Conflict Of Interest: Should You Be Worried?
This article examines the conflict of interest law in Pakistan relating to public and private bodies.
Conflict of interest or even a perception of it can be fatal to relationships, especially an employer-employee relationship. Therefore, it is very important to understand firstly what the concept entails and secondly the boundaries after which conflict of interest arises and what sort of liability one can incur.
What is a conflict of interest?
“Conflict of interest” is a wide term whose definition varies across contexts. However as a starting point according to Black’s Law Conflict of interest is a “real or seeming incompatibility between one’s private interests and one’s Fiduciary duties. The conflict of interest can also be between two of a Lawyer’s clients. (Blacks Law Dictionary, 8th Edition)
This refers to a situation in which a person has a duty to more than one person or organization, but cannot do justice to the actual or potentially adverse interests of both parties. This includes when an individual’s personal interests or concerns are inconsistent with what is best for a customer, or when a public official’s personal interests are contrary to their loyalty to public business.
In Pakistan, the laws relating to conflict of interest are not consolidated. Several statutes are in the pipeline at the federal and provincial level. The most notable of these are below.
The Punjab Prevention of Conflict Act 2019 established principles of conflict of interest for public office holders and related post-employment matters with the aim of preventing and minimizing the possibility of conflicts arising between parties comprising of private interest holders and public duties of public officeholders.
It defines a conflict of interest in Section 2 (e) as:
“conflict of interest means any interest of a personal nature of a public office holder in a decision pertaining to an official matter which leads to an unlawful financial benefit or an avoidance of liability to the public office holder or his family”
This act provided a mechanism for resolution of those conflicts in the public interest should they arise. This was partly done by establishing an independent commission with the mandate to determine the measures necessary to avoid conflict of interest; and thus to determine whether a contravention of the Act has occurred.
It provided a reporting procedure to report violations and in case a violation was found, there were penalties which ranged from a public declaration that the person complained against has a conflict of interest, all the way to losing the competence to contract in that matter altogether. Monetary penalties could also be imposed.
Having an environment free of conflicts of interest would encourage experienced and competent persons to seek and accept public office and it will facilitate interchange between the private and public sector.
Furthermore, there are other Bills such as The Prevention and Management of Conflict of Interest Bill 2017 at the federal level dealing also with public bodies, which have the distinction that unlike the Punjab Prevention of Conflict Act which recognizes that law should not deny equal opportunities to relatives of the public office holder (as relatives cannot be barred from legal business activities, and, for matters connected therewith and ancillary thereto), the Federal Bill instead is more stringent and stipulates in explanation of Section 3(1) that “A conflict of interest may exist even if no unethical, improper or illegal act results from it.”
In the 2013 C L D 2232 SECP vs BMA CAPITAL MANAGEMENT LIMITED, TREC HOLDER/BROKER OF KARACHI STOCK EXCHANGE LIMITED, it was held that the primary duty of a broker/company was to act as an agent for parties who wished to buy or sell shares and not enter into transactions where a conflict of interest would arise between the broker and its clients:
Thus according to case law, it is the duty of a broker or a company to act in good faith and not enter into transactions where there is a conflict of interest.
Private bodies and Corporate Governance
With regards to private bodies, the possibility of a conflict of interest in the background of financial institutions is considered. The starting point for these is firstly the State Bank of Pakistan guidelines on prohibiting conflict of interest on part of the institution itself.
The State Bank of Pakistan Guidelines on Prohibited Banking Conduct Provision 5, dealing with Complacency, holds that banks will be considered complacent if they are found less interested in taking necessary actions to ensure responsible banking conduct. Such actions may require investing or reengineering systems and procedures, developing products, managing human resources, engaging with customers, etc.
Following is an example of complacency on the part of the banks:
(f) Existence of conflicting reporting lines despite the apparent conflict of interest or high probability of biased or partial decision-making.
And so, this circular shows that if banks exercise conflict of interest and report conflicting financial data they could attract penalties/action taken against them.
Then there is the issue of conflict of interest within a financial institution concerning its directors. This issue within Financial institutions is dealt with by having the presence of a code of conduct and ethical standards for directors. Thus, they perform their fiduciary duties in a way where conflict of interest does not arise between their personal interests and their fiduciary duties.
The exact contents of the code vary from institution to institution but after examining the code of conduct of leading banks of Pakistan these their salient features:
1.) Directors must ensure that they identify and avoid any situation of conflict whether actual or apparent with the interest of the Bank, regardless of whether the situation involves the director directly or a member of their immediate family.
2.) They shall not acquire or attempt to acquire any undue gain or benefit either to themselves or to their relatives, partners, or associates and if any director is found guilty of such gains, they shall be liable to pay to the bank an amount equal to that gain.
3.) Further, every director, including their spouse and minor children, who is in any form, whether directly or indirectly, concerned with or interested in any contract or arrangement entered into, or to be entered into, by or by the bank shall disclose the nature of their concern or interest at a meeting of the directors and abstain from discussion, voting or otherwise influencing a decision on any matter related to such a contract and/or arrangement.
4.) If any director has a conflict of interest, the other directors shall ensure that the quorum of the meeting of the Board shall not be deemed fulfilled unless at least two independent directors are also there and present at any such meeting in person or through other means (such as video link) when such a matter of interest comes up for the first time for the consideration of the Board.
Conflict of interest of employees and financial intuition
There needs to be a code of conduct for employees regarding this matter, which is often found in leading financial institutions. The salient features of most such codes are:
1.) An undertaking to avoid all such circumstances where there is a personal conflict of interest or an apparent one with the interest of the financial institution or its customers.
2.) In case of potential conflict of interest, the employee would be required to declare it immediately to senior management and will take steps to resolve and manage the matter in an open manner and will not try to resolve a conflict of interest on their own.
Conflict of interest is a reality which many are afraid to tackle. However, given the potential for its impact on business and society, it is high time that the guidelines laid out above for managing conflict of interest are followed so that an efficient and fair environment promoting prosperity and transparency is present.
The writer received an LLM from Queen Mary University of London in International Business Law and an Advocate at the High Court working for various government bodies and foreign commercial clients.