Hard core cartel crime: criminal penalties for directors and officers of corporations

Federal Treasurer Peter Costello recently announced that the Australian Government has decided to introduce criminal penalties for serious cartel conduct. The maximum penalties will be a term of imprisonment of five years and a fine of $220,000 for individuals and a fine for corporations that is the greater of $10 million or three times the value of the benefit from the contravention, or where the gain cannot be determined, 10% of annual turnover.

These proposed penalties send out a clear message - cartel behaviour will not be tolerated in Australia.

For directors and officers of corporations, it means yet another layer of personal risk. There is even more reason now for directors and officers to review the trade practices of each corporation they serve to ensure compliance.

What is a cartel?

A cartel is formed when two or more competitors enter into a contract, arrangement or understanding to fix prices, restrict output, divide markets or rig tender bids. There does not need to be a formal written agreement between the competitors; there rarely is. There only needs to be an understanding, which theoretically could be no more than a wink and a nod.

These arrangements generally contravene various provisions of Part IV of the Trade Practices Act 1974, which prohibits anti-competitive conduct.

The damage caused

At the "Cracking Cartels" convention held in November 2004, Graeme Samuel, chairman of the Australian Competition and Consumer Commission (ACCC), described cartels as 'a cancer on our economy' and 'insidious and damaging behaviour'. It is now generally accepted that cartels in Australia cost businesses, taxpayers and consumers billions of dollars in higher prices. Cartels also have the effect of constraining innovation through their support of inefficient production processes.

A number of cartels have been exposed in Australia in markets generating billions of dollars each year. If you consider this information in light of recent international studies which have found that -

• the average life of a cartel is about six years; and

• a cartel increases the prices of affected goods or services by an average of 10%,

it's not hard to envisage the damage that cartels have caused to our economy.

The ACCC fight

Cartels epitomise the anti-competitive conduct that the Trade Practices Act prohibits. It comes as no surprise that cartels have long been the red rag to the ACCC bull.

But the ACCC's charge to prosecute cartel offenders has always been hamstrung by one fundamental problem ? cartels are typically secret, formed by verbal and informal arrangements. As a result, the existence of a cartel is often extremely difficult to prove.

To combat this, the ACCC launched its leniency policy for cartel conduct in June 2003. Broadly, under the policy the ACCC offers -

• immunity from ACCC-instituted court proceedings, to the first corporate or individual to disclose the existence of a cartel of which the ACCC is unaware;

• immunity from pecuniary penalty, to the first corporate or individual to come forward and provide information about a cartel of which the ACCC is already aware, but has insufficient evidence to institute court proceedings.

The immunity is only available to those who cooperate fully with the ACCC and cease all involvement in the cartel. Immunity is not available for corporations or individuals that have coerced others to break the law, or who are the instigators of the cartel.

The most important aspect of the ACCC leniency policy is that immunity will only be available to the first to expose a cartel, or the first to come forward. There have been several instances where potential informants have come forward only to find that the leniency carrot has already been eaten. There is no prize for second place.

Also, leniency is available only in respect of actions which could be brought by the ACCC. It will not prevent any actions being brought by other aggrieved parties, such as consumers or competitors. The leniency policy is currently under review. It will be interesting to see what 'fine tuning' will be made to the policy to make it even more enticing for the potential informant.

Current penalties

Even under the current legislative regime, the consequences of being involved in a cartel for corporations and individuals can be very serious. The existing civil penalties include pecuniary penalties of up to $10 million per contravention for corporations and $500,000 for individuals involved. In addition, there is the risk of a damages claim being made by affected persons (eg. customers, suppliers or competitors) and, perhaps even more importantly, the risk of damage to the reputation and goodwill of each cartel member.

The proposed criminal sanctions

The ACCC hopes that these new criminal penalties will make the leniency policy even more attractive to potential informants. The criminal sanctions are intended to be brought against only those involved in serious cartel conduct that causes large scale or significant economic harm. Minor cartels are to be prosecuted through civil rather than criminal proceedings.

A guide is to be prepared by the ACCC and the Department of Public Prosecutions (DPP) setting out appropriate thresholds. The current view is that the DPP will only commence criminal proceedings against cartel members where the value of affected commerce exceeds $1 million within a 12 month period, and that the DPP will also consider -

• the cartel's impact on the market;

• the scale of damage caused to consumers or the public; and

• whether any of the alleged cartel members have previously been found by a criminal or civil court, or admitted, to have engaged in cartel behaviour.

The new criminal sanctions are scheduled to come into effect from July 2005.

Minimising your risk

There are a number of ways in which directors and officers can minimise their personal risk and the risk of the corporation they serve to cartel contravention. These include -

• don't breach the Trade Practices Act - prevention is always better than the cure;

• obtaining advice about any proposed dealing with an actual or potential competitor before reaching an agreement;

• developing an effective trade practices compliance policy and program - educating staff about the law and the penalties involved (particularly now the criminal penalties) may well deter rogue activity or correct any border-line practices;

• ensuring you conduct appropriate trade practices due diligence for all mergers and acquisitions - a corporation may inherit a culture of non-compliance when it purchases another business;

• putting in place a system to deal with problems promptly and decisively;

• considering the application of the leniency policy and developing strategies for dealing with the ACCC and affected customers and suppliers.

• NEVER discuss prices with competitors.

Conclusion

The proposed new criminal sanctions clearly increase the clout of the ACCC's enforcement armory in its fight against anti-competitive conduct. The ACCC's leniency policy will now be even more tempting for those involved in cartels to come forward. With the prospect of criminal convictions and custodial sentences, and the likelihood of an increase in cartel exposure, the onus is firmly on company directors to introduce effective trade practices compliance regimes.