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An increase in the legal ammunition in terms of criminal penalties to tackle bid rigging, price fixing and other cartel conduct looks likely, via criminal penalties reports Gary Hughes from Wilson Harle.
The revisiting of this debate is not a surprising development – the pressure to toughen up the Commerce Act’s penalty provisions has intensified here ever since Australia introduced criminal sentences last year. It partly reflects international regulatory trends in trying to increasingly sheet home anti-competitive behaviour (and other regulatory misconduct) to individual directors and managers, not just corporations. A discussion paper issued by the Ministry of Economic Development (MED) on “Cartel Criminalisation” leaves the impression that this is now a highly likely step for New Zealand in 2010. Currently, cartels are illegal, and punishable by hefty ‘pecuniary penalties’ - which in the legal jargon are not a criminal fine, but at least have ‘quasi-criminal elements’. Not that many years ago, the government dramatically increased the level of penalties in the Commerce Act in 2001. Despite a similar Ministry of Commerce consultation process concluding (back then) that there may be a case for criminal penalties, the 2001 amendments quite conspicuously did not introduce criminal penalties at that time. So what has changed, in less than a decade? In essence, three main things:
Some of our key trading partners have criminalised in recent years, including Australia, the UK, Ireland, Japan, and Korea. They join the long-standing criminal jurisdictions of the US and Canada. The OECD advocates criminalisation as ‘best practice’, and the Ministry report raises concerns about whether New Zealand could be seen as a ‘soft touch’ if we do not follow suit.
Risk of over-reaching into legitimate endeavoursFew people contest that hard core cartels are detrimental to efficient market functions, and should be punished. And unquestionably, nothing will concentrate the mind of directors and executives on cartel issues quite like the prospect of being imprisoned. The main problem, as international experience shows, is the difficulty in defining such offences in a way that does not over-reach and lead to positive economic activity being curtailed. That can easily happen if managers are uncertain about the boundaries of the law, but very nervous of its potential repercussions. A subsidiary problem is that in recent years the Commerce Commission has labelled quite a few cases ‘price fixing’ or ‘cartel’ behaviour when many people would view it more objectively as ordinary joint venture behaviour, or industry solutions that are sensible and economic-efficiency enhancing. Examples include: Joint bids for government services contracts where the collaboration between suppliers is transparent and disclosed to the buyer; and restraints that are part of a legitimate joint venture, but an unincorporated one which struggles to fit within the convoluted and narrow exception offered in the Commerce Act. Some of these cases rely on an aggressive interpretation of the current price fixing provisions, and lack the essential element of covert behaviour or secretive intent. The case against cartels is undermined by categorising this type of borderline conduct as ‘theft’ or a ‘fraud upon the consumer’. It will be critical, if criminalisation does proceed, for the current joint venture exception, and others (such as ‘joint buying’) to be improved so managers know, as far as possible, exactly where they stand.
Energy companies warnedBringing this topic close to home for the energy industry was a formal warning issued by the Commerce Commission to Contact Energy and TrustPower in late November 2009. Individuals at those companies were alleged to have attempted to engage in bid-rigging during the purchase by tender of the Cobb hydroelectric power station near Nelson in 2002, owned at that time by NGC. The warning was issued after an investigation under the existing (non-criminal) price-fixing provisions. That investigation itself arose rather randomly out of the Commission’s broader electricity market inquiry last year, seemingly from documents uncovered under statutory notices in that inquiry. This in itself is a reminder that old emails never really disappear, and wide-ranging document demands can fish up all sorts of unexpected and unrelated communications years later. The communications were made in the run-up to the tender and eventual purchase of a generation asset but, in the companies’ defence, were in the context of proposed hedging contracts that were not eventually signed. The Commission had to assess whether proposed back-to-back hedges were a “legitimate risk management strategy”, or a front for unduly collaborative behaviour between the two preferred bidders for the asset. The incident raises some timely lessons including:
This Contact and TrustPower exchange may be quite a fact-specific example, and was, at worst, an ‘attempt’ to rig the bid, without that actual effect coming about and no damage resulting. Giving a ‘warning’ suggests that while the Commission had concerns, the matter was relatively insignificant overall, or perhaps lacked the strength of evidence to actually sue. Given the rhetoric now to be found in the Ministry discussion paper (eg. that cartel conduct is the most egregious competition sin of all, and we need the maximum deterrence that can be found), it seems unlikely such examples will attract a mere warning in future.
Policy options put forward by the MEDThree main options are mooted by the Ministry (assuming criminality is desired):
A public submission period will follow before any legislative proposals are crystallised. This is a significant step-change in our competition law, and it is important that firms and industry associations participate in the debate.
Energy NZ Vol.4 No.2 March-April 2010 |
The Government has released, for public debate, proposals to introduce criminal offences and potential jail sentences for hard core cartel behaviour.