Are Your Employees Breaking The Law?

The Department of Justice (DOJ) Antitrust Division investigations into P-O-P bid-rigging and price-fixing in New York and Milwaukee made plenty of headlines nationwide. But just in case they still haven't made you reconsider how you police your operation, take note: "The story of these companies could happen to anyone," says James H. Mutchnik, a trial attorney working on the DOJ's Midwest investigation. "These companies won awards and were respected in the industry, but they made some very bad business decisions."The bad news is that these activities can be difficult to detect and probably are more prevalent than most executives suspect. The good news, say DOJ officials, is that there are policies that can be enacted to discourage this activity -- and having them in place may reduce the punishment meted out if a company is caught.Efforts Weren't EnoughExecutives with the companies involved in the current P-O-P investigations say they thought they had sufficient policies in place to avoid these problems. Now, those programs are being given even more emphasis, they say, to ensure that employees remain aware of what constitutes a crime and the penalties for being involved."We want to put these activities into real terms," explains Jim Friel, director of the Stamford, Conn.-based Special Audits Group at Philip Morris. (The company was involved in both phases of the DOJ investigations through its Philip Morris operations in New York and its Miller Brewing subsidiary in Milwaukee.) "People will say they don't have these problems in their company, and they wouldn't tolerate them. But when you explain how some of these fraudulent schemes work, they start to see possibilities in conversations they've heard. Then they want to know what to be looking for. We try to give our people the tools to critically analyze what they're seeing."Allied Domecq Spirits & Wine (which was involved in the New York investigation through its spirits division and Hiram Walker subsidiary) has put more emphasis on its educational program, says spokesman Ross Fleckenstein: "We had a program in place before, but we reinvigorated it last summer. After these events began to unfold, we took it on the road and got more aggressive with getting the message out to our people."In essence, these crimes are violations of the 1898 Sherman Antitrust Act, which forbids competitors from joining together to control the market and allocate business. Typical violations in the P-O-P industry involve producers/brokers who are competing for a series of projects a client may have under bid. They get together (often by phone) and decide what the winning bids will be in each case, distributing projects among the various conspirators.In other cases, an employee of a consumer product marketing company (the client) is actively involved. The P-O-P company will submit phony or padded invoices, with a percentage being kicked back to the client's employee.In the current investigations, more than 25 defendants (people and companies) have been convicted, with more than $13 million in fines assessed and several jail terms and home-confinement sentences handed down. Virtually all involved pleaded guilty rather than face indictment. According to a Justice official, "many more" charges are yet to be filed in the investigations.Why P-O-P?Antitrust schemes are especially tempting to those involved in P-O-P, say Justice officials, due to the industry's organization. First, most individual products have a low cost and long production runs, making it easy to pad a bill without it being evident. "It's much easier to steal $1 each from a thousand units than to steal $1,000 from one product," Mutchnik explained during a seminar at POPAI MarketPlace in Chicago. "The customer doesn't notice the excess, and you can make a huge profit." In most cases, there are only a handful of competitors for any one project, and many of them know each other. Coordination is relatively simple, as long as all bidders are involved. There are also high barriers of entry for new competitors, especially with permanent P-O-P projects, due to the tooling and equipment needed. And the recent trend of "rightsizing" at client corporations has wiped away many middle managers, leaving purchasing activities consolidated in the hands of fewer people with less time to devote to evaluating each bid and justifying their need to focus projects with a few core suppliers.What To Look ForThere are tell-tale signs consumer product marketer managers can look for that might indicate criminal activity, Justice officials say. "Individually, any of these can be innocent," says a DOJ spokesman. "But put together, they can start to look suspicious." They include:Year after year, the same vendor wins a specific bid. "If the same company always wins a contract, maybe it means they're better," Mutchnik says. "But maybe they're not. Maybe they've been allocated that project by their competitors."No new competitors bid on your business. "Competitors sometimes figure out that it's not worth their time and effort to bid on a project if they see that the business environment is closed," Mutchnik says.Having a vendor specialize more than is reasonable. "When a competitor stops bidding on business he used to try for and focuses only on certain jobs, why is it happening?" a Justice spokesman says. "One reason may be that he's doing so well [by padding his invoices] in another area that he doesn't bother trying to get other work."Employing personnel who aren't looking to advance. "If employees stay in their jobs for a long time and pass up promotions, it's a warning sign," Mutchnik says. It also should set off alarms if the long-time employee has better relationships with his vendors than with his own managers. "Learn the addresses of your employees and take a drive by their houses," Mutchnik suggests. "If they live nicer than you do, maybe it means they're independently wealthy, and maybe it means you ought to question where the money comes from."Receiving unaggressive bids on reorders. In some cases, an initial project order receives vigorous low bidding and the project is awarded. When a reorder is put out to bid, several companies come in substantially higher than their initial bids had been, and the original supplier wins easily.There are also tell-tale signs that suspicious vendors can spot, officials say. A long history of competitively selling to one company and the inability to get in the door with the same product at a similar company may be one sign. In addition, information that