How they manipulate privatization auctions. An interview with a lawyer.

21.8 billion hryvnias over seven years. This is the result of sales of state and municipal properties within the framework of the small-scale privatization program. In the system... ProZorro.Sales, where During these auctions, 7400 successful online auctions took place. As a result, the property price increased 2.2 times reports Ministry of Economy.

"The launch of Prozorro.Sales significantly reduced the level of unfair practices in the market," says Yulian Khorunzhyi, senior partner at Ario Law Firm. But it hasn't completely won. Collusion among participants still occurs at privatization auctions, or unintelligible refusal to accept the winning bid.

Correspondent LIGA.net, who has been researching privatization since 2021, spoke with a lawyer about the most common manipulations at auctions, the ways in which participants disrupt bidding, and how the Antimonopoly Committee detects all of this.

How to increase your chances of winning

What are the most common manipulations in privatization auctions on Prozorro.Sales?

This issue should be viewed more broadly, because in addition to privatization as such, many other auctions take place on Prozorro.Sales: these include auctions in bankruptcy proceedings, land leases, auctions of the Deposit Guarantee Fund of Individuals, and many others.

No system in the world is completely protected from manipulation. At the same time, the launch of Prozorro.Sales has significantly reduced the level of unfair practices in the market.

Let me give you an example: auctions in bankruptcy proceedings. Before 2019, these auctions were conducted using the "hammer" method, and almost 90% of them were challenged in court. After switching them to... ProZorro.Sales This figure has decreased significantly and, according to our estimate, does not exceed 5%.

With the introduction of ProZorro.Sales Those who previously had no chance of acquiring the asset can now realistically participate in the bidding and win. But even in ProZorro.Sales Manipulations are possible, albeit insignificant.

The most common ones relate to increasing one's own chances of winning. For example, a real auction participant involving a "related" company as a second participant.

For example, a real participant makes a high bid and later refuses to purchase the property in order to determine the winner as a "related" company that made a lower bid. Or, both of these participants make maximum, "space-like" bids and refuse to buy the asset in order to disrupt the auction. There are other options for manipulation as well.

However, such manipulations are not cheap, and often very expensive, so those who resort to them are very well aware of the ultimate goal. Usually, the purpose of disrupting an auction is to postpone it, or simply to find out other potential participants, or to agree with them on a joint purchase, or to make other participants – competitors – lose interest in the asset.

Let's talk about specific examples. LIGA.net I've seen auctions where the first and second places could be taken by firms of business partners. Why would two business partners bid almost the same price for an asset?

In order to block another real participant.

After all, if the winner refuses to buy, the right passes to the next highest bidder. Business partners, by making close bids, try to leave the field only for themselves. Of course, this leads to the loss of security deposits of both participants in the auction, but, as they say, the end justifies the means.

But if it turns out that there was collusion between the participants, they lose not only the deposit. A fine for violating antitrust legislation may also be added, which can reach up to 10% of the annual turnover of the groups of companies that colluded.

However, today such a practice is used very rarely, and even then, with very meticulous preparation, because since the end of 2022 – beginning of 2023, the Antimonopoly Committee of Ukraine (AMCU) has been closely monitoring this.

No-names and refusal to win.

Next case. An auction is won by an unknown company, then it refuses to fulfill the contract, then a new auction is announced, and again an unknown company wins and refuses again. Why do this?

This is characteristic only of auctions where the right to purchase the asset in case the winner refuses to acquire the property does not pass to the participant who came in second. The goal here is simple – to simply disrupt the auction in order to continue controlling the asset that was put up for auction.

Another possibility is that a no-name company wins, but doesn't disrupt the auction. For example, this could be an attempt to hide the real buyer until the last moment.

However, it is worth understanding that after the auction is completed, the procedure for obtaining permission for concentration from the Antimonopoly Committee of Ukraine (AMCU) will often take place. In such cases, the Antimonopoly Committee will conduct a thorough investigation and learn everything about the ownership structure and sources of funds of the winner.

Another scenario: when an unknown company wins, it can offer other participants to buy the asset from it by selling the corporate rights of this unknown company.

