Last year, the Antitrust Division’s Deputy Assistant Attorney General for Criminal Enforcement, Richard Powers, spoke at the Public Contract Law Section’s Procurement Symposium. He emphasized the Division’s long history of criminal enforcement involving government contracting and explained the Division’s desire to contribute “to the important dialogue about public procurement issues, in which the ABA’s Public Contract Law Section has been a leading voice for over six decades.” Since that address, the Division’s efforts to detect antitrust wrongs affecting public procurement have expanded, strengthened by a first-of-its-kind interagency partnership. As a result, public contract lawyers and their clients should continue to be attuned to antitrust risks.
The Division criminally prosecutes conspiracies among competitors to rig bids, fix prices, and divide markets that distort the free market and cheat consumers of competitive prices and quality goods and services. Antitrust conspiracies cause particularly grave harm when they affect public procurement. Collusion targeting public contracts compromises the integrity of the process through which the government purchases goods and services, and the costs of collusion are borne by taxpayers.
For that reason, collusion affecting the government has long been a focus of the Division’s investigative and prosecutorial efforts. Indeed, the Division Manual explains that, in determining whether to open an investigation, “[b]ecause the Division’s mission requires it to seek redress from any criminal antitrust conspiracy that victimizes the Federal Government and, therefore, injures American taxpayers,” misconduct that directly impacts the government “is potentially by itself dispositive.”
The nature of public procurement makes it particularly vulnerable to collusion. Not only is combatting that collusion core to the Division’s mission, but the impact from these efforts stands to be particularly significant. In fact, an Organisation for Economic Co-operation and Development study estimated that eliminating bid rigging could reduce procurement costs by 20 percent or more. Because the federal government spends hundreds of billions of dollars each year on contracts for goods and services, reducing anticompetitive conduct in procurement could save tens of billions of dollars per year.
To bolster the effort to combat procurement collusion, in November 2019, the Antitrust Division spearheaded the formation of the Procurement Collusion Strike Force (PCSF). The PCSF harnesses the combined capacity and expertise of prosecutors from the Division’s five criminal offices and thirteen U.S. Attorneys’ Offices, along with investigators from the Federal Bureau of Investigation and four federal Offices of the Inspector General, to combat antitrust crimes and related schemes affecting procurement at all levels of government.
The PCSF is a virtual strike force organized in thirteen district-focused teams. Each district team, which includes national partners along with additional in-district working partners, uses its collective resources and skills to fulfil the PCSF’s mission of deterring, detecting, and prosecuting crimes that undermine competition in government procurement, grant, and program funding. A key part of the PCSF’s deterrence mission is conducting outreach and providing training so that procurement officials, government contractors, criminal investigators, auditors, and data scientists all recognize and report antitrust risks and potential wrongdoing in the procurement process. Since its launch, the PCSF has conducted over thirty in-person outreach presentations in thirteen states and the District of Columbia. Amid the pandemic, the PCSF has transitioned to online training. To date, the PCSF has provided interactive virtual training to approximately 5,500 representatives from 500 federal, state, and local agencies.
The PCSF has also seen early success in terms of investigation and prosecution. First, the PCSF’s thirteen district teams have experienced exponential growth with active participation of over 100 federal, state, and local in-district working partners that bolster investigative and prosecution efforts. District teams average more than eight working partners, including key state and local agencies like the Washington Area Metropolitan Transit Authority and the Miami-Dade County Office of the Inspector General. Second, the PCSF has received numerous citizen complaints of possible illegal conduct through its web-based reporting portal and has more than a dozen open and active grand jury investigations.
The PCSF has also led the effort to develop and marshal data analytics tools to detect and prosecute antitrust crimes affecting public procurement. The PCSF has engaged with data scientists and analysts across all levels of government to improve the use of data analytics to identify red flags signaling collusion in government procurement data. Many investigative agencies individually have made great strides on this front, and the PCSF is facilitating greater collaboration and the sharing of best practices among these agencies by leading training programs and convening roundtables.
The Sherman Act prohibits conspiracies among competitors to fix prices, rig bids, and allocate customers. Violating the Sherman Act is a felony. Executives face a prison term of up to ten years, in addition to significant criminal fines and the consequences of a felony conviction. Over the last decade, the average prison sentence in Division cases is 18 months. For example, in June 2020, the former chief executive officer and president of Bumble Bee Foods LLC was sentenced to serve forty months in prison and pay a $100,000 criminal fine following his conviction at trial for leading a three-year conspiracy to fix the prices of over $600 million of canned tuna.
