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Published: Fri, 02 Feb 2018

Criminalisation of antitrust enforcement

There has been considerable debate over the last few years in relation to the criminalisation of antitrust enforcement. Europe has over the last decade seen both a decriminalisation and criminalisation of its competition enforcement laws. The Netherlands, France, Austria and Luxembourg have all replaced a system of a criminal enforcement with a system of administrative fines while the UK and Ireland have introduced criminal penalties. Thus, while some countries have found that criminal sanctions have failed to have their intended effect, others believe that they are the way forward. I think that this sends an important signal – criminal sanctions have their benefits but they are not always successful and the institution of criminal sanctions needs to be carefully thought out. A successful criminal enforcement regime must have numerous additional tools to bolster the system and to ensure its success. In the absence of such tools criminal enforcement will become redundant and obsolete.

It should be noted that the activity that we are considering in this paper is limited to those carried out by hard core cartels and does not consider the imposition of criminal sanctions for other infringements of competition law. Hard core cartels, defined by the Organisation For Economic Co operation And Development (OECD) as ‘anticompetitive agreements, concerted practices or anticompetitive arrangements by competitors to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets…’ , are considered particularly harmful by the vast majority of economists and their existence cannot be justified. Several countries use a separate definition of the hard core cartel offence that is separate from the general anti competitive rules. In the UK, for instance, the offence is based on a ‘dishonest participation in an agreement which has as a purpose one or more of the specified hard core cartel activities’ . In this context the requirement of dishonesty provides certainty and restricts the imposition of criminal sanctions to a clearly and narrowly defined offence which is considered particularly harmful under competition law.

Part I of this dissertation will look at the arguments for and against criminalisation. Part II will determine which sanctions should be imposed while Part III looks at the importance of investigative tools, leniency programmes and corporate governance structures in the fight against cartels. Finally Part IV determines whether a single system of enforcement at the EU level as opposed to at the Member State level is preferable.

ARE CRIMINAL SANCTIONS AGAINST INDIVIDUALS DESIRABLE?

In the first section of this paper I will argue that criminal sanctions are a useful addition to the arsenal of weapons used by antitrust enforcement agencies. I will use imprisonment as the classic example of a criminal sanction though it should be remembered that criminal sanctions may include other sanctions such as criminal fines.

It is accepted that the main reason for imposing criminal liability on individuals who commit antitrust violations is to deter such further activity. Fines must fulfil this purpose if they are the only sanction that is to be used. However, economic studies have shown that the percentage of sales or turnover imposed as a fine is substantially less than the gains accrued by price fixers. The OECD has clearly stated that ‘there is ample empirical evidence that corporate sanctions in the form of fines are almost never sufficiently high to be an optimal deterrent, and in most cases are substantially below that level. In these circumstances, the threat of individual sanctions can strengthen the incentive of directors and employees to resist corporate pressure to engage in unlawful activity and thus enhance the level of deterrence’.

Although there is no systematic empirical data to prove that the deterrent effects of criminal sanctions on individuals can be justified and there appears to be agreement between the member countries that the collection of the relevant data would be virtually impossible , anecdotal evidence exists to suggest that criminal sanctions can have a deterrent effect. For example, there is evidence that cartel meetings have specifically been held outside the United States in mistaken belief that this would circumvent the imposition of criminal sanctions. Also, there have been instances in the United States where individuals have offered to pay high financial fines instead of serving a prison sentence while nobody has ever offered to go to jail to avoid paying a fine . In the absence of conclusive proof that criminal sanctions have the deterrent effect that they claim to have a decision to introduce criminal sanctions must be based on whether countries conceptually believe that criminal sanctions are necessary to deter cartels. The full extent of the deterrent effect of criminal sanctions can be gathered from the comments made by a senior corporate executive ‘..as long as you are only talking about money, the company can at the end of the day take care of me – but once you begin talking about taking away my liberty, there is nothing that the company can do for me’.

