Time to Reopen Some Antitrust Division Field Offices? (Part II)

Time to Reopen Some Antitrust Division Field Offices? (Part II)

honoreebadgeIn a recent post (here) I advocated for the Trump administration to reopen some of the shuttered Antitrust Division field offices to help focus on public procurement bid rigging at the local and regional level. As discussed in the earlier post, the field offices have always been major contributors to the international cartel program, so this suggestion is not meant to diminish the international effort. But, field offices are uniquely positioned to establish relationships with regional investigative agencies and public procurement bodies, which has led to mega bid rigging investigations and prosecutions such as school milk, road construction, electrical construction and collusion on DOD purchases handled by regional commands.  In this post, I want to focus on two points: 1) that public procurement bid rigging is worthy of the attention of antitrust enforcers; and 2) until the closing of four of the seven field offices, public procurement was a focus of the Antitrust Division resources.

The Impact of Public Procurement Collusion

Established competition regimes have emphasized to their less developed international enforcement agencies that there should be an emphasis on public procurement collusion.   The International Cartel Network (ICN) states:

When bid rigging impacts public procurement, it has the potential to cause great harm. One reason for this is that public procurement is often a large part of a nation’s economy. In many OECD countries, it amounts to 15 per cent of the gross domestic product and in most developing countries; it is substantially more than this. (here)

The Antitrust Division and the Federal Trade Commission expanded on this in a submission to the Organization for Economic Co-operation and Development (OECD. Below is a lengthy quote from the 2007 document, which makes the point I’d like to make better than I can:

PUBLIC PROCUREMENT ñ THE ROLE OF COMPETITION AUTHORITIES IN PROMOTING COMPETITION– United States –5 June 2007

In the United States, government attorneys at the Antitrust Division of the U.S. Department of Justice have for many years spent considerable time conducting outreach and training programs for public procurement officials and government investigators, including investigators who work for government agencies which solicit bids for various projects. These outreach programs help develop an effective working relationship between the government attorneys who have the expertise concerning investigating and prosecuting bid rigging, and public procurement officials and government investigators who are in the best position to detect and prevent bid rigging on public procurement contracts. Government attorneys advise procurement officials on how their procedures can be changed to decrease the likelihood that bid rigging will occur and what bidding patterns and types of behavior they and their investigators should look for to detect bid rigging. In turn, procurement officials and investigators often provide the key evidence that results in a successful bid-rigging prosecution. Our experience has been that this team effort among public procurement officials, government investigators, and government attorneys has contributed to a significant decrease in bid rigging on public procurement in the United States over the last twenty to thirty years.

In the 1970s and 1980s, a majority of overall criminal antitrust prosecutions in the U.S. were for bid rigging, primarily involving public procurement. Most notable in terms of the number of cases was bid rigging on the construction of roads and on the sale of milk to schools. During this time period, the Antitrust Division filed hundreds of cases involving bid rigging on road building and the sale of milk. More recently, the number of bid-rigging prosecutions has dropped dramatically. For example, during the past three years less than five percent of the criminal antitrust prosecutions in the United States were for bid rigging. (here)

The message has been delivered and received by newer competition agencies. The Competition Commission of India, as just one example, has made public procurement investigations and prosecutions a priority.  This chart is from a Commission publication, Public Procurement System: Competition Issues (here):

GAINS FROM COMPETITION: INTERNATIONAL EXPERIENCE

  • OECD survey -shows saving to public treasury of 17 to 43% in developing countries
  • European Commission – cost saving of Euro 5 billion to 25 billion between 1993 to 2003
  • In Russia: Saving of $7 billion to Govt. budget in 2008
  • Pakistan: Saving of Rs.187 million for Karachi water and sewerage board
  • Columbia: Saving of 47% in procurement of military goods
  • Guatemala: Saving of 43% in purchase of medicines

Previous Antitrust Division Efforts at Protecting Infrastructure Tax $$

If the Trump administration is able to launch a significant infrastructure development program, the emphasis on pubic procurement competition becomes even more important.   In fact, when the Obama administration launched its American Recovery Act, the Antitrust Division made public procurement a priority. An Antitrust Division press release (here) noted:

A working group, co-chaired by [John] Terzaken and trial attorney Kate Patchen from the Division’s San Francisco field office, conducted training for more than 25,000 individuals from 20 Federal agencies. Terzaken’s development and management of the Recovery Initiative was recognized by the Department with an Attorney General’s Award in 2010.

The bulk of these outreach efforts were conducted by the field offices. I don’t know the exact extent of the Division’s current outreach activity, but from anecdotal evidence it has largely disappeared.

From a practical (and slightly cynical) point of view, launching an effort to prevent and detect public procurement collusion is a win/win situation for any administration. If no collusion is detected, Bingo! The program worked and the taxpayers saved countless dollars. And, if bid rigging is detected and prosecuted, that also is a success, as the prosecution will serve as a strong deterrent that “bid rigging will not be tolerated.”

I think I will have one more post on this subject.

Thanks for reading.

Time to Reopen Some Antitrust Division Field Offices?

