Fraudulent Bids

The National Competition Commission ("CNC") announced in November 2007 their intention to examine thoroughly the construction sector in Spain with the aim of identifying the existence of so called "fraudulent bids".

Fraudulent bids are undertaken to force an agreement over the conditions of the offers. They can be identified into several categories. When the contract is awarded to the offer with the highest price, the bidders can agree to pay prices much greater than those that could have been bid in the assumption that there had not existed any previous agreement. In other occasions, the bidders share the contracts between them in advance (here, the bidders lodge offers that are far too expensive or withdraw their so as to award the contract to a particular bidder.) Often these differing means coincide with geographical markets already established.

These practices are not only common in private contracts but also in public contracts. When there is produced fraudulent bids in public contracts, this not only eliminates the competition but also considerably increases the cost to the taxpayer for the work and services awarded by the public entities.

Prohibition of the fraudulent bids

Fraudulent bids are deemed anti-competition agreements prohibited by article 81 of the EU Treaty and by the provisions of the national law of competition that reproduce this article in all member States. In Spain, the new Law of Defence of Competition considers that the fraudulent bids constitute cartels1, that is to say, a very serious infraction of article 1 of the Law of Defence of Competition2. These practices are sanctioned with fines of up to 10% of the total volume of business of the liable company, calculated in the tax year immediately before the imposition of the fine3

Precedents

There exist numerous decisions of the European Commission that condemns the practice of fraudulent bids in a variety of sectors4.

Recently, numerous national authorities of the defence of national competition have investigated these practices. In March 2007 the Office of Fair Trading ("OFT") carried out a thorough investigation in the construction sector in which it found numerous evidence of the continued existence of fraudulent bids in thousands of contracts that represented a value in excess of 3 million GBP5. The OFT conducted surprise investigations of 57 companies. The national authority of competition of the Low Countries, Nederlandse Mededingingsautoriteit, also has imposed fines in excess of 75 million euros to more than a dozen companies in the construction sector. For another part, the competition authorities of Sweden, France, the Czech Republic and Germany have all detected fraudulent bids on numerous sectors of the economy (between them the sectors ranging from tarmac, ventilation, and construction of high tension cables).

At the end of last year, the President of CNC, Luis Berenguer Fuster, stated his surprise at the lack of similar decisions that confirm the existence of fraudulent bids and similar practices adopted in the construction sector in Spain. The CNC already has announced that it will utilise the resources that it has at its disposal to concentrate on the most serious cartels and those most damaging to consumers. We wait for the implementation of the legislative and institutional reforms of 2007 that will aid in the prosecution of these practices and the implementation of a "competitive culture" in the construction sector, along with the reduction of prices as a consequence.