When might conflict of interest become a crime?

An assistant manager of a manufacturer was found guilty of defrauding his employer by awarding purchase orders for office supplies and machinery parts to a company set up by him at inflated prices and not disclosing his ownership of the company.

An assistant manager of a public organization was found guilty of misconduct in public office for assisting a tenderer owned by his counsin to deceive the public organization in the tendering process for a multi-million-dollar contract.

A maketing executive of a trading company was convicted of fraud for diverting payments by the company for purchases to a company owned by his father and wife where they kept 10% of the payment before paying the real supplier.

The financial controller of a listed company suggested the company to engage accounting services in a project, and then set up an accounting firm and awarded various services his acounting firm without disclosing his ownership of the firm to the listed company. The company affirmed that it would not have engaged the firm. He was convicted of fraud.

The list can go on and on.

Conflict of interest is a frequent occurence in organizations, commercial or public alike. In general, having a conflict of interest, or failure to disclose conflict of interest (except making a false declaration of no conflict), is not a staturoy offence by itself. However, an employee or agent having a conflict of interest in a business process/transaction may often be tempted to misuse his position to derive gain for himself or his associates (such as causing the company to award a contract to a supplier owned by himself or his relative), coupled with intentional non-disclosure - It is these dishonest acts that he performs that could amount to fraud.

From the above cases of fraud involving conflict of interest, it can be observed that the acts normally comprise two elements: non-disclosure (i.e., covering up) of the relationship (i.e., existence of conflict of interest) when declaration of conflict of interest is expected or required, and acts to secure benefits for the employee/agent or his associate in a manner that is dishonest, unfair, improper, manipulative, or involving a breach of trust. Mere non-disclosure without some abuse of position may not end up in a fraud case, except making a false declaration of no conflict. For example, in the case of conflict of interest of a senior government official in the late 1990s, where he had dealt with cases submitted by his spouse’s company and failed to declare the relationship, did not end up in prosecution but only termination of service, after it was confirmed that there was no favourable treatment of those cases by him and there was no strong evidence he avoided disclosure on purpose.

However, what amounts to conflict of interest is not clear-cut. Questions were always asked: how about a bidder’s manager is my relative, former colleague, fellow committee member in a professional body? or a job applicant is my former classmate whom I only see once a year in homecoming? To make it clearer, some companies provide a narrow definition of conflict of interest which staff are required to avoid or declare, e.g., having financial interest in a supplier. If the company provides such a narrow scope of conflict of interest, an employee awarding a contract to an associate’s company in which he himself has no financial interest could argue that he did not know it amounted to conflict of interest and was not allowed by the company.

To better address the risk of conflict of interest, it is recommended that organizations (1) lay down an explicit requirement on the avoidance and declaration of conflict of interest, (2) avoid a narrow definition of conflict of interest, (3) give examples on what are regarded as conflict of interest relevant to the company’s business context and the employees’ duties, stating that these are not exhaustive, (4) advise employees to consult supervisor/manager or an Ethics Officer if unsure, (5) specify the responsibility of, and provide guidance, to supervisors how to properly handle conflict of interest of subordinates, (6) require disclosure and management decision be in writing, (7) provide adequate integrity training to all personnel, (8) have in place a whistle-blowing mechanism and require employees to report breaches of the Code.

For further practical advice and training, feel free to contact us.

(Note: the above do not amount to legal opinion or legal advice, but are observations and advice from a fraud risk management perspective.)