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Bid rigging is a fraudulent scheme in procurement
auction An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition e ...
s resulting in non-competitive bids and can be performed by corrupt officials, by firms in an orchestrated act of
collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...
, or between officials and firms. This form of collusion is illegal in most countries. It is a form of
price fixing Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given ...
and market allocation, often practiced where
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
s are determined by a
call for bids An invitation to tender (ITT, otherwise known as a call for bids or a request for tenders) is a formal, structured procedure for generating competing offers from different potential suppliers or contractors looking to obtain an award of business ...
, for example in the case of government construction contracts. The typical objective of bid rigging is to enable the "winning" party to obtain contracts at uncompetitive prices (i.e., at higher prices if they are sellers, or lower prices if they are buyers). The other parties are compensated in various ways, for example, by cash payments, or by being designated to be the "winning" bidder on other contracts, or by an arrangement where some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves. Bid rigging almost always results in economic harm to the agency which is seeking the bids, and to the public, who ultimately bear the costs as taxpayers or consumers.


Forms


As acts of corruption

* Change order abuse occurs when a contractor colludes with project officials, wins a low bid, and asks to change the contract afterwards. That is approved by officials, resulting in a much higher bid being retroactively approved. * Bidder exclusion allows project officials to essentially choose their bid. There are multiple methods to achieve that like the following: ** Instituting unreasonable qualification parameters, excluding non-preferred firms, or effectuating the same by shortening the time of acceptance periods for new bids following a request. ** Advertising projects to select bidders or bidding markets, thereby reducing publicity of bid procurement. ** Bundling of contracts to exclude bidders. ** Coercion and intimidation can also be used, as well as the simple rejection of individual bids over trivial matters. * Purchase splitting to reduce the minimum bid amount. That functions as contracts are split up to reduce the actual procurement amount and keep it under a threshold value. That reduces competitive bidding and enables less oversight at the project level as bid prices drop and kickbacks can be allotted. * Leaking of bid information, which requires a relationship of some degree between the project and a bidder as the bidder is handed information to gain an unfair advantage. * Bid manipulation is another method for officials to choose the bidder of their choice but occurs after receipt of bids. The methods for this would include either changing bid parameters, evaluation processes, or other activity to effectively select the bidder of choice. * Rigged Specifications allow more bidder exclusion by officials by either tailoring requests to individual bidders or creating a vague criterion to reasonably choose a preferred bidder. * Unbalanced bidding involves high bid prices for commencing phases of development and low prices for later stages. That effectively increases the flow of funds for the bidding firm. This occurs when bidders cite high prices for items, intending to raise the number of units and purchase them at a competitive rate while simultaneously skimming profits from the artificially high bid price. Additionally, bidders may give low quotes for non-necessary items (knowledge gained through collusion or experience) to disadvantage other firms as their bid amount is more competitive. This also serves to increase the cost of entry for new firms. * Unjustified sole source awards are bids chosen on criteria unrelated to their competitiveness. That can be performed blatantly, by falsifying bids, or by price splitting.


Within a

cartel A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Mos ...

* Bid suppression collusion occurs when some of the conspirators agree not to submit bids to allow another conspirator to win the contract. * Complementary bidding, also known as cover bidding or courtesy bidding, occurs when some of the bidders agree to submit bids that are intended to be unsuccessful so that another conspirator can win the contract. For example, the cover bids might contain prices that are uncompetitive in relation to the prices submitted by the conspirator, who is designated to win the contract, or the cover bids might contain conditions that the conspirators know to be unacceptable to the agency calling for the bids. * Bid rotation occurs when bidders take turns being the designated successful bidder. For example, each conspirator is designated to be the successful bidder on a certain contract, with conspirators designated to win other contracts. That is a form of market allocation in which the conspirators allocate or apportion markets, products, customers or geographic territories among themselves. This is then divided up such that each will get a "fair share" of the total business, without truly having to compete with the others for that business. * Bid delegation can be a factor fostering the presence of bid rigging; for instance, it is the case of marketing agencies that bid for the same ad space on behalf of different and competing agents.).


