By Dave Loxton
The press has recently been full of articles on price fixing and other forms of collusion by a number of high profile South African Companies. A number of large fines have been imposed, often by agreement between the affected company and the Competition Commission. A number of companies have escaped censure by co-operating fully in the investigation by the Competition authorities to obtain what is known as “corporate leniency in respect of its participation in collusive activities.
It would appear that the greater the degree of cooperation, the greater the chance of full indemnity being granted. Put differently, a company would generally be advised by its advisors to make full and frank disclosure in order to obtain corporate leniency. This would in all likelihood minimise the risk of a substantial penalty being imposed by the relevant Competition authorities.
Although criminal sanctions are to be included in the Competition Act in the near future, parties and their advisors often neglect to consider that the provisions of the Prevention and Combating of Corrupt Activities Act 12 of 2004 (“PCCA Act”) may already result in criminal sanctions for certain types of conduct. This is one of the many pieces of anti-corruption legislation promulgated by the legislature, designed to stamp out organised crime, racketeering and general corruption. PCCA Act sets out offences in respect of corrupt activities. The provisions of Sections 12 and 13 are of particular interest for the purposes of this discussion. These two sections deal in particular detail with the offences in respect of corrupt activities relating to contracts and the procuring and withdrawal of tenders. Broadly speaking, PCCA Act provides that it is an offence for anybody to agree or offer to accept what is called a gratification from another person, in order to improperly influence in any way, the execution or procurement of a contract, or to fix the price stipulated or otherwise provided for in any such contract, or to influence a person to accept a particular tender, or to withdraw a tender made by him for such contract.
These provisions deal with conduct which the Competition Commission is very often investigating. The South African consumer has the right to expect the benefit of free and open competition: the best goods and services at the lowest price, but a competitive bidding process is necessary to achieve that end. This competitive process only works however, when competitors set prices honestly, openly and independently. When there is collusion the whole system breaks down. Prices are inflated and ultimately the consumer is cheated. That is why price fixing, bid rigging, and other forms of collusion are illegal and outlawed in most countries in the world. Indeed, that is why the Competition Commission in South Africa is so active in trying to stamp out practices which ultimately harm the consumer.
Broadly speaking collusion of the nature we are dealing with in this discussion falls into the following categories :
- A Bid Suppression Scheme. This occurs if one or more competitors who otherwise would be expected to bid, or who have previously bid, agree to refrain from bidding or withdraw a previously submitted bid, so that the chosen winning competitor’s bid is accepted.
- Complementary Bidding. This is also known as cover or courtesy bidding. This occurs when some competitors agree to submit bids that are either too high to be accepted, or contain special terms that will obviously not be acceptable to the purchaser. Such a bid is not intended to secure the buyers acceptance, but is merely designed to give the appearance of genuine competitive bidding. These kinds of bid schemes are the most frequently occurring forms of bid rigging and they defraud purchasers by creating the appearance of competition, to conceal secretly inflated prices.
- Bid Rotation. In such schemes all conspirators submit bids but take turns in being the lowest bidder. The terms of the rotation may vary. For example, competitors may take turns on contracts according to the size of the contract, allocating equal amounts to each conspirator, or allocating volumes that correspond to the size of each conspirator company.
- Sub-contracting. These arrangements are often part of a bid rigging scheme. Competitors who agree not to bid, or to submit a losing bid, frequently receive sub-contracts or supply contracts, in exchange for not bidding, from the successful bidder. In some schemes a low bidder will agree to withdraw its bid in favour of the next low bidder, in exchange for a lucrative sub-contract that divides the illegally obtained higher price between them.
Almost all forms of bid rigging schemes have one thing in common :
an agreement amongst some or all of the bidders which predetermines the winning bidder and limits or eliminates competition amongst the conspiring vendors.
Other forms of collusion include market division or allocation schemes, which are agreements in which competitors divide markets, among themselves. In such schemes competing firms allocate specific customers or customers products or territories amongst themselves. For example, one competitor will be allowed to sell to or bid on contracts by certain customers or types of customers. In return he will not sell to or bid on contracts held by customers allocated to the other competitors. In other schemes, competitors agree to sell only to customers in certain geographical areas, and refuse to sell to customers in geographic areas allocated to conspirator companies.
Bid rigging, price fixing and other collusive agreements are usually reached in secret and as such can be very difficult to detect. However the type of conduct as set out above is a lot more common than one would like to think. As already stated, the Competition Commission is doing an admirable job in hunting down and prosecuting offending companies. Let us now turn to examine the consequences of full and frank disclosures.
Assume for the purposes of this discussion that Company A has been involved in bid rigging in the form of complementary bidding. Company A has agreed to submit bids that are clearly inflated and contain special onerous terms that will not be acceptable to the purchaser. This was designed to give the appearance of genuine competitive bidding, but was part of a grand scheme to assist Company B to obtain the bid. In return for this conduct company A obtains a lucrative sub-contract.
The Competition Commission gets wind of this and there are widespread press reports that it is now about to investigate the particular industry within which Companies A and B operate. The board of Company A takes fright and instructs its legal advisors that they should approach the Competition Commission immediately and offer its full cooperation in return for corporate leniency. That way it will not have to pay any financial penalty. In conjunction with its legal advisors a designated director submits an affidavit to the Competition Commission, detailing in full, each and every aspect of Company A’s conduct around the complementary bidding, and setting out in great detail the names of the other parties to the collusive conduct, and also details the financial benefit obtained. Nothing is kept secret, with the idea being that there will be no financial penalties which might affect the share-price of Company A.
The Competition Commission grants full corporate leniency and Company A’s board of directors heaves a great sigh of relief. The only fall out has been reputational and the board believes that it can manage that.
However, when one turns to consider Sections 12 and 13 of PCCA Act, and indeed the common law crime of fraud, perhaps our board of directors should not be sleeping so easily. Assume that a disgruntled customer approaches the South African Police Services in terms of Section 34 of PCCA Act, and details the admissions. The customer duly calls for an investigation to be conducted by the South Africa Police Services in terms of Sections 12 and 14 of PCCA Act. What now?
It seems as if the relevant director, and indeed the whole board of Company A, will have some difficulty persuading a court of law that the relevant director (and indeed the board) is not guilty of an offence in respect of corrupt activities relating to the procuring and withdrawal of tenders, as the conduct falls squarely within the ambit of Section 13 of PCCA Act. There is the acceptance of a gratification, in the sense that Company A was awarded the sub-contract. The gratification was offered as an inducement to influence the purchaser to accept the particular tender. There is a misrepresentation to the purchaser that the bids are genuine. Such conduct is unlawful and intentional and there is potential prejudice, in the sense that the purchaser pays more than is necessary.(It could even be argued that the requirements of the common law crime of fraud have been met.)
Companies and their directors and management will therefore be well advised to consider the provisions of PCCA Act before gayly making full and frank disclosures to the Competition Commission to obtain corporate leniency in terms of the Competition Act. The consequences for the directors could be enormous. They could not only face a jail sentence, or fine or both, but furthermore Section 28 of PCCA Act provides that the particulars of the convicted individuals should be endorsed on a register. The consequences of that endorsement are that that particular company will not obtain any government work for a period of at least five years.