Major Offensive Against Corruption – German Railways Anti-Cartel SWAT

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Having spent many years advising my colleagues in the oil industry how to manage risks related to competition law compliance I was interested recently to learn about an interesting twist in the way some other big companies are dealing with cartel risk. In this Article I introduce the Deutsche Bahn’s Anti-Cartel SWAT team (CRK4).

Traditionally we in the oil industry have been heavily focused on ensuring that our downstream businesses like fuel retailing and commodity trading are in full compliance with all the relevant competition and anti-trust laws. These are the areas of the industry which are involved in selling and in the past they have often been the focal point of investigations by the authorities.

Where transgressions have been uncovered they have been very expensive. For example in 2004 Competition authorities in Italy uncovered anticompetitive practices in relation to the supply of aircraft fuels at Italian airports. As a result fines were imposed on a number of oil companies. The Approximate penalties involved were ENI – Euro 117 million, Esso – Euro 67 million, Kuwait – Euro 47 million, Shell – Euro 57 million, Tamoil around Euro 20 million and Total – Euro 9 million. As a result of this case the downstream jet fuel supply industry has gone to considerable lengths to implement risk management and corporate governance processes to provide assurance that such transgressions can not recur (you can get more information about this specific case here).

Generally, less attention has been paid to competition law issues in the upstream oil and gas businesses like exploration and production because these were not considered to be operations directly involving sales or marketing. However anyone managing mega projects for finding, extracting and delivering oil will be well aware of the enormous procurement spend that is typically involved. In this industry billions of dollars are spent on services, technology, hardware and consumables (like chemicals) every year.

Many of these products and services may only be available from one or a limited number of suppliers. These suppliers are often small to medium sized enterprises (like ‘Mittelstand’ companies in Germany) where the authority to negotiate and to manage the interactions with key competitors rests in the hands of a single senior manager or possibly even the owner. As a result this is just the kind of environment in which understandings‘ between competitors can flourish – to the detriment of customers.

Such understandings might be in relation to pricing, areas of product or technology specialisation or regional coverage (like ‘who supplies where?’). They are unlikely to be formally documented. Meetings between competitors may occur at, or near, trade fairs or industry association gatherings which on the face of it are relatively innocent opportunities to promote normal business and relationships with suppliers and customers. However beneath this façade of innocent trade activities some groups have more clandestine cartel-type discussions

When they operate these cartels result in customers paying higher prices than would operate in a normal competitive market. Oil majors like any other large purchasing organisations are the potential victims of such activities and where cartels are successful the impact on the bottom line of their victims can be measured in many millions of dollars.

I was therefore interested to learn this week how one major European purchaser has declared war on the many cartels operating among its suppliers. This may be a useful lesson for other industries involved in large procurement projects. Perhaps the time is right for mega purchasers like the oil and gas exploration and production companies to move away from their defensive stance with regard to competition law and go on the offensive. If the estimates from the example below are correct the potential prize for companies offensively using competition/ anti-trust legislation to stamp-out corruption among supplier cartels is huge.

German National Rail Company (Deutsche Bahn) Declares War On Supplier Cartels

On 24th March the German newspaper Süddeutsche Zeitung carried an exclusive report on the activities of a relatively new special unit within the Deutsche Bahn referred to as CRK4. This unit is located on the 16th floor of the company’s offices on Potsdamer Platz in Berlin and comprises six lawyers under the leadership of Tilman Makatsch. Its role is to hunt down supplier cartels and, where illegal price fixing against the rail company occurs, to secure financial damages.

The view of the rail company’s main board director responsible for legal compliance and data-protection, Gerd Becht, is that his organisation is directly or indirectly impacted by nearly a third of all the cartels that have been identified in Germany. In the past 5-7 years it is estimated that as a result of these activities the company has been cheated out of more than a billion euros. In many cases the interest due on these sums during the intervening period exceeds the value of the original fraud.

The Deutsche Bahn wants this money back and Becht believes that the pioneering approach used by his organisation will set a benchmark against supplier cartels for other large procurement companies to follow.

