Cartels: raising the stakes

Cartel enforcement is one of the key priorities for the new Competition & Markets Authority (CMA) – the body that on 1 April 2014 took over a number of functions of the Office of Fair Trading and the Competition Commission to become the UK’s lead competition and consumer authority. To achieve this, the CMA works closely with the police and other enforcement authorities, including the Crown Office & Procurator Fiscal Service (COPFS) in Scotland.

At the same time, the CMA’s budget has been enhanced specifically to enable it to step up its cartel and broader competition enforcement activities, and the criminal cartel offence under the Enterprise Act 2002 (EA02) has been amended to make it easier to prosecute. The CMA’s civil competition investigation powers under the Competition Act 1998 (CA98) have also been strengthened.

As a result, the risks for individuals and businesses of engaging in cartel activity are higher than ever, as is the importance of compliance, and legal advisers need to ensure that they are aware of these changes.

This is true irrespective of the economic sector, size or geographical location of the businesses involved. Indeed, in the case of the devolved nations, the CMA’s commitment to achieving effective enforcement throughout the UK is underlined by the establishment of a devolved nations team with representatives in Edinburgh, Belfast and Cardiff.

The CMA’s close working relationship with COPFS builds on the relationship that already existed between COPFS and the CMA’s predecessor, and is illustrated by assistance provided by COPFS as well as a number of police forces in Scotland in relation to two significant ongoing criminal investigations. Both involved the execution of criminal cartel warrants at business premises in Scotland and resulted in the arrest of a number of individuals and coordination with six police forces across the UK.

As regards civil cartel enforcement, the Commercial Vehicles case shows that firm action will be taken, irrespective of the size of the companies involved or the geographic scope of the infringement. In that case, Mercedes-Benz and five of its commercial vehicle dealers were found to have infringed competition law, resulting in the imposition of fines totalling over £2.8 million. That case involved dealers mainly active in areas within the North of England and parts of Wales and Scotland. The penalties wiped out up to 18 months’ profit after tax of the dealers concerned.

The Commercial Vehicles case also shows how easy it can be to cross the line between legitimate and illegitimate contacts between competing businesses, in particular where there are informal relationships and contacts between staff from competing companies. One business in that case was fined largely because one of its employees had attended and was involved in setting up a meeting where illegal activity was discussed.

Co-operation between COPFS and CMA

Joint working by COPFS and the CMA is underpinned by a memorandum of understanding (MOU). This was first entered into between the CMA’s predecessor and COPFS in 2003 and has been revisited and refreshed on a number of occasions. A new MOU between the CMA and COPFS was recently agreed. It sets out the way that the CMA and COPFS co-operate to investigate and/or prosecute individuals in respect of the cartel offence and looks to encourage higher levels of co-operation from those engaged in cartel activity. The involvement of COPFS from an early stage in an investigation enables a joined-up approach with the CMA and the making of strategic decisions regarding tactics and evidence-gathering, in order to maximise the prospects for successful prosecutions and disruption of crime.

The CMA operates a leniency programme for those involved in a cartel who report the cartel and co-operate with any investigation. In the context of CA98, an undertaking may receive total or partial immunity from financial penalties if it comes forward with information about its role in a cartel. Decisions about whether to grant leniency to undertakings rest with the CMA. However, if any such decision could have an impact on the outcome of an existing COPFS cartel investigation or prosecution, the CMA will consult COPFS.

In the context of a cartel offence in Scotland, because of the constitutional position of the Lord Advocate as set out below, the CMA cannot guarantee immunity from prosecution (unlike in England & Wales, and Northern Ireland). Where the CMA has received an application for immunity from prosecution in respect of a cartel that falls to be prosecuted in Scotland, the CMA will report the circumstances and recommendations to the Lord Advocate, who will accord any recommendation for immunity serious weight in exercising his discretion in the grant of criminal immunity in Scotland. In determining whether to grant conditional criminal immunity, the Lord Advocate will take cognisance of the CMA’s own rules on leniency as set out in its guidance: see www.gov.uk/government/uploads/system/uploads/attachment_data/file/284417/OFT1495.pdf.

Where possible the Lord Advocate will give an early indication at the commencement of a leniency application, and before the applicant’s identity has been revealed, whether criminal immunity is likely to be granted (subject to full ongoing co-operation and on the basis that there are no criminal convictions or associations to be disclosed).

Where the Lord Advocate declines to grant or give such an early indication of immunity or to give an early indication that a criminal investigation will not be initiated, any information from an applicant which was provided to enable the Lord Advocate to reach his decision will not be used in evidence against the applicant, provided the information was not false or misleading.

Criminal cartel offence

The criminal cartel offence applies to certain types of conduct by individuals (EA02, s 188). A person commits a criminal offence if they agree with one or more other persons that two or more undertakings will engage in certain prohibited cartel arrangements. The prohibited cartel arrangements are, broadly, price fixing, market sharing, bid rigging or limiting production or supply. It is not necessary for the agreement actually to be implemented in order for the offence to be committed. There are certain limitations on the scope of the offence, such as a requirement for reciprocity of the cartel arrangements between the parties, and the need for the undertakings concerned to be operating at the same level in the supply chain.

The offence is aimed at deterring the most serious and damaging forms of anticompetitive agreement, which are referred to as “hardcore cartels”. These are often secret arrangements under which competitor businesses agree to coordinate their activity, usually in order to preserve or drive up prices. Such agreements are obviously harmful to the interest of customers and provide them with no countervailing benefits. On conviction an individual can face up to five years' imprisonment, an unlimited fine, or both, as well the possibility of director disqualification and the confiscation of assets.

