🚨 Phantom Bidding: Unfair Bidding Practices and Anti-Competitive Behavior

Today Korean Social News | 2025.05.10

📌 Bid Rigging Detected at US Military Bases in Korea... Improper Contracts Worth 25.5 Billion Won Through "Phantom Bidding"

💬 It was revealed that 11 Korean subcontractors and an American contracting company engaged in bid rigging worth approximately 25.5 billion won for facility management and supply services at US military bases in Korea. They predetermined which company would win the contract while other companies submitted artificially high quotes in a practice known as "phantom bidding" to interfere with the fair bidding process. Prosecutors have indicted 12 individuals without detention and also charged 2 corporate entities.

Summary

• Phantom bidding is when companies participate in bidding processes without actually intending to win the contract.
• Bid rigging hurts fair competition and wastes taxpayer money.
• This is illegal behavior punishable under both the Fair Trade Act and Criminal Code.

1️⃣ Definition

Phantom bidding refers to a practice where companies formally participate in a bidding process without any real intention to win the contract, allowing a predetermined company to win. Simply put, it's when companies agree in advance who will win, and others submit deliberately high prices just to play the role of "extras" or "phantoms."

This practice undermines the purpose of the bidding system, which aims to select the best contractor through fair competition.

💡 Why is this a problem?

• It prevents fair competition and disrupts market order.
• It unnecessarily increases government spending or project costs.
• It eliminates quality and service competition, harming clients and consumers.
• It makes it difficult for new companies to enter the market, hindering industrial development.

2️⃣ Characteristics and Methods of Phantom Bidding

📕 Main Features and Types

• Phantom bidding appears in various forms. The main types are:

  • Rotation scheme: Participating companies take turns winning contracts. When it's a specific company's "turn," others submit high prices.
  • Regional division: Projects in specific regions are won by local companies while others only participate formally.
  • Subcontract guarantee: The winning company promises subcontracts to the phantom bidders.
  • Payment type: The winning company pays a certain amount to the phantom bidding companies.

• Phantom bidding occurs in various industries. It commonly appears in:

  • Construction: Most frequently occurs in public construction projects.
  • Supply procurement: Happens in government or public institution purchasing bids.
  • Service contracts: Appears in facility management, security, cleaning service contracts.
  • Information technology: Occurs in system development and software development projects.
  • Defense procurement: Found in military supply procurement and military facility management contracts.

📕 Legal Penalties and Punishment

• Phantom bidding is punishable under several laws. The main legal grounds are:

  • Fair Trade Act: Regulated as unfair collaborative acts (collusion), with fines up to 20% of related sales.
  • Criminal Code: Constitutes bid obstruction, punishable by up to 2 years in prison or fines up to 70 million won.
  • National Contract Act: Can result in disqualification from bidding for up to 2 years.
  • Subcontracting Act: Additional penalties may apply for unfair subcontracting practices.

• The Fair Trade Commission operates a leniency program. Key aspects include:

  • Companies that voluntarily report their participation in collusion may receive reduced fines and criminal penalties.
  • The first company to report receives 100% exemption from fines, the second receives 50% reduction, with benefits varying by reporting order.
  • This system helps increase detection rates of collusion and encourages the breakdown of cartels.
  • Recent improvements limit benefits for collusion leaders to enhance the fairness of the system.

Social Impact of Phantom Bidding

1. Economic Loss: Public budgets unnecessarily increase, wasting taxpayer money.
2. Hindered Technological Development: Contracts are decided by collusion rather than quality and technology competition, hindering innovation.
3. Entry Barriers for New Companies: Collusion among existing companies makes it difficult for new companies to enter the market.
4. Corruption Spread: Bid rigging can connect to official corruption, spreading throughout society.
5. Decreased National Credibility: Especially in international bidding, collusion lowers national credibility.

3️⃣ Efforts and Cases to Prevent Phantom Bidding

✅ Prevention Systems and Measures

• The government operates various prevention systems. Main systems include:

  • Electronic bidding system: Reduces the possibility of collusion through transparent online bidding process management.
  • Lowest price automatic award system: Companies meeting certain quality standards with the lowest price automatically win.
  • Qualification review system: Comprehensively evaluates price, technical skills, performance, and financial status.
  • Bid collusion pattern detection system: Uses artificial intelligence and big data to detect collusion patterns.
  • Whistleblower protection and reward system: Encourages insiders with knowledge of collusion to report it.

• Private companies' self-regulation efforts are also important. Main company responses include:

  • Implementing ethical management programs: Encourages employee compliance with laws through Fair Trade Compliance Programs (CP).
  • Strengthening internal audits: Prevents illegal activities through regular audits of bidding-related work.
  • Employee education: Raises awareness of legal risks through education on fair trade law and bidding regulations.
  • Internal reporting system: Establishes channels to report illegal collusion within the company.
  • Enhanced contract review: Creates procedures to increase transparency in subcontractor selection.