a company is selling a product at an unusually higher price to one company than to another also indicates something may be wrong.Officials admit it's difficult for a competitor to turn in another based on suspicions. But there may be more to go on than mere hints. The Milwaukee investigation, in fact, began with a competitor reporting his attempted recruitment to the conspiracy. "If you rat someone out," a DOJ spokesman said, "it's the most pro-competitive thing you can do. You've just increased your competitor's costs of doing business dramatically" and opened the door to legitimate competition again.Many investigations have begun with anonymous letters. "We always evaluate anonymous tips for their specificity and lucidity," one New York official says. "They often have credibility that is worth checking out." Tips can be sent to either the FBI or the DOJ.Stupid MistakesOn one hand, officials admit these conspiracies are difficult to uncover and can run for 10 years or more before being stopped. On the other, conspirators often make stupid mistakes that lead to their downfall. Chicago DOJ officials mentioned cases outside the P-O-P industry in which clients were alerted to a conspiracy by receiving:Bids from competitors in the same handwriting.Bids from competitors in different cities with the same postmark.Bids from competitors that were exactly the same "to the penny."Wildly diverging pricing patterns on two essentially similar projects.A high bid with the competitor's lower bid accidentally stapled to the back.Conspirators with loose lips. According to a Chicago DOJ official, "When we hear them say, 'I submitted that bid as a courtesy to my competitor' or 'I was only doing my competitor a favor by bidding that job,' they often don't realize what they've said. But I know I've just caught them."Sometimes the vendor will plead innocence; sometimes they truly weren't aware that they were breaking federal law and that stiff penalties were in the offing. "But they know it's wrong, or they wouldn't try to conceal the crime and hide the money," a Chicago official points out. "And not a single one of the people we've caught had told their wives about what they were doing."Policies Can ProtectUnder federal sentencing guidelines, companies that have an effective detection and reporting policy in place when the crimes occur can receive a reduction in their fine and a lessening of the corporate liability. The Antitrust division has also enacted the most liberal amnesty program in the federal government.But a compliance and education program, officials warn, must be specific and administered by a top manager. "Many companies put their corporate attorney in charge," Mutchnik says. "That's not sufficient. It has to be a manager who oversees the buyers. You have to have an audit procedure in place and a system to discipline people."Philip Morris' company auditors discovered discrepancies and took their findings to the DOJ, which began the New York investigation. The special audits group conducts audits on the company's worldwide subsidiaries on a continuing basis. "We look for red flags by running through massive amounts of information," Friel says. "It's not magical, and it's not easy to detect. But something will kick out if you keep at it. You won't catch all of it, but even if you're only catching one percent, it adds up fast. And it sends a deterrent message to others."Put It In WritingIn many companies, employees must sign an affidavit saying they have read the company's policies on these activities and understand they are a crime. This is more than just grounds for firing a person, Justice officials say. This proof that they understood their activities were Federal offenses can also aid in prosecuting them.Philip Morris has a "fairly comprehensive business policy statement," Friel says, which is distributed annually to anyone who can approve company funds. Employees also sign a document stating they have read the policy and will report any illegal activities in their personal experience. The policy also covers conflicts of interest that can arise in a worldwide company with spouses or family members employed at interrelated businesses. "The important point is that the disclosure is made and supervisors are aware of it. We're looking for a fair amount of confidence that we aren't being compromised."Domecq also uses an affidavit, which covers the use of company funds and assets, complying with trade practices, receiving gifts from vendors and reporting conflicts of interest. Vendors must sign off on the policies if they do more than $25,000 worth of annual business with the company.P-O-P companies are policing themselves, too. At Everbrite Inc., Greenfield, Wis., which was convicted in the Milwaukee investigation, an extensive educational program was put in place about two years ago. It is presented to any employee in a position with access to funds. It includes a signed document that summarizes potential illegal activities and what should be done if one arises. "Education is the key to the game," says Tom Donnelly, vice president of human resources. "We want to ensure that all of our employees are informed of the law and its consequences. Everbrite does not want to violate the law and never did."The companies realize such programs and aggressive prevention measures may create a paranoid atmosphere. "The goal is to instill a healthy skepticism so the employees stay aware," says Philip Morris' Friel. "We want them to at least question what's happening when they see something unusual. You don't want everyone so paranoid they're calling the FBI every time someone is awarded two contracts in a row. But you want them to keep their eyes open and be proactive."How To Avoid ProblemsJustice officials also offer steps marketers can take to help their buying employees avoid running afoul of the law. These include occasionally expanding the vendor list, changing the vendors who bid on specific projects and awarding projects based on factors other than the lowest bid.They also suggest that the personnel who buy raw materials for the manufacturer's products talk frequently with buyers of P-O-P materials and other services. "They may have tactics and methods they can share," says one official.Adds Mutchnik, "You have to be afraid. Not afraid of me or of being caught, but afraid of the consequences of having one employee do something that puts you in jeopardy. Don't put the entire fate of your company in the hands of one guy."

Are Your Employees Breaking The Law?

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