The Competition Council fines 10 construction companies for participating in the cartel

On July 30, the Competition Council (the CC) adopted a decision in the so-called “construction companies’ cartel” case, detecting long-term prohibited agreement of ten construction companies on the conditions of participation in public and private procurements in Latvia. As a result, a fine totalling 16,652,027,40 euros was imposed on companies for the violation of the competition law.

Based on the information provided by The Corruption Prevention and Combating Bureau (the KNAB) and additional evidence obtained during the investigation, the Competition Council found a violation of the Competition Law prohibition specified in Article 11, Paragraph one and Article 101 (1) the Treaty on the Functioning of the European Union in the activities of SIA “SKONTO BŪVE”, SIA “LATVIJAS ENERGOCELTNIEKS”, SIA “VELVE”, SIA “ARČERS”, SIA “RERE BŪVE”, SIA “RE & RE”, SIA “RBSSKALS Būvvadība”, SIA “ABORA”, AS “LNK Industries” and SIA “MERKS”.

Dividing cartel into two groups

From the transcripts of the builders' audio recordings submitted by the KNAB, it can be concluded that the representatives of the largest construction companies discussed the conditions of participation in the procurements at least 12 times in total in a period from 2015 to 2018. They were meeting at least three times a year to distribute procurements. In total, almost 90 procurements were discussed during these negotiations, of which the CC identified at least 70.

The parties of the case agreed on both private and public procurement, incl. European Union (EU) co-financed procurements. The CC, performing the analysis of the case materials, concluded that the construction companies had been divided into two groups - “Group No.1” and “Group No.2”, which tried to divide the procurements among themselves according to the principle “half to half” or so that between the two groups, the totals by amounts would be as similar as possible. Among other things, the negotiations discussed the potential winner of the procurement who would be entitled to the particular procurement and the formal participation with a “cover offer” or, conversely, non-participation in the procurement.

To facilitate the procurement distribution process, notes were used, where the distribution of procurements was hidden. During the proceedings, the notes came to the attention of the KNAB and later to the attention of the CC.

The parties divided into groups

Distorted construction market throughout Latvia

During the research, the CC identified at least 70 out of almost 90 negotiated procurements, of which most were concluded with a contract with the total contract amount of 686,989,991 euros. Thus, when companies agreed on the distribution of procurements and conditions of the participation in procurements, the procurement organizers did not receive offers from competing bidders but only simulating competition, which distorted the construction market in the entire territory of Latvia. In addition, the cartel affected fair and legal use of public funds, incl. use of EU funds. The obtained data shows that more than half of the procurements were made with EU co-financing. Procurements also varied in scale, with the smallest contract amount being less than one million and the largest over 100 million euros. However, the averages show that most purchases have been in the order of several million euros.

In general, the competition was distorted in procurements related to the construction and reconstruction, as well as the development of technical construction projects and supervision of construction of educational institutions, shopping centres, medical institutions, sports centres, stadiums, law enforcement agencies, radioactive waste bins and repositories and various other infrastructure objects. The builders' prohibited agreement was, for example, on the procurement of Mežaparks Open-air Stage, Riga Technical University, the New Riga Theatre, Ventspils Concert Hall, Culture Palace “Ziemeļblāzma”, Latvian National Museum of Art Occupation Museum, as well as many others. Moreover, the cartels were based not only on public procurement but also on private procurement, such as the construction of the shopping and entertainment centre “Akropole”, the reconstruction of the shopping centre “Alfa” and the construction of the “Rimi” logistics center.

Objects and contract amounts were known

The cartel was implemented both for procurements that had already been announced and for procurements that had not yet been issued. For example, the builders talked about the procurement of the shopping centre “Alfa” more than a year before and about the procurement of the shopping centre “Akropole” a little less than a year before the announcement of the procurement. Similar behaviour was observed at other times, incl. public procurement. Also, from the transcripts of the builders' audio recordings, the CC concluded that the builders often have personal not business-related contacts with the procurement organizers, which can be used without hesitation to implement the cartel agreement and achieve the necessary and intended distribution result in a particular procurement.

The transcripts of the audio recordings confirm that the parties were aware of their illegal activities and therefore acted in a covert manner, repeatedly reminding the interlocutors to “leave the phones out of the meeting place” and not to use the word “scheme” but “common understanding”. The CC also concludes that the parties were aware of the incompatibility of their actions with competition law, indicating in the conversation: “But in principle, we have to be careful with the Competition Council. Care must be taken (..)”.

Juris Gaiķis, the Chairman of the CC: “For many years, the environment of organizing and conducting procurements has been distorted. As reflected in the transcripts of the audio recordings and the procurements, the negotiations analysed in the case show that there was no free competition in them, which was affected not only by the builders' own agreements but also in some cases by possible procurement organizers support. Although the contracting authority was aware of the existing cartel in certain cases, it did not report this illegal situation to the CC, which is not acceptable, because these persons are most directly responsible for the fair use of public and EU co-financing.”

Significant penalties and settlement

The total study made by the CC was for the period at least from 2011 to 2019. The duration of the infringement varies for the parties depending on their involvement in the cartel, but for none of the companies, it is not less than a year and eight months, whereas, for others, it is more than six years.

Duration of the parties' involvement in the cartel

Given the duration of the infringement and the significant damage inflicted on procurement organizers and their clients, the CC imposed substantial fines on the companies involved in the infringement. The fine is calculated as a percentage of the company's previous financial year's net turnover, considering the duration and gravity of the infringement. Accordingly, a higher penalty is imposed on those parties who were more actively involved in the development and enforcement of the cartel, for example, by defining the basic principles, objectives, and form of implementation of the cartel agreement, that the agreement between the parties to the case is oral, and those who often participated in the fixed negotiations at the same time with a more significant number of representatives present. Thus, the CC established that SIA “VELVE”, SIA “SKONTO BŪVE” and SIA “RE & RE” stood out with a higher level of activity in comparison with other parties to the case.

The CC's fines imposed on the cartel members must be paid jointly and severally with their parent companies. Considering that SIA “VELVE” cooperated with the institution and submitted all the information at its disposal, a reduction of 1.5% was imposed on the company. Also, a settlement was reached with SIA “VELVE” on the termination of the legal dispute in the case, the company agreed with the established facts and committed not to appeal the final decision of the CC. Therefore, the settlement provides for a 10% reduction of the fine. In its turn, the operation of SIA “RBSSKALSBūvvadība” has been liquidated, therefore no decision on the fine was made.

Cartel members’ and fines imposed on them as a percentage of the previous financial year's turnover and in absolute terms (euro):

Ieva Šmite, Director of the Prohibited Agreements Department of the CC: “The CC has concluded one of the most significant cartel investigation cases in the history of the CC. This would certainly not be possible without our partners of this case, The Corruption Prevention and Combating Bureau. The study and scope of this case was a great challenge for us, and only such close interinstitutional cooperation once again proves that this is the right way to achieve a successful outcome.”