Crime and punishment

The burly Yorkshire contractor laughs.

“If there is anyone in the construction industry smart enough to be involved in cartels I’d be surprised.”

On recent evidence, there are plenty smart enough. Last week, the Office of Fair Trading announced that it had launched dawn raids on 22 firms in the East Midlands and South Yorkshire; the suspicion was that they had been colluding on tenders for the past five years. That was just the latest in a series of cartel-crushing operations that the OFT has pursued in the industry over the past year. Indeed, construction’s tendency to collude has become so apparent that it is one of the five sectors the watchdog has prioritised in its 2005/06 business plan.

The OFT now poses a real threat to any firms that have fallen below the immaculate standards required by competition law. Not only are they at risk of fines as high as 10% of their global turnover, but directors face criminal prosecution by the Serious Fraud Office and the possibility of a 15-year disqualification from running a company. And it’s not just the conscious fraudsters who are risk: many companies are unsure what the OFT defines as collusion, are unaware that that definition has changed over the years and aren’t sure of their rights when facing investigation. How many bosses know what they can and can’t say when they run into a rival in their local pub?

Dawn raids

The term “dawn raids” is a joy for headline writers, but the reality is less exciting. For a start, the investigation team normally turns up at 9.30am and, according to one contractor with first-hand experience, “they’re really polite”.

Often the OFT has secured a warrant from the court to enter the premises immediately – otherwise a suspect company would have to be given two days’ notice, allowing time for key documents to be destroyed. Upon arrival, the team – often about six investigators – asks for the most senior person in the company. At this point, whoever that is should call for legal representation; ideally, each OFT investigator should be man-marked by a lawyer. The OFT allows about an hour for the lawyers to arrive, but insists that employees are taken to areas where they can be monitored and that IT systems are secured.

Sean McNabb, a principal investigation officer at the OFT, says that he welcomes the presence of lawyers: “Most firms will seek legal advice, often by telephone. We are conducting intrusive investigations, so some people respond in a less than positive way … Legal advice can help sometimes, as it can calm down a potentially confrontational situation.”

One contractor who did not seek legal advice was Terry Brown, managing director of Brown and Mason, one of several demolition contractors raided last month. The investigation team arrived at 9.30am and waited in the firm’s reception for Brown’s arrival 10 minutes later. As he wasn’t being interviewed, Brown decided not to call for a lawyer. Nicola Gare, senior solicitor at Davis Arnold Cooper, suggests that, even so, he should have done (see “What to do if they come for you”, below right). She says: “If the lawyer is there, they can do things like check the validity of the warrant. There was one instance where the OFT arrived at the wrong company.”

As it was, the OFT’s investigators left Brown and Mason after seven hours, taking with them an A4 folder containing about 50 pages of the company’s documents, including two fixed-price contracts and a list of successful bids. The OFT’s McNabb insists that the raiding teams are “pretty transparent” and tell their targets what they are supposed to have done. Brown claims that this was not the case: “They wouldn’t say what they were looking into. I sat down afterwards and asked them how it works. It amazed me that these people can inflict a fine on you and it doesn’t go to court.”

The flat roofing case

Brown later discovered that the investigation could take about a year, during which time the OFT has powers of intrusive surveillance. This may include, for example, bugging a hotel room where collusive meetings are suspected of taking place. At the end of this, the guilt of a company is adjudged and fines may be imposed.

In March, the OFT concluded its investigation into collusive tendering for flat roofing contracts in north-east England. Seven firms were found guilty of being involved, and £471,000 of fines were imposed.

One of the contracts scrutinised was for a roof at Willington Quay, a comprehensive school in north Tyneside. It seems that the West Midlands contractor Briggs Cladding and Roofing was desperate to win this job. Its only rival was a firm called Roofclad. It so happened that the two were also the only bidders for a second education project, George Stephenson Community High School in Newcastle, so they cut a deal. In a witness statement, Roofclad’s sole director Stewart Openshaw said: “I cannot remember the exact words of the conversation but the gist was that Briggs wanted to win Willington Quay. It was suggested that Roofclad submit a cover price to North Tyneside council. Essentially this meant that Briggs would tell me what their tender price was and Roofclad would ensure its price exceeded this sum.” In exchange, Briggs would produce a cover price on George Stephenson, ensuring that the companies split the work.

Roofclad had its fine cut 50% to about £12,500. This was part of the OFT’s “leniency” programme, whereby companies can have their fines reduced if they co-operate with the investigation, show that the collusion was a “one-off” and consult with staff to ensure that no further infringements of competition law occur.

In this manner, Briggs also had its entire £89,000 fine waived after it turned whistleblower, despite being considered guilty of collusion in three instances. It is believed that Briggs went to the OFT after a disgruntled employee threatened to inform on it. Whatever the truth of the case, it is clear that guilty contractors must now decide whether or not they sacrifice their relationships with their peers or risk a heavy fine.

The leniency policy, introduced in March 2000, has increased the number of cartels broken – in the past, the OFT relied on anonymous complaints or annoyed employees. The OFT’s McNabb says: “Leniency has been effective and has been important in the roofing sector.”

Construction culture

The roofing case has led to the OFT placing construction near the top of its hit list. Stephen Tupper, a senior lawyer specialising in competition law at Watson Farley Williams, says it also brought to light the arcane practices of smaller construction firms: “Construction was targeted because it became abundantly obvious that flat roofing could not possibly be the only sector of construction that does this.”

Tupper points out that many firms are aware that they are doing something wrong, but take comfort from the fact that they are conforming to a distinct industry culture. Theoretically, European industries compete within one vast free market, but only the

largest projects attract bids from outside the UK. Smaller jobs are competed for within relatively small regions, and there is a natural tendency for the firms within them to become “organised”. Some even argue that cartelising a region bring benefits on the grounds that without bid-rigging they wouldn’t have the enough money to provide basic safety equipment, such as hard hats.

The Enterprise Act changed all this when it came into force in 2002. The act showed that the government was looking at competition infringements as more than simply a matter for the European Union. The Dutch have been breaking construction cartels for decades – their equivalent of the OFT said earlier this year that it would be prosecuting HBG’s parent, Royal Bam, for collusion.

Construction is particularly vulnerable to “innocent” collusion because of the number of trade associations it contains. In these forums and the so-called bar chats before meetings, businessmen may exchange information that they regard as harmless gossip, but that the OFT could regard as breaching competition law – especially if it concerns methods of pricing or materials to be used. Contractors are therefore advised to remove items from agendas if there is any risk that they could be deemed collusive, or at least make sure they leave the room when they are discussed – and that this is noted in the minutes.

This old chums’ world of industry was exposed by the roofing case. In one contract, David Murray, managing director of Sunderland-based Hylton Roofing, admitted in his witness statement that he was asked “as a favour” to submit a cover price for a contract, and did so, albeit against his better judgment. There was no financial gain for Hylton or Murray and the OFT concluded that the latter was simply naive, and cut the company’s fine 35%. However, if the OFT takes a stronger line, a director can find themselves in far greater danger than just being fined under the Enterprise Act – they can be referred to the Serious Fraud Office, which could result in criminal prosecution.

This all seems a far cry from the jovial tone of the Yorkshire contractor quoted at the beginning of this article. He may be right that there are few “smart” or organised cartels operating in the construction industry. But the everyday practices of many firms will still need to be reformed if they are to ensure that the likes of Mr McNabb don’t turn up on their doorsteps.