How Anticorruption Enforcement Can Undermine Antitrust Amnesty Programs, and What To Do About It

One of the most important law enforcement techniques that has emerged in the last few decades to combat cartels (anticompetitive collusion between competitors) is the use of programs that promise automatic amnesty to the first member of a cartel to self-report the illegal enterprise. These amnesty programs enable law enforcement authorities to gather the evidence they need to build strong cases against other members of the scheme, and, perhaps more importantly, these amnesty programs destabilize cartels—and might even deter their formation—by taking advantage of the incentive that individual cartel members have to cheat on each other. Since the 1990s, after the success of the amnesty program pioneered by the Antitrust Division of the U.S. Department of Justice (DOJ), antitrust amnesty programs have been replicated in many jurisdictions, leading some to declare a “leniency revolution” in competition law.

But the existing amnesty programs have a weakness They usually only offer protection for violations of antitrust laws, leaving even the firm that self-reports the antitrust violations potentially liable for other unlawful conduct that the cartel members engaged in as part of their anticompetitive scheme. And many of these anticompetitive schemes turn out to involve corruption, especially in the public procurement context. Cartels often bribe the official in charge of the procurement process, because a corrupt official can monitor and punish defections from the cartel, facilitate the exclusion of non-aligned competitors, and ensure an equal distribution of cartel profits. A firm that hopes to take advantage of an antitrust amnesty program might have to report all of this to qualify for amnesty, as often the programs require, as a condition for amnesty, reporting on the involvement not only of other cartel members, but of any public officials who may have facilitated the collusive conduct. But the fact that a self-reporting cartel member is not guaranteed amnesty from prosecution for corruption or other associated wrongdoing (such as money laundering) complicates the operation of antitrust amnesty programs, because this lack of guaranteed amnesty weakens the incentive of cartel members to self-report in cases where the cartel has engaged in bribery. The problem is especially pronounced when the penalties for bribery are much more severe than those typically imposed in cartel cases.

This is less of a problem in jurisdictions where anticorruption and antitrust authorities are departments of a single agency, as with the US Department of Justice (DOJ). But in many other jurisdictions, such as the EU, Brazil, and Mexico, competition law enforcement—and administration of the antitrust amnesty programs—are handled by enforcement agencies that do not have authority to prosecute corruption cases. From a potential self-disclosing company’s perspective, this poses a challenge: Disclosing participation in a bribe-paying cartel to the competition authority may also trigger an enforcement action by the separate agency responsible for prosecuting corruption, meaning the company will have to negotiate with both agencies, with the anticorruption agency not bound by the antitrust amnesty program. Indeed, in many countries anticorruption agencies may not have the same authority as antitrust agencies to grant leniency to self-reporting companies. In Brazil, for instance, though an antitrust amnesty program has been in place since 2000, settling corruption cases only became possible in 2014. In Mexico, the antitrust amnesty program was created in 2006, but a program for self-reporting bribery cases only entered into force in 2016. In both countries, although there is an established process for settling corruption investigations, there is no immunity provision for self-reporting; a discount in the applicable fines is often the best a firm can hope for. And even when both the antitrust agency and the anticorruption agency have authority to settle and grant leniency, the mere fact that a company knows it will need to enter into two or more separate negotiations increases the uncertainty and costs associated with self-disclosure, undermining the effectiveness of the amnesty program.

How should this problem be addressed in those countries where merging authority over antitrust and anticorruption enforcement in a single agency is not feasible or desirable? There are several possibilities:

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Guest Post: Afghanistan’s Radical–and So-Far-Surprisingly Successful–Public Procurement Reforms

Today’s guest post is co-authored by frequent GAB guest contributor Mark Pyman, Senior Fellow at the London Institute for Statecraft and former Commissioner of the Afghanistan Joint Independent Anti-Corruption Monitoring and Evaluation Committee, together with Sohail Kaakar of the Afghanistan National Procurement Authority.

