Conflict of interest
Encyclopedia
A conflict of interest (COI) occurs when an individual
Individual
An individual is a person or any specific object or thing in a collection. Individuality is the state or quality of being an individual; a person separate from other persons and possessing his or her own needs, goals, and desires. Being self expressive...

 or organization
Organization
An organization is a social group which distributes tasks for a collective goal. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon - as we know `organ` - and it means a compartment for a particular job.There are a variety of legal types of...

 is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.

A conflict of interest can only exist if a person or testimony is entrusted with some impartiality; a modicum of trust is necessary to create it. The presence of a conflict of interest is independent from the execution of impropriety. Therefore, a conflict of interest can be discovered and voluntarily defused before any corruption
Corruption
Corruption usually refers to spiritual or moral impurity.Corruption may also refer to:* Corruption , an American crime film* Corruption , a British horror film...

 occurs.

Conflicts of interest related to the practice of law

Judicial disqualification, also referred to as recusal, refers to the act of abstaining from participation in an official action such as a legal proceeding due to a conflict of interest of the presiding court official
Judge
A judge is a person who presides over court proceedings, either alone or as part of a panel of judges. The powers, functions, method of appointment, discipline, and training of judges vary widely across different jurisdictions. The judge is supposed to conduct the trial impartially and in an open...

 or administrative officer. Applicable statutes or canons of ethics
Ethics
Ethics, also known as moral philosophy, is a branch of philosophy that addresses questions about morality—that is, concepts such as good and evil, right and wrong, virtue and vice, justice and crime, etc.Major branches of ethics include:...

 may provide standards for recusal in a given proceeding or matter. Providing that the judge or presiding officer must be free from disabling conflicts of interest makes the fairness of the proceedings less likely to be questioned.

In the legal profession
Practice of law
In its most general sense, the practice of law involves giving legal advice to clients, drafting legal documents for clients, and representing clients in legal negotiations and court proceedings such as lawsuits, and is applied to the professional services of a lawyer or attorney at law, barrister,...

, the duty of loyalty owed to a client prohibits an attorney (or a law firm
Law firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other...

) from representing any other party with interests adverse to those of a current client. The few exceptions to this rule require informed written consent from all affected clients. In some circumstances, a conflict of interest can never be waived by a client. In perhaps the most common example encountered by the general public, the same firm should not represent both parties in a divorce or child custody case.

A prohibited or undisclosed representation involving a conflict of interest can subject an attorney to disciplinary hearings, the denial or disgorgement of legal fees, or in some cases (such as the failure to make mandatory disclosure), criminal proceedings. In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, a law firm usually cannot represent a client if its interests conflict with those of another client, even if they have separate lawyers within the firm, unless (in some jurisdictions) the lawyer is segregated from the rest of the firm for the duration of the conflict. Law firms often employ software in conjunction with their case management and accounting systems in order to meet their duties to monitor their conflict of interest exposure and to assist in obtaining waivers.

According to the Nevada State Bar, an attorney may help a surviving general partner re-title partnership property in his individual name, help the survivor obtain letters of administration, and, as the attorney for the estate, collect his fees and costs from the estate for defending the survivor's individual interest in the re-titled property against a third party's claim that it was an estate asset.

Conflicts of interest generally (unrelated to the practice of law)

More generally, conflicts of interest can be defined as any situation in which an individual or corporation (either private or governmental) is in a position to exploit a professional or official capacity in some way for their personal or corporate benefit.

Depending upon the law or rules related to a particular organization, the existence of a conflict of interest may not, in and of itself, be evidence of wrongdoing. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. A conflict of interest can, however, become a legal matter for example when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit. A director or executive of a corporation will be subject to legal liability if a conflict of interest breaches his Duty of Loyalty
Duty of Loyalty
Duty of Loyalty is a term used in corporation law to describe a fiduciaries' "conflicts of interest and requires fiduciaries to put the corporation's interests ahead of their own." "Corporate fiduciaries breach their duty of loyalty when they divert corporate assets, opportunities, or information...

.