The law must provide incentives to individuals to comply with it. In the case of antitrust violations the incentives are best achieved by criminal sanctions against individuals. The best explanation of the necessity of criminal sanctions has, in my opinion, been put forward by Werden and Simon. They believe that there are reasons to punish individuals as well as corporations. Three types of individuals must be considered. The first is the entrepreneur who is in fact the corporation, so fining the individual is indistinguishable from fining the corporation. If only corporations could be fined entrepreneurs could simply protect themselves by withdrawing their assets from the corporation. Thus there is a case to be made for individual sanctions in this case. The other two types of individuals fall into the category of hired managers. One type fixes prices under orders and the other does so on his own initiative. In the latter case the individual manager must be punished. The corporation has been unable to adequately monitor and supervise the manager’s conduct through, for example, the threat of dismissal. ‘A more potent weapon is necessary, and imprisonment of individuals probably is needed to provide it’ . Punishing the former type of hired manager is also appropriate as it is necessary that managers resist the pressure to price fix. These arguments in favour of imposing sanctions on individuals are even stronger given the current corporate culture. Managers and executives often move from company to company and managerial incentives have become difficult to reconcile with corporate profit maximisation objectives. Managers may work towards objectives other than maximum firm profits including personal monetary gain. It would be unfair to impose large fines on shareholders who had little control over the agents of the corporation and who have to foot the bill of their employees’ misconduct. After all it is these very individuals in corporations who take the decisions thereby committing the corporate crimes.

Becker suggested that provided penalties were high enough, low detection rates – hence low discoverability – would not result in inefficient law enforcement since such high penalties would be sufficient to deter even the toughest criminal. Furthermore, in a costless, errorless legal system, where violators are always apprehended and convicted, the optimal penalty is a fine equal to the harm suffered by the victims of the crime . However, Becker came to his conclusion based on the assumption that society would be happy to tax certain activities i.e. society would be happy to accept payment in exchange for the commission of the act. In the words of Kahan ‘To the ears of the public, fines seem to say that offenders may buy the privilege of breaking the law; and we can’t very well condemn someone for purchasing what we are willing to sell’ . As pointed out by Werden and Simon , this detracts from the moral reprehensibility of the act. Society must see cartels for what they are – theft from consumers. Some studies have shown that anti competitive mark ups can be as high as 50% and can have damaging repercussions not only on the individuals paying higher prices but on the economy as a whole. Indeed, as discussed by Levenstein and Suslow, the price increases (based on anecdotal evidence essentially from the trade press) for international cartels range from 10% to 100%. One example of such cartel is the graphite electrodes cartel which raised prices in the United States by over 50% between 1992 and 1997 . The extent of loss suffered by consumers is evident in these cases and cartel activity should carry the same moral stigma as theft. In my view sanctions against cartels should not simply internalise the externality imposed by such cartels on consumers by being fined but should rather condemn the practice altogether. The necessity to prevent cartels is evident while empirical evidence exists to disprove Becker’s theory that fines will always be preferable to imprisonment. In 2008 the European Commission announced fines of up to 2.2 billion euros in the seven decisions that it gave. However, some of these decisions related to repeat offenders . For instance the paper bleach cartel was a third time repeat offender while the glass and candle wax cartels had engaged in cartel activity before. Despite earlier fines these cartels continued to persist which suggests that ready been discovered in the past but continued to function despite earlier fines. The Commission increased its fine on the paper bleach cartel by 90% to 1.8 billion euros. The other two cartels’ fines were raised by 50%. The fact that these cartels continued their activities despite having been fined in the past is a clear indication that fines despite having been significantly increased over the years do not prevent cartels.

