Criminalisation of Cartels
By Cornwell Dauds*
1.Following the lead of other jurisdictions, the South African government declared war on cartel practices by introducing section 73A to the South African Competition Act to criminalise hard-core cartel practices such as price-fixing, market division and collusion in tenders (bid rigging). Granted, cartel practices have worldwide been declared a most egregious offence which has no place in a sound economy and, for this very reason, most jurisdictions have imposed an outright prohibition on these practices. This is because of the very harmful effect cartel practices have on consumers – they cause a rise in the prices of products and services (often a steep rise!).
2.Until the introduction of section 73A, only administrative sanctions in the form of fines had been imposed on those firms found to have engaged in cartel practices. But it is the companies which end up paying these fines – not the directors or executive managers personally. With the aid of section 73A , government wishes to go after individuals by imposing criminal sanctions on the directors and executive managers of those companies that are found to have engaged in hard-core cartel practices. Government’s desire is to have these individuals criminally prosecuted, and upon conviction sentenced to a jail term. As a way of deterring cartel practices – which are harmful to consumer welfare – one could probably not fault Government’s thinking.
3.But what success does the South African government expect to achieve with the criminalisation of cartels? For starters, it is not easy to expose a cartel whose activities are typically kept secret by cartel members. Competition authorities worldwide have long appreciated this difficulty, and for that very reason have resorted to the use of what is known as the “corporate leniency policy” to break the mould. They have offered cartel members – who have typically been sworn to secrecy by the cartel – leniency if they came forward and said “mea culpa” (I have done wrong), and then immediately spill the beans on their co-cartel members. The South African competition authority has followed suit in implementing this leniency policy. In fact, most of the successful prosecutions of cartel practices have been obtained through the use of the leniency policy – both here and in other jurisdictions. This policy allows “turncoat” cartel members to escape the full might of the law. To any member that invokes the leniency policy, it is about self-preservation. A cartel member will typically only make use of the leniency policy and confess if there is a suspicion that the competition authority is onto them, or if the cartel members had a fall-out, and one of the members considers it wise to move first and take advantage of the leniency policy. Even so, without the corporate leniency policy, competition authorities would have found it incredibly difficult to successfully prosecute companies for cartel practices.
4.With the introduction of section 73A to the Competition Act, the South African government moved to the next level by declaring its desire to impose not only administrative (i.e. monetary) sanctions on “guilty” companies, but also criminal sanctions on those individuals (directors and executive managers) found to have engaged in cartel practices. With a criminal prosecution comes a heavy burden of proof – guilt is required to be proved beyond a reasonable doubt. Not an easy burden to overcome in competition cases. Understandably, government wants to discourage violations of section 4(1)(b) of the Competition Act – i.e. price-fixing, market division and bid rigging. Government wants to discourage any dabbling in the cartel “cancer” by fighting the practice on two fronts – through administrative (monetary) sanctions and through criminal sanctions. But just how realistic is the criminal sanctions front?
5.While the US have had some success with the criminal prosecution of cartel practices, other jurisdictions which have also introduced criminal sanctions have not been particularly successful. The relative success in the US is largely attributable to the fact that that country’s law enforcement institutions and procedures are uniquely suited to the criminal prosecution of cartel practices. For instance, United States’ Department of Justice (DoJ) administers the leniency program and is also the prosecuting authority – it does not have to rely on another prosecuting authority to prosecute the individuals alleged to be involved in cartel activities. The US is thus able to co-ordinate the leniency program and criminal sanctions for violations of the law.
6.By contrast, other jurisdictions – including South Africa – lack this co-ordination between the corporate leniency policy which allows cartel members to open up, and the prosecution of individuals. While the leniency policy is administered by the competition authority, criminal prosecution is the responsibility of another authority (in South Africa, the National Prosecution Authority). This means the competition authority itself is not able to offer individuals (directors and executive managers) a lesser sentence, or immunity, in exchange for co-operation. Sentencing and the issue of immunity will be entirely in the hands of the prosecuting authority and the Court where there is no guarantee of a lesser sentence or immunity as an incentive for co-operation.
7.Having regard to the above, how realistic is it to expect the directors and executive managers of a firm confess their cartel sins where there is a chance they might face the full criminal might of the law? Experience will tell and we wait with bated breath to see how this will pan out.
* BA LLB, BCom (Honours)(Finance and Investments), Postgraduate Advanced Taxation Certificate, Postgraduate Diploma in Finance (University of Leicester), International Tax Program (ITP)(Harvard), LLM (Harvard), MSc (Tax and Accounting)(London School of Economics)
Author of Dauds on Tax: Contemporary Issues 1st Edition, QB Publishers; Dauds on Finance and Derivatives 1st Edition, QB Publishers
