Insiders and Collusion in Bidding

This article was originally published on September 21, 2014 and written by Rodney J. Johnson.

Bidding fraud is a type of fraud that directly damages the competitiveness of an organization by raising input costs, thereby causing necessarily lower profitability or higher output prices and degrading competitiveness. The goal of service providers or vendors who participate in bidding fraud is to avoid competition or artificially raise the economic value they can extract from the purchasing organization.

In many cases, collusion in bidding is aided by support from organizational insiders, be it in the purchasing department or higher up. With diligence, collusion in bidding can be understood, investigated, and rooted out.

Collusion in Bidding and Potential Insider Support

Complementary Bids
A bidder or multiple bidders agree to submit inflated bids to provide cover for a pre-selected winner and make that winner’s bid look more attractive. Bids are submitted not to win, but to protect the pre-selected winning bid. In some cases, the complementary bids may be coming from companies that exist only to submit defective bids. This is made possible by the fact that many companies don’t do due diligence on vendors who submit obviously uncompetitive bids. Often, these complementary bids are submitted by sister companies of the winning bidder.

Potential Insider Support: The preselected winning bidder has been instructed to submit more than one bid, usually from an affiliated company, by those in the purchasing department, because a minimum number of bids are required to comply with purchasing/bidding policy.

Bid Rotation
Bidders agree that a different bidder among the colluding participants will win each round in turn. This is especially useful if each round is subtly different and the colluding bidders have preferences for what kinds of projects they would like to win. 

Rodney J. Johnson
President, Erudite Risk
Founder Resilience Cloud

Rodney J. Johnson is currently President of Erudite Risk, Co-Founder of the KBLA, and Founder of Resilience Cloud. He has spent most of his work life in Asia. Working in both the IT and the risk management sectors, he has been based in Korea and Singapore, while running companies with direct operations in Korea, China, Singapore, and India. He is the former country manager of a Korean subsidiary of a Silicon Valley operating systems start-up acquired by Samsung SDS, Korea’s largest systems integration company. Following that acquisition, he served as the chief operating officer of the new Samsung SDS–affiliated company that resulted from the acquisition.

Rodney J. Johnson is also a former technology analyst, reporting on Asian technology issues, and served as an intelligence analyst in the US Army. Over the last 13 years, he has led or been involved with more than 2000 risk management and security-related cases for multinational companies in Asia, as well as directly consulted for more than 30 of the Fortune 100. He has a BA in economics and mathematics and an MBA from the University of New Mexico’s Anderson School of Management.What customer industries is your company strongest in?


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Differences can be in terms of profitability, resources needed, skills needed, geographical coverage, etc.

Potential Insider Support: Bidders have been instructed beforehand on what projects are upcoming and the expected value of projects (and expected winning bid pricing), making it easier for colluding bidders to organize themselves into a non-competing pact.

 

Bid Suppression
One or more bidders agree to not bid so that another party may win the business. This is usually in return for compensation from the winning bidder(s), but it may also be in response to threats. Collusion doesn’t work if one or more potential bidders decide to not participate in the scheme. The easiest way to overcome the problem of a potential bidder who refuses to collude is to ensure that bidder just sits out the process completely.

Potential Insider Support: Project or product requirements can be written in such a way that the undesirable bidders are excluded from bidding right from the beginning. The undesirable bidders may now not be invited to submit bids. This also makes it easier to explain why various parties did not submit bids.

Market Division
Bidders collude concerning which bidder will win bids for different market spaces. Participants divide the market up based on various criteria and agree not to bid against each other. This is a long-term plan for collusion that goes beyond just colluding on this round of bidding or the next. It basically sets out rules whereby the colluding parties agree that certain market spaces ‘belong’ to certain players.

Potential Insider Support: Comparisons of geographical or product segment costs and capabilities are hidden or brushed under the rug so that inefficiencies or out-of-sync pricing in different areas never surface in black and white.

Investigating Collusion in Bidding

Collusion can be detected by looking out for various indicators of it. It is important to keep in mind that none of these signs of collusion are proof of collusion. They are simply indicators that more investigation may be merited.

  • Winning bidders subcontracting pieces of the bid to one or more losing bidders or even those invited to bid who eventually did not submit a bid.
  • The most competitive bid, which ended up being the winning bid, is not even close to being competitive if looked at against previous rounds of bidding.
  • Winning bids seem to be submitted by different bidders each time.
  • The same company wins each round. The same companies lose each round. (fake bids by sister companies, non-existent companies)
  • Line item prices submitted by the same vendor go from being high (losing round) to low (winning round) depending on the round.
  • The basis for the bid prices and reasons for previously successful bidders not participating are out-of-sync with expectations, unclear, or make no sense.

 

Due diligence should be performed on all bidders, even those who are unlikely to win, in order to ferret out fake bids and ensure the integrity of the bidding process. The due diligence process should also look at the details of the bids, themselves, to search for anomalies and unexpected similarities between bidders.

 

Erudite Risk


Erudite Risk offers risk management and security-related professional services for multinational companies operating in the Asia-Pacific region. With operations in India, Korea, and Singapore, Erudite Risk is ready to help you meet the challenges of Asia, the most dynamic and challenging business environment in the world.

Rodney J. Johnson is President of Erudite Risk. He has lived in Asia for most of his adult life, but still longs for good Mexican food.