Monday, October 15, 2007

Competition – Corporate Leniency Policy Review
By Jean Meijer / Maryanne Angumuthoo
“An effective leniency program will lead cartels members to confess their conduct even before an investigation is opened.  In other cases, it will induce organisations already under investigation to abandon the cartel stonewall, race to government, and provide evidence against the other cartel members.”[1]
With this sort of ambition in mind and in keeping with the worldwide trend towards intensified cartel enforcement, the South African Competition Commission implemented a corporate leniency policy (“CLP”) in 2004[2], in its own effort to encourage cartel members to blow the whistle on fellow offenders, in return for immunity from prosecution. 
A cartel is an association by agreement among competing firms to engage in, among other things, price fixing, division or allocation of markets, and/or collusive tendering.[3]  Simply, a cartel amounts to competitors agreeing not to compete.  In terms of the harm they cause, cartels are the most egregious form of anti-competitive practice which competition authorities are mandated to deal with, and this is reflected in the fact that the highest sanctions are normally reserved for cartels, including criminal sanctions in some jurisdictions.[4]
Under the 2004 CLP, a cartel member who is the first in line to approach the Commission, qualifies for leniency by – providing complete and truthful disclosure of all information available to it; offering full, expeditious and continued co-operation to the Commission; immediately ceasing the cartel activity or acting as directed by the Commission; not being the instigator or not having coerced other firms to participate in the cartel; and not alerting former cartel members that it has applied for leniency.  A leniency applicant is required to submit a written application and the Commission retains the discretion to grant or refuse the application, regardless of whether the applicant meets all the requirements.
In September this year, the Commission expressed its intention to review the CLP by publishing a discussion paper which listed six areas for potential improvement, identified by the Commission in the course its discussions with various stakeholders.  The proposed revisions suggest – 1) amendments to the Competition Act and the Competition Commission Rules to make specific statutory provision for the CLP, which presently only has policy status and has resulted in uncertainty among firms about the CLP’s force and effect; 2) amendments to the CLP provisions to remove the Commission’s unfettered discretion to award leniency, in order create certainty that firms who comply with the CLP conditions will receive immunity; 3) including a new provision allowing oral or paperless applications; 4) removing the disqualification from immunity for cartel members who are instigators or coerced other firms to either join or remain in the cartel; 5) making provision for markers to permit an applicant to reserve its place while it collates the information it will disclose to the Commission; and 6) providing for designated contact persons at the Commission to manage the CLP process, to avoid among others, confusion about which firm is first to door in its application.
What is particularly useful about this review is the Commission’s acknowledgement that the CLP presently creates enormous uncertainty for leniency applicants who cannot be secure that their efforts to comply with all the CLP conditions, which necessitates revealing highly sensitive and mostly damaging information about its business practices, will be rewarded; and that this uncertainty deters firms from exposing cartel abuses.
The significance of this problem was highlighted by Scott Hammond, of the Antitrust Division of the United States Department of Justice, who noted that earlier versions of leniency policies in the United States, Canada and the European Union (jurisdictions with the most experience and success with leniency programmes) were fundamentally flawed and unsuccessful because they lacked transparency, were unpredictable and failed to provide the necessary incentives and induce self-reporting and co-operation.[5] 
In Hammond’s experience, transparency must include not only explicitly stated standards and policies, but also clear explanations of prosecutorial discretion in applying those standards and policies.  The American leniency program, Hammond says, is inherently transparent because the exercise of prosecutorial discretion in its application has, to a great extent, been eliminated.  The initial leniency programme introduced in 1978, which was designed to maintain a greater degree of prosecutorial discretion, and ran for 15 years, simply did not work.  The programme was revised in 1993 to make it easier and more attractive for companies to come forward and co-operate with the Antitrust Division.  Although there have been a number of amnesty applicants he would have preferred to prosecute, Hammond’s experience has been that prospective leniency applicants come forward in direct proportion to the predictability and certainty of whether they will be accepted into the programme – a company that cannot accurately predict how it will be treated as a result of its corporate confession, is far less likely to report its wrongdoing.
In the CLP review discussion paper, the Commission has itself noted that, “[i]n the pursuit of cartels, the interests of consumers are paramount.  Therefore, the authorities are prepared to forsake a sanction against a cartel member who has applied for immunity in return for that firm’s assistance in prosecuting other members of the cartel.”  The wide ambit of the Commission’s discretion in the existing CLP does not support this approach.  Indeed, the success of the CLP has been stunted by its uncertainty and unpredictability and the consequent lack of confidence in the process by firms and their legal representatives.  Since the institution of the CLP (just over 3 and a half years ago), the Commission has received only eight applications for leniency, the majority of which have been in the airline industry.[6]  The suggested amendments will certainly contribute towards curing the CLP’s lack of sufficient inducements and concessions that are necessary to overcome the perceived risks and costs to a company reporting on cartel practices.

[1] Scott D Hammond, ‘Cornerstones of an Effective Leniency Program’, presented before the ICN Workshop on Leniency Programs Sydney, Australia, 22-23 November 2004.

[2] In terms of section 79 of the Competition Act 89 of 1998.

[3] International Competition Network: Anti Cartel Enforcement Template: South Africa

[4] The United States treats hard-core cartel offences as felony crimes and individuals and corporations are subject to prosecution.

[5] Hammond was then Director of Criminal Enforcement and is presently Deputy Assistant Attorney General in the Antitrust Division. See note 1.

[6] Applications have also been received in the fresh milk and bread industries.