There are auctions in which two companies participate; for example, let's take the auction for Vinnytsia-Pobutkhim. Two companies submitted their applications to participate on the same day and time. During the auction, bids were actually made in the first round, and the company that made the highest bid won. In the other two rounds, the two participants behaved passively. What could this indicate?

A distinctive feature of Prozorro.Sales is that you don't know how many participants are registered before the auction begins. At the same time, participants often want to increase their chances of winning.

By the way, in small-scale privatization, only one participant is needed for the auction to take place. That is, the person who participated in the auction and offered a bid is the one who buys it. But before the auction begins, participants don't know if anyone else is interested in the lot, so sometimes a "safety net" participant is entered.

Therefore, to hedge their bets, players often enter with two companies at once. If there are no competitors, one company is declared the winner – and everything goes according to plan. However, if unexpected participants appear, there are two scenarios: either try to disrupt the auction, or get their "dummy" company into second place so that it has the right to buy out if the winner refuses.

Take even the example you mentioned. The winning company had been managing this enterprise for a long time. Even if the auction failed, it would have been beneficial for them: they could continue to control the asset for a while.

Therefore, mostly, if, for example, two participants take part in an auction and the second one does not make any bids during the auction, then this second participant is either related to the first one, or the price offered by the first one is simply unattainable for the second one, and he simply does not make any other bids.

Ukrbuild, sale of debts, AMCU investigation

How does the Antimonopoly Committee of Ukraine determine the relatedness between two companies that entered the auction?

The AMCU (Antimonopoly Committee of Ukraine) review is thorough. First, it checks for corporate relatedness. That is, whether there are formal or informal ties between two companies.

The second thing they look at is digital traces. That is, all entries to the platform by participants are checked, the IP addresses from which these participants logged in are checked, and the emails from which confirmations were sent are checked to see if these addresses have a common origin.

Employment relationships are checked. For example, one person may have previously been the deputy director of another company that is also participating in the bidding.

They investigate business relationships: whether the companies worked as counterparties to each other, whether there are ongoing financial relations. The origin of the funds for the security deposit is analyzed separately.

The Antimonopoly Committee of Ukraine (AMCU) even studies the style of documents: font, design, and so on. The committee literally "digs down to the molecules." And if it finds evidence of collusion, the consequences for companies are very serious – up to fines of 10% of annual turnover.

And how often does the inspection usually take place?

If we are talking about a large object, the inspection can take up to six months or even longer.

David Bezhuasvili recently bought Ukrbud, but the very next day it turned out that he was under sanctions and therefore could not acquire the asset. Can the State Property Fund check the participant before the auction begins?

No, that's technically impossible. Information about participants is confidential until the auction is complete. This is one of the key principles of Prozorro.Sales, which guarantees transparency.

If the customer knew who was submitting bids, they could, for example, cancel the auction simply because they didn't like a particular participant. Therefore, all participants are unknown until the auction is over.

The only one who sees them before the auction starts is the online platform through which they entered. But for it, disclosing this information would mean a loss of trust and reputational risks. Therefore, the data is maximally protected.

If the first company refused to buy the asset, and the second one also doesn't want to, can a third party participate?

No, then the auction is completely canceled and a new one is scheduled. The participants who disrupted the auction – that is, the first two companies – are disqualified and cannot participate in subsequent auctions to purchase this asset.

In some types of auctions, the amount of the security deposit is even increased for other potential participants. This is done to reduce the desire to deliberately disrupt the bidding process.

If only one company participates in the auction, can it acquire the asset?

Yes, if the auction terms allow it.

Sometimes, on Prozorro.Sale, the acquisition of the right to claim assets is put up for auction. This happens, for example, with the enterprises of Konstantin Zhevago. When a buyer repurchases the debts of an enterprise, does this mean that he acquires ownership of the enterprise?

There are two options here. The first: for example, corporate rights of an enterprise or a bank building can be put up for auction. If you win such an auction, you really do acquire a certain object as property.

The second option: the right to claim, for example, secured by a mortgage on property, may be put up for auction. In fact, this means you are buying the right to "sue" for a debt or asset. After all, this right still needs to be converted into real property. A conflict with the current owner of the property inevitably arises here, since the owner is not the Deposit Guarantee Fund, but the person registered in the registers.