In fact it has been argued that imprisonment together with fines can result in the most efficient outcome. According to Chu and Jiang ‘fines and imprisonment serve different deterrent functions to potential criminals of different groups’ . In their model they group potential criminals according to their initial wealth. They argue that in a situation where the penalty rate does not alter according to the wealth of the individual violating antitrust law fines cannot be set at the ‘maximum feasible extent’ otherwise the undeterred poor may choose to commit the most severe crime. On the other hand fines cannot be set too low either, or a wealthier criminal will also not be deterred. Thus if the same penalty rate must be set for all criminals with different wealth, it may actually be more efficient to have a combination of imprisonment and less than the maximum fines in deterring crimes . According to this model, therefore, the optimal solution requires imprisonment in conjunction with fines.

Spangnolo asserts that criminal sanctions are not necessary since the fine levels currently paid by corporations can be increased by forcing companies to issue new shares and sell them to the public. This would have the effect of putting the firms control at stake which would in his opinion ‘hit the insiders (i.e. the real decision makers) that control the firm’ . In his view, this would deal with the dual problems of low fines and identifying those directly responsible. I disagree with this view. Firstly, dilution of shareholders rights makes no sense if the shareholders are far removed from the decision makers. Since it has been accepted that cartel activity can be perpetrated by middle managers it may well be the case that the culprits are not the people in control of the firm.

One of the strongest arguments against criminal sanctions for collusive behaviour is the danger of convicting an innocent individual i.e. the danger of false positives. Such a risk can be considerably large and undesirable from a social view point. Some commentators have argued that while a corporate fine, unjustly imposed, is largely a welfare neutral redistribution of money from a social welfare point of view, imprisonment is a deadweight loss to society – not only in terms of the direct cost of imprisonment but also in terms of the inability of the individuals imprisoned to contribute in a meaningful way to society and should be avoided unless there is absolute certainty that the deterrence effect outweighs such social costs. While this argument is strong I do not believe that it is sufficient to overrule the case for imposing criminal sanctions. For one thing the danger of false positives, i.e. convicting innocent individuals can be managed and minimised. Firstly, the higher standard of proof required in criminal cases will act as a barrier to such errors. Furthermore, a clearly defined cartel offence, for example as in the UK, setting out the boundaries of the illegal activity will go a long way in ensuring that only very pernicious activity is caught.

A further concern that was raised by member countries in one of the OECD’s roundtable reports was that criminalising anti cartel laws could make anti cartel enforcement less effective. New Zealand, when reviewing its system of sanctions against cartels concluded that higher standards of proof and evidence collection were likely to lead to fewer prosecutions and a reduction in the number of successful convictions. However, this argument fails to consider the fact that in most jurisdictions where criminal sanctions have been introduced, such sanctions are concurrent with administrative sanctions and a competition authority will bring a criminal action only where it believes it is able to prosecute successfully. In the event that there is insufficient evidence to satisfy the burden of proof for a criminal conviction, the competition authority may nonetheless be able to bring a civil action and so the minimum level of enforcement will in almost all cases be achieved.

Which Sanctions Are Ideal

There is a variety of sanctions that can be imposed for antitrust violations. These include imprisonment, criminal fines and disqualification. It has been argued that criminal fines and disqualification provide sufficient alternatives to imprisonment at a lower social cost. However, in my opinion this is not the case. Sanctions must provide individuals with incentives to comply with the law and, with the exception of imprisonment, all the options allow the violators of antitrust law to circumvent the effect that such sanctions are meant to have on them. In the case of criminal fines, companies can very easily indemnify their agents for any fines imposed. Alternatively companies can compensate their agents in advance for taking the risk of being fined. The main advantage of imprisonment over fines is that it is impossible to shift the penalty ex post and it is also more difficult to arrange for a premium to compensate the risk in advance . Consideration was given by the OECD to the idea of making it illegal to reimburse employees for fines for competition law breaches but this proposal was rejected, for instance by New Zealand, on the grounds that it constituted a very great intervention in the firm’s internal affairs .

The problem with disqualification orders is that, firstly, the firm can provide monetary compensation for the manager’s inability to continue acting in a management role. Secondly, its effect as a deterrent depends on the age of the manager. For instance, in the case of an older person, disqualification may allow the manager or director to simply retire with the company compensating for any financial losses . In most countries, disqualification orders are directed against the directors of companies only and this further limits their use. Thus, imprisonment is preferable to these other options.