In turn, corporate wrongdoers face significant fines, civil damages, and debarment. The statutory maximum fine for a Sherman Act violation is $100 million, and the maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by victims if either amount is above $100 million. The Division has obtained fines as high as $925 million. Since September 2019, the Division has obtained four corporate criminal fines and penalties at or above the $100 million statutory maximum. For example, in July 2020, Taro Pharmaceuticals U.S.A., Inc. (Taro) was charged with conspiring to fix prices, allocate customers, and rig bids for generic drugs. To resolve a two-count felony charge, Taro agreed to a deferred prosecution agreement, under which it agreed to pay a $205.7 million criminal penalty.
When the federal government or its agencies are victims of antitrust violations, the Department of Justice can obtain triple damages under Section 4A of the Clayton Act, along with civil penalties under the False Claims Act. In 2018, following the first significant settlements under Section 4A in many years, Assistant Attorney General Delrahim confirmed the Division “will exercise 4A authority to seek compensation for taxpayers when the government has been the victim of an antitrust violation.”
Private parties, including state and local governments, can also obtain triple damages as a result of an antitrust violation under Section 4 of the Clayton Act. Private parties may also use guilty pleas and convictions for price-fixing, bid rigging, and market allocation as prima facie evidence in follow-on civil suits.
Conviction for antitrust offenses can also result in debarment. For example, FAR 9.406-2 provides for debarment for convictions of federal antitrust statutes “relating to the submission of offers.” Likewise, as noted in Taro’s deferred prosecution agreement, its conviction for violating the Sherman Act would likely have resulted in mandatory exclusion from all federal health care programs under 42 U.S.C. § 1320a-7.
Public contracting is particularly susceptible to antitrust offenses and other forms of collusion. Bid rigging—an agreement among competitors that limits competition in the bidding process—is the type of collusion occurring most frequently in this context. It may take the form of bid rotation, in which competitors take turns winning bids; complementary or “cover” bids, in which certain competitors submit intentionally high or otherwise unacceptable bids; or bid suppression, in which certain competitors refrain from bidding on particular projects. Allocation agreements, in which competitors divide up a market by geographic region, customer, or type of product, can also occur in public contracting. All such schemes are designed to ensure that a particular company wins the business at a higher price than it would in a genuinely competitive market.
Several aspects of public procurement make it especially vulnerable to such schemes. Potential sellers must undergo a qualification process to bid on public contracts, which results in relatively few eligible bidders and makes it more difficult for new competitors to enter the market. Having a smaller pool of eligible bidders makes it easier for those bidders to improperly coordinate their bids. That government agencies often require specialized goods and services, or have rush or emergency projects such as disaster-relief efforts, further limits the number of qualified bidders and creates opportunities to cheat. Government agencies also may have repetitive or regularly scheduled purchases, and regulatory requirements governing procurement can make the process predictable and thus subject to bid rotation and other forms of bid manipulation. The immense monetary value of government projects also provides an incentive for greed to prevail over truly competitive conduct.
Prime and subcontractor agreements, teaming arrangements, and joint ventures bring additional risks. Such arrangements can, of course, be procompetitive and efficient, allowing companies to combine their capabilities to offer the government better products and services at a lower cost. But such arrangements also provide an opportunity to collude.
Companies that share pricing and other competitive information in the context of a legitimate teaming arrangement may be tempted to use that information to inform their bids on projects outside the teaming arrangement, for which they should be competing against one another. Companies may agree that one or more of them will refrain from competing on the prime contract, or submit a deliberately losing bid, in exchange for receiving a subcontract. Prime contractors also can facilitate bid coordination among potential subcontractors, often in exchange for a cut of the profits or favorable treatment on other transactions. That many companies are repeat players in a given market and can act as prime or subcontractors on different projects increases their opportunities to coordinate and potentially collude on government projects.
In counseling clients or conducting internal investigations, certain red flags should be kept in mind as possible signs of bid rigging or other collusion. These include instances in which the same companies win and lose bids over time; companies appear to win the same amount of business over a series of bids; companies only submit bids in certain geographic areas or for certain projects despite being qualified and able to bid on others; bids are much higher than estimates or there are sudden increases in price that cannot be explained by increased costs; there are large price differences between the winning and losing bids; or winning companies subcontract to losing bidders.
