On Nov. 5, the Department of Justice (DOJ) announced it is forming a government procurement collusion strike force (Strike Force). The Strike Force will comprise prosecutors from the DOJ Antitrust Division (Division) and 13 United States Attorney's offices, including those in New York, Washington, D.C., Chicago, Ohio, Los Angeles and the Eastern District of Virginia. The Strike Force will partner with the Federal Bureau of Investigation (FBI) and Inspectors General from the Department of Defense, the U.S. Postal Service and the General Services Administration. The mission of the Strike Force is to "deter, detect and prosecute antitrust crimes and related schemes in government procurements" in order to "ensure taxpayers [receive] the full benefits of competitive bidding."
The Strike Force comes at a time when the DOJ is heavily involved in procurement prosecutions and investigations. Consequently, it should come as no surprise that this announcement will increase scrutiny of the public procurement process. Companies should therefore strongly consider evaluating their antitrust compliance programs to ensure they are in line with the DOJ's new compliance policy guidance.
This client alert examines the rationale behind the Strike Force, its impact on the industry, and the problems and vulnerabilities in the government procurement sector.
Industry Reasons Behind Forming the Strike Force
This announcement comes on the heels of an Oct. 25, speech given by Richard Powers, the deputy assistant attorney general for criminal enforcement at the American Bar Association's 2019 Public Procurement Symposium. There, Powers spoke on the growing problem of corruption and fraud in the public procurement industry. He specified that the Division shall prioritize investigations of criminal antitrust violations in the public procurement process by coordinating with other agencies to prosecute conduct that deprives the government – and, in turn, the taxpayers – of the benefit of fair competition.1
In his speech, DAAG Powers explained that price fixing, bid rigging and other antitrust violations have devastating effects on the economy and society. In government contracting, antitrust violations increase costs borne by the government and directly impact taxpayers. For example, rigging bids and allocating market share during the procurement process inevitably causes a rise in the prices offered to the government. In turn, the taxpayer suffers.
While price fixing and bid rigging can occur in almost any industry, they are likely to occur in industries where only a few firms compete. Powers cautioned that the public procurement industry features certain characteristics that make it more vulnerable to antitrust violations:
- Government projects are lucrative and numerous,2 but there are generally few providers. The fewer the sellers, the easier it is for them to collude on bids.
- It is difficult to monitor government contractors consistently.
- During disasters, the government's need for services outweighs its ability to remain parsimonious. Contractors can take advantage and rig prices in these times of need.
Unfortunately, these vulnerabilities provide government contractors avenues through which to manipulate the procurement process. However, with the new Strike Force, the Division will prioritize enforcement tools to aid in the prosecution and, ultimately, prevention of this conduct. Severe consequences for engaging in public procurement corruption include (1) recommending to a contracting agency that a company be barred from government contracting, (2) seeking treble damages for anti-competitive conduct (discussed in the next section), and (3) conducting parallel civil and criminal investigations.
The Strike Force Follows Recent and Ongoing Procurement Corruption Enforcement Actions
Although the creation of the Strike Force paints a target on the government contracting industry, recent cases and ongoing grand jury investigations aided in the decision to form the Strike Force. In fact, during the press conference announcing the Strike Force, Assistant Attorney General Makan Delrahim stated that there currently are more than 100 open antitrust grand jury investigations, of which one-third concern public procurement.
The largest and most prominent enforcement action that led to the creation of the Strike Force is the indictment of several South Korean companies for rigging bids to the Department of Defense for U.S. military fuel supply contracts. At least five companies pleaded guilty between November 2018 and March 2019, and seven individuals have been indicted for criminal antitrust violations and fraud against the U.S. government. Importantly, the DOJ invoked a powerful, yet underused, civil enforcement tool in Section 4A of the Clayton Act. Section 4A empowers the DOJ to obtain treble damages in antitrust matters when the government is the victim.3 In total, the companies paid penalties in excess of $360 million.
What Will the Strike Force Do?
The Strike Force will seek to prevent antitrust and other violations in the procurement process through education and training while also investigating and prosecuting cases. It will inform federal, state and local officials about red flags and other vulnerabilities in the procurement process. The Strike Force will also follow through on statements that Powers made regarding how to ensure successful enforcement:
- DOJ must give clear notice on
priorities - The impetus behind the Division's new procurement
fraud focus is:
- Taxpayer protection.
- Number of existing investigations.
- DOJ must increase enforcement
- This means there will be a higher likelihood of companies being detected, and the DOJ will divert resources to increasing training to prosecutors and investigators.
- DOJ must explore the use of data analytics to enhance investigative efficiency.
- DOJ will seek higher financial penalties.
- DOJ will consider providing details of a company's anticompetitive conduct to the relevant contracting agencies, thereby increasing the chances of debarment.
- DOJ must create positive incentives:
- The Division's Leniency Program. The Leniency Program provides companies and individuals that meet certain conditions an opportunity to avoid prosecution for criminal antitrust violations. To qualify for leniency, a company must be the first to self-report the conduct and fully cooperate with the Division's investigation, among other conditions. The Division issued guidance that provides insight into the requirements for leniency and the application process. The guidance, drafted in the form of an F-A-Q, is available at https://www.justice.gov/atr/page/file/926521/download.
- Favorable treatment of comprehensive compliance programs. The Division recently announced a significant change to its policy on criminal antitrust compliance. Going forward, companies that demonstrate that they had in place robust and effective antitrust compliance programs at the time of an offense will be eligible to be considered for a deferred prosecution agreement if they self-report the conduct to the Division and cooperate with antitrust enforcement authorities.
Given the amount of federal money involved in public procurement, any amount of overcharge caused by bid rigging or other anticompetitive conduct will economically harm the government and the taxpayers. This harm is the impetus behind the Strike Force, and companies should understand that the shifting of resources to scrutinize this industry indicates a greater likelihood of the DOJ reviewing bids and making inquiries of government contractors. With severe penalties available to the government, such as high fines and debarment, companies should take time to review and strengthen their compliance programs.
Our experienced antitrust attorneys are well-versed in the Division's Leniency Program, the DOJ's compliance program guidelines and the public procurement process. If a government contractor suspects that it has violated the antitrust laws, receives a government subpoena, or as a preventive measure wants to conduct a review of its compliance programs and procurement processes, our attorneys are well-equipped to make assessments and advise on the best course of action.
1. Here, "public procurement" refers to federal, state and local government contracting. The Division's focus is not limited to federal procurement. Instead, if federal grant money is used for local or state projects, the Division will investigate allegations of procurement corruption.
2. According to the Government Accountability Office (GAO), in fiscal year 2018, federal agencies obligated more than $550 billion to acquire products and services. See "Federal Contracting, Information on Agencies' Use of the Lowest Price Technically Acceptable Process," GAO Report to Congressional Committees (September 2019).
3. In a November 2018 speech at the ABA Antitrust Section Fall Forum, Delrahim committed to applying "all authorities Congress has granted . . . to remedy antitrust injuries to the American taxpayer." This includes Section 4A of the Clayton Act. His intention is that parallel civil investigations and the threat of treble damages under Section 4A will increase the "incentive for co-conspirators in cartel cases to come forward."
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