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First of all, conflicts of interest come up routinely when paper reviews are performed. It is usually necessary to report any conflict of interest when reviewing a paper, or performing reviews of a grant. Often papers are used in support of a future proposal for a grant renewal, and so publication can be very political, especially between rival groups, and particularly when there are precious few experts to review the work.
Some people talk about “managing” a conflict of interest rather than eliminating it. That is, if you are doing research in a field that does not have many other people working in it, then reviewing a paper or proposal of a potential rival is almost unavoidable. The best we can hope for under those circumstances is disclosure of the conflict while making a good faith effort to provide an objective review.
So what should you do? You should discuss the issue with your advisor: is he aware, first of all, that he is in a position of conflict of interest? Without giving a lecture on ethics, try just opening up a general discussion with your advisor about how the peer review system works. If that discussion confirms an impression that the advisor is manipulating the system, then consult another senior colleague.
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