The 90-day deadline attached to the Competition Bureau’s 142 production orders for records, issued this spring to certain condominium corporations in the GTA, is due to expire before the summer is out.

As has been reported, the independent law enforcement agency applied to the courts for the orders as part of an inquiry into allegations of bid-rigging and conspiracy in the supply of condominium refurbishment services. A media spokesperson for the Competition Bureau stated in a May 31 email that the agency had not made any conclusion of wrongdoing at that time, but that the investigation was ongoing.

“Should evidence indicate that the Competition Act has been contravened, the commissioner will not hesitate to take appropriate action,” the spokesperson said.

At affected condominium corporations, the production orders prompted site staff to call their head offices, which instructed their clients to confer with their legal counsel, who confirmed compliance is mandatory.

As condominium lawyers advised their clients on how to comply with the production orders and property managers set about tracking down the requested records, news of the inquiry raised a number of questions. Who could potentially be implicated in the investigation? (So far, condominium board directors and property managers do not appear to be on the bureau’s radar.) Have any of the affected corporations suffered a loss as a result of bid-rigging and conspiracy? If so, will they have an opportunity to make a recovery?

If the answers are to come — the Competition Bureau could find nothing and close its investigation — they are expected to take time. In the interim, industry members have predicted that the event will encourage boards to raise their contract-tendering standards.

With all this in mind, here’s a look at the inquiry’s legal context, best practices in procurement and tips on fraud prevention.

The inquiry’s legal context

For some, the production orders issued in May were their first introduction to the Competition Bureau. As its name suggests, the independent agency administers and enforces the Competition Act, federal legislation with civil and criminal provisions that make bid-rigging and conspiracy offences carrying possible fines and prison terms.

Bid-rigging is when, in response to a call for bids or tenders, two or more parties agree, unbeknownst to the organization issuing the call, that one or more of them will withdraw or withhold a bid, or make submissions based on an arrangement with competing bidders. Conspiracy deals with an agreement between competitors to fix the price or restrict the supply of a product or services, or to allocate customers or markets.

Considering the seriousness of the associated penalties, competition lawyers Steve Szentesi and Mark Warner recommended that condominium corporations responding to production orders evaluate their exposure to liability.

“Before you produce anything to the bureau, you assess what you’re holding and whether there’s a potential risk that you’ve violated the Competition Act yourself,” said Szentesi. “And if that’s the case, you may want to assess strategies to reduce risk — maybe it’s the immunity program, maybe it’s negotiating with the bureau, maybe it’s merely explaining irregularities.”

The process is time-sensitive, as there are benefits to approaching the bureau first to cooperate in its investigations — which sometimes expand beyond their original targets — if a party finds it possesses incriminating evidence.

“In an industry where people work closely, they can come to see each other as natural allies,” said Warner. “Sometimes their interests diverge in the course of an investigation, and you don’t really know what the other side’s doing — you don’t really know if there’s a supplier who has been involved in something along the chain and has gone in and admitted it — so it’s important to understand your risks in relation to the various other parties.”

While evaluating risk may be the most pressing matter for condominium corporations scrambling to comply with the production order, there’s also the question of whether those corporations might be victims of bid-rigging and conspiracy. Unless and until they get an answer, news of the inquiry serves as an impetus for all condominium corporations to review their procurement processes.

Best practices in procurement

Simon Brown, executive vice president of ArcBlue Consulting and member of the Supply Chain Management Association, said he believes there are five steps all organizations should take as they put contracts out to tender.

First, the organization needs to confirm that the service it wants to obtain will in fact provide the desired solution. For example, Brown said, if a condominium has a leaking roof, the corporation should determine the root cause of the problem to avoid repeatedly patching holes if the real culprit is a pest infestation.

Next, with the correct specifications in hand, the organization can conduct the process, which involves establishing what the outcome should look like, including whether low cost or top quality is a priority for a particular project.

After the organization sets its expectations, it can let proponents clarify the scope of the job as well as requirements and standards.

Then, the corporation can compare the potential contractors based on the information it has received, whether face to face, through an e-auction or request for proposals (RFP).

As a final step, said Brown, organizations should close out the process by providing feedback to the unsuccessful proponents.

“One of the things that tends to happen is, we find a contractor that we really like and keep going back to them, and that doesn’t make them a bad comparison, but it makes it very difficult to demonstrate that the process was fair and there was nothing else going on,” he explained. “So that conclusion process would help us encourage others to participate.”

A common pitfall is when organizations fail to follow a process for work that starts out minor but becomes major, which is why Brown suggested scaling these standards to the circumstances, whether the condominium corporation comprises six units or 600 units. What circumstances ought to trigger a competitive process depends on both the availability of suppliers — how many experts are qualified to complete the work — and the size of the contract in relation to the corporation’s overall expenses.

