CUSTODIAL SANCTIONS FOR CARTEL OFFENCES An Appropriate Sanction

CUSTODIAL SANCTIONS FOR CARTEL OFFENCES: An Appropriate Sanction for Australia? 18/03/2018 Terry Calvani Adelaide— 18 October 2009

My new best friend Vincent of Cleland 2

2003— ACCC invites Office of Fair Trading & Irish Competition Authority to discuss the Dawson Report with officials of the Treasury. Australia House London Aldwych, The Strand 3

The Dawson Report Waiting for Godot ? 4

TODAY’S AGENDA 1. Custodial sanctions as a deterrent. 2. Enactment is only the beginning. 3. Lessons learned from Ireland. 4. Discussion. 5

Cartel Remedies How can we optimally deter price fixing? 6

OUR THESIS 1. General deterrence is the objective. 2. Either monetary or custodial sanctions should in theory be able to provide an appropriate level of deterrence. 3. But to do so, fines would have to be much larger. 4. Such an increase in fines is politically infeasible. 5. Only custodial sentences are likely to deter cartels. 7

Our stock of knowledge-- n n Law Library We know a lot about the substantive law and the underlying economics because these subjects have been studied by a great many people for a great many years. We know much less about the role of deterrence in “white collar” crime. 8

The Problem with Fines and other Monetary Payments— 1. Ceteris paribus we should prefer fines over custodial sentences. n Incarceration requires state resources, while fines contribute to state resources. n Incarceration is a significant restriction on human liberty. 2. But in practice, fines are insufficiently high to deter. 9

Thinking seriously about deterrence-n So, shouldn’t we obtain optimal deterrence if the price fixer gives back what he or she took in the form of either fines or compensatory damages? 10

Thinking seriously about deterrence-- But this assumes we catch them all-n Unfortunately, cartel authorities catch only a small percentage of pricefixers. n Indeed, the evidence suggests that a majority get away. The Cartel Police at work 11

Thinking seriously about deterrence-- n The penalty must be adjusted by the probability of detection, prosecution and punishment. JEREMY BENTHAM 1748 -1832 An Introduction to the Principles of Morals and Legislation. 12

Recent cartel cases With international co-operation Air Cargo Transportation $1, 513, 000 ? ? 13

Recent cartel cases With international co-operation 14

European Commission Directorate General – Competition Neelie Kroes Former Commissioner Philip Lowe Former Director-General “Historic fines in the Vitamins Cases demonstrate the Commission’s serious commitment to fighting cartels. ” 15

Thinking seriously about deterrence-As long as we get to keep some of the money, price fixing is a good idea. 16

Problem #1: An Effective Fine May Be Too High— Assuming n E R IS V Wouter P. J. Wils price increase of 10%, n profitability increase of 5%, n duration of 5 years, and n probability of detection of 16% D E then monetary penalties would have to be in the range of 150% of annual turnover. European Commission Legal Service 17

Problem #1: An Effective Fine May Be Too High— Revised assumptions. Assuming n n duration of 5 years, and n European Commission Legal Service profitability increase of 10%, n Wouter P. J. Wils price increase of 20%, probability of detection of 33% then monetary penalties would have to be in the range of 150% of annual turnover. 18

Is this capital punishment for undertakings? Such a penalty would force a large number of companies into liquidation —with costs to: nworker redundancy, nsuppliers, ncommunities, ntax and revenues. 19

Problem #2: The Agency Issue— “ As agents of corporations commit violations of competition law, it makes sense to prevent them from engaging in unlawful conduct by threatening them directly with sanctions and to impose such sanctions if they violate the law. ” 20

Problem #2: The Agency Issue— n Managerial incentives are often different from corporate profit maximization objectives. Bonuses and salaries associated with performance, status, business travel, and power may be more important to managers. n Monetary penalties imposed on shareholders may not impact those individuals who actually fixed prices. 21

But why not fine the individuals? 22

Problem #3: Victims Oftentimes Pay the Fine— British Public School Case 23

United States Department of Justice Antitrust Division What about the U. S. United States Department of Justice Headquarters Building 24

OBJECTIONS TO CUSTODIAL SENTENCES— 1. Danger of false positives. 2. Incarceration is inconsistent with social and legal norms. 25

Mr. Justice Mc. Kechnie High Court of Ireland “They cause a transfer of consumers’ money to themselves. They are offensive and abhorrent, not simply because they are malum prohibitum but also because they are mala in se. ” 26

Sir John Vickers Warden, All Souls College, Oxford University formerly Chairman & Director-General, U. K. Office of Fair Trading “cartels are like theft, criminalisation makes the punishment fit what is indeed a crime” “Policy for Markets and Enterprise” Address before the British Chamber of Commerce Mar. 31, 2003. T 27

Hon. Joel Klein formerly Assistant Attorney General of the United States Price-fixers are just well-dressed thieves. 28

OBJECTIONS TO CUSTODIAL SENTENCES— 1. Danger of false positives. 2. Incarceration is inconsistent with social and legal norms. 3. Increase in Rights of Defence will make conviction difficult. 29

CONCLUSION— n Fines do not adequately deter. n An increase in fines to an appropriate level is politically infeasible. n Custodial sanctions are the only penalties likely to deter. 30

TODAY’S AGENDA 1. Custodial sanctions as a deterrent. 2. Enactment is only the beginning. 31

A WORLD TOUR OF COMPETITION AGENCIES-- Where are cartel offences criminal? 32

Jurisdictions with custodial sentences — 33

A WORLD TOUR OF COMPETITION AGENCIES– U. S. A. n. Per n. No se illegal. maximum fine. n. Maximum term of imprisonment— 10 years. 34

