officer, as it were.

In the Eurostat case, it was held that while there was no evidence of personal enrichment emanated from the scandal, that there was clear breach of financial regulation and it was further held that the Commissioner related should resign.

In fact, former Commissioner Pedro Solbes, initially denied knowing about the Eurostat scandal however later resigned in April 2004 to become Finance Minister of Spain. The Eurostat case speaks of the European Commission and in addition speaks of an entity which had auditors who missed this colossal crime. The sky would certainly be the limit in the case of entities without a fully fletched or fully functioning supervisory mechanism.

Taking a look at the legislation governing the Central Bank one finds that:

As per Article 12 of the main Act, the Board may regulate its own procedure.

Article 29 provides that The Bank shall keep the Minister informed of the policy of the Bank: Provided that:

this does not result in interference with the independence of the members of the Bank's decision making bodies; (b) the special status of the Governor in his capacity as member of the Governing Council and General Council of the European Central Bank is fully respected; and (c) confidentiality requirements resulting from the Statute are observed.

Was the Minister concerned ever informed of the procurement policies of the Central bank, or do the ocean-wide provisos bubble-wrap the Bank's defence in never needing to do so?

Article 7(e) of the Bye laws to the Central Bank Act notes that the Governor or in his absence the Deputy Governor shall be responsible for 'the discharge by officials and other employees of the Bank of the duties laid upon them' - does this not invariably imply that such discharge should be proper and free from conflict of interest, and if the rumour is true that the Deputy Governor is exclusively delegated the procurement function, then even so this could never act so as to in any way exempt the Deputy Governor from the responsibly of the proper discharge of his own duties.

Article 8 (6) of the Main Act state that: (6) The Governor may be requested by the House of Representatives to report on the conduct of the Bank before a committee of the House of Representatives appointed for this purpose and to provide such committee with any information deemed necessary: Provided that the Governor may not be so requested more often than once every six months.'

8(5) on the other hand states that: '(5) The Governor and the Deputy Governors may be relieved of their office only if they no longer fulfil the conditions required for the performance of their duties or if they have been guilty of serious misconduct.' Article 13 of the main Act sets out the Audit Committee who among other things shall be responsible for the Central Bank's internal control.

Perhaps not surprisingly but nonetheless disappointedly, the Department of Contracts and the European Central Bank both washed their hands clean of the case and declared no competence, leaving the Central Bank to bask in all the glory of its independence which renders it the untouchable. A direct quote from the European central Bank's reply marking its non-involvement reads as follows: 'Please be advised that the European Central Bank (ECB) is not the body competent to deal with an appeal against a procurement decision taken by any other contracting authority conducting a procurement procedure'.

Facta lex, inventa fraus. The learned maxim that reminds that as laws are made, in tandem loopholes are created to be employed. So bigger scandals have happened, and by that measure, can it realistically be expected of the small sailing boat to sport clean sails when it treads a contaminated sea?

Locally, the circumstances and rumours outlined above would never have emerged, had there been better transparency and independence in the outward procedure by which the cheapest bidder (an SME's) appeal to the award was conducted, as there would have been no need for the same. However, in view of the sequence of events as they unfolded and now that they have been suggested, one calls for a serious investigation to take place on the rumours outlined, if for nothing else in order to put to the test the new government's simplification philosophy and for all to learn form the results.

Marilyn Mifsud is a lawyer at PKF Malta, an audit and business advisory firm [email protected]