To ensure the process is truly competitive, he said that the corporation should consider inviting players from outside their immediate market to bid on work when possible. In the event that bid-rigging is occurring, and the same three to five contractors consistently respond to the corporation’s call for tenders, one newcomer can upset the dynamics — although anti-competitive practices tend to be difficult to uncover in real time.

“It’s easy to see once someone proves corruption and forensic diagnostics are applied to the financials of the different organizations,” said Brown. “It’s a challenge to see when you’re looking at bids.”

Tips on fraud prevention

Of course, the best-case scenario would be to prevent bid-rigging and conspiracy from occurring. The next-best option would be to detect fraud as soon as possible.

That’s why David Malamed, a forensic accounting partner with Grant Thornton’s specialist advisory services practice, said all companies that work on construction projects should have whistleblower programs in place. It’s through whistleblowers that roughly half of these schemes come to light.

“A common example is: There are three main contractors, each contractor would have a conversation with each other, saying, ‘This is the time for me to win, so I’m going to be the most competitive,’ and you can almost do a round robin,” said Malamed.

He attributed the pervasiveness of construction fraud, as described in a 2013 Grant Thornton white paper on the subject, to a lack of consistently applied policies and procedures. Condominium corporations also have a role to play in adhering to and documenting procedures each step of the way.

For example, said Malamed, if he was reviewing how a snow-clearing contract was awarded, he would expect to find a file with information on the corporation’s requirements, such as amount of salt, time of service and years of experience. He would also expect that file to contain information on how the RFP was issued, who sat on the bid-review committee and a report card-style evaluation cross-referencing the corporation’s requirements with each competitor’s qualifications.

Proper procedure would dictate that more than one person sat on the bid-review committee, and that none of its members had a vested interest — business or personal — in the decision. As a measure of internal control, the forensic accounting partner further recommended having an individual who did not sit on the bid-review committee follow up to confirm that the successful proponent was in fact used for the work.

There are a number of red flags for bid-rigging. One is the hiring of unsuccessful proponents as subcontractors. Another is related parties and common ownership, where companies appear to be independent but either have familial or other connections to each other or to an individual within the condominium community. Plus, there are unusual bidding patterns.

“If the maximum price is going to be $250,000 and people’s bids are coming in at $249,000 — and that $250,000 cap was not stated — I’d be interested to know how they came so close to that number,” Malamed offered by way of example. Since recovery through the courts may be cost-prohibitive, he advised that condominium corporations should have fidelity insurance, which covers an organization for losses stemming from the dishonest acts of a specified person.

What could come next

The Competition Act also gives victims the right to sue for the recovery of damages attributed to bid-rigging. Such actions, which can be expensive and time-consuming, typically, although not necessarily, follow criminal convictions, which themselves can be time-consuming to obtain, said Szentesi.

Competition Bureau investigations alone can run anywhere from two to upwards of five years. If the independent law enforcement agency finds evidence that the Competition Act has been contravened, its enforcement actions will eventually be made public.

In 2016 to date, the bureau has announced an $18,000 fine for a Quebec company for participating in a sewer services cartel; a $140,000 fine for a Quebec company and its president for participating in a residential construction bid-rigging scheme; as well as a $13-million fine for a Japanese auto parts company for participating in a bid-rigging conspiracy.

Warner commented that Canada’s class-action bar, which is entrepreneurial and well-funded, will likely follow the bureau’s latest investigation with interest. Specifically, those firms will be watching to see if a number of condominium corporations was victimized at the hands of a large company.

But, he added, “I have been involved in cases where the bureau says it’s investigating and it goes nowhere.”

Meanwhile, as condominium corporations await further news in the bureau’s inquiry, Ontario’s Ministry of Government and Consumer Services is drafting the regulations that will crystallize the specifics of Condominium Act reforms passed last year. Changes to the consumer-protection legislation include a new provision for following a procurement process for certain contracts.

The regulations are expected to set out a requirement for sealed bids, but the full details are not yet known. For now, the onus is on the individual condominium corporation to set its own contract-tendering standards, such as adopting safeguards to protect itself from becoming a victim of fraud.

“There’s no magic bullet to make sure that doesn’t happen,” said Szentesi, “but between knowledge of bid-rigging, common strategies to violate the law and how to strengthen tender and bid processes, there’s a lot that boards and other procurement agencies can do to reduce the risk that they’re getting gamed or they’re subject to illegal bidding.”

Michelle Ervin is the editor of CondoBusiness.