It gives an impression of false practice in science beside many others that we all must be aware of. What steps scientific community is taking to avoid it and punish the authors & reviewers who do like this. I hope for a particular topic/subject there must many reviewers outside the host University/ Department/ institution. It seems just like a business for money by publishers and job promotions for authors rather than developing science.
I believe that most papers for peer review from established journals do not go to individuals from the same University or Department who have submitted the paper and this causes a potential conflict of interest. In the event the reviewer is aware of the identity of the author of the paper and has a potential conflict of interest with the author/group, it is the ethical responsibility of the reviewer to disclose this to the concerned editor.
Many so-called "open access" journals do not follow a stringent peer-review and in those cases, the situation you describe is possible. From my experience, I do not think well established and respected journals send papers to the same institution or department for review.
But it is happening with many of the so-called "open access" and peer-review journals so the conflict of interest seems to be there.
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