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Print articleConstruction Cartel Receives an Offer it Can't Refuse
April, 2007 - Charlotte Sjostedt
The Office of Fair Trading has written to a number of undisclosed companies in the construction industry, in relation to its ongoing investigation into a suspected multi-billion pound bid rigging cartel. It is offering the "late comers" a last chance to mitigate the potential fines which might be ascending upon them in the biggest cartel investigation in UK history.
Background
Last month saw a remarkable development in what appears to be the most extensive cartel investigations in the UK to date. Ever since the OFT announced in 2004 that markets in the construction industry were subjected to investigations, this sector has become somewhat of a running theme in the Competition e-bulletin. The watchdog has repeatedly pledged its intention to stamp out rogue business practices in the construction industry and the latest announcement reveals the true scale of the project.
In 2005 it was announced that dawn raids had been conducted on a number of company premises in the East Midlands. The companies involved were suspected of rigging bids in the buidling sector. Bid rigging is viewed as belonging to the category of the most serious of competition law infringements. It is classed as a so called "hardcore" infringement by the competition authorities.
Bid-rigging
Bid-rigging is the illegal practice by which companies who are supposed to be in competition with each other to win a piece of work, instead decide in secret to divide up the work between them. The result for the companies involved in the bid rigging is that they can offer higher prices than they would have, had they been subjected to normal market restrictions, as they know that their rivals will not be outbidding them.
While the purchaser thinks that it is getting the best deal by choosing the company which is offering the lowest price, it will be accepting a price which has been pre-agreed by the cartel.
Bid rigging can take the form of practices such as, for example, cover pricing and bid rotation. Bid rotation means that the competitors take turns in putting in the best offer, while cover bidding is the practice whereby certain companies put in bids which are designed to fail to win the work, e.g. due to the price offered or the conditions attached. All these tactics are intended to steer the buyer into having to "chose" the bid which has been pre-selected by the cartel.
The offer by the OFT
Almost 40 companies have already applied for leniency in the current investigation. The door is now officially closed for any more companies who were considering coming forward to apply for immunity in relation to the conduct under investigation. The OFT has announced that the quality of evidence uncovered to date is such that it cannot accept any more applicants under its policy.
However, in its offer the OFT is hoping to "fast-track" the investigation by encouraging other cartel members to come forward in return for a reduced penalty. While these "late comers" are no longer able to apply for leniency, the OFT are giving them a last chance to reduce potentially significant fines.
The offer on the table from the watchdog is a reduction of the financial penalty in exchange for co-operation in the form of admissions to participation in bid rigging and certain ancillary assurances. The reduction of fine will be less than that for the leniency applicants, but will nonetheless be of significant value to the companies in question. The benefit for the OFT is to significantly reduce the time it takes to complete the investigation.
The biggest ever cartel investigation in this county
The scale of the current investigation is of an unprecedented size and complexity for the OFT and will have presented it with challenges different to those it has encountered in the smaller investigations it has undertaken in the past. For an understanding as to the magnitude of the suspected arrangements currently investigated, it is worthy of note that dawn raids have been carried out on 57 companies. The evidence uncovered by the watchdog during this investigation confirms bid rigging in thousands of tenders, the combined estimated value of which is reaching £3 billion.
The complexity of the task has meant that the watchdog has needed to adapt more sophisticated methods of investigation. The OFT has had to use powers of investigation previously not employed, such as digital evidence gathering and forensic IT to discover electronic documents held on computers. Forensic analysis has been used in cases where it has appeared that attempts have been made to conceal evidence. Ex-employees have further been requested to give interviews.
Still scope for leniency for construction companies
In addition to the current "late comer" deal, it will be of importance to companies in the industry to know that it is still possible for them to receive lenient treatment, including full immunity from a fine, under the OFT's leniency regime, if they come forward with information in relation to cartels outside the geographic scope of the investigation (i.e. principally the East Midlands, Yorkshire, and Humberside) or in other product markets (i.e. beyond general building work, such as house construction and commercial and industrial construction, in both the public and private sector).
Leniency is thus still available to companies coming forward in relation to other construction related industries, such as civil engineering, highway maintenance, or other large infrastructure projects.
Damages claims
One factor which may deter companies from coming forward is the potential for damages claims. While leniency arrangements and the accompanying reduction of penalty will limit the effects of public enforcement, once a company is named as an addressee on an infringement decision, it is at increased risk of becoming the target of civil action damages claims. This reality might work against the current incentives now offered, fuelling companies' hesitation in coming forward.
Conclusion
This is the first development of its kind in a UK cartel investigation and as well as indicating the sheer scale of the enquiry underhand, the move demonstrates the watchdogs' willingness to explore alternative routs when undertaking its enforcement obligations and come at a time when the European Commission is finding its resource stretched in the cartel area.
