BA cartel probe sees OFT test its criminal powers post-Enterprise Act

It’s a bold move. The Office of Fair Trading (OFT) has chosen what is arguably one of the most high-profile cartel investigations in recent times to test its toughened powers, acquired under the Enterprise Act 2002.

The OFT has launched both a criminal and civil investigation into alleged price-fixing by British Airways (BA) and Virgin Atlantic in relation to fuel surcharges for long-haul passenger flights to and from the UK. The case will be the first public test of the OFT’s toughened powers to prosecute individuals found guilty of anticompetitive practices.

Berwin Leighton Paisner head of EU and competition law David Harrison says the case is a dramatic development. “It’s highly significant that that OFT has launched a criminal case under the Enterprise Act in such a high-profile case,” he says. “It sends a very strong message and shows the OFT is flexing its muscles.” Indeed, the case has already seen its first casualties. Last month BA’s commercial director Martin George and head of communications Iain Burns quit amid the price-fixing probe. Both had been on leave of absence since mid-June, when BA confirmed that the OFT and the US Department of Justice (DoJ) were investigating alleged cartel activity.

That said, the OFT’s criminal investigation into alleged price-fixing by BA and Virgin has taken the companies, their advisers (Slaughter and May and Herbert Smith respectively) and the regulator into uncharted waters. Indeed, several questions remain unanswered. For instance, how long is the investigation likely to last? Will the OFT or the Serious Fraud Office (SFO) be the prosecuting agency? And will the BA cartel investigation open the floodgates?The OFT declined to comment on the ongoing fuel surcharges investigation, but the OFT’s director of cartels division Simon Williams says the regulator is likely to bring one or two cases. “There’s no quota and it depends on how much of what comes to our attention justifies use of criminal powers,” he says.

One City competition partner says of the timing: “The DoJ moves quickly. Indeed, it can have resolutions within six months. It’s not uncommon for European Commission cartel investigations to take between four and six years.”

Another competition partner adds: “You could find that BA secures a settlement with the US litigants [regarding the related class action suits] and the OFT is left behind.”

The OFT’s repsonse to the issue of timing is vague. It argues that the length of the investigation will depend on the size and complexity of the case. “The SFO’s cases take such a long time because they’re among the most complex to put before the criminal justice system. Some cartels may be less complex than the usual SFO case and might, in consequence, take less time,” claims Williams.

There are also too many variables to predict the eventual outcome of the investigation. What is clear, though, is that the Enterprise Act has given the UK the potential to create one of the most formidable competition enforcement regimes in the world by bringing it closer to that adopted in the US.

The head of fraud and regulatory at Russell Jones & Walker (RJW) Rod Fletcher says: “The most interesting part is the way the UK is following the US model, particularly by targeting individuals.

“This is a classic example of where criminal law comes into the boardroom. Directors and managers need to ensure that they’re fully aware of their liabilities in this area.”

The biggest winners likely to emerge from the criminalisation of cartel activity are the white-collar crime firms. It is understood that Peters & Peters and BCL Burton Copeland have both scored roles to advise individuals implicated in the fuel surcharges investigation.

When the Enterprise Act came into force in June 2003, a number of City firms formed referral relationships with the likes of BCL, Kingsley Napley, Peters & Peters and RJW. But with no immediate cases for the firms to handle, those relationships have until relatively recently remained dormant.

As one fraud specialist puts it: “Everyone rushed around to identify who they can refer individuals to. But not much has happened since then.”

Section 188 of the Enterprise Act created for the first time a specific criminal offence, which arises when an individual dishonestly agrees with one or more persons that two or more businesses will engage in certain prohibited cartel arrangements, such as price-fixing or bid-rigging.

The cartel offence is punishable by a maximum of five years’ imprisonment and/or an unlimited fine. The Enterprise Act also created a series of independent offences for failing to cooperate with, or obstructing, an investigation, carrying a range of penalties that include unlimited fines and imprisonment for up to five years.

The danger of extradition to the US, where the sanctions are much harsher, is a scary prospect for those BA executives who may have proceedings launched against them.

Last year Ian Norris, the former chief executive of industrial giant Morgan Crucible, became the first foreign national to receive a court extradition Norris, who is being advised by White & Case London litigation head Alistair Graham, appealed against his extradition on price-fixing offences last month (October). During his appeal Norris argued that, for extradition to kick in, price-fixing had to be a criminal activity in both the UK and US. The decision is expected to be handed down by the end of the month.

Pharmaceutical group Goldshield, advised by Jones Day partner Craig Shuttleworth, is intervening in the Norris case. The company became involved because it is contesting a similar point of law on conspiracy to defraud in its dispute with the SFO concerning the pharmaceuticals cartel case (see box).

The Enterprise Act came into force more than three years ago, but to date nobody has been charged under Section 188. In stark contrast, the DoJ has prosecuted hundreds of cases successfully. But who’s to say that once the OFT gets its house in order it can’t bring as many cases at its US cousin?

Conspiracy to defraud?

In addition to the OFT’s toughened powers under the Enterprise Act, the SFO has separate powers to prosecute individuals under the common law offence of conspiracy to defraud for offences that took place prior to the Enterprise Act. In April the SFO launched criminal proceedings against nine individuals and five companies for allegedly conspiring to defraud the NHS in relation to a scam that involved restricting the supply of certain drugs, including the blood-thinner Warfarin and penicillin-based antibiotics between January 1996 and December 2000.

But RJW’s Rod Fletcher says: “It’s still open to argument as to whether cartel activity can amount to the common law offence of conspiracy to defraud.” Indeed, nobody has been prosecuted successfully for conspiracy to defraud where the underlying offence relates to cartel activity.