News
Serious cartel conduct - coming to a jail near you?
First published in NZLawyer, 8 February 2008
In a paper in November last year ("Recent Developments, Trends, and Milestones in the Antitrust Division's Criminal Enforcement Program"), Scott Hammond, Deputy Assistant Attorney General of the United States Department of Justice (DOJ), stated:
"The carrot and stick enforcement strategy of coupling the Division's Corporate Leniency Program with severe sanctions and use of all available investigatory tools to create a significant fear of detection, both inside and outside the United States, has succeeded in cracking dozens of international cartels, securing convictions and jail sentences against culpable U.S. and foreign executives, and obtaining hefty corporate fines. The Division has steadfastly emphasized the importance of individual accountability and stiff corporate fines to optimize deterrence of cartel conduct."
In 2007, sentences for breaches of the United States' Sherman Act involved a record 31,391 jail days, with an average sentence of 31 months, and over US$630 million in criminal fines. The DOJ currently has 135 pending grand jury investigations, including over 50 investigations of suspected international cartels.
With the Australian Government's publication late last year of the Discussion Paper: Criminal Penalties for Serious Cartel Conduct the criminalisation of cartel conduct has come a significant step closer to home.
The Discussion Paper follows on from the 2003 Dawson Review's recommendation that "serious or hard-core cartel activity may be sufficiently reprehensible to be punishable by the imposition of a gaol sentence" and reflects the Australian Government's commitment to introducing a bill into Parliament this year to criminalise such conduct under the Trade Practices Act 1974 (the TPA).
Many of the concepts underpinning the exposure draft of the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008, released for consultation with the Discussion Paper, are familiar from the existing civil liability provisions of the TPA and our own Commerce Act. The key ingredients of the proposed offences are:
-
making a contract or arrangement or arriving at an understanding or giving effect to a contract, arrangement, or understanding;
-
which contains a "cartel provision", i.e., a provision relating to price-fixing; restricting outputs in the production and supply chain; allocating customers, suppliers or territories; or bid-rigging;
- by parties that are, or would otherwise be, in competition with each other.
The ingredient that would distinguish criminal from civil liability is a dishonesty requirement - the intention of dishonestly obtaining a benefit. The prosecution would need to prove the relevant conduct was dishonest according to ordinary peoples' standards and known by the defendant to be dishonest according to ordinary peoples' standards. Such a requirement is the standard for criminal liability for serious cartel conduct under the United Kingdom's Enterprise Act 2002 (with which the Australian draft legislation has much in common) and already exists in other areas of Australian law, e.g., in the Commonwealth Criminal Code Act 1995 and Corporations Act 2001.
The proposed maximum penalties for individuals are imprisonment for five years and a fine of A$220,000 (as compared to five years and an unlimited fine in the United Kingdom or ten years or US$1 million in the United States). For corporations the maximum fine is the greater of A$10 million or three times the value of the benefit from the cartel or, where that cannot be determined, 10% of annual turnover (as compared to US$100 million in the United States; there is no criminal liability for corporations under the Enterprise Act).
A draft Memorandum of Understanding (MOU) released with the Discussion Paper proposes that the ACCC will investigate suspected criminal cartel offences and refer such conduct to the Commonwealth Director of Public Prosecutions (DPP) for prosecution. The ACCC would also manage the civil and criminal immunity processes, with the DPP deciding whether to grant immunity in criminal proceedings.
In deciding whether to refer a matter to the DPP, the ACCC would consider the duration and market impact of the conduct, the detriment caused to the public, and whether the value of affected commerce or bids exceeded A$1 million within a 12 month period. In deciding whether to prosecute, the DPP would consider the cartel's impact, the scale of the detriment caused to consumers and the public, and any previous admissions to or convictions for cartel conduct. Although the MOU records that "Criminal investigations and prosecutions will be targeted at serious cartel conduct, and relatively minor conduct will ordinarily be pursued civilly", it also states that "some matters may warrant both criminal and civil proceedings".
Criminalisation of serious cartel conduct has been considered previously in New Zealand. In a January 1998 discussion document, "Penalties, remedies and court processes under the Commerce Act 1986", the Ministry of Commerce concluded that "hard core cartelisation is a far more serious offence than the civil law offence of insider trading ... and the consequences of price fixing to New Zealand society seem to be more akin to tax and customs duty evasion". Although not currently on the legislative radar, it seems inevitable given the international trend towards criminalisation of serious cartel conduct in general (countries that have criminal sanctions for cartel conduct include the United States, Canada, the United Kingdom, France, Ireland, Norway, Germany, Austria and Japan) and harmonisation of trans-Tasman business laws in particular that the issue will be considered again here. Those trends and the existing criminal liability for white collar offences such as tax and customs evasion and (from 29 February) insider trading mean that the odds of similar amendments to the Commerce Act in time must be high.
If the Australian legislation is passed later this year, there will of course be more immediate implications for New Zealand companies and individuals operating on both sides of the Tasman. To the extent those companies and individuals are involved in cartel conduct in Australia they will be directly exposed to the risk of prosecution. To the extent there is parallel conduct in New Zealand, they face an increased risk of detection here because criminalisation of serious cartel conduct increases the incentives to seek leniency and a cartel member seeking leniency in Australia will almost inevitably seek leniency in both jurisdictions. As the Commerce Commission's General Counsel, Peter Taylor, stated in a 2007 paper, "The Application of the Leniency Policy":
The Commission will watch developments in Australia with interest. In the meantime, it notes the sentiment of the US DOJ that:
"Nothing in our enforcement arsenal has as great an effect as the threat of substantial incarceration in a United States prison - nothing is a greater deterrent and nothing is a greater incentive for a cartelist, once exposed, to cooperate in the investigation of his co-conspirators".
Click here to read the discussion paper, exposure draft of the legislation and MOU.
Submissions close on 29 February 2008.
