Due Diligence: 4 Red Flags of Collusion

One of the many schemes that can cause serious legal and financial consequences is collusion in business. While some business leaders might wonder what separates collusion from other types of fraud and how to identify it, there is a key factor: secrecy. 

Collusion involves at least two parties (sometimes more) who collaborate to deceive others, usually for financial or market gain. Due to its secretive nature, collusion can be difficult to detect and weed out. This poses a serious problem because the consequences of noncompliance for an organisation are often severe.

According to the Wall Street Journal, the U.S. Department of Justice (DOJ) is “preparing to tackle competition issues in several important markets, including alleged price-fixing in the generic-drug industry, rules for music licensing and purported employer collusion that limits options for sought-after workers” (Wall Street Journal, 2020). Indeed, these are the types of schemes that are most often associated with collusion. Price fixing is a global problem found in many different industries, for example. However it’s important to note that collusion is just as common at the local level – for example, where contractors bid to provide goods or services regularly. Sometimes competitors will engage in collusion by making secret arrangements to rotate bids or share bid details to artificially deflate prices.

In one recent case, the branch manager for a U.S.-based insulation contractor pleaded guilty in a scheme to rig bids and commit other forms of fraud on insulation contracts. The DOJ had launched an investigation into the branch manager’s actions from 2011 to 2018, finding that he “conspired with other insulation installation contractors to rig bids and engage in fraud on insulation installation contracts in Connecticut, New York, and Massachusetts. Insulation installation contractors install insulation around pipes and ducts on renovation and new construction projects at universities, hospitals, and other public and private entities. In addition to his guilty plea, DeVoe has agreed to pay restitution” (DOJ, 2020). “Free and open markets are the foundation of a vibrant economy. For years, the defendant illegally coordinated bids on construction projects to enhance his profits, eliminate competition, and ultimately steal from public and private customers,” said Brian C. Turner, Special Agent in Charge of FBI’s New Haven Field Office.

The DOJ noted in its press release that this crime hurt the hospitals, universities and businesses that solicit and pay for the contractor’s services under the expectation that the bidding process is fair and above board, not rigged to benefit a contractor at their expense. The money lost in such schemes (through paying inflated contracts) often represents taxpayer dollars. The fact that collusion, in this case, lasted for at least seven years indicates that tens of thousands of dollars (or more) were likely lost through fraud.

So, what can organisations do to be better protected from collusion schemes – whether from inside their own company or perpetrated against them by outside partners/contractors? While collusion is secretive by its very nature and can be difficult to detect, red flags can indicate that something might be amiss. CRI® Group’s integrity due diligence experts are specially trained to uncover collusion in all its forms, and they describe the following as some of the signs to watch for when dealing with competitive bid contracts:

A high percentage of awards go to the same company

If a single bidder is winning most of the contracts for a particular set of goods or services, there might be something wrong despite several other contractors involved in the bidding. This is especially true if there are any issues or complaints around the bidder, such as poor quality products or services, they are late in delivering on their contracts, etc.

Lowest bidders are not winning awards

Suppose the contracts are consistently going to bidders other than the lowest bidder. In that case, this might warrant further investigation – as most contracts are considered “low bid” and would reasonably go to the lowest bidder. Also, if there is a higher-than-average range or spread between bidders, that could signal that something is off.

There is a high number of late bidders

Late bids can be a sign of collusion if bidders, or an agent at the organisation soliciting bids, are sharing bid information – such as the highest bid (so far) in an award process. This is especially true when the winning bidder is consistently the last one to submit bids. If late bidders are being approved regularly, you need to know why.

Bidders share (or have similar) names, addresses, or other information

This is an obvious red flag. In some cases, bids from two different contractors have been submitted from the same fax machine! This indicates that parties might be colluding in their bid submissions, and you need to look further.

Other countries’ DOJ and enforcement bodies have demonstrated their willingness to detect, investigate, and punish collusion. For the sake of your organisation, it is best to be proactive when it comes to your bidding and contract processes. CRI® Group’s integrity due diligence services can help you identify the above red flags. Our experts also conduct risk assessments to help find weaknesses in your business process and controls that might make your organisation vulnerable to collusion. This holds whether you need the goods or services or are a supplier or contractor submitting bids. The secret crime of collusion causes financial harm through inflated costs, representing a legal and financial liability to your organisation and/or clients. By being attuned to spot red flags, you’ll be more likely to notice the smoke …. before it turns into a fire.

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CRI® Group has safeguarded businesses from any risks, providing investigations (i.e. insurance fraud), employee background screening, investigative due diligence, business intelligence,  third-party risk management, forensic accounting, compliance and other professional investigative research services. In 2016, CRI® Group launched the Anti-Bribery Anti-Corruption (ABAC®) Center of Excellence – an independent certification body established for ISO 37001:2016 Anti-Bribery Management Systems, ISO 37301 Compliance Management Systems and ISO 31000:2018 Risk Management, providing training and certification. ABAC® operates through its global network of certified ethics and compliance professionals, qualified auditors and other certified professionals. Contact ABAC® for more on ISO Certification and training.