Division prosecutors have a variety of fraud charges at their disposal to combat collusion, in addition to the more typical antitrust charges brought under the Sherman Act. Where the evidence supports it, the Division may charge mail or wire fraud, conspiracy to defraud the United States, major fraud against the United States, false claims, bribery of a federal official, bribery of a state or local official, or kickbacks by private contractors. Deliberately falsifying the certificate of independent price determination required by FAR 52.203-2 can also lead to allegations of fraud.
The Division may charge fraud and antitrust violations together, as in the case of a corrupt purchasing agent facilitating collusion among bidders. Where the evidence does not show an antitrust violation among horizontal competitors, the Division may still charge fraud, particularly where it undermines competition. This can include collusion among companies with overlapping ownership, bidders setting up sham companies to submit bids, or companies soliciting their competitors to rig bids. Ferreting out and prosecuting all such conduct is a key mission of the Division and the PCSF.
Recent cases underscore the Division’s commitment to investigating and prosecuting collusion in public procurement. They also illustrate how conditions favorable to collusion and red flags of bid rigging can signal unlawful conduct.
In November 2018 and March 2019, for example, five South Korean oil companies agreed to plead guilty for their involvement in a decade-long bid-rigging conspiracy that targeted over $600 million in contracts to supply fuel to U.S. military bases in South Korea. According to the publicly filed charges, the companies discussed and agreed which one would win each line item in each solicitation, and at what price. They then bid accordingly, with some submitting intentionally losing bids or refraining from bidding on line items that had been allocated to other companies. Following an investigation by multiple law enforcement partners, including the Federal Bureau of Investigation, Department of Defense’s Defense Criminal Investigative Service, Defense Logistics Agency, Army Criminal Investigative Command, and Air Force Office of Special Investigations, the companies agreed to pay over $150 million in criminal fines and over $200 million in civil damages. Seven executives of the companies also were charged.
The fuel supply investigation highlights several conditions favorable to collusion. Because the U.S. military required significant amounts of fuel that would have been too costly to transport from other countries, the pool of qualified bidders was limited to the relatively few oil refineries based in South Korea. It would have been difficult for new competitors to obtain the equipment and regulatory approval needed to enter the market and compete with the existing bidders. The solicitations at issue also involved standardized products with few substitutes, as the U.S. military required certain types of fuel for certain applications. And the Department of Defense purchased the fuel on a repetitive and predictable schedule, which the conspirators exploited to predetermine their bids rather than compete as the solicitations intended.
In another case involving U.S. military funds, Yuval Marshak, the former executive of an Israel-based defense contractor, pleaded guilty to mail fraud, wire fraud, and major fraud against the United States for his role in multiple schemes to defraud the multibillion-dollar U.S. Foreign Military Financing (FMF) program. Marshak, who oversaw the spending of FMF funds to supply aircraft refueling tankers, falsified bid documents to make it appear that certain contracts had been competitively bid when they had not. He also submitted false certifications that no commissions were being paid in connection with the contracts, when in fact he had arranged to receive commissions and for them to be paid to a company owned by a close relative to disguise their true nature. Marshak was sentenced to thirty months in prison.
In another recent case, Anthony Daguanno, a former contracting executive, and Aradondo Haskins, a former contracting executive and City of Detroit official, were each sentenced to twelve months in prison for engaging in schemes connected with the Treasury Department’s Blight Elimination Program. The program provided funds to help communities demolish vacant houses to promote home values and economic growth, and Detroit was one of the recipients. Both defendants were responsible for soliciting competitive bids. Instead, they provided a subcontractor with confidential information about other bids, which allowed that subcontractor to win profitable contracts, in exchange for bribes. Following a joint investigation with the FBI and Special Inspector General of the Troubled Asset Relief Program, Daguanno pleaded guilty to conspiring to commit honest services fraud, and Haskins pleaded guilty to conspiring to commit honest services fraud and to taking bribes as a public official.
Finally, no discussion of the Division’s enforcement efforts would be complete without reference to its Leniency Policy. For more than twenty-five years, corporations and individuals who are the first to report their antitrust crimes, cooperate in the Division’s investigation of those conspiracies, and meet the program’s requirements can avoid criminal conviction, fines, and prison sentences. The program has been the Division’s most successful prosecutorial tool, which has been adopted in various forms in more than sixty jurisdictions.