As an auctioneer or official

* Phantom Bids are false bids taken by an auctioneer to trick a legitimate bidder into bidding more would have otherwise been the case. The auctioneer hires confederates to call out the phantom bids. If the phantom bid is the winner, the lot is hidden and comes back around for a second auction, or the second-highest legitimate bidder is informed that the first bidder was unable to make payment. * Buy-back is the strategy in which the auctioneer or seller bids on a lot and buys it back to protect it from being sold to the highest bidder for an insufficient price. That is fraud if the auction is advertised as an "absolute auction", meaning there are no reserve bids. * Phantom auctions, in the real estate industry, may occur when the bank "tentatively" auctions a foreclosed home and gives bidders an option to give "preliminary bids" for homes that are not yet authorized for auction. If the reserve bids are not met, the home is updated as "never was available for auction" even though bids were received. Some houses are auctioned at fire-sale prices, and the auctions are closed before the auction was formally announced. Investors rush to get in their preliminary bids before the house is technically up for auction. Bidders fear losing options so it results in more bids, and naturally, higher prices. If bidders fail to reach the target bids, the item was never available for auction. Banks do that because if they unloaded all of their
toxic assets A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder. Because assets are offset against liabilities and freq ...
at once, the housing market would collapse, which causes foreclosed homes to be dribbled out with phantom auctions. Those forms of bid rigging can occur together, and two or more of the practices could occur at the same time. For example, if one member of the bidding ring is designated to win a particular contract, that bidder's conspirators could avoid winning by not bidding ("bid suppression") or by submitting a high bid ("cover bidding").


Economic costs

Many of the issues presented by bid rigging are the result of cartel involvement. Inefficient firms are not pushed out, as they would have been in a competitive market, and firms experience more profit, despite an inefficient allocation of resources. Cartels behave more like monopolies and so their behaviors, such as bid rigging, create market inefficiencies as contracts are fulfilled at elevated values. Furthermore, bid prices increase with more repeated collusion. Ultimately, the cost is typically borne by the taxpayer as government-sponsored contracts are artificially above market value. Additionally, it can be thought of as raising prices for the taxpayer (or consumer) as firms rent seek. One study found that bid rigging significantly raised prices over market value in the seafood industry in Philadelphia in a bidding scheme involving Defense Personnel Support Center, a purchaser for the Department of Defense. The high price of entry and fewer entrants in many industries results in lessened incentives for firms to behave competitivel


Remediation

Bid rigging is an illegal practice under the criminal or competition laws of most developed countries. Depending on the jurisdiction, it is punishable by fines, imprisonment or both. At a very basic level, there would likely be more competitive bidding if there were more firms present in a market, outside of a cartel, as evidence shows that bids lessen in value as the number of firms rises. Furthermore, collusion becomes less frequent with better market competitiveness, a result of reduced ability to compromise. The
Organisation for Economic Co-operation and Development The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate ...
(OECD), in its work on bid-rigging and cartels in public procurement, makes the following suggestions for better tenders: * Developing expertise and awareness of the market for which a tender is being designed. * Maximizing the number of bids and potential contractors for enhanced competition among proposals. * Striving for clarity in requirements and details. * Reducing potential for communication between bidders and procurement officials and adhering to a strict criterion and process of evaluation. Suggestions for ameliorating procurement auctions have also been put forth. Lengstein and Wolfstetter suggest that when a particular bidder is preferred, disregarding cost, possible reforms include a sealed Vickrey auction, or if there is reason to believe that officials and bidders are in contact, an open auction is preferred to sidestep potential bribery. When officials are engaged in more competitive procurement processes with regard to price but are suspected of kickbacks, a potential solution is the open auction to prevent clandestine arrangements such as change order abuse. If a closed or sealed auction process is preferred, the use of electronic bidding and investment in tamper-resistant systems is suggested.


