What is a Conflict of Interest? Give Me Some Examples

Image by Melissa Lin. © The Balance 2018

 

A conflict of interest is a situation in which an individual has competing interests or loyalties because of their duties to more than one person or organization. A person with a conflict of interest can't do justice to the actual or potentially conflicting interests of both parties.

Conflicts of interest involve a person who has two relationships that might compete with each other for the person's loyalties. For example, the person might have a loyalty to an employer and also loyalty to a family business. Each of these businesses expects the person to have its best interest first. Thus, the conflict.

A conflict of interest can exist in many different situations, involving personal loyalty and loyalty to a private employer, a government employer, or a professional relationship. The easiest way to explain the concept of conflict of interest is by using some examples:

  • A public official whose personal interests conflict with their expected loyalty to the organization.
  • A person who has a position of authority in one business that conflicts with his or her interests in another business or organization.
  • An attorney who attempts to represent both parties in a divorce. 

Conflict of Interest Examples

Several common activities that can create a conflict of interest are nepotism, self-dealing, and excess compensation.

Nepotism is the practice of giving favors to relatives and close friends, in matters of hiring, promotion, transfer, or termination. The term comes from the word for "nephew," it was common practice in ancient times. Nepotism is considered a conflict of interest because the relative may not be the best person for the job.

Self-dealing is an action taken by a corporate fiduciary (someone who has a fiduciary duty) for that person's personal gain, rather than for the benefit of the company. Examples including using corporation funds as a personal loan, or buying company stock based on insider information (also an insider trading violation), 

Excess compensation. In a non-profit organization, setting compensation or benefits for officers, directors or trustees may result in a conflict of interest. For example, paying an employee in a position or substantial authority excessive compensation serves a private interest.

Other Actions That Can be Conflicts of Interest

Here are some other examples of conflict of interest:

Asking for and taking bribes (giving something with the intent to influence)

Asking for or accepting gifts because of an official position in a government organization (some businesses also have policies against taking gifts from customers)

Misuse of an official position to get something not entitled to that would not be properly available to other individuals in your situation, like doing personal business on company time or avoiding a speeding ticket by showing a government ID.

Asking someone else to do something that's not available to others in your position, like asking an assistant to run personal errands.

Presenting a false claim to an employer for a payment or benefit, like filing a false timesheet for time not worked.

Improperly disclosing or personally using confidential information gained through the job

Taking a second job that conflicts with duties with the primary job. Just taking a second job isn't necessarily a conflict of interest. But if an employee in the accounting department had a second job with an accounting firm that did work for the employer, that could be a conflict. 

Avoid What Looks Like a Conflict of Interest

Even the appearance of a conflict can be prohibited. A public employee, for example, who acts in a manner that would make a reasonable person think they can be influenced could be charged with conflict of interest. 

Want to avoid possible charges of conflict of interest? Making a public disclosure of the facts and of potential conflicts or recusing (removing) yourself from a decision can show your understanding of policy or law.

Is Conflict of Interest a Crime? 

Like other types of illegal or unethical activities, conflict of interest activities carry the risk of consequences. In the federal government, conflict of interest laws carry the possibility of criminal prosecution.  State conflict of interest laws for state and municipal employees include criminal prosecution as an option .

Conflict of Interest - Government Employees

Federal and state laws have been set up to criminalize conflicts of interest in the public sector (government entities). In certain circumstances, conflict of interest can result in prosecution.

The federal government has a criminal conflict of interest statute (18 U.S.C.§ 208) that prohibits government employees from participating personally and substantially in official matters where they have a financial interest. The spouse, minor child, general partner, and certain others are also included in this prohibition. Potential conflicts of interest can arise from several sources:

  • Assets and investments
  • Liabilities
  • Private investment funds
  • Business or farm ownership
  • Corporate employment
  • A law firm or consulting employment
  • Employment with institutions of higher education, and related research, speaking and writing activities.

Penalties are fines of up to $10,000, prison for up to two years, or both. 

Each state also addresses potential conflicts of interest for legislators and government employees, by various laws, rules, or constitutional provisions. State definitions of conflict of interest usually specify that a legislator not have personal or private financial interests that conflict with their legislative duties. 

As an example, Iowa's conflict of interest includes in conflict of interest

"an activity that involves the use of the state's or the political divisions' time, facilities, equipment, and supplies ... to give the person or member of the person's immediate family an advantage or pecuniary [monetary] benefit that is not available to others."

