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 indeed possible and the harsh penalties, especially imprisonment that can result if they are in fact turned in. This will increase the deterrent effect of the criminal sanctions since individuals will be eager to avoid prison sentences.

Leniency Programmes

Leniency aims to encourage cartel participants to turn themselves in. Since the standard of evidence required in criminal cases is considerably higher than in civil cases it is essential that competition authorities encourage self reporting to obtain additional evidence. The underlying premise of a leniency programme is that the risk of sanctions will provide incentives to apply for amnesty. As the sanctions imposed become harsher the incentive to opt for leniency is magnified. Azevedo explains the underlying premise of leniency programmes. A firm that decides to inform on anti competitive practices benefits by avoiding the sanctions that would have been imposed on the company and its employees had the cartel been detected and, by starting an investigation, it creates a situation where it is harder for other cartel members to retaliate against it . Given these incentives the introduction of criminal sanctions increases the incentive of firms and individuals within the firms to blow the whistle.

However, it has been argued that criminalisation of cartel activity can have opposite effects: ‘criminalisation of cartel conduct for individuals makes voluntary cooperation more possible, because of the threat of personal sanctions, but also makes it more necessary, because a right against self incrimination attaches’ . As a result, the government needs to encourage individuals to cooperate if it wants to gather evidence and is likely to be more successful where it has a clear leniency programme in place. Leniency applicants must be certain of their rights and the benefits that they will get as a result of coming forward to disclose any cartel activity. Therefore, while it is true that criminal sanctions make telling on a cartel more appealing, in practice, the effect of such sanctions is likely to be enhanced by ensuring that there is a clear and predictable leniency procedure in place. The higher evidential burden needed to be achieved in order to procure a criminal conviction means that the competition authority will have to rely more heavily on its leniency programme to acquire evidence.

The effects of a clear leniency programme are evidenced by the United States DoJ’s successful introduction of its Corporate Leniency Policy (Amnesty Programme) in 1993. This Amnesty Programme gave automatic immunity to the first applicant and its employees who came forward to report an illegal activity. Before 1993 amnesty was discretionary. Because the DoJ could still prosecute a firm that exposed a cartel, firms had a disincentive to apply for amnesty and approximately only one company per year came forward under the old leniency programme . Subsequently, the number of leniency applications has increased to around two a month and fines have increased substantially . Similarly in the EU, after the introduction of the modified Leniency Programme which replicates a number of the features of the US Amnesty Programme, applications increased from 11 between 1996 2002 to 34 between 2002 and 2004. The substantial increase in applications in both the United States and the EU demonstrates the need to design leniency programmes carefully because poorly designed leniency programmes are unlikely to succeed.

Automatic immunity is essential if a leniency programme is to have its desired effect. This is because to satisfy the evidence requirements of leniency the undertaking depends on the cooperation of the individuals who committed infringing acts, to collect facts and evidence . If these individuals were to face criminal charges, without immunity, they will be unwilling to cooperate and this would undermine the underlying premise of a corporate leniency programme.

In addition to the Corporate Leniency Programme which encourages firms to seek refuge for itself and its employees, the DoJ also runs an Individual Amnesty Programme which gives incentives to individuals to come forward against its own corporation in exchange for complete immunity from sanctions. The benefit of allowing individual leniency programmes has been pointed out by Scott Hammond as follows:

‘The individual amnesty programme helps prevent companies from covering their misconduct. The real value ...of the Individual Leniency Programme is not in the number of individual applications..., but in the number of corporate applications it generates. It works because it acts as a watchdog to ensure that companies report the conduct themselves...So long as one of its employees has individual exposure, the company remains at great risk. If the company self reports the conduct under the Corporate Leniency Policy, then the company and all its co operating executives will avoid criminal prosecutions. However, if the company delays or decides not to report, then the company puts itself in a race for leniency with its own employees’ .

Automatic immunity for employees under the Corporate Leniency Programme or the Individual Leniency Programme ensures clarity and transparency while playing on the mutual distrust of not only the undertakings who are parties to the cartel but also between the actors within a single undertaking.

