Antitrust Investigation

Nine Builders at Center of Cartel Probe

CARTEL A coal-fired power plant in Hamm, Germany. Source Imago Hans Blossey
Questionable invoices for construction of a coal-fired power plant in Hamm, Germany, owned by utility RWE set the cartel office's investigation into motion.
  • Why it matters

    Why it matters

    German criminal and antitrust probes into nine building supply companies could uncover a wide-ranging conspiracy to inflate the prices of power plants and other major infrastructure projects across Germany.

  • Facts

    Facts

    • Munich prosecutors and antitrust officials are investigating nine building supply companies for alleged price-fixing and other fraud.
    • The companies at the heart of a series of ongoing probes include firms based in Germany, France and the Netherlands.
    • According to prosecutors, the firms colluded to fix prices and submitted fictitious bids to drive up construction contracts.
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    Audio

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A construction cartel has allegedly bilked energy utilities and industrial corporations in Germany for years.

The Munich Public Prosecutor’s Office and German Federal Cartel Office are investigating nine companies suspected of illegal price fixing, issuing fictitious invoices for work never performed and at least one case of paying bribes with funds from an undeclared construction account.

According to the allegations, eight German and a Dutch building equipment supplier are at the heart of the investigation, which focuses on alleged harm to 20 companies, including German utilities RWE and E.ON. The alleged fraud involved about 50 major building projects, with an estimated order volume of several hundred million euros, and caused financial losses that have yet to be quantified.

Global corporations including E.ON and RWE, Alstom of France and Hitachi of Japan were among those allegedly victimized by the cartel. Volkswagen subsidiary Audi was reportedly conned during construction of an building at its headquarters in Ingolstadt.

Electronics giant Siemens, one of Germany’s largest private employers, was apparently the biggest victim.

A warrant issued by Munich prosecutors targeted five building suppliers: Caverion, an offshoot of Finnish construction YIT Corporation; Cofely, a unit of French building group GDF Suez; two German firms, Ferrostaal Air Technology and Kraftanlagen München and Nickel, a unit of the French Vinci unit. Others under scrutiny of prosecutors include Imtech, a Dutch firm, and three other German building suppliers: Rixner Lüftung-Klima, Julius Gaiser and Siegle + Epple.

“Starting in 2007, Caverion, Cofely, Ferrostaal Air Technology, Kraftanlagen München and Nickel joined forces to form a fixed group of company,” reads the search warrant issued by the Munich Public Prosecutor’s Office.

According to the document, the five companies named in the warrant “entered into anti-competitive agreements in the context of major construction projects, to the detriment of Siemens AG.”

 

International Cartel-01

 

The public prosecutor’s office named a dozen individual defendants, including several chief executives, who work for the five suspected building supply companies.

None of the companies involved was willing to comment on the allegations.

A spokesman for Siemens said that while the company was aware of the investigations, it was not ready to comment at this time.

Over time, the nine companies became a club of sorts, with more than 30 employees involved in its activities.

They included rank-and-file employees, department heads, directors, authorized officers and even a few chief executives.

Many of the agreements were made by telephone, but the partners preferred meeting in person at airports in Cologne, Frankfurt and Munich to discuss the most important issues. Munich prosecutors speculate the club had only one purpose: to reach illegal agreements to the detriment of third parties.

Handelsblatt exposed a few of the players in this secret society just a few months ago.

There were some peculiar aspects to the construction of two large power plants by utility giant RWE in the northwestern German city of Hamm, and at the Dutch seaport of Eemshaven.

Dutch building equipment provider Imtech had been awarded the contract after a supposedly difficult competitive process, but then it managed to earn an astonishingly large profit.

Imtech also paid hundreds of thousands of euros to several third parties that were never involved in the project.

Dutch building equipment provider Imtech had been awarded the contract after a supposedly difficult competitive process, but then it managed to earn an astonishingly large profit.

The case attracted the attention of public prosecutors and the Federal Cartel Office, who quickly uncovered signs of a cartel.

According to their findings, the cartel was organized as follows: To ensure that one of the companies involved would be awarded the contract at an excessively high price, the others submitted even more expensive bids.

In return for their assistance, they then received payments “through fictitious invoices and other constructs designed to cover up the compensatory payments,” according to the search warrant issued by the Munich prosecutors.

At this stage in the investigation, there is every indication the cartel that targeted RWE was only one of many.

Something very unusual has happened since then.

Because their names had already appeared in the newspaper, before the Federal Cartel Office had even created a file for them, the presumed perpetrator companies felt that they were under extreme time pressure.

They had only a few weeks to take advantage of a state’s evidence provision of sorts.

If they offered the cartel office their full cooperation, they could expect mild treatment — unless another member of the cartel went to the authorities first.

 

CARTEL A building project in Berlin's Maerkisches Quarter. Source Imago Jürgen Ritter
Questionable renovation costs of an apartment building in Berlin’s Märkisches Quarter neighborhood. Source: Imago / Jürgen Ritter

 

“The problem was that we had to make this decision before we knew what was actually happening,” said one of those involved.

There were several reasons for this.

Construction services provider Caverion, for example, had changed hands several times in recent years, so that the individuals who now had to negotiate with the cartel office were not the ones who had been involved in the alleged cartel.

