Bid Rigging Definition
Bid Rigging refers to the process in which a number of bidders illegally forms a consortium to fix the winner of the bid. The technique eliminates healthy competition by manipulating the bid price to keep it at a predetermined level.
Conspiracy is more likely when there is frequent Bidding for similar offerings or only a few participants in the bidding process. During such situations, it is easy for bidders to collude and inflate the tender offer.
Key Takeaways
- Bid rigging occurs when a group of bidders unlawfully band together to devise strategies to reduce competition in a bidding process and determine the bid winner.
- Common types include cover bidding, bid rotation, bid suppression and non-conforming bid.
- Increasing the number of participants, maintaining the confidentiality of the information, and training the bid processing team are few methods that can effectively prevent collusion scenarios in the bidding process.
How Does Bid Rigging Work?
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Bid rigging is a common practice in almost every industry. It hampers the buyers’ efforts to get goods and services at a competitive price. The participants negotiate on the winning bid and its price ahead of time. Also, they divide the additional profit earned by winning a high-value bid among the consortium members. The losing participants engaged in collusion submit a low-value bid or bid with unacceptable criteria for deliberately losing the bid. They may also be able to obtain subcontracts from the winning bidder. It takes many different forms, out of which the most common and well-known are listed below:
- Cover Bidding: In cover bidding, bidders planning to lose prepare bid containing unappealing terms or unacceptable bid amounts. As a result, all the competitors’ bids are above an agreed price but less than the winning bid. This makes the bid of a predetermined winner looks enticing. Moreover, it creates an illusion that the bidding process is fair and competitive. This is also called as complementary bidding.
- Bid Rotation: In bid rotation, the team of bidders conspiring will continue to participate in the future tenders; however, the intended bid winner will change each time.
- Bid Suppression: In bid suppression, competitors of the collusion team decide to completely abstain from the bidding process so that the agreed entity could win the bidding process.
- Non-Conforming Bid: In the non-conforming bid, bidders furnish bid submission that does not meet the qualifying criterias.
- Phantom Bidding: Phantom bidding takes place with the help of accomplices to trigger qualified bidders to quote a high value. The bid price is artificially raised due to this plan.
As explained above, bid-rigging can result in legitimate auctioneers or buyers sourcing the goods or services at a higher price. These businesses would, in turn, either pass these additional costs to consumers or will degrade the quality of their products and services. This is why it is considered illegal in most countries and attracts monetary fines and imprisonment.
Examples of Bid Rigging
Foreign-exchange bid rigging case
Mark Johnson, a former head of forex at HSBC Holdings Plc, and Akshay Aiyer, a former JPMorgan Chase & Co. trader, were convicted for their roles in a foreign exchange bid rigging scam. They plotted with traders from other banks in chat rooms, phone conversations, and social meetings to synchronize bids and set prices for African, European, and Middle Eastern currencies while giving the impression that they were competing.
According to a Bloomberg report, since the crackdown began, the US has investigated more than a half-dozen traders. Several institutions all around the globe have spent more than $10 billion in fines for wrongdoing in the currency markets. Citigroup Inc., Barclays Plc, Royal Bank of Scotland Group Plc, and JPMorgan Chase all admitted to manipulating currency exchange rates in 2015 and were obliged to give the Justice Department roughly $2.5 billion as part of a $5.8 billion deal with regulators.
How to Prevent Bid Rigging?
There are various signs which we can look to determine if there was any effort to influence the bidding process or not. For instance, some terms and conditions in a contract appear unnecessary and intentional to make it ineligible for the bidding process. In addition, some bids have quoted a price much higher than the market price without a proper justification.
Buyer and participating bidders can create a prolific and open competition, preventing collusion opportunities and benefitting the buyer to obtain a reasonable price.
- Increase the number of bidders: The design of the tender process must accommodate a maximum number of bidders to decrease the chance of collusion. As the number of participants increases, the complexity of forming a consortium of bidder’s decreases.
- Encourage maximum participation by simplifying the procedures: Rigid and stringent entrant criteria discourage potential qualified bidders from participating. Therefore, the organizers should maintain a fair cost of operation by simplifying the participation procedures, such as curbing unnecessary changes in bid forms and stop demanding irrelevant information.
- Confidentiality and equality: Confidentiality is the key here. The bid price of a bidder should not be disclosed to anyone under any circumstances. Also, no supplier or bidder should be given any preferential treatment.
- Restrict communication: Restricting the communication between bidders reduces the chance of collusion. They will have limited opportunity to meet if the bid takes place through electronic means or post.
- Train the team: Adequate training of the procurement team results in a tender process less vulnerable to bid rigging. The operations team should have access to historical data of bid conduct to analyze and detect bid-rigging patterns.
- Raise questions: If any bid or a clause in the bid does not make sense, appropriate questions should be raised to get the necessary clarifications.
- Grievance redressal: Officials can encourage complaints and whistleblowing that would help to detect collusion. Also, they can collect non-collusion affidavits from participants.
- Awareness of market prices: It is crucial to keep an eye on the market price and conditions to assess a bid price and detect collusion effectively.
Frequently Ask Questions (FAQs)
It is an unlawful way of influencing the outcome of a tender. Therefore, it acts as an example for the penalized antitrust violation, and the convict has to face imprisonment.
In many countries, specifically, OECD member countries under competition law, Bid rigging is illegal. The competition law aims to prevent anti-competitive practices in public procurement. In the United States, competition law is called Antitrust law.
It is treated as a crime since it reduces the fair chance of qualified participants. Also, the negative impact will subsequently flow to consumers in the form of increased cost.
Recommended Articles
This has been a guide to Bid Rigging and its Definition. Here we discuss how bid rigging works along with the examples and how to prevent it. You may also have a look at the following articles to learn more –
- Takeover Bid
- Bid Price
- Bid vs Ask
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