Bulgaria: Against All Odds - The Conflict Of Interest Prevention And Disclosure Act Meets Real Estate

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

In November 2008 Bulgaria lost EUR 220 mln in EU funds as the European Commission deemed the former Bulgarian government incapable of fighting corruption.

Being almost unprecedented, this sanction was rumoured to have been the main cause of the dramatic loss of the parliamentary elections in July 2009 by the governing party. The European Commission has made it clear that Bulgaria may yet lose even more EU funds in 2009 unless corruption is tackled. With hundreds of millions of Euros in EU funds at stake for 2009 and a new government in office, Bulgaria is starting to improve its image, including through active measures under the recently adopted Conflict of Interest Prevention and Disclosure Act (CIPDA).

How to discourage an investor

With regard to real estate development, corruption within local authorities can be particularly problematic since most procedures require approval at the local level.

The new cadastre map, for example, is intended to provide reliable access to data regarding real estate in Bulgaria. Within the process of its adoption, however, the loopholes in the law are such that the right to object to the draft cadastre map can be misused to challenge ascertained property borders, especially with regard to real estate of big investors. Every objection is directed straight to administrative courts and is to be decided by one judge only. This legal option, initially intended to ensure correct data in the cadastre map, eventually has created a risk that ownership may be wilfully challenged.

Recently, a big international client was forced to put on hold a ca. EUR 20 mln property development in a small town as a result of such a wilful claim filed by a neighbour. The neighbour is a local company whose manager is a member of the local municipal council and is chairing a key municipal commission responsible for approval of real estate development investments. As the new cadastre map was to be approved, the neighbour objected, claiming half of the property of the client. The claim was based on outdated drawing and was completely unfounded. Nevertheless, it was directed to the local court for review. The manager of the neighbour then took advantage of her position in the municipal council and ensured that the zoning procedure for the project was put on hold until the court proceedings were completed.

This is a classic example of a violation of conflict of interest rules under a law recently adopted as part of the measures to tackle corruption – CIPDA. It took several years until it was finally adopted in the midst of heated discussions and incessant criticisms about corruption by the EU. Now, CIPDA is expected to improve the business environment through a set of strict anti-corruption measures.

CIPDA – Prerequisites and practical issues

Almost every public servant is liable under the law. There has been particularly heated debate on the issue of whether members of municipal councils should be liable or not. Since this is deemed a position of honour, some argue that, as council members usually have another income- generating occupation, it is inevitable that there will be conflicts of interest. Still, the municipal councils are particularly sensitive to undue influence since the major business investments, especially in property development, require a decision of the municipal council (as discussed above).

Filing a complaint under CIPDA for a conflict of interest is free of specific requirements. Anyone may file a complaint where there is suspicion of a conflict of interest. It is not necessary to show substantial evidence or personal damages suffered. The complaint is investigated by a special committee according to the position of the public servant, meaning the member of the municipal council will be summoned for questioning at the municipal CIPDA committee.

The investigation is to be completed within two months of its filing, at which time the committee summarises its findings in a report with a conclusion on the alleged violation of CIPDA. Based on the report the committee issues a decision whether there is a conflict of interest and, if this is the case, imposes sanctions on the public servant. For certain categories of public servants (e.g. members of the municipal councils), the findings of the committee are to be confirmed by the administrative court in summary proceedings.

CIPDA envisages grave sanctions for violations, ranging from an administrative fee, to an order to disgorge the profits acquired as a result of the violation, to criminal liability for failure to submit a declaration. Furthermore, a violation established in due order is grounds for dismissal from public service.

CIPDA is thus well equipped to fight corruption. And there are some indications that it has achieved a preventative effect already. Within the context of the abovementioned investment, the option of filing a complaint under CIPDA has been discussed as a potential solution of the problem since, as of recently, the local authorities seem determined to ensure that corrupt practices are no longer tolerated.

Successful against the odds

The corruption issue has been particularly acute in the field of EU funds for farming, administered by the Bulgarian Paying Agency. As a result of massive mismanagement of the funds (e.g. allocation to companies close to public servants approving the projects), the financing has been put on hold, forcing hundreds of farmers to wait indefinitely for their subsidies.

One of these farmers, who complied with numerous requirements only to find that they might not receive any subsidies, is a German investor and client. He has established a successful biology farming business in an underprivileged area of Bulgaria and is an exemplary beneficiary for agriculture subsidies under an EU program for the development of rural areas. Initially, his subsidies for 2008 were put on hold. However, as the effects of CIPDA began to spread, through active communication with the Paying Agency we have managed to get the subsidies partly repaid. It is yet to be seen whether CIPDA will fulfil the great expectations placed in it but, at least for now, the future seems promising.

The Conflict of Interest Prevention and Disclosure Act is well equipped to fight corruption. And there are some indications that it has achieved a preventative effect already.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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