Cities and municipalities address conflict of interest too. Massachusetts, for example, has a conflict of interest law for municipal employees. 

Conflict of Interest After Employment

Even after someone leaves a position, conflict of interest can take place. Many government and private entities have specific restrictions against this kind of conflict. For example, former federal employees in the executive branch are restricted from appearing before the federal government on behalf of other people or organizations. This includes "switching sides" restrictions after leaving the government and being hired by a company for which the official had a role in government. 

In common with other government and private entities, the Massachusetts conflict of interest legislation bans the person from working for anyone other than the government entity on a matter that they worked for the entity doing. These after-employment restrictions may also involve business partners and immediate family.

Conflicts of Interest in the Workplace

Here are some workplace situations in which conflicts of interest in the workplace occur:

  • An employee may work for one company but he or she may have a side business that competes with the employer. In this case, the employee would likely be asked to resign or be fired. 
  • A common workplace conflict of interest involves a manager and an employee who are married or dating and have a relationship. This is a conflict because the manager has the power to give raises or promotions to the employee. Discussions about the company between the two people may also breach confidentiality restrictions. 
  • An employee who has a friendship with a supplier and allows that supplier to go around the bidding process or gives the supplier the bid has a conflict of interst.
  • A former employee may take his former company's customer list and directly compete. Non-compete agreements are often required of executives and business owners for this reason.

Many organizations have policies and procedures that don't allow a conflict of interest, to avoid a potential problem before it occurs. For example, in the situation above, many businesses have policies against hiring relatives in certain situations.

Conflicts of Interest by Boards of Directors

Members of a corporate board of directors sign conflict of interest policy statements. If a board member has a conflict of interest, he could be removed from the board and possibly sued. For example, if a board member has a sexual relationship with an employee, or if he is taking business away from the company and giving it to others. 

A common conflict occurs when a board member hears of a potential deal that might affect the selling price of company stock (up or down). The board member's attempt to profit from this knowledge is called insider trading; it's illegal as well as being a conflict of interest. 

Non-profit boards are particularly held up to public scrutiny and the IRS monitors charities for this reason. For example, setting benefits or compensation for officers, directors, or trustees can become a conflict of interest. A charity can lose its tax-exempt status if unless it operates in a manner consistent with its charitable purposes. 

Conflicts of Interest in the Professions

Attorneys are bound by the Code of Professional Responsibility of the American Bar Association. One common example of conflict of interest by an attorney is if the attorney tries to represent both parties in a case (like a divorce). Attorneys must take care to check for potential conflicts before accepting a client. Some lawyers and law firms use software to monitor potential conflicts of interest. 

Journalists and reporters can get into ethical trouble by publicly endorsing a political client or cause or taking positions on political or social issues. Other potential conflicts are reporting on close friends or family, receiving free copies of books, films, and games to review. Journalists must declare conflicts of interest in order to maintain their trust with audiences. 

Get the help of an attorney to write a conflict of interest policy for your organization. Set up policies and procedures for all possible types of conflicts, from board policies on down. Then enforce these policies in all situations.

Article Sources

  1. Law.com. "Conflict of Interest." Accessed Dec. 21, 2019.

  2. Lawsider. "Nepotism." Accessed Dec. 20, 2019.

  3. Legal Information Institute. "Self-dealing." Accessed Dec. 20, 2019.

  4. IRS. "Form 1023: Purpose of Conflict of Interest Policy." Accessed Dec. 21, 2019.

  5. Legal Information Institute. "18 U.S. Code § 201. Bribery of public officials and witnesses." Accessed Dec. 21, 2019.

  6. Mass.gov. "Summary of the Conflict of Interest Law for Municipal Employees." Accessed Dec. 20, 2019.

  7. U.S. "Office of Government Ethics. "Analyzing Potential Conflicts of Interest.

  8. National Conference of State Legislators. "Conflict of Interest Definitions." Accessed Dec. 20, 2019.

  9. "Iowa Code 68B Sec. 2A." Accessed Dec. 21, 2019.

  10. U.S. Office of Government Ethics. "Criminal Conflict of Interest Laws." Restrictions on Former Employees. Page 26. Accessed Dec. 21, 2019.

  11. Investor.gov. "Insider Trading." Accessed Dec. 21, 2019.

  12. Legal Information Institute. "Conflict of Interest." Accessed Dec. 21, 2019.

  13. The Center for Ethics in Journalism. "Introduction to Conflict of Interest." Accessed Dec. 21, 2019.