There often is confusion over these two situations. Someone accused of a conflict of interest may deny that a conflict exists because he/she did not act improperly. In fact, a conflict of interest can exist even if there are no improper acts as a result of it. (One way to understand this is to use the term "conflict of roles". A person with two roles—an individual who owns stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 and is also a government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

 official, for example—may experience situations where those two roles conflict. The conflict can be mitigated—see below—but it still exists. In and of itself, having two roles is not illegal, but the differing roles will certainly provide an incentive for improper acts in some circumstances.)

As an example, in the sphere of business and control, according to the Institute of Internal Auditors
Institute of Internal Auditors
Established in 1941, The Institute of Internal Auditors is a guidance-setting body. Serving members in 165 countries, The IIA is the internal audit profession's global voice, chief advocate, recognized authority, and principal educator, with global headquarters in Altamonte Springs, Fla., United...

:

Organizational conflict of interest

An organizational conflict of interest (OCI) may exist in the same way as described above, in the realm of the private sector providing services to the Government, where a corporation provides two types of services to the Government that have conflicting interest or appear objectionable (i.e.: manufacturing parts and then participating on a selection committee comparing parts manufacturers). Corporations may develop simple or complex systems to mitigate the risk or perceived risk of a conflict of interest. These risks are typically evaluated by a governmental office (for example, in a US Government RFP) to determine whether the risks pose a substantial advantage to the private organization over the competition or will decrease the overall competitiveness in the bidding process.

Relationship to medical research

The influence of the pharmaceutical industry on medical research has been a major cause for concern. In 2009 a study found that "a number of academic institutions" do not have clear guidelines for relationships between Institutional Review Boards and industry.

Types of conflicts of interests

The following are the most common forms of conflicts of interests:
  • Self-dealing
    Self-dealing
    Self-dealing is the conduct of a trustee, an attorney, a corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting for his own interests rather than for the interests of the beneficiaries of the trust, corporate shareholders, or his clients...

    , in which an official who controls an organization causes it to enter into a transaction with the official, or with another organization that benefits the official. The official is on both sides of the "deal."
  • Outside employment, in which the interests of one job contradict another.
  • Family interests, in which a spouse, child, or other close relative is employed (or applies for employment) or where goods or services are purchased from such a relative or a firm controlled by a relative. For this reason, many employment applications ask if one is related to a current employee. If this is the case, the relative could then recuse from any hiring decisions. Abuse of this type of conflict of interest is called nepotism
    Nepotism
    Nepotism is favoritism granted to relatives regardless of merit. The word nepotism is from the Latin word nepos, nepotis , from which modern Romanian nepot and Italian nipote, "nephew" or "grandchild" are also descended....

    .
  • Gifts from friends who also do business with the person receiving the gifts. (Such gifts may include non-tangible things of value such as transport
    Transport
    Transport or transportation is the movement of people, cattle, animals and goods from one location to another. Modes of transport include air, rail, road, water, cable, pipeline, and space. The field can be divided into infrastructure, vehicles, and operations...

    ation and lodging
    Lodging
    Lodging is a type of residential accommodation. People who travel and stay away from home for more than a day need lodging for sleep, rest, safety, shelter from cold temperatures or rain, storage of luggage and access to common household functions.Lodgings may be self catering in which case no...

    .)
  • Pump and dump, in which a stock broker who owns a security artificially inflates the price by "upgrading" it or spreading rumors, sells the security and adds short position, then "downgrades" the security or spreads negative rumors to push the price down.


Other improper acts that are sometimes classified as conflicts of interests are probably better classified elsewhere. Accepting bribes can be classified as corruption; almost everyone in a position of authority, particularly public authority, has the potential for such wrongdoing. Similarly, use of government or corporate property or assets for personal use is fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...

, and classifying this as a conflict of interest does not improve the analysis of this problem. Nor should unauthorized distribution of confidential information, in itself, be considered a conflict of interest. For these improper acts, there is no inherent conflict of roles (see above), unless being a (fallible) human being rather than (say) a robot
Robot
A robot is a mechanical or virtual intelligent agent that can perform tasks automatically or with guidance, typically by remote control. In practice a robot is usually an electro-mechanical machine that is guided by computer and electronic programming. Robots can be autonomous, semi-autonomous or...

 in a position of power or authority is considered to be a conflict.