✅ Domestic and International Detection Cases

• Various phantom bidding cases have been detected in Korea. Major cases include:

  • In 2023, five companies were caught colluding in public institution food supply bidding worth about 12 billion won over two years.
  • In 2022, ten companies were caught taking turns winning highway rest area operation rights, resulting in fines of about 15 billion won.
  • In 2021, seven companies were caught dividing the market by region in Defense Acquisition Program Administration military supply procurement, leading to criminal punishment.
  • Recently, 11 companies and an American contractor were indicted for colluding to gain improper benefits worth 25.5 billion won in US military base bidding.

• Similar cases occur overseas as well. Major cases include:

  • In the US in 2024, three companies were caught colluding in Department of Defense facility maintenance contracts, resulting in fines of about 20 million dollars.
  • In the EU in 2023, 12 construction companies from 5 countries were fined a total of 400 million euros for colluding in public infrastructure project bidding.
  • In Japan in 2022, major construction companies were caught colluding in Tokyo Olympic facility construction bidding, causing social controversy.
  • International organizations continue to raise concerns about collusion in bidding for aid projects in developing countries.

4️⃣ Related Terminology

🔎 Bid Rigging

• Bid rigging is an illegal collaborative act that hinders fair competition.
• Bid rigging refers to two or more businesses agreeing in advance on who will win, what the winning price will be, or who will participate in public bidding. This is a typical type of "unfair collaborative act" under the Fair Trade Act.
• Main types of bid rigging include "winner determination collusion" (predetermining the winner), "price collusion" (adjusting bid prices), "bid participation restriction collusion" (limiting who participates), and "market division collusion" (dividing markets by region or product).
• Bid rigging damages the fundamental purpose of the bidding system, which aims to select the optimal contractor through free and fair competition. It causes budget waste for the contracting entity (especially public institutions) and reduces consumer welfare, making it a serious economic crime.

🔎 Leniency

• Leniency is a system that reduces penalties for companies that voluntarily report their participation in collusion.
• Leniency (voluntary reporting reduction system) is a system that reduces fines or criminal penalties for businesses that voluntarily report their participation in cartels or cooperate with investigations. It aims to increase the detection rate of secretive collusion.
• Korea's leniency system was introduced in 1997 and has been improved several times. Currently, the first company to report receives 100% exemption from fines and prosecution, while the second receives a 50% reduction in fines and reduced prosecution.
• The leniency system effectively weakens cartel stability by creating distrust among participants. However, issues like the fairness problem of giving the same benefits to collusion leaders and "leniency shopping" through repeated reporting have been pointed out.

🔎 Bid Obstruction Crime

• Bid obstruction crime is a criminal offense that punishes actions interfering with fair bidding.
• Bid obstruction crime is defined in Article 315 of the Criminal Code as an offense that punishes activities that interfere with fair bidding or auctions through deception, force, or collusion. It is punishable by up to 2 years in prison or fines up to 70 million won.
• Main types of bid obstruction include phantom bidding, "collusion avoidance" (where companies other than the predetermined winner don't participate), and "interference by force" (pressuring specific companies to win).
• Bid obstruction crime applies separately from the Fair Trade Act's collusion regulations, so a single act of collusion can result in both fines under the Fair Trade Act and criminal punishment under the Criminal Code. Recently, there has been a trend toward strengthening punishment for collusion in public bidding.

5️⃣ Frequently Asked Questions (FAQ)

Q: How can I report suspected bid rigging?

A: Suspected bid rigging can be reported through several channels. The most common method is using the "Report Center" on the Fair Trade Commission website. You can report easily online, and anonymous reporting is possible. You can also call the Fair Trade Commission's "Collusion Report Center" (phone: 044-200-4491~4) or submit a report by mail. When reporting, it's more effective to include specific information such as a list of suspected companies, bidding information (bid announcement number, contracting entity, etc.), and suspicious circumstances (submission of documents with the same typos, unusual bidding patterns, etc.). Insiders can benefit from reduced penalties using the leniency system, and external whistleblowers may receive rewards. For public institution bid rigging, you can also report to the Anti-Corruption & Civil Rights Commission's "Integrity Portal," the Board of Audit and Inspection, or the Prosecutor's Office.

Q: How can small businesses protect themselves from bid rigging?

A: There are several ways small businesses can avoid being involved in or harmed by bid rigging. First, implementing a Fair Trade Compliance Program (CP) to educate employees about relevant laws and risks and establish an internal audit system is important. Second, when contacted by other companies with bidding-related offers or proposals, clearly refuse and if possible, record these contacts. Third, if you notice suspicious signs (similar quotes from competitors, unusually high winning bids, etc.) in the bidding process, consider reporting to the Fair Trade Commission. Fourth, actively use electronic bidding systems and avoid negotiations in closed rooms or non-transparent transactions. Fifth, avoid discussing sensitive information about prices or bidding during industry meetings or association activities. Finally, if you unavoidably become involved in collusion, one option is to voluntarily report using the leniency system.