CMA sets sights on cartels within the construction sector

Date published

06/04/2018

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The Competition and Markets Authority (CMA)’s new campaign, which encourages people to be “safe, not sorry”, will focus on hunting out illegal cartel activity within the construction sector.

The CMA is encouraging people who think they may have been involved in illegal cartel activity within the construction sector to do the ‘safest thing’ and report it to the CMA. The campaign follows a 30% increase in tip offs in 2017. The CMA has an increased budget of £2.8 million for the campaign and can offer rewards of up to £100,000 and immunity from sanctions to whistle-blowers who come forward.

Cartels

Competition policy encourages businesses to compete with each other in order to promote innovation, efficiencies and the driving down of prices. A cartel is a group of independent providers who (usually secretly) seek to avoid competition policy in an effort to increase profits by agreeing not to compete with each other. Once formed, the cartel seeks to enable members evade competition requirements. Prohibited cartel activities include:

  • Direct or indirect price fixing
  • Limiting production or supply
  • Sharing customers or markets
  • Bid-rigging.

The construction industry is seen as being at greater risk of cartels forming, as evidenced by its history of anti-competitive behaviour. In 2009, the Office of Fair Trading (now defunct) imposed fines totalling £129.2 million on 103 construction firms in England for colluding with competitors in illegal anti-competitive bid-rigging activities on 199 tenders from 2000 to 2006, mostly in the form of 'cover pricing'.

Cover pricing is where one or more bidders in a tender process obtains an artificially high price from a competitor. Such cover bids are priced so as not to win the contract but are submitted as genuine bids, which gives a misleading impression to clients as to the real extent of competition. This distorts the tender process and makes it less likely that other potentially cheaper firms are invited to tender.

The Competition Act 1988 prohibits anti-competitive or concerted practices which may affect trade within the United Kingdom. The CMA has the power to impose fines up to 10% of an undertaking’s worldwide turnover in the last financial year. Under the Enterprise Act 2002 it is a criminal offence for a person to enter into certain cartel activities, including bid-rigging, price-fixing and output restricting. People found guilty of an offence can be imprisoned for up to 5 years and directors can be disqualified from office for up to 15 years.

A cartel offence does not have to occur over a substantial period. It can arise from the single exchange of sensitive information. In Balmoral Tanks Limited [2017], the CMA found that sensitive information shared at a single meeting was enough to find the defendant in breach of UK competition law.

CMA cracks down

The CMA reported a 30% increase in 2017 of the number of reports of cartel activities. The CMA is currently undertaking four investigations in the wake of its new campaign. This has been spurred on by the CMA offering rewards of up to £100,000 to whistle-blowers with ‘clean hands’. Anyone involved in the cartel activity will have to submit to the CMA’s leniency program. A whistle-blower who submits to the leniency program may get immunity from the available penalties.

Leniency

The first company to report an offence will be guaranteed automatic immunity from prosecution and the subsequent penalties, in addition to those who are the first to come forward when an investigation commences. All those who follow may be subject to discretionary immunity. Whilst this does create incentives to report activity, companies should seek legal advice before taking any steps in order to understand the true legal implications of their actions. Once formal investigations are opened the CMA has statutory power to compel witnesses to respond to information requests in addition to conducting dawn raids.

Comment

  • The CMA is clearly investigating more cases that it did in the past, and has increased the resources at its disposal to do so.
  • In taking action against individuals it is now easier for the CMA to prosecute cartel cases, as there is no longer a requirement for the defendant to have acted dishonestly.
  • If cartel activity is suspected, consideration should be given to reporting an offence and/or making a leniency application to the CMA after having taken legal advice.
  • If not already in place, a competition law compliance programme should be established. Staff should be made aware of the law concerning anti-competitive behaviour and that sharing even the smallest amounts of sensitive information with competitors could amount to a cartel offence.
  • Where third parties suffer loss as a result illegal anti-competitive behaviour they can seek compensatory damages.
  • From an insurance perspective, all policies (including D&O), should be checked in relation to the cover provided for costs incurred responding to regulatory investigations. Generally, fines and penalties cannot be insured against on public policy grounds.

Read other items in the Construction and Engineering Brief - April 2018