Impact of criminal sanctions for corporate officers

LegalTalk - April 2009

Have you minimised cartel risk within your organisation?

Fines in Australia for cartel conduct have reached $36 million. Although this is a relatively small fine when compared to the fines in the US and Europe, which have reached previously unimaginable levels, it recognises the moral reprehensibility of cartel conduct. There seems to be widespread consensus on the need for increased deterrence given the adverse impact of cartel activity on economic welfare.

At least 20 countries provide for jail terms for cartel conduct, with the average in the US being 31 months. Formal and informal cross-border cooperation is also growing with information exchange, simultaneous raids and extradition. In these circumstances, it is not surprising that the Australian government is looking to align Australia with international trading partners by proposing, among other changes, the introduction of criminal sanctions for corporate officers who breach the new cartel provisions.

The passage of the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 is imminent.

Current civil regime

Under the existing laws, corporations who engage in cartel behaviour face fines of up to $10 million or three times the value of the illegal benefit gained from the cartel, or where that cannot be ascertained, 10% of the corporate group's annual turnover in Australia for the preceding twelve months, whichever is greater. An individual who is found to have engaged in cartel behaviour currently faces a maximum fine of $500,000 per offence.

New criminal penalties

Under the proposed changes, the maximum penalty for an individual found guilty of cartel conduct will be a 10-year jail term or a fine of $220,000. The penalty for a corporation will be the same as the fines that currently apply to corporations.

Identifying cartel risk within your organisation

Economic factors

Recognise whether the economic conditions are such that cartels activity is likely to occur. Unfortunately, in times of economic recession, the conditions become ripe for cartels to form and flourish due to various factors including the following:
  • too many suppliers
  • shrinking demand
  • excess capacity
  • increased price competition
  • smaller margins
  • trading losses.
There may be financial pressures on an industry to increase prices and profitability. Another economic factor to be mindful of is import competition from low-cost countries or dumping.

Industry factors

Identify the industry structures which are most conducive to collusive conduct. You might find that your organisation is susceptible to collusive behaviour occurring if:
  • it is difficult or costly for new suppliers to enter the industry
  • only a few suppliers or a small group controls most of the market, and
  • the suppliers have similar costs, or fixed costs which account for a high proportion of the total costs.
You also need to be mindful if there is an active trade or industry association in the industry in which your organisation operates, where competitors meet to discuss the industry or where competitors know each other well through sport, social contact, shifting employment or other legitimate activities. Again these situations might be conducive to collusive behaviour.

Other factors which may operate in your industry, providing fertile grounds for collusive behaviour include:
  • suppliers who can be easily monitored - for example they publish their prices or tender results
  • buyers lack expertise
  • products and services are homogenous
  • products or services have few or close substitutes
  • customers make regular, repetitive purchases by way of competitive tender.

Supplier behaviour

Recognise the behavioural signs from suppliers, such as:
  • offering very similar or identical prices, discounts or rebates
  • unexpected or unjustified simultaneous price increases
  • regular unexplained parallel prices increases
  • charging different prices in certain geographical areas
  • a sudden narrowing of the range of quoted prices
  • price or margin increases in a depressed market
  • an unexplained reluctance to increase output.

Tender behaviour

In relation to tenders, the following behavioural signs might indicate the presence of cartel activity:
  • suppliers meet before they submit tenders
  • suppliers that would normally tender, fail to do so
  • tender prices are much higher than expected and are much higher than previous tenders or published price lists
  • the lowest tenderer's price has no close rival
  • the successful tenderer subcontracts work to its competitors that submitted higher tenders
  • suppliers appear to be taking turns and the winning tenders rotate through the major competitors
  • suppliers charge different prices in different locations

Minimising cartel risk within your organisation

A Trade Practices Compliance Program is essential for minimising and managing the cartel risks within an organisation. It ensures corporate compliance with the Trade Practices Act (TPA) and should have four essential ingredients:
  • commitment by senior management
  • systems for identifying and documenting the impact of the legislation on business activities, establishing clear lines of responsibility and providing a rapid response to problems
  • compliance education for staff
  • an ongoing analysis of the compliance framework in order to respond effectively to legislative changes as they arise.
Staff need to be aware of compliance issues and understand their obligations in order to comply with both internal business frameworks and external regulations and laws. Commitment to internal frameworks by senior management is a leading factor in the creation of broad organisational compliance. Senior management must be accountable for illegal/inappropriate behaviour and actively encourage compliant behaviour (through adequate systems) to minimise the risk of non-compliance that arises when staff are ignorant of their obligations. The ACCC estimates that over 80% of TPA breaches occur unintentionally through a lack of a working knowledge of the TPA.

An effective compliance program needs more than documented policies and procedures. It needs to become embedded in an organisation's way of doing business. To do this, the program needs the overt support of the most senior management so that a positive compliance culture is developed and staff are encouraged to act in accordance with documented policies and procedures.

In addition, the program must join seamlessly with the business processes of the company. It should be consistent in format with other operational guidelines and should take into account the responsibilities of the individual managers of the company.

A clear message should be sent to all staff that the organisation has zero tolerance for cartel conduct. An effective Trade Practices Compliance Program will introduce or reinforce a compliance culture in the organisation and may include the following key elements:
  • whisteblower policy
  • tender pricing review procedure
  • trade association guidelines
  • prior legal clearance for any proposed dealing with a competitor
  • comparative price monitoring programs
  • cartel-specific training
  • ACCC dawn raid protocols and how to deal effectively with the ACCC if the situation arises.

Conclusion

Regulators have been concerned that large penalties in the form of fines or compensation orders have simply become a 'cost of business' for many organisations who engage in cartel conduct.

With the imminent introduction of criminal sanctions for cartel conduct, including jail terms of up to 10 years for corporate officers found to be in breach of the proposed cartel provisions, it is crucial for all organisations to turn their minds to minimising and managing the cartel risks within their organisation.