The rail and logistics company has an annual expenditure of over 20 billion euros putting it in a similar league with the oil exploration and production companies mentioned above. It has about 40,000 suppliers which provide not only trains, buses, tracks and switching equipment but also clothing, furniture, food, drinks and much more. Even the coffee cartel which was busted a few years ago had a negative impact on Deutsche Bahn. Numerous coffee roasters were found to have swindled their major customers for at least a decade. As a purchaser of over 300 tons per annum of coffee the company has demanded damages from numerous suppliers. Makatsch and his Anti-Cartel SWAT Team are investigating more than 20 companies in this area.

In London Deutsche Bahn is cooperating with other European rail networks on what they consider to be the over-pricing of carbon brushes used for the transfer of electricity to locomotives. London also sets the scene for the SWAT team’s attack on what it considers to be excessive bank charges. CRK4 is also currently active in Oslo, Norway, and of course in the German courts.

So far the biggest success of the Anti-Cartel SWAT team in terms of monetary value has been with the track cartel. This group of steel suppliers had been fixing prices for many years and according to the Süddeutsche Zeitung Report Thyssen-Krupp and Voestalpine have together already paid Deutsch Bahn approximately Euro 200 million. The regional court in Frankfurt still has to pass judgement on the role of other steel suppliers.

As a profit centre CRK4 is extremely profitable although this alone is not the only motive driving Becht and his Anti-Cartel SWAT team. His view is that the team is leading the way in changing the traditional industrial culture within Europe. He believes cartels have been operating in nearly every branch of industry. The Süddeutsche Zeitung mentions that based on reports from competition authorities even manufacturers of chocolate are under investigation.

Since the European anti-trust authorities have started providing ‘Supergrass’ incentives, like reduced penalties for cartel participants who shop their ‘cartel chums’, more price fixing syndicates are coming to light. Sometimes as a result of cartel participants cooperating with the authorities their victims may struggle in getting the full compensation they believe should be applicable. This irritates Becht – a supergrass may for example, as a condition of their cooperation with the authorities, provide evidence under an assurance of confidentiality. This can make the victims investigations for legal damage claims more challenging. However the EU competition authorities are working to improve the position of cartel victims in such situations.

It is clearly in the interest of the competition authorities that buying organisations play a more active role in bringing anti-competition syndicates to light – this strongly supports the authorities’ cartel busting process. Deutsche Bahn believes it is keeping ahead of the pack by insisting that suppliers confirm in its supply agreements that they will return 15% of the value of goods if they are found to have been involved in price fixing agreements. Other German trading groups like Metro make similar demands on their suppliers. In such situations the burden of proof to demonstrate that the amount involved was less than 15% lies clearly with the transgressors.

In addition the Deutsche Bahn requires that where its suppliers have been involved in anticompetitive practices they must terminate the employment of the managers and employees involved. They must also provide proof that the illegal activities have been stopped. Only those who go through this self-sanitization process can remain suppliers of Deutsche Bahn.

And the next project for the CRK4 Cartel SWAT Team? A damages case has already been prepared in readiness for the courts. It involves numerous, and in some cases very well known, breweries. I wonder if they will manage to arrange a court appearance on April 23rd – the date when in 1516 the German Beer Purity Law (Reinheitsgebot) was endorsed in Ingolstadt. This only allowed beer to be made from three ingredients – water, malt and hops – and it is generally regarded as the birthday of German beer. Interestingly this law also set the price of beer at 1-2 pfennig per Mass (a rather large glass) – an early case of price fixing perhaps!

Chris Duggleby

For German visitors to my site if you would like to read the original article in the SDZ from which some of the above information about the DB was taken please use the link here.

If you would like to find out more about the Risk Management Author Chris Duggleby please visit my home page which can be found here.

Here are some other business risk management articles which can be viewed in PDF format by clicking over the names below:

Designing a Risk Management Process by Chris Duggleby (May 2012)

Management of Change Article by Chris Duggleby (March 2012)

Pandemic Risk Management Article by Chris Duggleby (February 2012) (or ‘How to Prepare for the Consequences of Microbial Sex!’)

If you have any comments or recommendations about competition/ antitrust compliance, the Deutsche Bahn offensive approach using its Anti-Cartel SWAT team CRK4 or any of the subjects raised on the www.chrisduggleby.com website please use the comments box below.

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