In today’s inflationary market, getting competitive bids from suppliers is more important than ever. But competitive bidding doesn’t do you much good if the process is compromised.
Snyder singled out bid allocation as an especially lucrative fraud, if done correctly. “Everybody gets a piece of the action, and as a result of that, knowing there’s not going to be legitimate competition for the bidding, they all agree to bid higher than they otherwise would bid,” he explained.
Unlike price fixing, which is typically directed at a range of consumers, bid rigging is the most common antitrust offense that is directed at a single entity, such as a government agency or a company, Snyder said.
Federal Enforcement
The Antitrust Division has exclusive jurisdiction over the criminal prosecution of these fraud schemes. Under the Sherman Antitrust Act, three key factors must be proven:
THE DOJ NEEDS YOU!
The following excerpt from the DoJ’s Fraud Primer addresses those industries prone to collusion and offers some prevention tips.
Conditions Favorable to Collusion
While collusion can occur in almost any
industry, it is more likely to occur in some indus-
tries than in others. An indicator of collusion may
be more meaningful when industry conditions are
already favorable to collusion.
Collusion is more likely to occur if there
are few sellers. The fewer the number of
sellers, the easier it is for them to get
together and agree on prices, bids,
customers, or territories. Collusion may
also occur when the number of firms is
fairly large, but there is a small group of
major sellers and the rest are “fringe”
sellers who control only a small fraction of
the market.
The probability of collusion increases if
other products cannot easily be substituted
for the product in question or if there are
restrictive specifications for the product
being procured.
The more standardized a product is, the
easier it is for competing firms to reach
agreement on a common price structure. It
is much harder to agree on other forms of
competition, such as design, features,
quality, or service.
Repetitive purchases may increase the
chance of collusion, as the vendors may
become familiar with other bidders and
future contracts provide the opportunity
for competitors to share the work.
Collusion is more likely if the competitors
know each other well through social
connections, trade associations, legitimate
business contacts, or shifting employment
from one company to another.
Bidders who congregate in the same
building or town to submit their bids have
an easy opportunity for last-minute
communications.
What You Can Do
Antitrust violations are serious crimes that can
cost a company hundreds of millions of dollars in
fines and can send an executive to jail for up to ten
years. These conspiracies are by their nature
secret and difficult to detect. The Antitrust
Division needs your help in uncovering them and
bringing them to our attention.
If you think you have a possible violation or
just want more information about what we do,
contact the Citizen Complaint Center of the
Antitrust Division:
E-mail:antitrustcomplaints@usdof.gov.
Phone:
1-888-647-3258 (toll-free in the U.S. and
Canada) or 1-202-307-2040
Address:
Citizen Complaint Center
Antitrust Division, U.S. Dept. of Justice
950 Pennsylvania Ave. NW, Suite 3322
Washington, DC 20530
Source
DoJ Primer on Procurement Fraud.
Has there has been an agreement between competitors that unreasonably restrains trade? In this regard, “agreement” is defined broadly, Snyder said. Whether the agreement is written, oral, or a nod-and-wink is irrelevant. “As long as there is some meeting of the minds that competitors are going to do the same thing, or work together in some fashion, that’s enough to make out an agreement under the Sherman Act,” he said.
Did a defendant knowingly join that agreement? “Ultimately, they don’t even have to realize that what they did was illegal,” Snyder warned.
Did an unreasonable constraint of trade occurred in interstate commerce or foreign commerce?
The penalties for antitrust corruption (which include jail time) can be significant, Snyder warned. For crimes committed after June 2004, companies risk facing fines up to $100 million, not including treble damages. Individuals risk facing fines of $1 million and up to 10 years in prison. “And when we can [pursue criminal penalties] we do, because that is the way you deter conduct,” Snyder said.
Ultimately, the fine and jail sentence depends on the affected commerce, rather than the gain or loss. For example, competitors trying to rig bids on a $100 million project will face much harsher penalties than fraudsters fixing bids on a $10 million project.
Snyder cited one significant case where four international airlines involved in a price-fixing scandal agreed in June to pay $504 million in fines. Of the total settlement, one of the four airlines—Air France-KLM—has agreed to pay $350 million. The other carriers involved are Cathay Pacific Airways, Martinair Holland, and SAS Cargo Group.
The case—tipped off to the agency by an amnesty applicant in 2005—has already garnered more fines than any other single case in the Antitrust Division’s history, Snyder said, and is projected to get much bigger. In total, airlines have agreed to pay $1.2 billion in fines with several other companies still being investigated.
“If you set an example in an industry by hitting the companies hard, and hitting the individuals hard, you normally don’t have to worry about that industry for a while,” he said.
What to Look for
Certain patterns of bidding or pricing suggest the possibility of collusion. One question Snyder recommends companies should ask: “Does the condition of the market make it easier for bidders to get together to make a bid than would otherwise be the case?” Here are a few potential red flags to watch out for:
Only a few sellers in a particular industry exist, or the same company always wins a particular bid.
Only a small group of major vendors win a majority of the bids.
The product out to bid has no substitute, or has restrictive specifications that limit who could supply it.
Bidders are required to drop off their bids at the same physical location at a particular time, which allows bidders to get together and arrange who’s going to win the bid.
Bids are higher than prices listed previously for the same type of work.
Prices stay the same, even as raw materials increase in price.
Proposals or bids have identical typeface or stationery, or contain whiteout marks.
Still, even if all of these market conditions were present, “None of them actually means that collusion has actually occurred; it just means that the conditions are favorable for collusion,” said Snyder.
When looking for patterns, try writing out each company’s bids in table format. For example, look to see whether each bidder wins the same amount of work, and whether the bidders involved take turns winning bids; “normally you would expect their to be one company that’s going to be more efficient than the others, more competitive than the others, and, therefore, is going to win more of the bids than the others,” Snyder said.
Avoid getting trapped into buying just one bidder’s product by increasing your pool of potential bidders, and ultimately by dividing your purchases, just so you “don't establish those long-term entrenched relationships that discourage other companies from bidding against the dominant vendor,” he said.
Also, keep an ear out for the loudmouth bidder—somebody who makes suspicious statements before a bid, indicating he knows what other competitors are going to do.
“It might sound like these are scenarios that couldn’t possibly happen in real life, but the reason I’m telling you about them is that they happen,” Snyder said, “and in a lot of cases, repeatedly.”
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