Afghanistan may be one of the most corrupt countries in the world, but it is also where some of the world’s most innovative anticorruption solutions are being implemented. Case in point: Afghanistan’s reforms to its public procurement system.

In Afghanistan, government procurement accounts for 19% of GDP and almost 50% of the national budget. However, procurement corruption has long been endemic, with many figures taking large cuts from almost every contract, and many contracts being little more than money-extraction schemes. But in 2015—at a critical juncture, when Afghanistan’s government was faced with unprecedented public pressure due to insecurity, recession, withdrawal of international troops—the government adopted significant reforms to its procurement system in order to curb corruption and improve government performance. (The immediate catalyst for the reform was a particularly corrupt military fuel contract, but the reforms go well beyond addressing this one incident.)

After a brief review of alternatives, the Afghan government decided on a radical reform based on a single regulatory body and a centralized procurement system. Continue reading

Getting Serious (and Technical) About Procurement Corruption: The Transparent Public Procurement Rating Project

For corruption fighters, public procurement is notable for two reasons. One, it is damnably complex. Two, it is often permeated with corrupt deals.  The latter makes it a critical target of anticorruption policy, the former a tough nut to crack. The thicket of laws, regulations, standard bidding documents, and practices that govern procurement means civil society groups advocating counter corruption measures are often at sea.  Lacking expertise on this bewildering set of rules, they can do little more than campaign in general terms for reform, urging steps like “greater transparency” or “tougher penalties” for corrupt activities.

But as anyone knows who has tried to persuade a government of uncertain will and commitment to adopt effective anticorruption policies, the devil is in the details.  Unless one has mastered the details of public procurement, a government can do all sorts of things to “improve transparency” or “crack down on procurement scofflaws” that are nothing but public relations gambits. So it is a pleasure to report that civil society organizations in Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine have joined to form the Transparent Public Procurement Rating Project, which provides a way for staff to master the details of the public procurement and to thus be able to present detailed proposals for rooting corruption out of their nation’s public procurement systems.    Continue reading

Ceiling Prices: A Second Best Method for Attacking Bid Rigging

The procurement laws of all countries provide that with a few, narrowly drawn exceptions public contracts are to be awarded on the basis competition.  As the drafters of the UN model procurement law explain, the reason is straightforward. A competitive procurement gives all those seeking the government’s business an equal chance to win the contract while at the same time maximizing the chance that government will receive quality goods, services, or civil works at the lowest price.

The problem comes when would-be suppliers do not compete for government’s business.  When instead of each one preparing its bid independently, based on what price the firm can charge and still make a reasonable profit, the bidders sit together and agree which one will “win” the contract and at what price, a price that can sometimes be twice what it would have been were there competition.

How can a government reap the benefits of competition when bidders have rigged the bid? The answer is that it cannot.  At least not immediately.  It can, as both the U.S. Department of Justice and the OECD recommend, institute procedures that make it harder for firms to collude, and it can, again as both these agencies regularly urge, vigorously enforce laws that outlaw bid rigging.  But these measures take time to have an effect; in the meantime, a government cannot halt all procurements.  It still needs to buy computers, desks, and other goods, to contract with cleaning, fumigation, and other service providers, and it must continue to build and repair roads, damns, and other civil works.

So in the face of collusion or cartel-like behavior by its suppliers, is government powerless in the short-run?  Must it accept whatever price the bid riggers offer? No matter how high it might be? Continue reading

Guest Post: Did the London Summit Make a Difference to Open Contracting? Does Open Contracting Make a Difference for Tackling Procurement Corruption?

Gavin Hayman, Executive Director of the Open Contracting Partnership, provides today’s guest post:

Anyone remember the London Anti-Corruption Summit last May? It seems like a long, long time ago now, but it was a big deal for us when 14 countries stepped forward at the Summit to implement the Open Contracting Data Standard to open, share, and track all data and documents coming from the billions of dollars that they are spending on public contracting and procurement each year.