A WORLD TOUR OF COMPETITION AGENCIES– CANADA n. Per se illegal. n. Can$ 14, 000. n. Maximum term of imprisonment— 14 years. 35

A WORLD TOUR OF COMPETITION AGENCIES– IRELAND n. Not per se. Article 81(3) defence. n€ 4, 000. n. Maximum term of imprisonment— 5 years. 36

A WORLD TOUR OF COMPETITION AGENCIES– IRELAND Jurisdiction of the Central Criminal Court— n. Murder, n. Rape, The Irish Central Criminal Court in The Four Courts, Dublin n. Treason, n. Price and Fixing. 37

A WORLD TOUR OF COMPETITION AGENCIES– U. K. n. Dishonesty requirement. n. No maximum fine. n. Maximum term of imprisonment— 5 years. 38

A WORLD TOUR OF COMPETITION AGENCIES– Others 1. Brazil: 5 years of imprisonment. 2. Estonia: 3 years of imprisonment. 3. Israel: 5 years of imprisonment. 4. Japan: 5 years of imprisonment. 5. Korea: 3 years of imprisonment. 6. Russia: 7 years of imprisonment. 39

A WORLD TOUR OF COMPETITION AGENCIES– Others. Some countries have criminal sanctions, but for a very limited set of cartel offences— n Germany: 3 years of imprisonment. n France: 5 years of imprisonment. n Spain: 5 years of imprisonment. 40

A WORLD TOUR OF COMPETITION AGENCIES– Others. Countries where parliaments have introduced legislation to criminalise cartel offenses— New Zealand: South Africa: 41

The reality is really quite different from what the laws might suggest! 42

What actually happens— n Estonia—no one. n Russia—no one. n Ireland—no one. (All suspended. ) n Japan—no one. (6 sentences, but all stayed. ) n Korea—no one. (All suspended. ) n Canada—no one. (1 incarcerated associated with violence) n Brazil—no one. (Sentences imposed, but on appeal) 43

What actually happens— n Estonia—no one. n Russia—no one. n Ireland—no one. (All suspended. ) n Japan—no one. (6 sentences, but all stayed. ) n Korea—no one. (All suspended. ) n Canada—no one. (1 incarcerated associated with violence) n Brazil—no one. (Sentences imposed, but on appeal) n Israel— 7 have gone to prison (9 months the longest). 44

A WORLD TOUR OF COMPETITION AGENCIES– U. K. The Marine Hose Case— n 3 individuals sentences to U. K. prison terms. "Cartels are not limited to national boundaries, and our coordinated work with the European Commission and the US Department of Justice illustrates our determination to investigate international and national cartels alike. " John Fingleton, OFT Chief Executive 45

Joint plea agreements v n Marine hose individuals – longest sentences ever foreign nationals — Peter Whittle (30 months, $100, 000); (£ 649, 636) — Bryan Allison (24 months, $100, 000) — David Brammar (20 months, $175, 000) (£ 366, 354) 46

A WORLD TOUR OF COMPETITION AGENCIES– U. S. A. n. Per n. No se illegal. maximum fine n. Maximum term of imprisonment— 10 years. 47

Number of days served per year— 48

Sentences: Average Length in Months— 49

SANCTIONS n Last year the average time served by persons convicted of price-fixing was over two years in prison. And this was before the penalties. Sentences as high as four were n years increased! have been imposed, and note that there is no legibility for parole. 50

TODAY’S AGENDA 1. Custodial sanctions as a deterrent. 2. Enactment is only the beginning. 3. Lessons learned from Ireland. 51

Unsolicited advice: Lessons from my tenure in Ireland— n Deterrence is THE objective. Justice, i. e. , treatment of like cases in like fashion, is not. 52

Common mistakes— Focus on cases that can be brought and won in a reasonable period of time. Ignore other “good” cases. 53

Unsolicited advice: Lessons from my tenure in Ireland— n Deterrence is THE objective. Justice, i. e. , treatment of like cases in like fashion, is not. n Bring only serious cases; don’t debase the currency. 54

Common mistakes— If you bring misdemeanor-type cases you will be forever confronting others who want similar treatment. 55

Unsolicited advice: Lessons from my tenure in Ireland— n Deterrence is THE objective. Justice, i. e. , treatment of like cases in like fashion, is not. n Bring only serious cases; don’t debase the currency. n Avoid cartel cases where economics plays an important role. 56

Common mistakes— At least in the early years, focus on cases where the evidence is clear. Avoid cases where economic evidence is relevant. 57

Unsolicited advice: Lessons from my tenure in Ireland— n Deterrence is THE objective. Justice, i. e. , treatment of like cases in like fashion, is not. n Bring only serious cases; don’t debase the currency. n Avoid cartel cases where economics plays an important role. n Staff cartel cases appropriately. 58

Common mistakes— The skill sets of cartel case officers and those who investigate other cartel offenses are different. 59

Unsolicited advice: Lessons from my tenure in Ireland— n Deterrence is THE objective. Justice, i. e. , treatment of like cases in like fashion, is not. n Bring only serious cases; don’t debase the currency. n Avoid cartel cases where economics plays an important role. n Staff cartel cases appropriately. n Immunity programs without certainty don’t work well. 60

Common mistakes— Most companies are reluctant to seek immunity unless the program is both transparent and certain. The agency should not have discretion. 61

TODAY’S AGENDA 1. Custodial sanctions as a deterrent. 2. Enactment is only the beginning. 3. Lessons learned from Ireland. 4. Discussion. 62