Becker has argued that the social cost of imprisonment is very high. However, the social cost is reduced if the prison sentence is short. Simon and Werden believe that, in any event, the marginal deterrent effect on price fixers remains high only for rather short terms of imprisonment and then falls rapidly since the major part of the disutility experienced by businessmen is the stigma associated with incarceration which will be roughly the same for a nontrivial term as it is for a longer term . It is better to have shorter jail sentences which a potential defendant knows will be imposed with some certainty rather than simply having long jail sentences . This optimal jail sentence should be set where the marginal benefit of increased deterrence equals the marginal cost of imprisonment.

In the United States contribution to the OECD’s Third Report on the Implementation of the 1998 Recommendation , it was noted that between 2003 and 2005 the average term of incarceration was 18 months, a relatively long sentence and yet cartel activity continued to be uncovered during this period. Leslie has endorsed longer jail sentences on the ground that such long sentences will communicate the gravity of the offense and that the 18 month jail sentence does not adequately deter the formation and participation in cartels . Firstly it is important to remember that other white collar crimes attract a higher sentence in the United States and that, accordingly, such a sentence is not, relatively speaking disproportionate to sentences for similar crimes. Insider trading cases have, for instance, been known to attract sentences of between 34 and 46 months . An 18 month jail term can therefore be considered short for this category of crime. Secondly, in my opinion cartels continue to persist because the members believe that they can avoid detection. Instead of using resources for longer jail sentences which have not been proven to be a deterrent it would be better to invest in methods and investigating techniques which improve and increase the likelihood of detection of cartels and cartel activity.

Beyond the Theoretical Debate: Leniency, Corporate Governance and Investigative Powers and Procedural Protection According to Kovacic whether criminal sanctions have the deterrent effect that they are meant to have will depend on 5 factors:

  1. The substance of the legal command
  2. The evidentiary standard by which a tribunal decides whether the command has been transgressed
  3. The likelihood that violations will be detected
  4. The likelihood that detected violations will be prosecuted and
  5. The power of the sanctions imposed for violating the command

Kovacic explains the United States success in its enforcement procedures have come through changes in (iii) and (v) above. The other three variables have remained constant while ‘the modern breakthroughs in US competition policy campaign against cartels… have occurred chiefly through improvements in methods for detecting collusion and through increases in sanctions’ . He finds it necessary that society accepts the use of criminal sanctions to punish individuals who participate in cartels. While some may argue that higher sanctions may be used as a substitute for improved detection, I believe that both must go hand in hand. Detection must be improved; otherwise the sanctions to be imposed will be worthless while sanctions must be serious enough so that in the event of detection they appear sufficiently menacing. The greater the probability of getting caught the more likely it is that the strong penalties imposed are factored in the violators’ calculations ex ante and the less likely they are to collude . Therefore additional tools are required to make criminal sanctions a success. In this section I will look at these additional tools.

Improved investigative techniques, leniency programmes, corporate governance schemes and increased public awareness are all complements to the introduction of criminal sanctions. A criminal enforcement regime will not succeed without the presence of these elements. In this section I will show the importance of each in these in addressing the criticisms made against the imposition of criminal sanctions. I will also determine the constituent elements of each of these tools and show why they are necessary in addition to criminal sanctions.