While criminal sanctions must be accompanied by a leniency programme, an argument can be made that the ability to provide leniency should be limited to the first applicant only and should not extend to individuals who follow later. The DoJ’s Amnesty Programme gives some concessions to those who come in second and third. However, these concessions relate only to a reduction in the monetary penalty imposed, and not to any of the criminal convictions that may arise from the second and following applications. It is important to have some form of gradation; otherwise criminal sanctions will lose their effect. Given the likelihood that the persons engaging in such collusion are few (since cartels try and keep their activities hidden and the fewer the people who know about it the less likely is the chance of detection) if criminal sanctions could be avoided by all then there would in fact be no point in imposing such sanctions. On the other hand, second and subsequent leniency applicants may have useful information to impart to competition authorities and therefore there must be some incentive to divulge that information. Reducing monetary fines is, in my opinion, a sufficient incentive. Once a cartel has been detected and an investigation been started there will be a high likelihood of incriminating evidence being uncovered, especially where a leniency applicant has come forward. The issue for all the other members of the cartel then becomes one of damage control i.e. Which corporation can limit the damage it will suffer as a result of the cartel being uncovered? Firms are obliged to try and get in through the door next.

It may be argued that by allowing leniency, the corporation and individuals who are most culpable will be able to avoid sanctions. This leaves the people who are less culpable to shoulder the full repercussions of the sanctions in an anti cartel investigation. However, it should be noted that most leniency programmes allow for carve outs so that where a leniency application is made by the corporation the competition authorities may nonetheless carve out certain individuals from benefitting from that leniency. Furthermore, most leniency programmes provide that an applicant who has coerced others to enter into the cartel will not be able to benefit from immunity.

A leniency programme should have a low evidential standard. In the US Amnesty Programme the leniency applicant has to simply bring in all the information it has in its possession and immunity is available. As a result even ‘peripheral players can blow the whistle, hence widening the pool of potential whistleblowers and increasing pressure on the major players’ .

This approach is more desirable than having a higher evidential standard since it enhances incentives for applicants to come forward. Often it is very difficult for an undertaking to determine what evidence will be key to a competition authority and what information is already possessed by a competition authority. If a higher evidential standard is required, undertakings and the individual employees therein may have to make a subjective assessment of the evidence in their possession before deciding whether to disclose the cartel to the competition authority. This would be detrimental for the competition authority and the leniency programme as a whole since it would create uncertainty and an unwillingness on the part of individuals to disclose potentially valuable information. Of course, this unwillingness will be heightened where criminal sanctions can be imposed. The 2002 EC Leniency Notice leaves much to be desired in this respect. Under the 2002 Notice it is unclear what type of evidence must be submitted in order to qualify for leniency . While the 2002 Notice only requires a company to produce evidence enabling the Commission to find an infringement, the test is a subjective one and this creates some uncertainty as to the evidential standard that is prevalent. Though the old regime required ‘decisive evidence’ whereby only documental evidence was permissible, the European Commission has in practice allowed oral presentations to be accepted in determining whether an undertaking can benefit from immunity . This makes the evidential standard more certain and easier to overcome. Certainty is essential in shaping firms’ and their employees’ willingness to come forward and when the stakes are so high, as is the case when criminal sanctions are imposed, individuals will not be willing to come forward unless they are absolutely certain that they will be let off the hook.

The US Amnesty Programme has another element called the ‘Amnesty Plus’ Programme. In the latter half of the 1990s statistics show that roughly half of the DoJ’s investigations were initiated as a result of cooperation during an investigation of a completely separate market. Accordingly, the DoJ decided to encourage applicants to disclose information that they had of such illicit activity in other markets. Under this programme applicants can seek to obtain more lenient treatment in a current plea agreement if it discloses a second unrelated conspiracy . The leniency applicant also will receive amnesty in relation to the second conspiracy and none of its employees who cooperate will be prosecuted criminally in relation to this second offence. Because the Amnesty Plus programme’s objectives are to encourage disclosure of other cartels, the standard practice is now to ask the ‘omnibus question’ – a question that is normally phrased as follows ‘do you have any information whatsoever, direct or indirect, relating to [description of conduct e.g. price fixing, bid rigging, market allocation] with respect to other products in this industry or any other industry?’ The applicant must answer the question truthfully otherwise he risks losing the amnesty provided to him in addition to facing charges for perjury or making false statements. I believe that this additional tool is particularly desirable where criminal sanctions have been adopted. Given the increased evidential burden that is required in criminal sanctions, the ‘Amnesty Plus’ Programme provides a unique means for competition authorities to gather evidence. Not only does it put pressure on cartel members in any given market but also imposes a race for leniency in potentially unrelated markets. For example, assume that firm A is a member of two cartels in unrelated products. If A becomes the leniency applicant in relation to one of the cartels, members of the second cartel will be concerned that A will participate in the Amnesty Plus Programme. Accordingly they will have an incentive to come forward and give evidence. However, the evidential standard required to benefit from Amnesty Plus must be very clear. Otherwise, given criminal sanctions, the incentives to come forward will be even more reduced than in the absence of criminal sanctions because as a consequence of failing to meet the evidential burden not only will the undertaking and its employees be liable in the first cartel case but will also potentially face sanctions with regard to the second cartel. The low evidential standard recommended by the United States is highly desirable in the case of all leniency programmes where criminal sanctions can be imposed on individuals.