COI is sometimes termed competition of interest rather than "conflict", emphasizing a connotation
Connotation
A connotation is a commonly understood subjective cultural or emotional association that some word or phrase carries, in addition to the word's or phrase's explicit or literal meaning, which is its denotation....

 of natural competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...

 between valid interests rather than violent conflict with its connotation of victimhood and unfair aggression. Nevertheless, denotatively
Denotation
This word has distinct meanings in other fields: see denotation . For the opposite of Denotation see Connotation.*In logic, linguistics and semiotics, the denotation of a word or phrase is a part of its meaning; however, the part referred to varies by context:** In grammar and literary theory, the...

, there is too much overlap between the terms to make any objective differentiation.

Examples

  • Self-policing
    Self-policing
    Self-policing, a form of self-regulation, is the process whereby an organization is asked, or volunteers, to monitor its own adherence to legal, ethical, or safety standards, rather than have an outside, independent agency such as a governmental entity monitor and enforce those standards.-To the...

     of any group is also a conflict of interest. If any organization, such as a corporation or government bureaucracy, is asked to eliminate unethical behavior within their own group, it may be in their interest in the short run to eliminate the appearance of unethical behavior, rather than the behavior itself, by keeping any ethical breaches hidden, instead of exposing and correcting them. An exception occurs when the ethical breach is already known by the public. In that case, it could be in the group's interest to end the ethical problem to which the public has knowledge, but keep remaining breaches hidden.
  • Insurance companies retain claims adjuster
    Claims adjuster
    Claims adjusters investigate insurance claims by interviewing the claimant and witnesses, consulting police and hospital records, and inspecting property damage to determine the extent of the company’s liability. In the United Kingdom, Ireland, Australia, South Africa, the Caribbean and New Zealand...

    s to represent their interest in adjusting claims. It is in the best interest of the insurance companies that the very smallest settlement is reached with its claimants. Based on the adjuster's experience and knowledge of the insurance policy it is very easy for the adjuster to convince an unknowing claimant to settle for less than what they may otherwise be entitled which could be a larger settlement. There is always a very good chance of a conflict of interest to exist when one adjuster tries to represent both sides of a financial transaction such as an insurance claim. This problem is exacerbated when the claimant is told, or believes, the insurance company's claims adjuster
    Claims adjuster
    Claims adjusters investigate insurance claims by interviewing the claimant and witnesses, consulting police and hospital records, and inspecting property damage to determine the extent of the company’s liability. In the United Kingdom, Ireland, Australia, South Africa, the Caribbean and New Zealand...

     is fair and impartial enough to satisfy both theirs and the insurance company's interests. These types of conflicts could be easily be avoided by the use of disclosures.
  • A person working as the equipment purchaser for a company may get a bonus proportionate to the amount he's under budget by year end. However, this becomes an incentive for him to purchase inexpensive, substandard equipment. Therefore, this is counter to the interests of those in his company who must actually use the equipment.
  • Representatives, in general, have different interests than their constituents. Thus, accepting bribes to vote a certain way is in their interest (assuming they don't get caught), while not in their constituents' interest. These actions are sometimes illegal, but often not, as in the case of a politician accepting large amounts of money for a political campaign, and in return, granting the contributor access to political leaders. This is often cited as an argument for direct democracy
    Direct democracy
    Direct democracy is a form of government in which people vote on policy initiatives directly, as opposed to a representative democracy in which people vote for representatives who then vote on policy initiatives. Direct democracy is classically termed "pure democracy"...

     (the replacement of representatives' votes with referenda).
  • Revolving door (politics)
    Revolving door (politics)
    The revolving door is the movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation and on within lobbying companies. In some cases the roles are performed in sequence but in certain circumstances may be performed at the same time...

    , government workers or elected officials quitting public service to work for the companies they used to regulate. Regulators are accused of using inside information for their new employers, or compromising laws and regulations in hopes of securing employment in the private sector.