The recent approach bears a resemblance to the approach taken by the Netherlands Competition Authority in a similar case in 2004 when, after having fined 22 companies, it decided to offer reduced penalties to any further companies coming forward in relation to a large investigation into bid rigging in the construction industry.
Maybe the two competition authorities have been exchanging notes?
Background
Last month saw a remarkable development in what appears to be the most extensive cartel investigations in the UK to date. Ever since the OFT announced in 2004 that markets in the construction industry were subjected to investigations, this sector has become somewhat of a running theme in the Competition e-bulletin. The watchdog has repeatedly pledged its intention to stamp out rogue business practices in the construction industry and the latest announcement reveals the true scale of the project.
In 2005 it was announced that dawn raids had been conducted on a number of company premises in the East Midlands. The companies involved were suspected of rigging bids in the buidling sector. Bid rigging is viewed as belonging to the category of the most serious of competition law infringements. It is classed as a so called "hardcore" infringement by the competition authorities.
Bid-rigging
Bid-rigging is the illegal practice by which companies who are supposed to be in competition with each other to win a piece of work, instead decide in secret to divide up the work between them. The result for the companies involved in the bid rigging is that they can offer higher prices than they would have, had they been subjected to normal market restrictions, as they know that their rivals will not be outbidding them.
While the purchaser thinks that it is getting the best deal by choosing the company which is offering the lowest price, it will be accepting a price which has been pre-agreed by the cartel.
Bid rigging can take the form of practices such as, for example, cover pricing and bid rotation. Bid rotation means that the competitors take turns in putting in the best offer, while cover bidding is the practice whereby certain companies put in bids which are designed to fail to win the work, e.g. due to the price offered or the conditions attached. All these tactics are intended to steer the buyer into having to "chose" the bid which has been pre-selected by the cartel.
The offer by the OFT
Almost 40 companies have already applied for leniency in the current investigation. The door is now officially closed for any more companies who were considering coming forward to apply for immunity in relation to the conduct under investigation. The OFT has announced that the quality of evidence uncovered to date is such that it cannot accept any more applicants under its policy.
However, in its offer the OFT is hoping to "fast-track" the investigation by encouraging other cartel members to come forward in return for a reduced penalty. While these "late comers" are no longer able to apply for leniency, the OFT are giving them a last chance to reduce potentially significant fines.
The offer on the table from the watchdog is a reduction of the financial penalty in exchange for co-operation in the form of admissions to participation in bid rigging and certain ancillary assurances. The reduction of fine will be less than that for the leniency applicants, but will nonetheless be of significant value to the companies in question. The benefit for the OFT is to significantly reduce the time it takes to complete the investigation.
The biggest ever cartel investigation in this county
The scale of the current investigation is of an unprecedented size and complexity for the OFT and will have presented it with challenges different to those it has encountered in the smaller investigations it has undertaken in the past. For an understanding as to the magnitude of the suspected arrangements currently investigated, it is worthy of note that dawn raids have been carried out on 57 companies. The evidence uncovered by the watchdog during this investigation confirms bid rigging in thousands of tenders, the combined estimated value of which is reaching £3 billion.
The complexity of the task has meant that the watchdog has needed to adapt more sophisticated methods of investigation. The OFT has had to use powers of investigation previously not employed, such as digital evidence gathering and forensic IT to discover electronic documents held on computers. Forensic analysis has been used in cases where it has appeared that attempts have been made to conceal evidence. Ex-employees have further been requested to give interviews.
Still scope for leniency for construction companies
In addition to the current "late comer" deal, it will be of importance to companies in the industry to know that it is still possible for them to receive lenient treatment, including full immunity from a fine, under the OFT's leniency regime, if they come forward with information in relation to cartels outside the geographic scope of the investigation (i.e. principally the East Midlands, Yorkshire, and Humberside) or in other product markets (i.e. beyond general building work, such as house construction and commercial and industrial construction, in both the public and private sector).
Leniency is thus still available to companies coming forward in relation to other construction related industries, such as civil engineering, highway maintenance, or other large infrastructure projects.
Damages claims
One factor which may deter companies from coming forward is the potential for damages claims. While leniency arrangements and the accompanying reduction of penalty will limit the effects of public enforcement, once a company is named as an addressee on an infringement decision, it is at increased risk of becoming the target of civil action damages claims. This reality might work against the current incentives now offered, fuelling companies' hesitation in coming forward.
Conclusion
This is the first development of its kind in a UK cartel investigation and as well as indicating the sheer scale of the enquiry underhand, the move demonstrates the watchdogs' willingness to explore alternative routs when undertaking its enforcement obligations and come at a time when the European Commission is finding its resource stretched in the cartel area.
The recent approach bears a resemblance to the approach taken by the Netherlands Competition Authority in a similar case in 2004 when, after having fined 22 companies, it decided to offer reduced penalties to any further companies coming forward in relation to a large investigation into bid rigging in the construction industry.
Maybe the two competition authorities have been exchanging notes?
