CUSTODIAL SENTENCES FOR CARTEL OFFENCES Deterrent or License

CUSTODIAL SENTENCES FOR CARTEL OFFENCES— Deterrent or License Fee? Terry Calvani Freshfields Bruckhaus Deringer US LLP formerly Commissioner, United States Federal Trade Commission formerly Member of the Board, Irish Competition Authority EGAP

ARE CRIMINAL PENALTIES NECESSARY TO ADEQUATELY DETER CARTEL BEHAVIOUR? 2

A WORLD TOUR OF COMPETITION AGENCIES-- Where are cartel offences criminal? 3

A WORLD TOUR OF COMPETITION AGENCIES– U. S. A. n. Per n. No se illegal. maximum fine. n. Maximum term of imprisonment— 10 years. 4

A WORLD TOUR OF COMPETITION AGENCIES– CANADA n. Per se illegal. n. Canadian $14, 000. n. Maximum term of imprisonment— 14 years. 5

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. 6

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. 7

A WORLD TOUR OF COMPETITION AGENCIES– U. K. n. Dishonesty requirement. n. No maximum fine. n. Maximum term of imprisonment— 5 years. 8

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. 9

A WORLD TOUR OF COMPETITION AGENCIES– Australia n. Rejected UK dishonesty requirement. n. A$10, 000. n. Maximum term of imprisonment— 10 years. 10

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. 11

A WORLD TOUR OF COMPETITION AGENCIES– Others. Countries where parliaments have introduced legislation to criminalise cartel offences— New Zealand: South Africa: 12

The reality is really quite different from what the laws might suggest! 13

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) 14

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). 15

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 16

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) 17

A WORLD TOUR OF COMPETITION AGENCIES– U. S. A. n. Per n. No se illegal. maximum fine. n. Maximum term of imprisonment— 10 years. 18

Number of days served per year— 19

Sentences: Average Length in Months— 20

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 elgibility for parole. 21

Cartel Remedies How can we optimally deter price fixing? 22

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. 23

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. 24

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. 25

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? 26

Thinking seriously about deterrence-But this assumes we catch them all-n Unfortunately, cartel authorities catch only a small percentage of price -fixers. n Indeed, the evidence suggests that a majority get away. The Cartel Police at work 27

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. 28

Recent cartel cases With international co-operation Air Cargo Transportation $1, 513, 000 ? ? 29

Recent cartel cases With international co-operation 30

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. ” 31

Thinking seriously about deterrence-- we get to keep some of As long as the money, price fixing is a good idea. 32

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 33

Problem #1: An Effective Fine May Be Too High— Revised assumptions. Assuming -n n profitability increase of 10%, n duration of 5 years, and 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. European Commission Legal Service 34

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. 35

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. ” 36

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. 37

But why not fine the individuals? 38

Problem #3: Victims Oftentimes Pay the Fine— British Public School Case 39

United States Department of Justice Antitrust Division What about the U. S. United States Department of Justice Headquarters Building 40

OBJECTIONS TO CUSTODIAL SENTENCES — 1. Danger of false positives. 2. Incarceration is inconsistent with social and legal norms. 41

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. ” 42

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 43

Hon. Joel Klein formerly Assistant Attorney General of the United States Price-fixers are just well-dressed thieves. 44

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. 45

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. 46