Therefore, while criminal sanctions should most certainly be allowed, it is essential that countries carefully consider strengthening other laws and schemes to complement such sanctions. Clear and transparent leniency schemes, properly instituted and monitored corporate governance structures and improved investigative powers will result in the increased detection of cartels and will therefore enhance the deterrent effect of criminal sanctions.

SHOULD ANTI CARTEL ENFORCEMENT BE CRIMINALISED AT THE EC LEVEL OR AT THE MEMBER STATE LEVEL

I argued in the first section of this paper that criminal sanctions, and more specifically imprisonment, are an extremely desirable weapon in the fight against hard core cartels. In the EU context, the necessity of criminal sanctions is evident from the fact that the current fines imposed are too low to have the deterrent effect they are meant to have. Under Article 23(2) of Regulation 1/2003 , the Commission cannot impose fines exceeding 10% of the global turnover of the undertaking in the preceding business year. In addition, private damages actions are limited. A study by Ashurst revealed that by August 2004 there had only been 28 European damages awards . Unlike the United States, therefore, European cartel law is not dependent on private litigants for its enforcement and is therefore enforced primarily by competition authorities and the courts . Since fines do not provide an adequate deterrent against cartel activity, the absence of a culture of private damages actions provides an additional argument in favour of criminal sanctions in the EU. In this section, I will look at whether criminal sanctions should be imposed at the level of the EU institutions or whether criminal sanctions should be instituted at the Member State level. In my view, the EU needs to provide the impetus to criminalise cartel enforcement. However, given the history of Europe and the numerous criminal systems this impetus will have to be carried out in steps. Firstly, it is essential to determine whether the current EC Treaty can be used to oblige Member States to introduce criminal sanctions. If this is possible, then this would be the preferable route to take in the short term as this would still leave the choice and means of criminal sanctions to the discretion of the Member States. Given the diverse procedures in each of the Member States, such an approach will enable each Member State to determine the best way to introduce such criminal sanctions into its system. Once this is achieved, the second phase should be harmonisation of the criminal sanctions imposed followed by harmonisation in certain key areas including leniency programmes, information exchange and investigative techniques so that a common minimum standard can be set across all the Member States. This second phase will however have to be part of the longer term agenda of the EU institutions.

The main benefit of such a two stage approach lies in the flexibility it affords Member States in the short term and the careful balance that it draws between the Member States and EU institutions’ competences. The EU institutions do not have the political support yet to introduce custodial sanctions at an EU wide level. Rather than formulate a specific offence and impose this on all the Member States it would be preferable for the EU institutions to simply require criminalisation of the activity for the time being while allowing Member States to determine what is the preferred mode of criminal sanction. In the long run however, the inconsistencies in leniency programmes, investigative and evidential standards and the protection of information exchanged will necessitate an EU wide system in all of these key areas. Given the need for all of these as complements to criminal sanctions, the long run position must be the imposition of EU level criminal sanctions for cartel activity.

The first question is whether Member States can be compelled to introduce criminal sanctions for hard core cartels. Under the current treaty framework establishing the European Competition Regime it may be possible for find a legal basis for EC level criminal sanctions. Under Article 83 EC the Council has broad legislative powers to establish ‘the appropriate regulations or directives to give effect to the principles set out in [Article] 81’. Hard core cartels form one of the most obvious breaches of Article 81 and so it would appear that rules which will give greater effect to Art 81 can be adopted. Alternatively, Art 308 could be used as the legal basis to formulate such rules. Art 308 can be used where the rules in question are necessary to achieve an EC objective, which in the case of criminal sanctions for cartels would be the protection of the internal market, and where the Treaty has not provided the necessary powers.

Furthermore, recent developments in the ECJ’s jurisprudence have done much to change the view that criminal sanctions cannot be proposed or implemented at the EC level.

