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Cartels face severe penalties

LAW

The Office of Fair Trading's decision against a cartel of nine roofing companies could be just the first in many price-fixing investigations.Other companies should heed the warning and check all is in order in their house, writes Stephen Tupper

AFTER one of the longest and most manpower-intensive investigations of its type ever undertaken, the Office of Fair Trading has issued a decision - reported recently in Construction News (March 25) - concerning a bid-rigging cartel in the flat roof contracting market.

At the heart of the illegal arrangements was a system whereby the companies involved 'covered' each other's prices. In other words, each company would put in what were, in effect, dummy bids, containing artificially high prices, for work being let by a customer that had been 'bagged' by a particular firm.

Nine roofing companies were fined a total of £330,000 for those and similar price-fixing arrangements that had taken place in the West Midlands and surrounding areas over the past four years. But rather than being the end of the story, this is just the beginning.The OFT is still conducting investigations into similar price-rigging activities that took place in other parts of the UK over the same period.Decisions relating to these investigations are expected over the coming months.

Before anyone in the construction world indulges in schadenfreude over the fate of a bunch of seemingly small-fry contractors, they should make absolutely sure that their own houses are in order.

For decades, British companies that were regularly involved in trade across borders have faced the spectre of hefty European Commission fines for illegal cartel activity. But prior to March 2000, when the bulk of the 1998 Competition Act came into operation, most construction companies had been insulated from the imposition of serious sanctions for participating in anti-competitive activities at home.

This, coupled with the obvious temptations that can arise in a sector where so much business is awarded after formal tendering procedures have been completed, creates a heady brew of complacency and opportunity.No one involved in the investigation, including the OFT itself, is in any doubt that what has happened in the flat roof segment has been, or is being, replicated elsewhere.

The construction industry is now firmly in the regulatory spotlight, but with a painful twist. If the events identified by the OFT had taken place after June 20, 2003, then, in accordance with provisions in the Enterprise Act 2002, criminal prosecutions would have been commenced in conjunction with the administrative investigation, and several members of the senior management of the firms involved would now be facing the real prospect of time in jail. So this decision should have set many alarm bells ringing.

Contractors should waste no time in conducting a comprehensive competition law audit and compliance programme. Even if you already have such a programme in place, you should review the OFT's decision in detail and arrange refresher training for all those staff members who are involved, both directly and indirectly, in sales and marketing.At the very least, you would be well advised to send a reminder to key personnel.

For those that have not been through a compliance procedure, an audit requires a company to review all relevant activity over the recent past to determine whether or not it may have been involved in illegal arrangements. At the same time, the company needs to start work on a prospective programme, which involves, for example, circulating a compliance diktat from the managing director or higher, a compliance manual, providing full training to most staff and so on.

Companies that carry out such an audit only to discover that offences have been committed have the option of following the example of two of the firms involved in the flat-roofing cartel by seeking leniency from the OFT.

Leniency can be granted from fines under the Competition Act 1998 and from criminal prosecution under the Enterprise Act 2002. Good as this may sound, however, obtaining leniency does not let you off the hook completely. All companies involved in price-fixing will have to face the music in terms of adverse publicity and the possibility that any third parties that were harmed financially from the wrong-doing will go to court, or to the Competition Appeals Tribunal, to seek monetary compensation.

On the other hand, if a company finds out it has been involved with illegal anti-competitive behaviour and chooses to do nothing about it, it will have to live with the possibility that one of the other members of the cartel will give them away.

Companies that fail to heed these warnings and undertake the simple steps outlined here will be running a significant risk.

All companies, be they large, medium or small, are equally affected by the law and none can afford to take the view that they will not be apprehended and dealt with in the same way as the flat-roofing cartel.

With the added sting provided by the Enterprise Act 2002, their senior management could come off a lot worse than the roofing companies' bosses.

It makes good sense, therefore, to waste no time making sure your employees not only understand the law but also abide by it.

Stephen Tupper is a partner with law firm Watson Farley & Williams.