Under the Antitrust Criminal Penalty Enhancement and Reform Act, the benefits to qualifying leniency applicants extend to private damages actions. Companies that receive leniency and provide civil plaintiffs with timely, satisfactory cooperation face liability for actual damages attributable to their own conduct, rather than triple damages for the entire conspiracy. In the context of federal procurement, the Division also applies the detrebling incentive in Section 4A claims seeking compensation when the government is the victim of an antitrust violation. As with private suits, to receive detrebling in the Division’s civil damages actions under Section 4A, defendants need to cooperate with the civil litigation team.
In addition to its Leniency Policy, in July 2019, the Division announced a policy change to incentivize and potentially reward investment in corporate compliance. In part because of its Leniency Policy, historically the Division did not credit corporate compliance efforts when assessing corporate charges. The Division now considers corporate compliance programs, together with the other factors under the Principles of Federal Prosecution, Principles of Federal Prosecution of Business Organizations, and the Corporate Leniency Policy, at the charging stage in criminal antitrust violations. The potential reward is resolution by deferred prosecution agreement (DPA), rather than guilty plea and criminal conviction. Along with the policy change, in an effort to provide transparency into its compliance analysis, the Division made public an internal guidance document focused on prosecutors’ evaluation of compliance programs.
While a DPA requires admitting to a crime, cooperation, and paying a criminal penalty, it can save companies from debarment and other consequences of criminal conviction. Simply having a compliance program, however, is not enough to earn a DPA, particularly in the absence of other hallmarks of good corporate citizenship, including self-reporting, cooperation, and remedial action. While uncovering misconduct and self-reporting are not prerequisites to earning a DPA, the company’s response to a violation is critical to the Division’s compliance assessment. Corporate action or inaction when wrongdoing is uncovered, or brought to the company’s attention, can speak volumes about the company’s commitment to compliance. Companies that discover misconduct but choose to sit on their hands rather than self-report, or that receive a grand jury subpoena but do not promptly cooperate, will be hard-pressed to demonstrate a commitment to compliance worthy of a DPA.
If the past is a prologue, prioritizing corporate compliance will be particularly important amid a crisis. Federal spending in response to the pandemic will provide “an enticing opportunity for greed to prevail over ethical conduct” because the combination of significant spending and “exigency create[] opportunities to cheat.” The risk of bad behavior is clear and present, as is the danger of detection given the PCSF’s focus and success to date. Amid conditions ripe for collusion, the Division’s hope is that government contractors will invest in antitrust compliance and remain the first line of defense to prevent antitrust crimes.
The incentives to invest are significant, and the consequences of conviction are substantial. The Division’s Leniency Policy has long incentivized antitrust compliance efforts. Since July 2019, the incentives have expanded because of the possibility that even if the race for leniency is lost, compliance efforts will open the door to a DPA. Balanced against the possibility of such rewards are the significant consequences of conviction. That is particularly so for government contractors, who face significant fines, damages, debarment, and jail terms for culpable executives.
The Division has long prioritized deterring, detecting, and prosecuting schemes that corrupt the competitive process by which the federal government procures goods and services. Safeguarding taxpayer dollars is core to the Division’s mission. And since November 2019, the Division’s efforts are backed by the combined capabilities and talent of the PCSF and its national and in-district working partners. These efforts have already borne fruit. The Division has worked to educate those on the buy side and sell side of public procurement, along with data analysts and criminal investigators, to recognize antitrust risks. Education is key to the efforts to deter wrongdoing. Education also supports detection efforts because it leads to complaints and self-reporting. Since November 2019, the Division has received countless citizen complaints, and has over a dozen active PCSF grand jury investigations. The Division and its partners are investigating, and the PCSF’s first prosecutions are on the horizon.
The Division looks forward to continued engagement with the public contract law bar. Its message to the bar and its clients is simple. First, the risks of running afoul of the antitrust laws are significant. Contractors and their counsel should educate themselves about antitrust risks and account for those risks in their compliance efforts. Second, collusion affecting public procurement has long been a focus, and the Division’s body of prosecutorial work protecting the public purse speaks for itself. The Division has redoubled its efforts backed by the additional resources of the PCSF. As a result, cartelists beware—the Division’s investigative net is at its widest and its detection capabilities are at their peak. Third, in addition to the stick of antitrust convictions, contractors should consider the carrot of self-reporting and cooperation. The Division’s Leniency Program offers the chance to avoid conviction, criminal fines, and jail terms, in addition to mitigating damages sought under Section 4A. If leniency is not available, the Division now offers a further incentive to invest in antitrust compliance because of the potential for earning a DPA driven by antitrust compliance efforts. As the Division and PCSF move forward in their mission, such considerations will be all the more crucial for contractors involved in public procurement.