Time to Reopen Some Antitrust Division Field Offices?

honoreebadgeThere has been much speculation about what a Trump presidency will mean for antitrust enforcement at the Antitrust Division and Federal Trade Commission. Much of the wonder is about whether Trump will take an activist approach he suggested during the campaign, for example, when he said he thought Amazon had “a huge antitrust problem” and he voiced opposition to AT&T’s effort to acquire effort to acquire Time Warner.   Or does the placement of Joshua Wright on the transition team signal a return to a more traditional Republican “hands off” role where the pendulum swings back to a belief that the market will correct concentration issues and the concern is more to prevent wrong-headed government intervention.

I have been thinking about whether there should be any adjustment in criminal enforcement. Criminal enforcement has generally been pretty steady over various administrations. They all have shared the belief that cartels are the “supreme evil of antitrust” and that jail sentences for culpable executives is the best deterrent. Two noteworthy developments in criminal enforcement, however, come to mind. Shortly after World War II, the legendary Thurman Arnold, head of the Antitrust Division, opened field offices to combat bid rigging in the construction trades. And, in 2013, then Assistant Attorney General Christine Varney closed four of the Division’s seven regional offices. The closed offices were Atlanta, Cleveland, Dallas and Philadelphia. New York, Chicago and San Francisco remained open. I think President-elect Trump should reverse that contraction and reopen field offices.

President-elect Trump has promised a massive public procurement effort to help rebuild America’s infrastructure. Two recent international cartel enforcement items brought to mind the wisdom of ramping up regional and local enforcement efforts to deter, investigate and prosecute bid rigging on these public projects. A couple of items caught my attention as I have been thinking of this subject.

 From Canada

On December 5, 2016, the Canadian press reported that:

The Competition Bureau of Canada says its efforts to identify and prevent bid rigging in construction contracts this year has already turned up potential criminal activity — just as new federal infrastructure money begins to flow.

Pierre-Yves Guay, the bureau’s assistant deputy commissioner, said some of the educational outreach the bureau has delivered since April has resulted in illegal activities being uncovered and inquiries being launched. (here)

From Brazil

USA Today reports on December 6, 2016

So far, there are indications that at least five bids related to World Cup stadiums were the subject of the cartel,” the anti-trust body CADE said in a statement…. Reports have been widespread about corruption linked to World Cup stadiums. Investigations are also on-going involving construction projects tied to this year’s Olympics in Rio de Janeiro.  (here).

I am going to write more about why I think it would be a good investment to open additional field offices. But first, a disclaimer. I was the Chief of the dearly departed Philadelphia Field Office and went down with the ship when the office was closed in 2013. I am not lobbying for my old job back, and in fact if I were adding field offices I would not at this time put one in Philadelphia. The real value of the Philadelphia office was the talent and experience of the staff there—and that, like Humpty Dumpty, can’t be put back to together again.   I do, however, think that the regional offices in Atlanta and Dallas should be reopened.

International cartels are a worthy focus of Antitrust Division resources but it’s worth remembering that the field offices played a huge role in the development of the Division’s international cartel program. The modern era of international cartel enforcement was the Archer Daniels Midland case brought by the Chicago Field Office. The record $500 million fine and other convictions in the vitamins investigation led by the Dallas Field Office followed that.  The Philadelphia Field Office had some “firsts” with the graphite electrode investigation and the extradition, trial and conviction of British executive Ian Norris. San Francisco has had accomplishments too numerous to mention as do the criminal sections headquartered in DC with blockbusters like air cargo and auto parts. The point is that international cartels can be investigated and prosecuted wherever there are talented and dedicated antitrust enforcers. But as for regional conspiracies, I don’t believe the opposite is true. The strength of the field offices had always been their ability to network with investigative agencies from the FBI, the gamut of federal IG’s offices, state and local prosecutors and public procurement officials. These local contacts were crucial to educating agents and purchasers about antitrust violations, and giving them the information (and motivation) needed to spot and report possible collusion.

Regional conspiracies do not produce the extraordinary fines that international cartels can. But, there is merit to investigating and prosecuting regional cartels. First, the harm from bid rigging on public procurement is very focused. It isn’t a case of millions of consumers losing pennies on a purchase, but a federal, state or local entity losing a big chunk of its scarce tax dollars. Bid rigging schemes are often more effective at raising prices. They can also be very long-lasting as the structure of public procurement can make these awards both more susceptible to bid rigging and more difficult for market forces to disrupt in the short-term. For these reasons, the Sentencing Guidelines give a modest one-point bump for bid rigging, recognizing it generally has a more serious impact on the victim.

Finally, successful prosecution of a bid-rigging scheme can bring meaningful restitution to the public victim in the form of treble damages. It restores public confidence that tax dollars are being spent wisely. And the cost of publicly procured goods often sees a dramatic drop, sometimes even simply by the start of an investigation. I also think the prosecution and imprisonment of domestic price fixers and bid-riggers can generate publicity and pack more of a “deterrent punch” than prosecution of foreign executives, many whom remain fugitives.

These are just some quick thoughts on why I think a couple of field offices in strategically placed geographic areas would be a boon for antitrust enforcement. I’ll be thinking and writing more about this subject as I get some free time. But, what do you think? If you have any thoughts on the matter, I’d be happy to hear them.

Thanks for reading.  More to come.