By region


South America


Brazil

Brazil's
Operation Car Wash Operation Car Wash ( pt, Operação Lava Jato) was a criminal investigation by the Federal Police of Brazil's Curitiba branch. It began in March 2014 and was initially headed by investigative judge in France, but unlike judges in the common l ...
is an ongoing investigation into the Brazilian semi-public multinational
Petrobras Petróleo Brasileiro S.A., better known by the portmanteau Petrobras (), is a state-owned Brazilian multinational corporation in the petroleum industry headquartered in Rio de Janeiro, Brazil. The company's name translates to Brazilian Petrole ...
. Petrobras is suspected of having overcharged bids as much as 3% of the total cost on contracts with an alleged $2.1 billion being misappropriated in kickbacks. Operation Car Wash is part of a larger investigation into Brazil's government as well and has contributed to the conviction and imprisonment of former president
Luiz Inácio Lula da Silva Luiz Inácio Lula da Silva (; born Luiz Inácio da Silva; 27 October 1945), known mononymously as Lula, is a Brazilian politician, trade unionist, and former metalworker who is the president-elect of Brazil. A member of the Workers' Party ...
. In early January 2018, Petrobras settled a United States class action case for $2.95 billion, though
JP Morgan JPMorgan Chase & Co. is an American Multinational corporation, multinational Investment banking, investment bank and financial services holding company headquartered in City of New York, New York City and Delaware General Corporation Law, inco ...
and
BTG Pactual BTG Pactual is a Brazilian financial company that operates in the markets of investment banking, wealth management, asset management, corporate lending and sales and trading. It offers advisory services in mergers and acquisitions, wealth planni ...
had expected a settlement between $5 and $10 billion. The Petrobras scandal extends beyond bid rigging in the oil sector as the investigation has also implicated Brazilian construction firms as bid rigging was discovered to be rampant in the preparations for the
2016 Summer Olympics ) , nations = 207 (including IOA and EOR teams) , athletes = 11,238 , events = 306 in 28 sports (41 disciplines) , opening = 5 August 2016 , closing = 21 August 2016 , opened_by = Vice President Michel Temer , cauldron = Vanderlei Cordeiro de ...
. This would not be the first instance of bid rigging by construction firms in recent Brazilian history as Andrade Gutierrez Engenharia SA, the nation's second largest construction firm, admitted to bid rigging during contract procurement for stadiums to host the
2014 FIFA World Cup The 2014 FIFA World Cup was the 20th FIFA World Cup, the quadrennial world championship for list of men's national association football teams, men's national Association football, football teams organised by FIFA. It took place in Brazil from ...
. This revelation implicates an additional five domestic construction firms and was revealed by the '' Conselho Administrativo de Defesa Econômica(CADE).''


Colombia

From 2002 until 2013, the Colombian government opened 121 investigations into bid rigging, which lead to sixty-nine entities paying fines amounting to nearly $23.5 million, with an additional nine entities receiving sanctions. Colombia was found to generally comply with the
OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate ...
's recommendations regarding competitive procurement.


North America


United States

In the United States, bid rigging is a federal felony criminal offense under Section 1 of the
Sherman Act The Sherman Antitrust Act of 1890 (, ) is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce. It was passed by Congress and is named for Senator John Sherman, its principal author. ...
. Even so, bid rigging is still rampant in the construction industry, auto sale auctions, and foreclosed home auctions.


Canada

In Canada, bid rigging is an indictable criminal offence under Section 47 of the
Competition Act The ''Competition Act'' is a Canadian federal law governing competition law in Canada. The Act contains both criminal and civil provisions aimed at preventing anti-competitive practices in the marketplace. The Act is enforced and administered ...
.


Europe

Bid rigging is illegal in the
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...
(EU) under
Article 101 of the Treaty on the Functioning of the European Union Article often refers to: * Article (grammar), a grammatical element used to indicate definiteness or indefiniteness * Article (publishing), a piece of nonfictional prose that is an independent part of a publication Article may also refer to: ...
(TFEU). The annual cost to the EU in economic waste as a direct result of bid rigging among cartels was estimated to be between €13 billion and €37 billion in 2008. Bid rigging seems to be on the rise across Europe, raising concerns particularly over excessive expenditures and single-bid tenders. These single-bid tenders represented 17% of tenders in 2006, but 30% nine years later.
RAND The RAND Corporation (from the phrase "research and development") is an American nonprofit global policy think tank created in 1948 by Douglas Aircraft Company to offer research and analysis to the United States Armed Forces. It is finan ...
estimated that the overall annual cost posed to the EU by bid cost increases was $5 billion.


Slovakia

Bid rigging is illegal in Slovakia under the Act on the Protection of Competition and by EU membership, also Article 101 of TFEU. The first charges to be brought to court in Slovakia in 2006 by the Antimonopoly Office involved six construction companies who submitted bids with suspiciously consistent unit quotes. The fines from this bid rigging scheme amounted to €45 million following an initial court decision, an over-ruling, and a reinstatement of the initial verdict. In 2007, a Slovakian government ministry participated in bidder exclusion by posting a request for proposals regarding consulting on a bulletin board in an official building, though not open to the public. This resulted in a consulting firm winning a €120 million contract. The word for receiving kickbacks after participating in bid rigging is known as "tunelovanie" in Slovak.