The ECJ, in its judgement in Commission v Council , stated that:

‘Although, as a general rule, neither criminal law nor the rules of criminal procedure fall within the Community’s competence, that does not prevent the Community legislature, when the application of effective, proportionate and dissuasive criminal penalties by the competent national authorities is an essential measure for combating serious environmental offences, from taking measures that relate to the criminal law of the Member States which it considers necessary in order to ensure that the rules which it lays down on environmental protection are fully effective’ .

While the issue in the case pertained to a dispute between the Council and the Commission about the legal basis of a Framework Directive on Environmental Offences the ECJ did not expressly confine its judgment to the protection of the environment. In the subsequent Ship Source Pollution case the ECJ held that while the Commission can require that Member States impose criminal penalties for certain conduct, it cannot dictate the ‘type and level’ of penalties to be imposed since this is outside the Community’s competence . Given the importance of the enforcement of competition law in attaining one of the most fundamental objectives of the Community, namely the single market, it is possible to argue that the Commission can, on the basis of these judgments call for the criminalisation for violations of anti cartel rules.

However, the ability to use Art 83 and Art 308 will be curtailed heavily if and when the EU Reform Treaty is ratified because legislative competence in criminal matters will be provided for only in the context of judicial co operation in criminal matters and will be confined to adopting directives that will harmonise the enforcement regimes of the Member States. This indicates that harmonisation of criminal sanctions could only take place if consensus for such sanctions existed in Member States . If this is the case, even the ECJ will have to reconsider its decisions and give decisions on the basis of what can only be assumed to be the Member States intentions i.e. criminal matters are to remain within the competence of the Member States alone.

However, if criminal sanctions were to be introduced in the Member States followed by the adoption of clearly defined offence at the EU level, then this will provide greater weight for an EU wide leniency programme and for consistency in investigative powers as well as the system of information exchange. In the remaining part of this section I will show that there is much need of consistency in these areas in order to establish more efficient enforcement.

As can be seen from the table below, which details the different substantive national laws of the 27 Member States, with the exception of nine countries criminal sanctions are not present in any of the other Member States while only six of these countries impose custodial sanctions at present. Of course this substantive difference will limit the ability of the Member States to exchange information and will add an additional layer of complexity when information is being passed from a State with only administrative sanctions to a State with custodial sanctions.

Table 1: Custodial Sanctions for Breach of Substantive Prohibitions (Arts 81 or 82 EC) Against Individuals in Member States and Accession States EU Member State Custodial Sanctions?

Country Breach? Description
Austria No Criminal sanctions recently repealed. Formerly, StGB, s.168b imposed criminal sanctions for submission cartels in public procurement procedures (i.e. bid rigging)
Belgium N/A Information not available
Bulgaria Yes Competition Act 2008 Imposition of fines
Cyprus Yes S 3 of Law 13(1)/2008 makes cartels an administrative offence but repeat offenders are subject to two years imprisonment and criminal fines
Czech Republic No No criminal sanctions
Denmark No Danish Competition Act and Danish Penal Code: fines of a criminal nature may be made against natural persons but imprisonment is not possible
Estonia Yes Imprisonment and fines may be imposed on natural persons for intentional violations
Finland No No criminal sanctions for anti competitive conduct; but under Criminal Act, c.16, Art.8: providing false information is a criminal offence
France No Criminal sanctions recently repealed. Previously, fines and imprisonment existed for breaches of substantive prohibitions
Germany Yes Fines are possible in certain circumstances but imprisonment only exists for “collusive tendering”
Greece No No custodial sanctions possible68
Hungary No No criminal sanctions
Ireland Yes Competition Act 2002, s.6: individuals face fines, up to five years imprisonment, or both
Italy No No criminal sanctions
Latvia N/A Uncertain: fines, imprisonment and deprivation of right to engage in entrepreneurial activity for a specified period may apply
Lithuania No No criminal sanctions
Luxembourg No No criminal sanctions
Malta Yes Article 5 of the Competition Act introduces criminal fines for individuals
Netherlands No No criminal sanctions under the Dutch Competition Act (Mededingingswet), however, “aspects of competition law infringements may also qualify as violations of criminal law provisions”
Poland No No criminal sanctions
Portugal No No criminal sanctions for substantive violations, but fines of a criminal nature exist for procedural violations
Romania Yes Individuals with fraudulent intent and a decisive role in the conception and realization of the cartel can be convicted for a term between 6 months and 4 years.
Slovakia Yes Criminal Code, Art.149: minimum fine of ##125 to a maximum of ##125,000, or up to two years imprisonment for taking part in agreement restricting competition
Slovenia No No criminal sanctions; however, fines imposed by a misdemeanor judge may be criminal rather than administrative
Spain No No criminal sanctions
Sweden No No criminal sanctions
United Kingdom Yes Enterprise Act 2002, s.188: “cartel offence” (i.e. price fixing agreements or bid rigging) is punishable on indictment for imprisonment of up to five years and/or an unlimited fine; or in Magistrate's Court for imprisonment of up to six months and/or a fine. A director may be removed and prohibited from serving as a director for up to 15 years for knowledge or recklessness as to infringement of competition law.

