Penetrating The World of Dango

By Jay Peterzell/Washington

In Japan's $500 billion construction industry, bid-rigging is an established and rarely punished process that goes by the name dango. For the Pentagon, dango is an odious practice that inflates expenses by tens of millions of dollars a year on military projects in Japan. In an unprecedented case, the Justice Department announced last month that 100 Japanese firms had agreed to repay $33 million of excess profits on Navy construction projects. Reason: the companies were caught in the act.

The breakthrough was accomplished by skilled undercover work, Government officials told TIME. In the past, investigators had been unable to penetrate the closely knit fraternities formed by Japanese businesses. But in June 1986 the Naval Investigative Service adopted a new tactic when it began probing the Star Friendship Association, a consortium of 160 Japanese construction firms organized for the express purpose of raising prices on contracts at the huge U.S. naval base in Yokosuka.

To gain firsthand evidence, naval agents managed to recruit a key officer of the Star Friendship Association. The man, who had had a falling-out with one of the companies in the group, agreed to wear a hidden microphone at its meetings. The club operated with almost comic formality. A day or two after new contracts were announced by the Navy, the group would meet in downtown Yokosuka. "They would determine who was interested in bidding on specific contracts," says a U.S. official. "Then they would break up into smaller groups to decide who would get the award."

The lucky firm would tell the others to bid above a certain figure. In exchange the other companies would get a share of subcontracting work, a direct kickback or first dibs on future contracts. If the firms could not agree, they would call in an officer of the association to mediate. Unfortunately for them, this officer turned out to be the Navy informant.

The tougher U.S. attitude may already be paying off. The Air Force and Justice Department are investigating charges by Arthur Williams, former chief of the contracts-law division at Yokota Air Base, that another dango association has overcharged the Air Force and Navy about $76 million on $180 million worth of communications contracts during the past ten years. Most of the firms practicing dango were window dressing for a subsidiary of NEC, the electronics firm, which consistently got most of the work.

NEC denies taking part in any dango for the Air Force projects. But the apparent cost to the U.S. taxpayer was dramatically illustrated after an American firm first began competing for such contracts in mid-1988. Since then, NEC has won renewed contracts for work at six military bases -- but the company's bids for the work have fallen 40% to 60%. "This had been going on for about 20 years," says Williams. "I don't think any big firm has ever defrauded us like that before."

With reporting by Kumiko Makihara/Tokyo