Cartel activity is one of the most serious and insidious forms of white collar crimes. Rosalind Wright, chairman of the Fraud Advisory Panel and former director of the Serious Fraud Office (SFO), recently said: “Cartels, and in particular the most serious and dishonest cartels, severely damage the economy, raise prices, mislead investors and constitute theft from customers.” The UK competition authorities have been working hard to eliminate the problem.
The existence of criminal sanctions for anticompetitive activity has proved to be effective in deterring cartels in a number of countries, most notably the US, Canada and Japan. Drawing on this experience, the UK introduced a new cartel offence, which came into force in June 2003 under the Enterprise Act 2002 (EA).
A result of this ‘criminalisation’ is that the UK now has one of the most formidable competition enforcement regimes in the world. The offence is backed by tough criminal sanctions aimed at individuals, and the Office of Fair Trading (OFT) has been provided with redoubtable powers of investigation. Many believe that the new regime has already had a marked deterrent effect.
The cartel offence
This occurs where an individual dishonestly agrees with one or more people that two or more undertakings will engage in certain prohibited cartel arrangements, such as price-fixing, market-sharing, limitation of production or supply and bid-rigging. Where the dishonest agreement is made in the UK, the offence occurs irrespective of whether it is actually implemented. Furthermore, the offence may be made out whether or not the prohibited activity has impacted on the market. The test for dishonesty is established in R v Ghosh (1982) – ie the individual must have realised that their actions were dishonest by the ordinary standards of reasonable and honest people.
Powers of investigation
The EA gives the OFT wide and intrusive formal powers to investigate suspected cartel participants. These include powers to require information and documents; to carry out compulsory interviews; to enter and search premises under a warrant; and to carry out intrusive surveillance and action in respect of property. Suspects may also be interviewed under caution in accordance with the Police and Criminal Evidence Act 1984 procedures.
Information and documents may be required not only from the person under investigation, but also from any other person who the OFT believes has relevant information. Their production may be required immediately. The OFT can also require a person to attend a compulsory interview to answer questions on any matter relevant to the investigation. And there is no right to remain silent at compulsory interviews.
In most cases, cartel investigations will first become known to companies when the OFT ‘raid’ their premises. Powers to enter and search premises may only be exercised under a warrant. The warrant will also authorise OFT officers to seize and ask on-the-spot questions about relevant documentation. Reasonable force may be used to gain entry. Normally, original documents will be seized and relevant information that is held electronically may be required to be produced in a legible form for removal from the premises.
The EA provides the OFT with wide new powers of intrusive surveillance and property interference for the purposes of investigating the cartel offence. Intrusive surveillance is defined as covert surveillance in relation to anything taking place on any residential premises or in any private vehicle. The OFT also has powers to authorise directed surveillance, such as watching a person’s office, and to use covert human intelligence services (otherwise known as informants) in relation to cartel investigations.
It can also obtain access to communications data, such as telephone records, for investigations under the EA.
Further information is available in OFT Guidance entitled ‘Powers For Investigating Criminal Cartels’ (January 2004).
Cartel offence prosecutions will generally be undertaken by the SFO working in close cooperation with the OFT. The cartel offence is punishable by a maximum of five years’ imprisonment and/or an unlimited fine. The EA 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 OFT operates a leniency programme that is likely to become a primary source of information in its hunt for cartels. Under the programme, immunity from prosecution in the form of a ‘no-action letter’ will be offered to the first cartel participant who comes forward and cooperates fully with the OFT. Applications for leniency are a gamble and a no-action letter will not be issued where the OFT believes that it already has, or is in the course of accumulating, sufficient information to bring a successful prosecution. A considered approach is therefore necessary in seeking leniency and legal advice is essential.
A dramatic but important consequence of the criminalisation of cartels is that it has brought about the double criminality necessary for the extradition of offenders, not only from, but also to, other countries that have a similar competition offence. The cartel offence, as well as the offence of conspiracy and attempting to commit the cartel offence, are classified as extradition crimes.
Extradition to regimes such as the US, where cartel participants are punished even more seriously than in the UK, presents a scary prospect for those involved in cross-border operations.
Legal and compliance issues
The criminalisation of cartels has brought into sharp relief the importance of seeking legal advice from expert competition advisory and defence lawyers.
As well as being advised on wider competition compliance issues, such as the types of competitive behaviour that the law permits and prohibits, it is crucial during a cartel investigation that companies and individuals are advised properly on the criminal investigation process by expert defence lawyers. Companies must be aware of the legal limitations on the OFT’s use of its powers of investigation.
Fundamentally, it needs to know that the OFT may not require the production of documents that benefit from legal professional privilege. From an internal compliance point of view it is essential, therefore, that document retention systems are established that ensure legally privileged documents are stored in secure locations and are isolated from other documents.
While leniency applications may be made directly by an individual, they should not be handled without proper legal advice. As mentioned above, they do not always offer an absolute guarantee of immunity and timing is crucial. Guidance issued by the OFT on the issue of no-action letters confirms that initial approaches for leniency by lawyers may be made on an anonymous basis. This provides an opportunity for testing the water that should not be missed.
Compulsory interviews and interviews under caution are both processes that can and should be managed thoroughly. Both are daunting evidence-gathering procedures conducted by trained investigators with a view to securing admissions of guilt. To attempt these without legal representation can seriously undermine the defence case.
A vital element of compliance is damage limitation. Do companies have internal procedures in place for receiving the complaints of aggrieved employees and avoiding whistleblowing? In the event of a raid, do staff possess the requisite training to manage the process?
Do they know who to call and how to handle the OFT officers until help arrives? Is someone equipped to handle media and public relations? Do back-up plans exist that allow business to continue as usual?
All too often, these pertinent issues are not addressed until the investigation has begun. By then, the damage done is often irreversible. There is no room for complacency. Companies that invest in compliance strategies and have the right legal advisers on call are merely fulfilling a business imperative.
Mike Pullen is a partner in the EU and competition group of DLA. He was assisted in this article by Rakhi Talwar, a professional support lawyer in the firm’s regulatory group