A hive of illegal activity

Supply Management, May 22, 2008 by Brass, Richard

An OFT investigator tells Richard Brass how buyers are well placed to spot cartel involvement

When asked what he thinks is the best part of his job, James Allen says it's the variety and the opportunity to travel all over the country: "I've worked in Cornwall and in the Shetland Islands, and it's nice to meet people when you go out and about."

Whether those people are quite so happy to meet him is another question, because Alien is a principal investigations officer with the Office of Fair Trading, and the travel he does is to investigate businesses suspected of involvement in cartels.

Under the powers vested in the OFT, whether in Penzance or Lerwick, he can search a company's premises or turn up and demand documents he will copy and take away to scrutinise for evidence of price-fixing or other illegal anti-competitive behaviour. The result for the business, if found guilty, could be a fine of up to 10 per cent of its revenue and a prison term of up to five years for the directors.

Allen and his colleagues appear to have been making plenty of visits lately.

The OFT is expected to impose multi-million pound fines on more than 100 construction companies after a three-year investigation into bid-rigging on local council contracts worth £3 billion.

The inquiry, the largest in the OFT's history, relates to 3,000 construction contracts in England and touches on some of the biggest names in the construction industry. The companies concerned now have the option to defend themselves in writing to the OFT.

The news of the construction case coincides with a move by the OFT to encourage whistleblowing on price-fixing by offering a reward of up to £100,000 to anyone who exposes a cartel.

Allen says the offer of a reward is aimed at bringing the activities of the OFT into the mainstream of crime investigation. "It's a given that the law enforcement authorities pay money for information," he says. "The police do, the tax authorities do. We are looking to investigate serious crime, and we want to incentivise people to come to us with information about it."

When it comes to the effects of price-fixing, procurement is on the front line. Buyers, Allen believes, could be among the first to spot the signs of illegal activity. "We're very keen to encourage traders to be aware of risk and to come to us with their suspicions at the earliest opportunity. For buyers, it's about an awareness that you are at risk from cartels when you're buying, and looking for signs that might suggest potential suppliers have colluded with each other to affect prices and markets."

And what are those signs? "Similar pricing, similar price rises for a start. For instance, buyers will often be mail-shotted by suppliers with price increase letters written in similar language, with similar dates and price rises. Then there are unguarded comments that suppliers will make, like saying, 'There's no point asking for another price elsewhere because you won't get one.' People do say things like that.

"If there is anything buyers think is suspicious, we want them to speak to us as soon as they can, and to keep records of meetings they've had, original correspondence and notes of things they think are suspicious."

But buyers need not feel the burden for rooting out price-fixing lies entirely with them. Most of the OFT's investigations are triggered by cartel participants coming forward in exchange for leniency, as Virgin Atlantic did in exposing its fuel-tax surcharge-rigging collusion with British Airways in 2006.

The move may not have won Virgin many friends at its rival airline, but it did help avoid the £121.5 million fine the OFT imposed on BA.

The Virgin/BA case illustrates how dependent the OFT is on participants coming forward to confess about incidents of price-fixing, an unavoidable occupational hazard that also makes it difficult to get a clear idea of the prevalence of such activity.

"Cartels are by their nature secret, and therefore it is very difficult to give any accurate assessment of how many there are," says Allen. "The OECD quotes that cartels add something like 10 per cent to prices generally, so that makes them a significant economic problem."

The BA case, which resulted in a fine only a little over a year after the activity was first reported to the OFT, also illustrates another aspect of the way the office approaches its work, Allen says. "We're willing to look for a speedy process and a settlement with companies that we're investigating."

But if companies don't co-operate, there's always the threat of those unwelcome visits to urge them along.

"We've got powers to carry out what the press like to call 'dawn raids'. But that isn't a very accurate description. They don't happen at dawn and they're not very raid-like."

Richard Brass is a freelance business journalist