Switzerland

Bid rigging occurs frequently in the construction industry in Switzerland. In 2007, seventeen different firms were involved in a bid rigging scheme but there was no prosecution as the ring had disbanded before colludin

In 2009, a ring of seven electricity firms from Bern were charged with bid rigging and fined two million Swiss francs. In Canton of Aargau, Aargau, in 2011, a bid rigging scheme was discovered wherein seventeen firms were fined eight million Swiss francs though the appeals are ongoing. Multiple other cases are still ongoing.


United Kingdom

In the United Kingdom, individuals can be prosecuted criminally under the
Enterprise Act 2002 The Enterprise Act 2002 is an Act of the Parliament of the United Kingdom which made major changes to UK competition law with respect to mergers and also changed the law governing insolvency bankruptcy. It made cartels illegal with a maximum pri ...
.


Asia


Japan

Although both a violation of Japanese criminal law and the Japan Anti-Monopoly Law, bid rigging is still a habitual practice of the Japanese construction industry. It has been shown by a number of academic studies both in Japan and in the US to be a system which considerably inflates the cost of construction projects, and in the Japanese public sector, considerably wasteful of annual tax money amounting to billions of Japanese yen. ''Dango'' refers to collusion in Japanese, or more precisely, "conference", and is an extremely prevalent system in Japan. ''Dango'' can be understood as a mutually beneficial system of bureaucracy and government and the private construction industry wherein bid rigging is incredibly common, benefiting colluding firms and officials alike in the form of kickbacks. The system of ''dango'' is often supported though as allowing small firms to continue to compete, though detractors are quick to point to the economic inefficiencies presented by a non-competitive market. The US Government, specifically the United States Trade Representative Office and Department of Commerce, made fierce efforts in the late 1980s and early 1990s to urge the Japanese government to reform ''dango'' as a de facto non-tariff barrier to foreign firms in the Japanese construction market. Despite years of negotiations, including promises by the Japanese government in the Structural Impediment Initiative (SII) trade talks, the practice was never fully stamped out and continued to flourish. In 2006, Tadahiro Ando, the then governor of
Miyazaki Prefecture is a prefecture of Japan located on the island of Kyūshū. Miyazaki Prefecture has a population of 1,073,054 (1 June 2019) and has a geographic area of 7,735 km2 (2,986 sq mi). Miyazaki Prefecture borders Ōita Prefecture to the north, Ku ...
, resigned over a series of bid rigging allegations and was subsequently sentenced to over three years in jail. As of 2008, thirteen lawsuits were still pending over 1990s' bid rigging for local government contracts to supply incinerator plants.


Korea

In a three and half year period from 1995 to 1998 there was an estimated $4.13 billion surcharge attributed to bid rigging in Korea's construction industry, representing 15.5% of the total spent. It was also found that firms already present in an area enjoyed a significant degree of incumbency, meaning that they were more likely to continue to win additional contracts in areas they were already developing. This was discovered to be a result of complementary bidding. Some legal action has been undertaken against these bid rigging schemes with nine contracting companies and several officials being charged and fined $5 billion in 1999.


See also

*
Bribery Bribery is the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With regard to governmental operations, essentially, bribery is "Cor ...
*
Cartel A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Mos ...
*
Collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...
*
Corruption Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...
*
Organized crime Organized crime (or organised crime) is a category of transnational, national, or local groupings of highly centralized enterprises run by criminals to engage in illegal activity, most commonly for profit. While organized crime is generally th ...
*
Operation Car Wash Operation Car Wash ( pt, Operação Lava Jato) was a criminal investigation by the Federal Police of Brazil's Curitiba branch. It began in March 2014 and was initially headed by investigative judge in France, but unlike judges in the common l ...
*
Price fixing Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given ...


Further reading

* Choi, Jin-Wook (2007–09). "Governance Structure and Administrative Corruption in Japan: An Organizational Network Approach". Public Administration Review. 67 (5): 930–942. doi:10.1111/j.1540-6210.2007.00779.x. ISSN 0033-335 * LaCasse, Chantale (1995). "Bid Rigging and the Threat of Government Prosecution". The RAND Journal of Economics. 26 (3): 398–417. doi:10.2307/2555995. * Porter, Robert H.; Zona, J. Douglas (1993). "Detection of Bid Rigging in Procurement Auctions". Journal of Political Economy. 101 (3): 518–538. * Woodall, Brian (1993). "The Logic of Collusive Action: The Political Roots of Japan's Dangō System". Comparative Politics. 25 (3): 297–312. doi:10.2307/422247.


References

{{DEFAULTSORT:Bid Rigging Anti-competitive practices Conflict of interest Organized crime activity Bidding strategy