Removal

The best way to handle conflicts of interests is to avoid them entirely. For example, someone elected to political office might sell all corporate stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

s that they own before taking office, and resign from all corporate boards. Or that person could move their corporate stocks to a special trust, which would be authorized to buy and sell without disclosure to the owner. (This is referred to as a "blind trust
Blind trust
A blind trust is a trust in which the fiduciaries, namely the trustees or those who have been given power of attorney, have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust and no right to intervene in their handling...

".) With such a trust, since the politician does not know in which companies they have investments, there should be no temptation
Temptation
A temptation is an act that looks appealing to an individual. It is usually used to describe acts with negative connotations and as such, tends to lead a person to regret such actions, for various reasons: legal, social, psychological , health, economic, etc...

 to act to their advantage.

Disclosure

Commonly, politicians and high-ranking government officials are required to disclose financial information - assets such as stock, debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

s such as loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

s, and/or corporate positions held, typically annually. To protect privacy (to some extent), financial figures are often disclosed in ranges such as "$100,000 to $500,000" and "over $2,000,000".

Certain professionals are required either by rules related to their professional organization, or by statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...

, to disclose any actual or potential conflicts of interest. In some instances, the failure to provide full disclosure is a crime.

Recusal

Those with a conflict of interest are expected to recuse themselves from (i.e., abstain from) decisions where such a conflict exists. The imperative for recusal varies depending upon the circumstance and profession, either as common sense ethics, codified ethics, or by statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...

. For example, if the governing board of a government agency is considering hiring a consulting firm for some task, and one firm being considered has, as a partner, a close relative of one of the board's members, then that board member should not vote on which firm is to be selected. In fact, to minimize any conflict, the board member should not participate in any way in the decision, including discussions.

Judge
Judge
A judge is a person who presides over court proceedings, either alone or as part of a panel of judges. The powers, functions, method of appointment, discipline, and training of judges vary widely across different jurisdictions. The judge is supposed to conduct the trial impartially and in an open...

s are supposed to recuse themselves from cases when personal conflicts of interest may arise. For example, if a judge has participated in a case previously in some other judicial role he/she is not allowed to try that case. Recusal is also expected when one of the lawyers in a case might be a close personal friend, or when the outcome of the case might affect the judge directly, such as whether a car maker is obliged to recall a model that a judge drives. This is required by law under Continental civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...

 systems and by the Rome Statute, organic law of the International Criminal Court
International Criminal Court
The International Criminal Court is a permanent tribunal to prosecute individuals for genocide, crimes against humanity, war crimes, and the crime of aggression .It came into being on 1 July 2002—the date its founding treaty, the Rome Statute of the...

.

Third-party evaluations

Consider a situation where the owner of a majority of a publicly held corporation decides to buy out the minority shareholders and take the corporation private. What is a fair price? Obviously it is improper (and, typically, illegal) for the majority owner to simply state a price and then have the (majority-controlled) board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...

 approve that price. What is typically done is to hire an independent firm (a third party), well-qualified to evaluate such matters, to calculate a "fair price", which is then voted on by the minority shareholders.

Third-party evaluations may also be used as proof that transactions were, in fact, fair ("arm's-length"). For example, a corporation that leases an office building that is owned by the CEO might get an independent evaluation showing what the market rate is for such leases in the locale, to address the conflict of interest that exists between the fiduciary duty of the CEO (to the stockholders, by getting the lowest rent possible) and the personal interest of that CEO (to maximize the income that the CEO gets from owning that office building by getting the highest rent possible).

Codes of ethics

Generally, codes of ethics
Ethical code
An ethical code is adopted by an organization in an attempt to assist those in the organization called upon to make a decision understand the difference between 'right' and 'wrong' and to apply this understanding to their decision...

 forbid conflicts of interests. Often, however, the specifics can be controversial. Should therapist
Psychotherapy
Psychotherapy is a general term referring to any form of therapeutic interaction or treatment contracted between a trained professional and a client or patient; family, couple or group...

s, such as psychiatrist
Psychiatrist
A psychiatrist is a physician who specializes in the diagnosis and treatment of mental disorders. All psychiatrists are trained in diagnostic evaluation and in psychotherapy...

s, be allowed to have extra-professional relations with patients, or ex-patients? Should a faculty member be allowed to have an extra-professional relationship with a student, and should that depend on whether the student is in a class of, or being advised by, the faculty member?

