Guest Author - Consuelo Herrera, CAMS, CFE
In the Keeping Free Markets Free story, the FBI portrays the scheme in which the president of a concrete company entered into an agreement to determine concrete’s prices. The story concludes with a not so good outcome because once the investigation was over, the company was ordered to pay a $29.2 million criminal fine as a result of the anti- trust investigation. The company’s president himself was sentenced to serve 48 months in prison and to pay a $829,715.85 criminal fine for his participation in three separate conspiracies with three different companies involving agreements to fix prices and/or to rig bids. The question is how much did this company win as a result of its violation of the Sherman Act? The FBI said that the conspirators “profited handsomely” without stating the figure.
Sometimes companies enter into a Price Fixing Agreement, which is an agreement between competitors where the competitors agree to fix the prices of products and services at a certain level. Title 15th, Chapter 1 of the U.S. Code states: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.”
Every business is exposed to the pervasive effects, even an unintentional violation, of these regulations. A forensic accountant’s ability to investigate approaches to uncover schemes involving anti-trust violations such as fictitious trades,which can be publicized through corporate newsletters. The goal is to, deliberately and knowingly, entice investors who are lured by the idea that they will obtain a higher value or profitability. The Department of Justice describes activities that conspirators carry out when entering into these agreements:
• Attending meetings or otherwise engaging in discussions in the United States and elsewhere by telephone, facsimile and electronic mail regarding the sale of products;
• Agreeing during those meetings and discussions to allocate shares of the product market among the conspirators;
• Agreeing during those meetings and discussions to a price list for the product they want to trade, in order to implement and monitor the conspiracy;
• Agreeing during those meetings and discussions not to compete for one another's customers either by not submitting prices or bids to certain customers or by submitting intentionally high prices or bids to certain customers;
• Submitting bids in accordance with the agreements reached;
• Providing information received from customers in the United States and elsewhere about upcoming jobs to a co-conspirator who was not an employee of any of the product’s manufacturers, but served as the coordinator of the conspiracy and acted as a clearinghouse for information to be shared among the conspirators;
• Receiving products’ prices for customers in the United States and elsewhere from the co-conspirator coordinator of the conspiracy;
• Selling products to customers in the United States and elsewhere at collusive and noncompetitive prices pursuant to the agreements reached;
• Accepting payment for products sold in the United States and elsewhere at collusive and noncompetitive prices;
• Authorizing or consenting to the participation of subordinate employees in the conspiracy; and
• Concealing the conspiracy and conspiratorial contacts through various means, including code names and private e-mail accounts and telephone numbers. The perpetrators made false statements to a federal law enforcement agent when questioned about their role and the role of others employed at the firm carrying out the conspiracy.
To prevent bid rigging, one of the most prevalent corporate frauds that engages the same executives and employees, avoid predictability of the contract terms and specifications. Acting to deter this kind of fraud is a paramount, otherwise organizations would be in an environment that fosters fraud and corruption. Protect a free market by implementing effective controls that prevent illicit activities such price fixing and bid rigging.
Following these guidelines issued by the US Department of Justice will help every business to be alert of potential red flags:
Conditions Favorable To Collusion
• Collusion is more likely to occur if there are few sellers. The fewer the number of sellers, the easier it is for them to get together and agree on prices, bids, customers, or territories. Collusion may also occur when the number of firms is fairly large, but there is a small group of major sellers and the rest are "fringe" sellers who control only a small fraction of the market.
• The probability of collusion increases if other products cannot easily be substituted for the product in question or if there are restrictive specifications for the product being procured.
• The more standardized a product is, the easier it is for competing firms to reach agreement on a common price structure. To agree on other forms of competition, such as design, features, quality, or service is harder.
• Repetitive purchases may increase the chance of collusion. Vendors may become familiar with other bidders and future contracts provide the opportunity for competitors to share the work.
• Collusion is more likely if the competitors know each other well through social connections, trade associations, legitimate business contacts, or shifting employment from one company to another.
• Bidders who congregate in the same location to submit their bids have an easy opportunity for last-minute communications.