Public Awareness

One of the criticisms encountered against the imposition of criminal sanctions is that as penalties increase prosecutors, jurors and judges may not be willing to enforce them because of the disproportionate impact on those caught . This ‘inverse sentencing effect’ can hamper the enforcement of criminal sanctions. According to a study carried out by Beutel , it may be preferable to have weaker punishment but more consistent enforcement rather than severe punishment which law enforcers are unwilling to enforce. Here the issue becomes one of increasing awareness of the harmful effects of cartels. The problem is that while the losses inflicted by cartels are very large they are less visible to the ultimate consumer while the culprits themselves are often respected members of society. Furthermore, while the United States has, since the introduction of the Sherman Act in 1890 considered cartel activity to be harmful, cartels were considered perfectly legitimate in other parts of the world well into the 1900s. Thus, there must be a conscious effort to educate the public of the harmful effects of such activities. For instance, in the Electrical Equipment indictments and pleas in the United States in the late 1950s, a number of executives were publicly sent to federal penitentiaries based on guilty pleas. The high profile nature of the case, together with the fact that the whole process was covered by the business press, helped highlight the illegality of collusive activity . The OECD has warned that a country’s social and legal norms need to be considered when determining whether to introduce criminal sanctions . Given (as demonstrated above) that criminal sanctions are a much needed deterrent for such activity, I believe that it is necessary to educate the public so that they perceive such activity as equivalent to other white collar crimes that attract imprisonment. This is especially so given the weak causal link between the final consumer and the perpetrators of the illegal act. Awareness plays a further, important part in detection since it enables consumers to effectively organise themselves and take action against cartels.

Some commentators have argued that criminalisation itself may be sufficient to highlight anti competitive practices as a form of white collar crime, bringing it to the public’s attention . While it is true that social norms can be altered through the law it is, in my opinion, important to introduce other means in addition to criminalising behaviour to educate the public. The primary reason for this is highlighted by the case of Norway – the Norwegian Competition Authority has for a long time taken cartel enforcement very seriously but has still failed to obtain a criminal conviction in the form of imprisonment . Therefore, though the criminal sanction i.e. imprisonment can play a useful role in signalling the damage done by cartels, I do not believe that that alone is sufficient to ensure the greatest deterrent effect. Judges and juries need to be advised as to how serious the offence is. In the United States this was brought about by clear and comprehensive Sentencing Guidelines (the Guidelines) which treated antitrust felonies as a serious offence – the Guidelines made imprisonment an immediate remedy for the sentencing court . The United States has also developed a comprehensive programme to reach out to various constituents . The Antitrust Division of the Department of Justice has adapted presentations about its criminal enforcement programme according to target groups distinguishing among presentations to purchasing officials; law makers; business executives; members of the antitrust bar and the general public.

The presentations to purchasing officials have focused on detecting signs of bid rigging and other suspicious conduct . Presentations to the members of bar associations are generally more detailed and technical while presentations to investigative agents tend to be fairly basic, focusing on crime, harm, investigative techniques and prosecution statistics . An updated report on developments in the criminal enforcement programme is also provided to business executives and bar members .

Another area that needs attention is the acceptance given to evidence provided by leniency applicants. Massey and Daly point out that the Irish courts have been sceptical of evidence provided by whistleblowers in other criminal cases, largely on account of what is regarded as the self serving nature of such evidence . If courts are not willing to accept such evidence then this will impact on leniency programmes also. Unless the risk of imprisonment is perceived to be real criminal sanctions will not have the much needed deterrent effect. Therefore it is essential to have public awareness drives that counter this problem.

Investigative Tools

In addition to such public awareness drives it is also essential that governments be willing to increase the resources made available to competition authorities. A higher standard of proof means that greater evidence needs to be collected to convict and it is necessary that greater resources are rendered available for such investigations. The Department of Justice (DoJ) has been able to rely on the investigative efforts of the Federal Bureau of Investigation (FBI) when gathering evidence against violators of antitrust laws since the early 1980s. At the moment two FBI agents are dedicated to investigating hard core cartels. All these factors have contributed to the increased detection of cartels and similar investigative techniques will be required in other parts of the world if there is to be increased detection of cartels and thereby an increased deterrent effect of sanctions. Indeed, while the European Commission may have broad powers to require the submission of information and to conduct dawn raids, in practice ‘its evidence gathering is less extensive than in the United States where the government can subpoena documents, execute search warrants, and require testimony before a grand jury’ . Improved investigative powers have an additional ancillary effect on the behaviour of corporations in that they are likely to pressurise companies into instituting corporate compliance requirements into their internal organisation.