Codes of ethics help to minimize problems with conflicts of interests because they can spell out the extent to which such conflicts should be avoided, and what the parties should do where such conflicts are permitted by a code of ethics (disclosure, recusal, etc.). Thus, professionals cannot claim that they were unaware that their improper behavior was unethical. As importantly, the threat of disciplinary action (for example, a lawyer
Lawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...

 being disbarred) helps to minimize unacceptable conflicts or improper acts when a conflict is unavoidable.

As codes of ethics cannot cover all situations, some governments have established an office of the ethics commissioner. Ethics commissioner should be appointed by the legislature
Legislature
A legislature is a kind of deliberative assembly with the power to pass, amend, and repeal laws. The law created by a legislature is called legislation or statutory law. In addition to enacting laws, legislatures usually have exclusive authority to raise or lower taxes and adopt the budget and...

 and should report to the legislature.

See also

  • Crony capitalism
    Crony capitalism
    Crony capitalism is a term describing a capitalist economy in which success in business depends on close relationships between business people and government officials...

  • Electoral fraud
    Electoral fraud
    Electoral fraud is illegal interference with the process of an election. Acts of fraud affect vote counts to bring about an election result, whether by increasing the vote share of the favored candidate, depressing the vote share of the rival candidates or both...

  • Fiduciary
  • Insider trading
    Insider trading
    Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...

  • Intra-household bargaining
    Intra-household bargaining
    Intra-household bargaining refers to negotiations that occur between members of a household in order to arrive at decisions regarding the household unit....

  • Judicial disqualification
  • Jury nullification
    Jury nullification
    Jury nullification occurs in a trial when a jury reaches a verdict contrary to the judge's instructions as to the law.A jury verdict contrary to the letter of the law pertains only to the particular case before it; however, if a pattern of acquittals develops in response to repeated attempts to...

  • Lobbying
    Lobbying
    Lobbying is the act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory agencies. Lobbying is done by various people or groups, from private-sector individuals or corporations, fellow legislators or government officials, or...

  • Medical ethics
    Medical ethics
    Medical ethics is a system of moral principles that apply values and judgments to the practice of medicine. As a scholarly discipline, medical ethics encompasses its practical application in clinical settings as well as work on its history, philosophy, theology, and sociology.-History:Historically,...

  • Money loop
  • Moral hazard
    Moral hazard
    In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...

  • Perverse incentive
    Perverse incentive
    A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.- Examples :...

  • Politics
    Politics
    Politics is a process by which groups of people make collective decisions. The term is generally applied to the art or science of running governmental or state affairs, including behavior within civil governments, but also applies to institutions, fields, and special interest groups such as the...

  • Recusal
    Recusal
    Judicial disqualification, also referred to as recusal, refers to the act of abstaining from participation in an official action such as a legal proceeding due to a conflict of interest of the presiding court official or administrative officer. Applicable statutes or canons of ethics may provide...

  • Revolving door (politics)
    Revolving door (politics)
    The revolving door is the movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation and on within lobbying companies. In some cases the roles are performed in sequence but in certain circumstances may be performed at the same time...

  • Tax resistance
    Tax resistance
    Tax resistance is the refusal to pay tax because of opposition to the government that is imposing the tax or to government policy.Tax resistance is a form of civil disobedience and direct action...

  • United States Office of Government Ethics
    United States Office of Government Ethics
    The United States Office of Government Ethics is a separate agency within the executive branch of the U.S. Federal Government which is responsible for directing executive branch policies relating to the prevention of conflicts of interest on the part of Federal executive branch officers and...

  • Silvio Berlusconi
    Silvio Berlusconi
    Silvio Berlusconi , also known as Il Cavaliere – from knighthood to the Order of Merit for Labour which he received in 1977 – is an Italian politician and businessman who served three terms as Prime Minister of Italy, from 1994 to 1995, 2001 to 2006, and 2008 to 2011. Berlusconi is also the...

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