Another of the accused companies, Dutch building equipment supplier Imtech, has replaced more than 70 percent of its German management since 2013 due to a serious crisis. In recent weeks, none of those who had been let go were willing to provide the former employer with information about illegal practices in previous years.

This led to serious miscalculations. In mid-January 2015, Imtech revealed that it had conducted an internal investigation of possible violations of German competition law between 2008 and 2010. When investigators from the public prosecutor’s office paid the company a visit nine days later, they not only accused Imtech of price fixing, but also specified the amounts of a number of suspected fictitious invoices — down to the last decimal point.

Construction services provider Caverion, for example, had changed hands several times in recent years, so that the individuals who now had to negotiate with the cartel office were not the ones who had been involved in the alleged cartel.

Ferrostaal Air Technology was similarly exposed.

When Handelsblatt reported that the company, based in Saarlouis in southwestern Germany, had issued fictitious invoices in relation to a large RWE construction project, managers came up with an astounding explanation. The company claimed its subsidiary, when competing for the contract with Imtech, had been forced to reduce its price so low that submitting a bid was no longer worthwhile.

Then, according to Ferrostaal, the company approached Imtech to recoup its costs. Imtech, however, was supposedly pleased by Ferrostaal’s decision to withdraw from the bidding process and issued an indemnity payment of sorts, which was processed through fictitious invoices.

Ferrostaal’s audacious claim that it had merely engaged in deceptive practices but not price collusion has since turned into a weak and untenable defense.

The Munich Public Prosecutor’s Office is now accusing the two chief executives involved of engaging in price fixing, not only in the RWE case, but also in cases involving a power plant built by Hitachi in Hamburg’s Moorburg district, a power plant built by Alstom in Lingen, near the Dutch border, and several Siemens projects.

The public prosecutor’s office refers to a group of five companies that allegedly harmed Siemens starting in 2007 as the “Siemens group.” Prosecutors investigated 20 large-scale projects, primarily in Europe, Asia and Africa.

“In the case of the contracts that were secured through price collusion, the bids that resulted in signed contracts were too high and led to a corresponding financial loss for the respective principal,” reads the search warrant.

Ferrostaal was unwilling to comment on the allegations. The company did state, however, that it was no longer responsible for the alleged activities because it had sold its subsidiary, Ferrostaal Air Technology, to Safe-Tec Consulting GmbH a few weeks earlier.

Achim Stöckmann, Safe-Tec’s chief executive, also happens to be a member of the Ferrostaal advisory board.

The fit between his company and Ferrostaal Air Technology, whose business includes the construction of munitions disposal plants, isn’t quite clear. It is clear, however, that neither Mr. Stöckmann nor Ferrostaal are commenting on price collusion, fictitious invoices and the like.

Ferrostaal was unwilling to comment on the allegations. The company did state, however, that it was no longer responsible for the alleged activities because it had sold its subsidiary, Ferrostaal Air Technology, to Safe-Tec Consulting GmbH a few weeks earlier.

The same is true of the other parties involved.

The companies in the so-called Siemens group did not respond to inquiries by Handelsblatt, nor did two other companies the public prosecutor’s office is investigating in connection with other projects, Rixner Lüftung-Klima in Rottach-Egern and Julius Gaiser GmbH in Ulm, both in southern Germany.

The management of another company under investigation, Stuttgart-based Siegle + Epple, could not be reached for comment.

“We have a policy of not speaking with journalists,” said company officials, noting that this also applied to questions about violations of competition law and fictitious invoices.

Instead, the company is likely to be answering questions from the public prosecutor’s office and the Federal Cartel Office in the next few days. As Handelsblatt has learned, the authorities seized a computer from Siegle + Epple that an employee had used to create an extensive directory of projects, including one that involved Würth, a screw manufacturer.

When contacted, the public prosecutor’s office and the Federal Cartel Office stated that they do not comment on ongoing proceedings.

However, the information contained in the files alone is apparently convincing.

According to one defendant, the public prosecutor’s office suspects that the Zeiss company was harmed by illegal price fixing related to 10 different construction projects, in which price levels were apparently kept artificially high through the submission of fictitious bids. The amount of the financial loss is apparently still unclear.

On the whole, however, millions have apparently disappeared into the pockets of swindlers, including €421,355, or $471,277 for Imtech during the construction of an Audi administration building in Ingolstadt and €349,755 for Caverion in connection with the RWE power plant in Eemshaven.

The principal on the projects was always paymaster for the mixtures of inflated bids, fictitious invoices, so-called protection money and indemnity payments. The public prosecutor’s office believes that while companies such as E.ON, Siemens and Alstom were convinced that they were choosing the most favorable bids from among several competitors, the accomplices were in fact dividing up the excessive profits behind the scenes.

The operator of the Mannheim AG major power plant, for example, was allegedly overcharged by up to a million euros for the construction of a new unit in 2010.

 

Jürgen Flauger is a Handelsblatt editor and Sönke Iwersen is head of Handelsblatt’s investigative reporting team and editor in chief of Handelsblatt Online. To reach the authors: flauger@handelsblatt.com and iwersen@handelsblatt.com

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