Conflict of Interest - Mark R Simmons Page 1 of 8 Web Site of Mark R. Simmons, CIA CFE What You Should Know About Conflict of Interest By Mark R. Simmons, CIA CFE Employees, in performing official duties, are expected to act on behalf of and in the best interests of the organization that employs them. A conflict of interest arises for an employee, officer or director of an organization when that person acts, or appears to act, on behalf of someone other than the organization; and has, or appears to have, a self interest of which the organization is unaware and that is actually or potentially adverse to its best interests. If a conflict of interest results in economic or financial loss to the organization through fraud, waste or abuse, then administrative, civil or criminal remedies may be pursued, as circumstances or policy dictate. What is Conflict of Interest? Conflict of interest is generally thought of as any situation involving hidden "self-dealing", "related-party transactions", "non-arms length relationships", or "serving two masters" that results in gain to one party at the expense of another. A structured definition of the concept of conflict of interest is: l the convergence between an individual's private interests/obligations/relationships and his or her professional obligations to the organization l such that an independent observer might reasonably question the motive, actions and outcomes regarding decisions made or actions taken by the individual, as a director, officer or employee, and l the individual, the individual's immediate family; or a third party or organization in which the individual or the individual's immediate family has a business interest or association, receives any "thing of value" as a result of decisions made or actions taken by the individual as a director, officer or employee of the organization. What Are "Things of Value"? "Things of value" include, but are not limited to: salaries or direct file://C:\WINDOWS\DESKTOP\Conflict%20of%20Interest%20Websites%20and%20Fil... 16/01/2004 Conflict of Interest - Mark R Simmons Page 2 of 8 commissions;finder fees; raises, bonuses, or promotion (other than those received as anemployee of the organization); receipt of automobiles, boats, or any gifts other than those of nominal value; receipt of paid vacations and trips; payment of credit card bills or of any other personal expenses; receipt of stocks, bonds, annuities or other investments; insurance policies paid for by a third party; an offer or promise of employment; realization of business profits or increased business value;realization of an unfair competitive advantage; or any other means of compensation or reward other than those provided by the organization to its directors, officers and employees. Consider the following actual situation. John Doe held a policy/decision making position as an official of a government organization, and was also an employee of a service company seeking business with the organization. The service company that employed John Doe had business dealings pending before the policy/decision making body on which Mr. Doe sat. Mr. Doe had cast a deciding vote that resulted in the selection of the service company to perform work for the organization. Mr. Doe created, at the very least, the appearance of a conflict of interest by participating in a decision making process that awarded business to the service company. Why? Because it is possible that John Doe acted in the best interest of the service company, or in self-interest, rather than in the best interests of the awarding organization. The possibility exists that in exchange for the favorable vote, the service company could reward Mr. Doe through promotion; year-end bonus; pay raises; gifts; gratuities and special benefits; special vacations; and any number of other benefits and rewards that would be hidden from the awarding organization. The above scenario could involve coercion as well. Unknown to the awarding organization, Mr. Doe could be threatened with termination if he does not cast a favorable vote. Conversely, by threatening to withhold a vote of approval, John Doe could coerce special benefits and rewards from the service company for himself or others. In addition, the possibility exists that because John Doe voted favorably, the awarding organization might be deprived of obtaining the best value for the money being spent, to the financial advantage of Mr. Doe and the service company. Conflict of interest can also exist and result in fraud when an organization has a hidden interest in, or derives a hidden benefit from, the outcome of an event or transaction. This more subtle type of conflict of interest could occur if officials of the organization, either alone or in conspiracy with providers of services, obtain public funds and use those funds for other than intended program purposes. In this instance, the organization has a hidden self-interest that is actually or potentially adverse to the interests of the government and the citizenry. The following story (also true) is an example. An official of an organization directed the owner of a company doing business under contract to provide computer equipment and contractor staff that would be used to perform non- contract related work. When seeking payment for the extra work, the file://C:\WINDOWS\DESKTOP\Conflict%20of%20Interest%20Websites%20and%20Fil... 16/01/2004 Conflict of Interest - Mark R Simmons Page 3 of 8 contractor billed the hours for non-contract work as having been expended on contract related activity. The billing occurred with the knowledge of the organization official, who instructed lower level staff to approve the bill for payment. Because the contract was part of a federal program, the organization's chief fiscal officer in turn filed a claim for reimbursement with the federal government, which the federal government, in good faith, paid. This type of fraud, perpetrated against the federal government over many years by making false statements and filing false claims, resulted in almost $30,000,000 in fines and settlements in lieu of criminal prosecution of several organization officials and employees. Is Conflict of Interest a Crime? In the U.S., conflict of interest usually is not itself a crime unless the individual with the conflict is a government employee, or acts in collusion with a government employee. However, the conflicting interests of a director, officer or employee may result in fiscal or economic loss or loss of competitive advantage to the organization. Should this happen as the result of an intentional act of fraud or abuse, those involved could be prosecuted civilly or criminally for receiving a bribe, receiving a reward for official misconduct, receiving unlawful gratuities, coercive use of official position, or official misconduct. Under U.S. Federal laws and regulations, organizations doing business with the federal government or who act as custodians or conduits of federal funds have an obligation and responsibility to manage, reduce or eliminate actual and potential conflicts of interest. Under civil law, directors, officers and employees owe a duty and loyalty to the organization and are expected to act at all times in the organization's best interest. However, when conflicting interests arise, the potential arises for directors, officers or employees to breach the duty and loyalty they owe. A convergence of interests at times may be favorable to the interests of the organization, as long as they are disclosed and understood in the organization's decision-making process. However, when dual loyalties or interests exist, the possibility always exists that in carrying out official duties, individuals may act not in the best interest of the organization, but rather in self-interest or in the interest of others. This inherent risk of conflicting interests can result in favoritism toward, or unfair competitive advantage gained by, companies providing goods and services; and/or theft of services, material or equipment; and/or private gain to directors, officers or employees. When such events occur to the fiscal, economic or competitive disadvantage of the organization, the shadow of bribery, kickbacks, fraud and corruption arises. IN the U.S. these are felony crimes prosecutable under state laws as well as under Federal law. Neither professed ignorance of the law, professed innocence, or professed lack of intent to violate the law, can preclude the possibility of civil or criminal arrest and prosecution. To protect the credibility and reputation of the organization's directors, officers and employees, it is important to avoid situations that produce a file://C:\WINDOWS\DESKTOP\Conflict%20of%20Interest%20Websites%20and%20Fil... 16/01/2004 Conflict of Interest - Mark R Simmons Page 4 of 8 conflict, or even the appearance of a conflict, with official duties performed on behalf of the organization What Are Some Common Examples of Conflict of Interest? The following are some common examples of conflicting interests that should be voluntarily and fully disclosed to the appropriate organization officials. Remember that these are indicators of potential problems, not proof of improper acts. Administrative Decisions/Funding: l As an officer or director of an outside entity, an officer of the organization engages in a decision affecting revenues to the organization that employs him/her. l An officer or employee takes administrative action within the organization which is beneficial to a business in which he/she has a financial interest. Procurements: l An officer or employee hires a consultant who is a relative without prior approval by the organization. l An officer or employee sole sources a purchase to a company owned by his/her brother/sister, or to one in which he/she has a financial interest or policy determining position, without prior approval of the organization of he/she is an member. l A director, officer or employee engages in a decision at the organization affecting a contract between the organization and a company for which the individual serves as an outside director.