One year later, how well have these countries have followed through on their commitments, and how much of a difference open contracting has made in combating corruption in public procurement? After all, it is government’s number one corruption risk; it’s where money, opacity, and government discretion collide.

The news is generally positive: the Summit commitments appear to have promoted genuine progress toward more open contracting in many of those countries, and the preliminary evidence indicates that such moves help reduce procurement corruption. Continue reading

Guest Post: An Exercise in Underachievement–The UK’s Half-Hearted Half-Measures To Exclude Corrupt Bidders from Public Procurement

GAB is delighted to welcome back Susan Hawley, policy director of Corruption Watch, to contribute today’s guest post:

A year ago, in May 2016, the UK government gathered 43 nations around the world together at the London Anti-Corruption Summit to show their commitment to fighting corruption. The resulting declaration made a number of bold promises. One of the most important—though not one that grabbed a lot of headlines—was the announcement that corrupt bidders should not be allowed to bid for government contracts, and the associated pledge by the declaration’s signatories that they would commit to ensuring that information about final convictions would be made available to procurement bodies across borders. Seventeen signatories went further, making specific commitments to exclude corrupt bidders, while six countries pledged to establish a centralized database of convicted companies as a way of ensuring procurement bodies could access relevant information. (Three other countries committed to exploring that possibility.)

The London Anti-Corruption Summit was right to be ambitious about focus on this issue in its declaration. Research shows that the risk of losing business opportunities such as through debarment from public contracts ranks has a powerful deterrent effect—equal to that associated with individual executives facing imprisonment, and much greater than one-off penalties such as fines. Yet debarment of corrupt companies for public contracting is quite rare. The OECD Foreign Bribery report found that while 57% of the 427 foreign bribery cases it looked at spanning 15 years involved bribes to obtain government procurement contracts, only two resulted in debarment. Even the US which has a relatively advanced debarment regime and which debars or suspends around 5000 entities a year from public procurement, appears to debar very few for foreign bribery and corruption. And the UK does not appear to have ever excluded a company from public procurement, despite laws in place since 2006 that require companies convicted of corruption and other serious crimes to be excluded from public contracts.

Did the London Anti-Corruption Summit mark significant turning point in the UK’s approach to this issue? Having persuaded 43 countries to sign a declaration that included a commitment to exclude corrupt bidders, did the UK have its own bold new vision to implement that commitment domestically? Unfortunately, the answer is no. Continue reading

Exposing Procurement Corruption: Ten Questions to Ask

No government activity is more susceptible to corruption than public procurement. The process by which government decides what to buy and from whom is lengthy, technically complex, and riddled with decision points that give procurement officers enormous discretion.  Oversight is thus especially difficult.  Moreover, because so much money is involved, the temptations procurement offers corrupt public servants and their private sector accomplices are particularly great.  Some developed countries spend as much as one-third of their budget on the purchase of public works, goods, and services, and the available data suggests the figure may even be higher in developing countries.

With so much at risk, it is no wonder that there has been an explosion of material on fighting corruption in public procurement.  The OECD, the World Bank, the European Union, and Transparency International have each issued a slew of publications on how to prevent corruption in public procurement, and the latest edition of Matthew’s anticorruption bibliography catalogues more than 100 articles, pamphlets, and books by academics, think tanks, and advocacy organizations on corruption in public procurement. Indeed, the amount of material is so overwhelming that reporters, civil society groups, and even parliamentarians and government auditors may be discouraged from pursuing allegations of procurement corruption.  For how does one know where to start?

Below are ten simple, straightforward questions that provide a starting-point.  They can be asked about any government purchase:  from “off-the-shelf” items like pencils and paper to a new road or bridge to the acquisition of customized IT systems.  The answers will provide a telling first indication of whether the procurement merits further scrutiny.  Continue reading