Joshua has argued that two separate systems one at the national and one at EU level would be problematic and inefficient. According to him ‘criminal enforcement ....does not fit easily into the European template and is hemmed around by procedural restrictions on exchange of information’ . After all, Article 12 of Regulation 1/2003 specifically restricts the use of exchanged information when imposing sanctions on a natural person. Article 12(3) states that ‘Information exchanged pursuant to paragraph 1 can only be used in evidence to impose sanctions on natural persons where:

The law of the transmitting authority foresees sanctions of a similar kind in relation to an infringement of Article 81 or 82 or in the absence thereof. The information has been collected in a way which respects the same level of protection of the rights of defence of natural persons as provided for under the national rules of the receiving authority. However, in this case the information exchanged cannot be used by the receiving authority to impose custodial sanctions.’

Thus, for information exchanged to be used against a natural person, the sanctions imposed in the Member States involved must be the same and in the event that the sanctions are dissimilar the same level of protection of the rights of defence must be provided for under the national rules of the receiving authority. There must therefore either be symmetry of sanctions or symmetry of legal protections . Since there is an array of sanctions across the Member States – even the Member States that have criminal sanctions can impose them in different ways and in varying degrees – issues will no doubt arise in relation to information exchanges . Furthermore, nothing in the provision precludes the use of the information gathered by one NCA from being used by the receiving NCA to start an investigation. Though the information received cannot be used in evidence by a Member State that imposes custodial sanctions, it may be used as a point of reference for a NCA to begin investigating the offence with the intention of imposing criminal sanctions in the event that illegal activity is discovered. This has a negative effect on leniency applicants who will be reluctant, as a result, to disclose all they know to one NCA, if they think that this will tip another NCA off and that there may be the danger of custodial sanctions.

There are also issues that are thrown up in relation to investigative assistance and co operation. Under Regulation 1/2003 the Commissions powers of investigation have been extended to include the power to search private homes if it is suspected that company documents may have been kept there. Commission officials are allowed to seal offices at the onset of an investigation in order to ensure that no document disappears in the course of the investigation. The powers of investigation have been greatly increased from the earlier Regulation governing this area which limited inspectors to ask for oral explanations relating to documents rather than allowing them to ask any questions related to the subject matter of the investigation . Member State officials are only vested with similar powers where they act as agents for the Commission. It is therefore only in respect of investigations which are made in the name of the Commission that there will be consistency of investigative measures.

Article 22(1) of Regulation 1/2003 authorises the National Competition Authorities (NCAs) to conduct investigations for each other subject to important limitations which are as follows: (i) The investigation must relate to a violation of Article 81 and 82; (ii) the NCAs must carry out the inspections in their own territories; (iii) the investigative powers and their execution must derive from national law and (iv) any information obtained can only be exchanged under Article 12 . In relation to investigative powers, the problem lies in the third limitation. The issue is whether information obtained abroad in a manner inconsistent with the national laws of the receiving authority can be used. Different Member States have different investigative powers. For instance Irish Competition Authority has powers to interview individuals and record their statements while the OFT in the UK can ask individuals to answer questions in respect of any matter relevant to the investigation . In the Postbank decision the ECJ came to the conclusion that ‘the Commission can only rely upon such evidence as it can acquire directly using its own procedures. It may not rely upon evidence supplied to it which it could not directly acquire itself’ . If the same principle is applied it would appear that this would limit further the ability of the European Competition Network, a network of the NCAs of the Member States, to use information collected.