The critical amendment to the cartel offence under the Enterprise and Regulatory Reform Act 2013 (ERRA13), which created the CMA, is the removal of the previous requirement to prove dishonesty by any individual who is party to an agreement (s 47). It is anticipated that this will lead to a greater number of cases resulting in successful prosecutions. It is important to note that the legislation is not retrospective and so will apply to agreements made on or after 1 April 2014, with dishonesty remaining an element of the offence for any agreements made before that date. The CMA has stated publicly that the removal of dishonesty from the cartel offence will not affect its intention to focus on hardcore cartels.

ERRA13 also introduces new statutory exclusions which mean that certain arrangements fall outside the scope of the offence. For the exclusion to apply, what is described as “relevant information” about the arrangements must have been notified to customers before they entered into agreements for the supply to them of the affected product or service, or in the case of bid rigging arrangements have been notified to the person requesting bids at or before the time when a bid was made, or have been published before the arrangements were implemented in one of the London, Edinburgh or Belfast Gazettes (Enterprise Act 2002 (Publishing of Relevant Information under section 188A) Order 2014 (SI 2014/535)). For these purposes “relevant information” amounts to the names of the undertakings to which the arrangements relate, a description of the nature of the arrangements which is sufficient to show why they might be of the kind caught by the cartel offence, and the products or services concerned.

In the event of a prosecution, three statutory defences have also been introduced by the legislation. Two of these are based on an individual being able to demonstrate that, at the time of the making of the agreement, they had no intention to conceal the nature of their arrangements from either their customers or the CMA. The third defence is that before making the agreement, the individual took reasonable steps to ensure that the nature of the arrangements would be disclosed to a professional legal adviser for the purpose of obtaining legal advice about them before they were made or implemented. The availability of a defence in the event of a decision to prosecute an individual for the cartel offence will depend in each case on the facts; and in the context of the legal advice defence, the CMA has stated that it considers that in order to demonstrate the requisite reasonable steps there must be a genuine attempt to seek legal advice on the arrangements.

Cartel enforcement in Scotland

In Scotland prosecutions can only be brought by the COPFS, which is headed by the Lord Advocate. In England & Wales and in Northern Ireland, prosecutions for the offence may only be brought by the Serious Fraud Office, or by or with the consent of the CMA.

Decisions by the Lord Advocate about criminal prosecutions are taken independently of any other person, and so a decision to prosecute a criminal cartel offence in Scotland rests with him and not the CMA. As it states in the Prosecution Code in Scotland: “No one can require the Lord Advocate to institute criminal proceedings or to abandon a prosecution.”

Prosecutors in Scotland apply the public interest test in each case they consider. Assuming that the report to them discloses sufficient admissible, reliable and credible evidence of a crime committed by the accused, the prosecutor must consider what action is in the public interest. Assessment of the public interest often includes consideration of competing interests, including the interests of the victim, the accused and the wider community.

The factors which require to be taken into account in assessing the public interest will vary according to the circumstances of each case. A number of factors set out in more detail in the prosecution code may be relevant. Not all of them will apply in every case, and the weight to be attached to any applicable factor will depend on the circumstances of each case. The assessment of the public interest involves a careful consideration of all the factors relevant to a particular case.

Pursuant to ERRA13, the CMA has produced prosecution guidance on the principles to be applied in determining, in any case, whether proceedings for an offence under the Act should be instituted. In preparing this guidance the CMA consulted with the Lord Advocate among others. The guidance sets out some offence-specific public interest factors that the CMA may consider in making a prosecution decision, and there is considerable crossover between these factors and those to be considered by Scottish prosecutors under the COPFS Prosecution Code.

The evidential requirements in Scotland are different from the rest of the UK, and accordingly in Scotland, in general terms, for there to be sufficient evidence there must be corroboration, that is evidence from at least two separate sources to establish the essential facts of the case, i.e. that the crime was committed and that the accused was the perpetrator.

The prosecution must prove these matters beyond reasonable doubt. The various sources of evidence which may be available include not only eyewitness evidence but documents (productions), financial records and forensic evidence as well as evidence of statements by an accused person.

If the evidence appears to be insufficient, prosecutors can instruct the police, or request another reporting agency, to carry out further inquiries. If, after a full inquiry, the prosecution is satisfied that the evidence is insufficient, no action will be taken.

Finally it should be noted that in respect of civil cartel enforcement under CA98, the CMA has jurisdiction throughout the UK, including Scotland.

Appropriate action

In conclusion, it is now more important than ever that businesses and their advisers ensure their compliance with competition law. If you believe that you or your clients have been involved in cartel behaviour, you should consider applying for leniency as a priority, because businesses that come forward to report their involvement in a cartel may have their financial penalty reduced or may avoid one altogether. For information about leniency go to www.gov.uk/cartels-confess-and-apply-for-leniency. For those with information regarding a suspected cartel the CMA operates a hotline on 020 3738 6888. The CMA also operates an informant reward programme and is prepared to offer rewards of up to £100,000, in exceptional circumstances, for information about cartel activity.

Additionally, to achieve compliance there are a number of helpful publications available on the CMA’s website. As well as some of the documents referenced above, these include guidance on competing fairly and the application of competition law, how to identify cartel activity, how small businesses can comply with competition law and the CMA’s powers of investigation of anti-competitive behaviour.