OFT Issues Lenient Fines for Non-Compliance in the Construction Industry

The Office of Fair Trading (‘OFT’) has fined 103 UK construction companies a total of £129.5 million for engaging in illegal anti-competitive bid-rigging activities, including ‘cover pricing’, on 199 tenders from 2000 to 2006. 

‘Cover pricing’ involves companies submitting artificially high bids for contracts they had no intention of winning, misleading clients as to the real extent of competition and distorting the tender process.  It makes it less likely that other potentially cheaper companies will be invited to tender.  Companies do this to remain on the client organisation’s list of preferred bidders for future tenders.

The OFT began its investigation of anti-competitive behaviour in construction in 2004, relating to building projects in the UK valued at £200 million, including schools, universities, hospitals and private projects.  It allegedly had evidence against over 1000 companies in connection to 400 contracts totalling £3 billion but pursued only 112 of them.

Among those fined were Kier Regional Limited at £17.9 million and Interserve Project Services at £11.6 million.  The OFT found six instances where successful bidders had paid to the unsuccessful bidder an agreed sum or compensation payment of between £2,500 and £60,000.  The payments were facilitated by raising false invoices.

Eighty-six of the 103 companies received reduced penalties because they admitted their involvement in cover pricing, many cooperated fully with the OFT’s investigation, and a significant proportion took measures to introduce formal compliance programmes and ensure their staff are aware of their legal obligations.  As a result, 33 parties received discounts on the level of fines of 35-65 per cent under the OFT’s leniency programme and 41 other parties received discounts up to 25 per cent under the March 2007 ‘fast track’ offer.  A further 12 parties received smaller reduced fines.

In total, fines were reduced from a pre-discount level of £194.4 million, a reduction of £64.9 million.  The 103 companies were on average fined £1.26 million, representing on average 1.14 per cent of their annual worldwide turnover.  This was much lower than the 10 per cent of companies’ annual turnover which the OFT could have required the companies to pay for breaching UK competition law.  The OFT also agreed to allow the fined companies to pay their fines over the course of the next three years when it could have required them to do so within two months of its decision to issue fines.  The OFT could have brought criminal prosecution (up to five years’ imprisonment) and director disqualification for up to 15 years but it did not.

Two of the top ten companies that received the highest fines received leniency by the OFT.  A subsidiary of Balfour Beatty Construction, Mansell Construction, was fined £5.2 million, a 50 per cent leniency reduction.  Balfour Beatty have said the anti-competitive behaviour took place before they acquired Mansell, and in light of the OFT investigation they carried out audits of all their businesses to ensure they are fully compliant with all aspects of competition law. 

Carillion JM Limited were fined £5.4 million, a 45 per cent leniency reduction, relating to activities at its subsidiary Mowlem before it acquired the company.  Carillion stated that immediately following the acquisition of Mowlem, it took steps to apply its own procedures within Mowlem to ensure it complied with the requirements of competition law.

The OFT fines serve as a reminder to all companies across all industries that by cooperating with the enforcement authorities in their investigations and by introducing and implementing formal compliance programmes which set high standards of conduct in everyday business practices, companies found to have engaged in illegal or corrupt activities will be more likely to receive less harsh penalties. 

The OFT’s leniency in the construction industry should be considered in light of the Guidance recently issued by the Serious Fraud Office, encouraging companies to voluntarily disclose suspected corruption and receive leniency in the form of an increased likelihood of a civil outcome as opposed to a criminal prosecution (provided board members are not implicated).

Companies should also conduct thorough due diligence on every business they seek to acquire or associate with and regularly review all of their businesses to ensure compliance with the law and codes of conduct.  Companies operating in the construction industry, for example, will have to ensure they comply with a new code of conduct that was introduced following the OFT’s bid-rigging investigations.  The code highlights the need for individual internal compliance programmes, and it will also be backed by guidance and training to help smaller companies that may not have the resources to put rigorous policies in place.

Sam Eastwood is a litigation partner and Head of the Business Ethics and Anti-Corruption Group and Chris Campbell-Holt is a researcher at Norton Rose LLP, http://www.nortonrose.com/. Chris was a member of the Secretariat of the Woolf Committee that was appointed by BAE Systems’ Board to report on BAE’s ethical policies and processes. Sam can be contacted on +44(0)20 7283 6000 or by email: sam.eastwood@nortonrose.com.

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