Worldwide: Antimonopoly Regulation Of Tenders In CIS

The sale of goods and services through tenders has become normal practice for many companies operating in CIS markets. The establishment and maintenance of transparent and honest conditions for bidding in tenders is one of the fundamental principles for developing competition on relevant markets. However, most CIS countries lack detailed antimonopoly regulation of tenders. This brochure provides more details on competition law and tenders' regulation.

The articles in this brochure have been prepared by DENTONS offices in various CIS countries, as well as our partner K&P Law Firm LLC (Armenia).

The brochure provides information on the following jurisdictions:

• Russia
• Kazakhstan
• Ukraine
• Belarus
• Azerbaijan
• Armenia
• Uzbekistan

RUSSIAN FEDERATION

Types of "tender"

The word "tender," one that has entered the spoken language, means a call for bids (torgi) (in the form of an auction or competitive tender (konkurs), in which a company or an individual meeting the criteria set by a potential client and offering the best terms for performance of the contract which is the subject of the tender obtains the right to enter into / perform such contract.

Russian Federation law identifies several types of calls for bids:

• Private, held in accordance with the requirements of the civil legislation.
• Calls held by so-called "certain types of legal entities," which means state corporations and companies, natural monopolies, public-funded institutions, etc. Such calls for bids are governed by Federal Law No. 223-FZ on the Procurement of Goods, Works and Services by Certain Types of Legal Entities of July 18, 2011, which lists the criteria for the calls for bids to which it applies.
• Calls held to satisfy state and municipal needs. They are regulated by Federal Law No. 44-FZ on the Contract System for Procurement of Goods, Works, and Services for State and Municipal Needs of April 5, 2013.

Antimonopoly regulation of calls for bids is a central issue in both the public and private sectors. Chapter 4 of Federal Law No. 135-FZ on the Protection of Competition of July 26, 2006 (the "Competition Law") determines the basic rules for antimonopoly regulation of calls for bids applicable to all types of calls mentioned above (and also contains special rules governing specific types of calls).

Antimonopoly requirements to the holding of calls for bids

Article 17 of the Competition Law establishes prohibitions on certain practices that may lead to the prevention, restriction or elimination of competition in a call for bids, namely:

1. Coordinating activities of tenderers by the organizers of calls for bids, requests for quotations or requests for proposals (hereinafter "Calls") or by clients.
2. Creating preferential terms of participation for one or more tenderers in the Calls, including via access to information.
3. Violating the procedure for determining the winner or winners of the Calls.
4. Participating in the Calls of the organizers or clients and/or employees of the organizers or employees of clients.

There is additional antimonopoly regulation for certain types of Calls: for example, contracts of authorities of the Russian Federation or its subjects, local government authorities and state extrabudgetary funds with financial organizations may be concluded only based on the results of public Calls.

In practice one of the most frequent violations of antimonopoly legislation with respect to Calls is collusion of tenderers, or of tenderers and the organizer, to achieve a specific outcome of the Calls. Such collusion is considered a cartel, an anti-competitive agreement among business entities (Article 11 of the Competition Law), strictly prohibited under Russian law.

Practices of tenderers

Generally tenderers enter into cartel agreements before the start of the Calls. There are several long-standing forms of such agreements:

1. Several dishonest tenderers intentionally decrease ("beat down," "taranyat") the price at the Calls until it becomes unreasonable from the economic standpoint, thereby depriving a bona fide tenderer of economic interest in the Calls. A few seconds before the end of the Calls the last participant of the cartel, who until that point had not made a bid, offers a price that is slightly lower than the price offered by the bona fide company. When determining the winner it is discovered that the companies that "beat down" the price do not meet some of the mandatory criteria of the Call, for example, they do not have the required permits. In the end, the contract is concluded with the dishonest tenderer that submitted the tender in the final seconds. A well-known example of the use of such a scheme is the case of a number of construction companies belonging to brothers that used it to ensure that one of their companies won the Calls¹. The case was considered by the Federal Antimonopoly Service of the Russian Federation (FAS) on the basis of a complaint from a bona fide tenderer.
2. Dishonest entities register to bid in the Call; however, only one company actually submits a bid (one for the entire Call or a different one for each specific lot). In this way the client is compelled to enter into the contract on the terms of a single bid. One of the most notable cases using such a scheme was the cartel of pharmaceutical companies investigated in 2010-2012. Seventeen entities participated in the cartel, and they were tenderers in a large number of Calls in which the colluders won in turns². The case was investigated by the FAS on the instruction of the RF Government jointly with the General Prosecutor's Office of the Russian Federation.

