On 20th June 2016, the UK’s Competition and Markets Authority (“CMA”) released an open-letter offering advice to public authorities to help spot anti-competitive activity during a tender process. This is known as bid-rigging. This open letter is primarily designed to help purchasers detect bid-rigging and to avoid becoming a victim of it.
The most common types of bid-rigging are:
- bid rotation, where companies agree to take turns in having an attractive bid, ensuring they all have an agreed share of the market;
- cover pricing, where companies agree to submit an inflated bid so that another bid from a pre-arranged company looks better value; and
- bid suppression, where companies agree not to submit a bid at all, meaning other firms face less competition and can win the contract.
This has the effect of pushing up prices for the purchaser, often around 10-20%. It has a wider effect on the economy too, mainly distorting the free market in terms of increased inefficiency (where the firm who can produce at cheapest-cost often does not) and in terms of the waste of time and money of the CMA in terms of searching for these wrongdoers.
The letter is designed to raise awareness and to encourage the reporting of suspected bid-rigging cases, through the CMA hotline or via email. It is often easy to fall into cartel activity and through increased awareness, the CMA hopes that professionals involved in the process watch out for this illegal activity. The penalties are serious; companies can be fined up to 10% of their annual worldwide turnover, individuals can be sentenced to a five-year custodial sentence and/or fined (as per Section 188 of Enterprise Act 2002), managers can be disqualified for up to 15 years, and there is significant reputational risk to the business involved. For instance, in 2013, a major car manufacturer and five of its dealers were fined over £2.8 million for their involvement in cartel activity, which was worth 18 months’ profit.
The CMA is giving financial rewards for those who offer information, and those involved in current bid-rigging can help mitigate their case if they come forward.
The open letter is designed to encourage reporting through raising awareness. Its effect will remain to be seen. It can also be seen as a way for the CMA to shift the burden of finding bid-rigging from CMA investigators to the public authorities involved themselves.