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New Tools to Fight Bid Rigging in Public Procurement Issued by Organization of Major World Governments
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March 30, 2009
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By James Newland, Ethan Litwin and John Foust
Howrey LLP
To assist governments in battling bid rigging, the Organisation for Economic Co-operation and Development (OECD) has issued “Guidelines for Fighting Bid Rigging in Public Procurement.” They include specific methodology and checklists to help OECD member governments prevent and detect cartel activity in procurement. Another recent OECD report focused on persistent cartel problems in the construction industry.
OECD said the guidelines, issued on March 12, 2009, “provide the most comprehensive strategy available today” to hinder and detect bid rigging. It drew on the experience of more than 30 jurisdictions. The guidelines “can be applied in a decentralized manner across government at both national and local levels” and “by public officials with no specialized economics or competition policy training,” according to OECD.
OECD describes itself as bringing “together the governments of countries committed to democracy and the market economy.” It provides them with resources on competition and fighting corruption. OECD member governments are Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
“Bid-rigging conspiracies waste taxpayers’ money and cause governments to pay far more than a fair price,” OECD said in its introduction to the guidelines. It noted that bid rigging “has the potential to cause great harm” because public procurement “is often a large part of a nation’s economy,” 15 percent of gross domestic product in many OECD countries.
OECD said the checklists included in the guidelines will help government agencies to detect bid rigging by prime contractors and subcontractors in a variety of forms, including:
 | Bid suppression, in which competitors agree to refrain from bidding.
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| Cover or complementary bidding, in which competitors agree to submit bids that are either too high or otherwise contain unacceptable terms.
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| Bid rotation, in which competitors agree to take turns being the low bidder.
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| Market allocation agreements, in which competitors divide the market by agreeing not to compete for certain customers or not to compete in certain geographic areas.
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Included in the guidelines are a six-point “Checklist for Designing the Procurement Process to Reduce Risks of Bid Rigging” and a seven-point “Checklist for Detecting Bid Rigging in Public Procurement.” Click here for the overview of the guidelines and click here for the full text of them.
The guidelines also list characteristics that are indicative of bid rigging. Use of the guidelines can result in increased scrutiny of joint ventures, particularly when the joint venturers are competitors able to perform the contract individually. Offenses can arise when joint venturers join together to avoid competition and submit an inflated bid.
Focus on Construction Industry
Another recent OECD report notes that “the construction industry has acquired a degree of notoriety” and that it “is well-known that the [construction] sector has been plagued by cartel activity for decades.” See, OECD Competition Committee, Policy Roundtables, Construction Industry, DAF/COMP(2008)36, p. 17 (June 2008). Click here to view the entire report.
The report noted that Lord Borrie, former Director General of Fair Trading in the United Kingdom, “once said that construction has the worst record of cartelization of any industry.” Id. at p. 9.
OECD’s report recognized that the construction industry is a “critical component” in the economies of every OECD member state because it builds and maintains the “buildings and infrastructure on which virtually every other [industry] sector depends.” Id. at p. 17.
OECD also noted that construction is a “sizeable sector in its own right.” Construction is Europe’s largest industrial employer, accounting for about 7 percent of total employment, and the construction industry accounts for 6.47 percent of gross domestic product of OECD countries. Id.
While acknowledging that the industry is made up of a very large number of small firms, the report noted that there was a “limited number of general contractors… capable of managing very large projects…. Competition among large general contractors and among specialty firms seems to be oligopolistic….” Id. at p. 9. It also expressed concern that bidding software could facilitate collusion in bidding. Id. at p 10. While acknowledging that cartels tend to be harder to maintain as the number participants increases, OECD reported that construction cartels involving dozens and even hundreds of participants have been detected. Id.
The report includes updates on the competitive situation in the construction industries of 19 countries. Id. at pp. 19, et seq.
OECD also provides resources on competition and fighting corruption. On July 30, 2008, OECD published a related paper, “Enhancing Integrity in Public Procurement: A Checklist.”
Current Enforcement Situation
Investigations of bid rigging and fraud in government procurement are increasing. Examples include investigations of the construction industry by the Office of Fair Trading in the United Kingdom, the ongoing investigation of the information technology services industry in Canada, and bid rigging investigations in Asia and Japan.
In the United States, the detection, prosecution and deterrence of cartel offenses, including bid rigging, remains the highest priority of the Justice Department’s Antitrust Division. At last count, there were more than 135 grand juries across the United States investigating alleged cartel activity.
Bid rigging is punishable under U.S. law by fines of up to $100 million for corporations, fines of up to $1 million for individuals and prison sentences for individuals of up to 10 years.
Since fiscal year 1997, the Antitrust Division has recovered more than $4 billion in criminal fines for cartel behavior, including more than $600 million in 2007. Prison sentences for persons who engage in cartel behavior recently have set records in terms of total days in prison (31,391), average sentences (31 months) and percentage of defendants sentenced to jail (87 percent).
Allegations of bid rigging have significant consequences for any company. At a minimum, the company may be faced with a lengthy and costly criminal investigation that can lead to convictions, fines and jail sentences. Criminal investigations often are followed by even longer and costlier civil investigations and litigation, which can easily cost $100 million to resolve in terms of penalties, damages and legal costs. Anti-competitive procurement activity also can damage the company’s public image and lead to debarment from government contracting.
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For more information about the issues covered in this report, please contact James Newland in our Washington, D.C. office at 202-383-7206 or at newlandj@howrey.com; Ethan Litwin in our New York office at 212-896-6591 or at litwine@howrey.com; John Foust in our San Francisco office at 415-848-4901 or at foustj@howrey.com; or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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