Guest blog: Cartel activity - illegal and harmful to procurement

Published: 16 August 2022

Did you know that competing suppliers having a conversation over coffee or a beer to discuss prices, tenders, quotes, markets, or services could be engaging in cartel activity? Furthermore individuals who take part in this harmful illegal activity can face jail time and companies involved can receive significant fines.

Cartel activity harms procurement (purchasing). Charities purchasing goods or services need be to be alert to the signs of cartel activity to keep themselves safe.

What is cartel activity?

You may have heard of drug or diamond cartels, but cartel activity can take place much closer to home. A “cartel” under the Commerce Act is where two or more businesses agree not to compete with each other. It can take many forms, including price fixing, rigging bids, sharing markets, or restricting output (of goods or services). The threshold for an agreement is low, it can be a very informal verbal understanding.  

If your charity is looking to commission a third party for a piece of work or you’re seeking to purchase supplies, you may be getting quotes or bids from multiple suppliers or different groups. This is where cartel activity can occur.

To start, here are some key terms:

Price fixing is when businesses agree on what prices they will charge to avoid having to compete which each other. It includes competitors agreeing to fix any part of a price, or to set prices according to an agreed formula and also agreeing to introduce a price such as an extra fee.

Bid rigging happens when there is an agreement between bidders about who should win a tender or any competitive quote or bidding situation. This may involve potential bidders agreeing to not bid or price, or to bid or price at a level, that supports the agreed winner so they can win at a price higher than a competitive one. Over time those in the cartel may take turns to be the winning bidder or they may even compensate those who agree to lose.

Market sharing is when businesses agree to carve up markets and not compete for the same customers. This could be in relation to the sale of a specific product, a geographic area or a particular type of customer or contract.

Restricting output happens when competitors agree to prevent, restrict or limit the goods or services they are selling. Reducing or suppressing output (supply) usually pushes prices up.

Cartel activity is usually done in secret without the knowledge of customers and purchasers. It is collusion between competitors and includes potential competitors. This includes independent contractors who also become competitors when they invoice for services.

Cartel activity may also involve a combination of all these behaviours above.

Why is cartel activity illegal?

Cartel activity is deceptive and dishonest, and it harms consumers, businesses and organisations. It prevents open and effective competition and this can damage the welfare of New Zealanders. Cartels generally cause harm by raising prices, and can also negatively affect choice, service levels, innovation, quality and investment.

Charities whose purchasing is affected by cartel activity will get less goods and services for their money, or lower quality goods or services.     

What are the penalties for cartel activity?

The penalties for cartel activity are significant because of the dishonesty element and the harm it causes.

Civil penalties for companies and individuals are very high. Individuals can be fined up to $500,000 and companies can be fined up to $10 million, three times the commercial gain, or ten percent of turnover per year, per breach. For individuals the stakes can be higher again as cartel activity is now a criminal offence, and jail terms of up to 7 years can be imposed.

What to look for? 

Cartel activity cannot occur without communication between competitors.

What may indicate possible cartel activity?

• Signs of communications between competing suppliers about bids, quotes or prices
• Knowledge of a competing supplier’s bid/quote, or a competitor’s non-public prices
• Suspiciously high-priced bids or quotes, pricing lacking details or not making sense
• Similar prices, quotes, or components of bids or quotes
• Bids or quotes using the same or similar wording
• Suppliers refusing or withdrawing, bids, quotes, or prices (and especially if there is no reason given, or the reason given does not stack up)
• If you do regular procurement, you may notice patterns for who bids, and who wins

If you see any of these signs, you need to carefully look further into what may be occurring. Act discretely, as there may also be valid explanations.            

How to help deter cartel activity

To avoid risk, it is important for businesses to make pricing decisions independently of their competitors. Some suppliers may not know the cartel laws and all suppliers can always be reminded. Requiring anti-collusion clauses or warranties or similar declarations that bids have been made independently of competitors is a great way to make it clear to suppliers they must not collude with competitors.    

Also

• Ask any supplier why they refused to or did not bid/quote (or withdrew one)
• Do not tell suppliers what the budget is
• Do not tell suppliers who else is bidding /quoting and/or has been approached

It is also important to design your procurement to get effective competition. Just getting bids or quotes from one or two of the same suppliers over time may not achieve this, and it can make it easier for cartel activity to occur. Competitors can also cooperate in ways that are not harmful, but these are limited and must be done openly and carefully.      

The Commerce Commission’s Bid Rigging factsheet(external link) has examples of anti-collusion clauses and more about the signs to look for, and deterring cartel activity.

How to report cartel activity

The Commerce Commission is the agency that investigates and prosecutes cartel activity. Please report any possible cartel activity by contacting the Commission.

If you think cartel activity may be happening during a procurement process keep good records of what is occurring and of any conversations. Act discretely so those involved are not tipped off as they may cover their tracks, and contact the Commission early - please email bidrigging@comcom.govt.nz. The Commission also has an anonymous online whistle-blower tool for reporting cartel activity anonymously in sensitive situations.

Links:

What is a cartel? https://comcom.govt.nz/business/avoiding-anti-competitive-behaviour/what-is-a-cartel(external link)

Reporting cartel activity: https://comcom.govt.nz/business/avoiding-anti-competitive-behaviour/what-is-a-cartel/reporting-cartel-conduct(external link)

Bid-rigging factsheet: https://comcom.govt.nz/__data/assets/pdf_file/0038/89858/How-to-recognise-and-deter-bid-rigging-Fact-sheet-April-2021.pdf.pdf(external link)

About our guest blogger:

The Commerce Commission’s Cartels team is responsible for enforcing the section 30 cartel prohibitions of the Commerce Act. As well as conducting investigations and assisting prosecutions, the team also does outreach, advocacy, and international engagement work. The Cartels team can be contacted at Grant.Chamberlain@comcom.govt.nz or Barrie.Sutton@comcom.govt.nz