An anti-competitive agreement does not have to be stable or permanent; it is possible for one tenderer to coerce others to withdraw from a specific Call through bribery³. There are also cases of threats and violence from a dishonest tenderer against a potential competitor.

Practices of the Call Organizer

In practice, call organizer, operator of an electronic tendering platform, tender or auction commission (Call Organizer") often engages in anti-competitive practices by agreement with tendering companies: the Call is held counting on the fact that a specific tenderer will win.

The following are possible practices of a Call Organizer that are recognized as violations of the antimonopoly legislation:

1. The setting of unfair, unnecessary or discriminatory tendering criteria for participation or terms of the Calls. Such terms may include integration of unrelated lots into a single lot, setting the requirement to have documents or equipment unrelated to the subject of the contract, etc. For example, the Government of Stavropol Kray when holding a public competitive tender among automotive businesses set the evaluation criterion at 7 points for businesses owning their production and technical facilities, and 0 points for those leasing them. Such a criterion was deemed to be invalid (as ownership of facilities does not affect the quality of services provided) and discriminatory against small and medium businesses⁴. The case was considered under a complaint from the automotive businesses.
2. The Call Organizer prevents participation in the Calls. For example, it does not publish information on the date and time of the Calls, does not provide the address of the electronic tendering platform, etc⁵.
3. The Call Organizer violates the procedure for determining the winner: it accepts a tender that does not meet the established criteria, selects a tenderer who did not make the best offer, etc⁶.

When considering cases of antimonopoly law violations in Calls (and when rendering decisions) the FAS may use a wide range of evidence of an offense. This includes:

• Witness testimony, minutes and recordings confirming the fact of a cartel agreement or another violation of antimonopoly law.
• Characteristics of the tenderers (they show signs of being "shell companies," operate from a single email address, are registered in a single building, etc.).
• Factual information concerning the holding of the Calls and the practices of the Call Organizer (for example, absence of data on the electronic tendering platform during the Calls, confirmed by a notarized screenshot).
• Information on activities of the tenderers (for example, a tenderer not being actually able to carry out a contract at the time the tender was submitted).
• Circumstantial conclusions (inferences). For example, the conclusion that absolute coordination by tenderers is not possible without prior collusion.

Appealing the actions of the Call Organizer

The FAS may find "anti-competitive" violations in Calls during its own audits of compliance with antimonopoly legislation (including on the instruction of the Russian Federation Government within the scope of its authority, or on the basis of information received on violations⁷) or during the consideration of complaints against the actions of the Call Organizers. Such complaints may be filed by tenderers, or by third parties whose rights and legitimate interests could be infringed by violation of the procedure for holding the Calls (the complaint procedure is set forth in Article 18.1 of the Competition Law).

The following are some of the most frequently encountered grounds for complaints regarding the practices of Call Organizers:

• Unfair tendering criteria.
• Unfair terms of the Calls, for example, combining unrelated subjects of a Call into a single lot.

Complaints must be filed with the FAS within ten days of tallying the result of the Call (or of publication of the Call results on the Internet, if such publication is required). The time period may vary depending on the result or the nature of the Call. Together with filing a Complaint, the results of the Call may be challenged in court.

