Welcome to Cartel Hell
22 April 2003
By 2008, as many as 30 executives could be imprisoned for price-fixing. The Enterprise Act 2002 represents the most aggressive criminal enforcement regime against cartels this side of the Atlantic. Individuals face five-year jail terms, unlimited fines, extradition to the US and up to a 15-year disqualification from acting as a director.
The Office of Fair Trading (OFT) will have at its disposal the full panoply of search, seizure, surveillance and interrogation powers available to criminal enforcement agencies, and will conduct investigations together with the Serious Fraud Office (SFO). The OFT anticipates that each year 40 cartel cases will be considered for possible criminal prosecution and it will launch up to six criminal investigations per year.
The cartel offence
The cartel offence created by Sections 188-202 of the act can only be committed by an individual and is focused on hardcore cartel arrangements, including price-fixing, market-sharing and bid-rigging. The benchmark for criminal liability will be whether the individual entered into a dishonest agreement. Dishonesty is likely to be judged both objectively (by the standard of a reasonable person) and subjectively (whether the individual knew their conduct to be dishonest).
The offence is broadly drafted. There is no definition of 'agreement' in the act and prosecutors will doubtless argue that it should be interpreted broadly, including informal understandings and forms of practical cooperation. No actual effect on the market need be proven. The offence is committed even if the agreement is not implemented. International cartels could be caught even if the only connection with the UK were an email in furtherance of the agreement. The general law on conspiracy also applies; thus, a director agreeing that a sales manager should attend a price-fixing meeting with competitors might be guilty of conspiracy to commit the cartel offence.
The cartel offence may not be committed by corporations. However, the position in relation to accessory liability remains governed by general principles. Parliament may unwittingly have enabled a creative prosecutor, in the right case, to pursue corporations for aiding, abetting, counselling, procuring or conspiring to commit the cartel offence. Companies also remain subject to the OFT's existing civil regime of administrative fines and sanctions for cartel activity, although the SFO will doubtless be sensitive to any potential prejudice to the fairness of any criminal trials caused by parallel civil proceedings. Indeed, it is understood that there is already some unease at the SFO at the civil proceedings advancing in parallel to its investigations into an alleged cartel in relation to the sale of drugs to the NHS.
Investigation and prosecution
Formally, both the OFT and the SFO may investigate and prosecute individuals involved in cartels. In practice, however, it is understood that the OFT will handle investigations under the supervision of an SFO case controller, while the SFO will become lead prosecutor. Given the OFT's lack of experience in criminal investigations, it is likely that, initially, it will be reliant on SFO guidance. For businesses and practitioners used to the relatively genteel inspections by the OFT and European Commission (EC), the SFO's more aggressive approach is likely to come as a nasty shock.
The OFT will now have intrusive powers (modelled on the SFO's existing powers) to order production of documents, to compel answers to questions and to search premises under warrant. The new 'seize and sift' power will also be available to the OFT. This enables the OFT to seize documents (including legally privileged or irrelevant documents) and to sift for the relevant material. This is a novel power even for the SFO. From its perspective, this removes a perceived barrier to its investigations. The SFO has expressed frustration that its investigations are slowed down by being unable to review seized documents until privilege issues in relation to such documents have been addressed. Given recent court rulings on privilege as a fundamental legal right, the way this will develop in practice will be interesting to monitor. It certainly emphasises the practical importance for those whose documents are seized to maintain a dialogue and cooperate with the SFO/OFT from the early stages of an investigation.
The OFT may also obtain evidence by surveillance of business premises or vehicles, use of covert human intelligence sources and surveillance of residential premises or private vehicles. Telephone calls may not be intercepted, but telecommunications operators may be required to provide telephone records. As a practical matter, covert human intelligence is likely to be an important source of evidence. To corroborate evidence obtained under the leniency programme, the OFT may require a cooperative witness to attend and record cartel meetings. The US Department of Justice has used this tactic successfully to obtain cartel convictions (in the Lysine case, for example).
The most powerful investigative weapon in the OFT's arsenal is likely to be its proposed leniency programme. Following the success of an equivalent US programme, the OFT proposes to offer immunity from prosecution to the first cartel participant to inform the OFT of the cartel. Once the OFT has sufficient information to proceed, it will not grant amnesty to subsequent leniency applicants. The effects of this can be spectacular. In the US vitamins cartel, Rhone Poulenc received a full amnesty for the company and individuals involved, while Hoffmann-La Roche paid a $500m (£318.3m) fine and its executives served four to five-month jail sentences. The OFT is doubtless banking on this 'divide and rule' strategy to spark a race to its doors among nervous cartel participants.
The amnesty applies to the company and relevant individuals within the company. This puts the management of any company involved in a cartel in something of a cleft stick. It may be in the interests of the company to keep quiet about its involvement; however, if the management decides to say nothing, the company risks the possibility of its employees seeking individual amnesty from the OFT and giving evidence against the company.
Although an effective enforcement tool, leniency is controversial. In a toy price-fixing investigation, the OFT imposed fines of £22.65m on Littlewoods and Argos, based almost exclusively on the damning testimony of Hasbro. As Littlewoods and Argos pointed out, Hasbro had 22 million reasons to testify. It remains to be seen how juries will assess the credibility of such evidence from cartel accomplices. They may be more sympathetic.
The record number of civil enforcement actions by European authorities against cartels shows that cartel activity is still prevalent in many sectors. The detection of cartels is a time-consuming process and the effectiveness of the new powers will depend on resources. The OFT has been promised an additional £21m over the period 2001-04. It remains to be seen whether that is sufficient to enable the OFT to act effectively. Certainly, it is a significant statement of intent. The UK, long seen as a soft touch for price-fixers, may be about to become very tough indeed. n
Sanjay Bhandari is a commercial fraud lawyer and Bill Batchelor a competition lawyer in Baker & McKenzie's business crime unit