Cartel crackdown

01 May 2008

The European Commission Is keen to eradicate anti—competitive practices, particularly those known as ‘hard core’ cartels. The Organisation for Economic Cooperation & Development (OECD) defines ‘hard core’ cartels as “anticompetitive agreements, arrangements or concerted practices amongst competitors to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas or share or divide markets by allocating customers, suppliers, territories or lines of commerce.”

Collusive tendering can take many forms and it is no doubt the case that certain time—honoured construction industry practices may amount to anti—competitive behaviour, which will breach competition law. The main techniques in bid—rigging or collusive tendering include:

⊇ Bid suppression — those who might be expected to bid do not do so or withdraw their bids

⊇Complementary or cover bidding — some competitors agree to submit prices that are too high to be acceptable or include terms unrelated to price that they know will be unacceptable

⊇Bid rotation — all competitors submit bids but take turns to be the lowest bidder.

Some of these practices may be legitimate. For example, a contractor invited to tender may wish to accept the invitation, but in reality not wish to win the work. The contractor may fear that if it does not accept the invitation it may not be invited to tender for future work for that particular client. In those circumstances, it may pitch its tender at a level that it knows will be unacceptably high. Such a practice is unobjectionable, but only providing that the contractor has not colluded with a competitor in so doing.

The EU is using its full range of powers to achieve its objective of stamping out these practices, supported by the Governments and the legal systems of individual Member States. For example, recent Commission cases involving cartels have concerned the construction materials market. These cases succeeded in identifying illegal, anticompetitive practices in that market and resulted in very substantial fines for those involved.

In the UK, for example, the Government has taken the fight against cartels one step further. In addition to the risk of financial penalties on the participants in a cartel, individuals who actively play a part risk committing a criminal offence. If convicted they can be subject to an unlimited fine and/or up to five years imprisonment. In addition, a director of a company that is found to have infringed competition law may be disqualified from acting as a director of a company.

During consultation on the legislation (the Enterprise Act which came into force in June 2003), concern was expressed that it risked criminalising activities that might otherwise be considered acceptable commercial behaviour. To meet this concern, the Government introduced the requirement that the individual be acting dishonestly.

To give teeth to the legislation, the UK Government also granted extensive investigative powers to the Office of Fair Trading (OFT), the UK's competition authority. Under the Enterprise Act, the OFT can request information and documents from those it believes to have relevant information and can enter premises and seize documents. In addition, it has the right to use intrusive surveillance powers such as the planting of surveillance equipment at both commercial and private premises and vehicles. The OFT may also use so—called ‘covert human intelligence sources’— informants in other words.

The OFT has specifically targeted the UK construction and housing markets as a priority for its cartels branch. Last year it investigated a group of roofing contractors in the West Midlands region, and used its extensive powers to secure hard evidence that these contractors had deliberately colluded to fix bids in local authority tenders. This resulted in substantial fines and very damaging publicity for the participants.

In seeking to root out cartel behaviour, both the Commission and the Member States’Governments have adopted policies to encourage disclosure. Given the difficulty of discovering secret cartels and the inherent problems in obtaining evidence about covert activities, a policy of lenient treatment for cartel members who disclose anticompetitive behaviour and provide evidence that assists in their investigation has been developed. One of the by-products of this policy is that cartel participants are at risk of exposure from their co—cartellists.

European and national authorities are currently on a mission to ensure that the personal and financial costs of such anti—competitive behaviour are unacceptably high. The industry should therefore be very aware of the substantial risks and penalties involved.

The OFT has specifically targeted the UK construction and housing markets as a priority for its cartels branch.

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