The FAS is required to consider the complaint on the merits within seven business days of receiving the complaint. Once the complaint is received FAS is required to notify the Call Organizer that a complaint has been received and suspend the Calls until the complaint has been considered on the merits. The Call Organizer and the tenderers may send the antimonopoly authority an objection or an addendum to the complaint and participate in the consideration of the complaint. The Call Organizer also cannot enter into a contract with a tenderer until FAS renders a decision on the complaint, otherwise the contract will be considered void.

The appellant may renounce its complaint (without the right to submit a complaint again). The decision or order of the FAS commission may be appealed in court within three months of the date of the decision or issuance of the order.

If, during consideration of a complaint, some of the arguments set out in the complaint are confirmed while some are not, the complaint is declared valid⁸. If the arguments set out in the complaint are not confirmed, but the FAS commission has determined that there were other violations that were not the subject of a complaint, the Complaint is deemed invalid, but the discovered violation is stated in the decision and, if necessary, the appropriate order is issued⁹.

Consequences of finding violations of antimonopoly law

FAS orders to eliminate antimonopoly law violations may include requirements to extend the Call once the criteria for participation and terms have been changed, or other violations have been eliminated, orders to strictly supervise the tendering procedure (including documenting all practices of a participant), etc.

Violation of the requirements of antimonopoly legislation is a ground for a court to invalidate the Call and transactions concluded on the basis of the Call, including further to a claim of the antimonopoly authority.

It is possible to impose administrative liability on violators, primarily under Article 14.32 (Conclusion of an anti-competitive agreement, taking anti-competitive coordinated actions, coordination of economic activity) of the Russian Federation Code of Administrative Offenses No. 195-FZ dated December 30, 2001.

Finally, if the anti-competitive practices have resulted in major (more than 10,000,000 rubles, or approx. US$17,185) damage to individuals, organizations or to the state, or have resulted in the deriving of a large amount of revenue (more than 50,000,000 rubles or approx. US$859,550), criminal prosecution of individual violators is possible. In this case primarily Article 178 (Prevention, restriction or elimination of competition) of the Russian Federation Criminal Code No. 63-FZ dated June 13, 1996 will apply. Penalties under the main component of this article reach a fine of 500,000 rubles (approx. US$8,595) or amount equal to the income of two years, forced labor or imprisonment for up to three years with possible deprivation of the ability to hold certain positions or engage in certain activities. The presence of aggravating circumstances may result in up to seven years of imprisonment.

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Footnotes

1. Case No. 05-10-07/2011 (decision of the FAS department for Orenburg dated September 2, 2011)

2. Case No. 1 11/158-10 (decision of the FAS Commission dated July 6, 2011) and others. For example, case No. 1 11/194-11 (decision of the FAS Commission dated December 2, 2011): one tenderer gave another tenderer money not to participate in the Calls. The case was considered at the confession of the bribed tenderer.

4. Case No.67 (decision of the FAS department for Stavropol Kray dated July 20, 2011)

5. For example, case No.132-/2014 (decision of the FAS Russia department for Krasnodar dated November 6, 2014): the client did not publish information on the Calls on the electronic tendering platform. The case was considered at the complaint of a potential tenderer.

6. For example, case No. 60 (decision of the FAS Russia department for Novosibirsk dated December 18, 2013): the tender commission awarded the winning tenderer the maximum number of points according to a criterion which it did not in fact meet. The case was considered further to wan application of the acting prosecutor.

7. For example, further to an inquiry from senator Ruslan Gattarov, the FAS audited an auction of the Ministry of Health to develop infrastructure for the Unified State Health Information System (FAS official website: http://www.fas.gov.ru/fas-inpress/fas-in-press_36824.html)

8. FAS Russia letter No. ATs /16109/14 dated April 23, 2014 on the Sending of Clarifications on the Adoption of Decisions by the Antimonopoly Authority based on the Results of Consideration of Complaints against Violation of the Procedure for Mandatory Callses in accordance with Russian Federation Legislation and the Procedure for Concluding Contracts according to the procedure of Article 18.1 of Federal Law No. 135-FZ on Protection of Competition dated July 26, 2006.

9. Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.