There are also differences in the level of protection of the rights of defence in the different Member States. For instance in Spain the former Vice President of the Competition Court, Ricardo Alonso Soto, has stated:

‘The provisions for exchange of information and for cooperation with the European Commission and with the NCAs of other Member States pose legal problems when it comes to confidential information. This disclosure of confidential information to other Authorities is not possible except with the consent of the affected parties’ such protection of the rights of defence is exceedingly high and has the potential to limit cooperation within the European Competition Network. The standard set by Spain, for instance, is so high that the affected parties in any case are likely to have objections to the transfer of any information to the six countries that have custodial sanctions (Cyprus, Estonia, Germany – where the case relates to bid rigging, Ireland, Slovakia and the United Kingdom). As a result the very cooperation that is meant to give strength to the European Competition Network is endangered.

Leniency applications have increased considerably since the introduction of the 2002 Leniency Notice but there is scope for improvement in the system. Leniency programmes would have greater success if leniency regimes were not as diverse as is currently the case and if uniform rules existed throughout the EU . Currently the Commission and 23 countries have leniency programmes whereas four countries, Denmark, Malta, Slovenia and Spain have yet to introduce leniency programmes. Furthermore, the nature of the leniency programmes varies greatly from one country to the other. In Germany leniency programmes do not cover criminal sanctions which are currently limited to bid rigging. As a result, while leniency applications can prevent an undertaking from being fined, the individuals who acted on behalf of the corporation will not be able to escape criminal sanctions. Surely, this will create a disincentive for individuals to cooperate. Therefore, when corporate actors risk jail sentences, complete immunity is a must in order to persuade these individuals to come forward. On the other hand, the UK and Ireland’s leniency programmes provide immunity against criminal sanctions though this immunity is not automatic in the case of the UK. The Office of Fair Trade has to issue no action letters to individuals if they are to benefit from the leniency programme. Equally, while full immunity is available for the head of a cartel under the 2002 Leniency Notice, unless they coerced other undertakings to participate in the cartel, some countries continue to follow the Commission’s first leniency notice of 1996 where ringleaders are not given immunity for their actions. National programmes in Ireland and in Germany fall within this category as applicants do not benefit from immunity if they have played a ‘decisive role’ in the cartel. Furthermore, there are differences in the amount of evidence that an undertaking must provide to secure its place in line while only the UK currently provides leniency plus as an additional option in its leniency programme . According to Massey Even if all Member States implemented imprisonment and provided for amnesty the success of the US Amnesty Programme could not be matched. This is primarily because complete immunity to individuals cannot be granted by a single authority at the EU level .

In addition there are a number of multi jurisdictional issues that arise as a result of the diverse leniency programmes that are operated. The most important of these is the need to avoid discovery in US litigation which is why leniency applicants prefer giving oral and not written statements. The danger of being subject to criminal sanctions and damages suits is a key consideration in international corporations’ decisions to apply for leniency. The EU has taken this concern into account when deciding to accept oral corporate leniency statements. However, some countries, like Belgium, continue to insist that leniency applicants submit written statements. In the absence of a one stop shop the process of applying for leniency can also become extremely cumbersome since leniency applications need to be made in a number of jurisdictions. The Commission recommends making multiple leniency applications simultaneously . Undertakings need to determine the feasibility of making so many applications especially since the evidence requirements and procedure vary across Member States. While these factors are important generally, irrespective of whether criminal sanctions are imposed, they become magnified when such sanctions are imposed because the incentive/disincentive to apply depends on the extent that individuals believe that they will be able to successfully apply for leniency.

All of the above factors make leniency programmes less efficient than they would be if there was a consistent leniency programme operated by the Commission which would then be responsible for determining the applicant’s place in line.

In June 2005 Commissioner Kroes reorganised DG Competition and created a dedicated cartel unit with about 60 specialised staff members. The new Cartel Directorate has three units which have the specific duty to enforce competition in relation to cartels and to deal with the immunity applications under the Commission’s leniency programme . While this increased dedication in the fight against cartels are a step in the right direction, in the short run, it is likely that the Commission will still have to rely on the investigative resources and the powers of the national competition authorities in discovering and weeding out cartels. In the long run, however, the cartel unit is likely to increase in size and expertise and may come to be seen as the best agency to lead investigations. Given the necessity of criminal sanctions, it is advisable that the European Commission take a long term view of anti cartel enforcement. The Commission has always championed itself as the ultimate protector of competition law and if it does not want to lose ground in an area that forms the very essence of competition law then it is essential that it take the initiative and not only push for the introduction of criminal sanctions in the short term but also come up with a long term strategy to enhance the deterrent effect of such sanctions.