Corporate Compliance Programmes

Another criticism often made of criminal sanctions is that the cost to society of false positives or Type II errors is very high. One of the ways in which this can be combated is by encouraging the use of corporate compliance programmes which will allow firms to educate their employees as to what competition rules are in place and the dangers of violating anti cartel laws. Rodger studied corporate compliance culture in the UK and came to the conclusion that the three companies that he surveyed were all weak in ensuring a management system for their compliance programmes – they did not have regular formal audits or systematic reviews . It was noted that the most ‘powerful compliance tool’ is the audit of competition law compliance programmes. Ideally this would include reviewing all files, random checks on diaries and a review of all corporate activity with a special focus on price agreements and relationships with competitors . While all the companies surveyed had some form of corporate compliance these were varied and each had their individual weaknesses. In the UK the Competition Act 1998 and the Enterprise Act 2002 made companies realise that price fixing would be a pressing concern. However, it did not, as evidenced by Rodger’s paper, force companies to develop a system where there is regular oversight of compliance with competition laws. It is essential that this is rectified and that governments encourage companies to introduce more robust corporate compliance programmes. Corporate compliance programmes can help detection of cartels, avoid errors and can therefore enhance the deterrent effect of criminal sanctions.

It is necessary for any corporate compliance programme to be supported by the senior management within the company and such management must demonstrate real commitment to continued compliance rather than simply introducing the system without any oversight . Regular training should be introduced and focused on employees, especially pointing out the dire consequences of hard core price fixing. It is necessary that there is on going training with regular refresher sessions, including specific sessions for new staff . It is essential that the corporate compliance programme include information about the personal penalties that price fixing entails. Employees need to be told that if they participate in a cartel they can personally be held liable and can be imprisoned . Furthermore, they must understand that they can be carved out of any deal that the corporation makes with the competition authority and that therefore, there is an added advantage of going to the competition authorities with the information first. This will also ensure that senior management is kept in check. Senior management responsible for formulating compliance programmes will realise that they will not be able to use employees as scapegoats if a cartel is discovered because each employee will have an incentive to go to the competition authority as soon as it discovers a cartel.

The fact that few individuals have come forward rather than corporations is an indication that while undertakings have fully understood and exploited the benefits of leniency programmes, individuals have yet to take the same approach. Compliance checklists are another tool that can be very useful to employees. Staff can be issued with a ‘Do’s and Don’ts’ checklists and corporations can employ a competition compliance officer to maintain a record of any meetings with competitors. Part of the ‘Don’ts’ list will include avoiding meetings with competitors without seeking proper authorisation unless this is within the usual course of business e.g. at a trade fair . Such a system is especially desirable since it aims to prevent any unlawful activity from occurring in the first place rather than aiming at damage control once such an activity has actually occurred. It also has an additional role in reducing Type II errors since once such training has been instituted then an employee who is caught facilitating collusion cannot argue that he was ignorant that the activity he was engaging in was illegal. Where there is a dishonesty element to be proved as in the UK, such compliance programmes will also help to establish this element, thereby facilitating the effect of criminal sanctions on individuals.

A corporate compliance scheme must also include ‘a willingness to discipline or dismiss any employee who violates that policy’ . Such a policy will result in an internalisation of some of the costs that society must face in detecting cartels – if corporations themselves are able to determine the wrongdoers and to penalise them accordingly then this will reduce some of the burden on competition authorities. Indeed, Parker pointed out that the Australian Competition and Consumer Commission (the body designated with ensuring compliance with competition law) had to focus on nurturing compliance in the 1980s due to insufficient resources available to it. This approach can be treated as an alternative to increasing the resources made available to competition authorities though some increase in the investigative powers and resources of competition authorities will nonetheless be desirable. Of course, such disciplining will include turning over individuals to the competition authorities. Individuals should be made aware, through the corporate compliance programme, that this is


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