NO.004

CRIMINAL PENALTIES FOR SERIOUS CARTEL BEHAVIOUR

I am announcing today that the Australian Government will amend the Trade

Practices Act 1974 to introduce criminal penalties for serious cartel conduct.

The Review of the Competition Provisions of the Trade Practices Act

(the Dawson Review) recommended the introduction of criminal penalties for serious

cartel conduct, recognising the growing international experience that suggests

they are effective in deterring serious cartel conduct.

However, the Dawson Review also indicated that a number of problems with the

introduction of criminal penalties needed to be resolved before such penalties

could be introduced.

Principally, the problems identified in the Dawson Review centred on appropriately

defining a criminal offence and implementing an effective leniency or immunity

policy in the Australian context.

The proposed criminal cartel offence will prohibit a person from making or

giving effect to a contract, arrangement or understanding between competitors

that contains a provision to fix prices, restrict output, divide markets or

rig bids, where the contract, arrangement or understanding is made or given

effect to with the intention of dishonestly obtaining a gain from customers

who fall victim to the cartel.

Dishonesty goes to the heart of serious cartel conduct, where customers are

deceived when purchasing goods or services, unaware that the price and supply

of those goods and services were determined by collusion, rather than competition.

To ensure the offence targets serious cartel conduct that causes large scale

or significant economic harm, and that minor breaches are dealt with through

civil rather than criminal proceedings, the DPP and the ACCC will enter into

a formal, publicly available Memorandum of Understanding (MOU) establishing

procedures for the investigation of the cartel offence and the circumstances

in which the ACCC will refer a case to the DPP for prosecution. The MOU will

also specify that in making an independent determination as to whether to prosecute

a particular matter, the DPP will consider factors such as the impact of the

cartel and the scale of detriment caused to consumers and the public, and previous

admissions to or convictions for cartel conduct.

The ACCC will issue guidelines, prepared in consultation with the DPP, to outline

the factors that will inform any decision to pursue a criminal investigation.

Appropriate protection for whistleblowers that come forward to uncover cartel

conduct will be provided though a clear and certain immunity policy. International

experience suggests immunity for whistleblowers is critical in uncovering cartels.

Guidelines will be published setting out the conditions for immunity to be granted

by the DPP, upon the advice of the ACCC. The respective roles and responsibilities

of the ACCC and the DPP will also be defined in the MOU.

The maximum penalties for the offence will be a term of imprisonment of five

years and a fine of $220,000 for individuals and a fine for corporations that

is the greater of $10million or three times the value of the benefit from the

cartel, or where the value cannot be determined, 10 per cent of annual turnover.

In accordance with the intergovernmental Conduct Code Agreement, the

Australian Government will consult with the States and Territories over the

next three months.

The Australian Government’s proposals are outlined in detail in the attached

statement.

MELBOURNE

2 February 2005

Contact: Amanda Kennedy

03 9650 0244

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PROPOSED ARRANGEMENTS FOR CRIMINALISING SERIOUS

CARTEL CONDUCT

BACKGROUND

Recommendation 10.1 of The Review of the Competition Provisions of the Trade

Practices Act (the Dawson Review) proposed the introduction of criminal

sanctions for serious cartel behaviour. The Australian Government accepted this

recommendation, in principle, subject to a working party finding practical solutions

to the problems that would arise in introducing criminal sanctions as identified

by the Dawson Review.

On 3 October 2003, the Treasurer announced a working party comprising the Treasury,

the Australian Competition and Consumer Commission (the ACCC), the Office of

the Commonwealth Director of Public Prosecutions (the DPP) and the Attorney-General’s

Department. The working party examined matters such as an appropriate definition

of the criminal cartel offence, the implementation of an immunity policy and

other matters that would arise in introducing criminal sanctions, such as the

conduct of investigations and appropriate penalties.

CRIMINALISING CARTEL CONDUCT

The Australian Government has now decided it will proceed to introduce criminal

sanctions for serious cartel conduct.

Cartel behaviour has significant detrimental consequences for the economy as

it constrains the achievement of efficiencies and innovation in the market by

supporting otherwise uneconomic production processes. Cartels increase prices

to consumers and reduce choice in the goods and services they can buy and are

akin to a fraud against the market.

International experience suggests that criminal penalties will provide a more

effective deterrent to serious cartel behaviour. The Government considers that

the arrangements set out below will be workable in the Australian legal context,

will not rule out legitimate business activities that benefit the economy or

are in the public interest, and will provide for effective safeguards in the

area of enforcement and prosecution.

THE CARTEL OFFENCE

The cartel offence will prohibit a person from making or giving effect to a

contract, arrangement or understanding between competitors that contains a provision

to fix prices, restrict output, divide markets or rig bids, where the contract,

arrangement or understanding is made or given effect to with the intention of

dishonestly obtaining a gain from the customers who fall victim to the cartel.

Dishonest intent will be proved if a jury is satisfied that the cartel arrangement

was dishonest according to the standards of ordinary people, and the defendant

knew it was dishonest according to those standards. This definition of dishonesty

is consistent with the Criminal Code.

Indicators of dishonesty include deception (such as lies or misleading statements),

making or relying upon representations or promises that are known to be false

or which would not be carried out, concealing facts that there is a duty to

disclose, and engaging in conduct that the defendant knows they have no right

to engage in.

Dishonesty goes to the heart of serious cartel conduct, where customers are

deceived when purchasing goods and services unaware that the price and supply

of those goods and services were determined by collusion, rather than competition.

The Dawson Review put the view that using an element of dishonesty to identify

criminal cartel conduct could cause difficulties to a jury. However, dishonesty

is an established concept in Australian criminal law and is widely used in corporations

and fraud offences. Further, dishonesty appropriately captures the genuinely

criminal nature of serious cartel conduct.

A dishonesty element will be used to distinguish criminal cartel conduct from the conduct caught by civil contraventions in the Trade Practices Act1974. The cartel offence will require proof that a contract, arrangement or understanding between competitors to fix prices, restrict output, divide markets or rig bids was made or given effect to with an intention to dishonestly obtain a pecuniary or non-pecuniary gain, either for the defendant or for another person. It must be intended to obtain the gain from a person or class of persons likely to acquire or supply the goods or services to which the cartel relates.

 

The Government considers that Australia should proscribe serious cartel conduct

in a manner consistent with international best practice.

To ensure effective enforcement the Australian Government also considers it

appropriate that there be parallel civil and criminal prohibitions on cartel

behaviour. This will enable a proportionate response to any attempt by cartels

to stifle competition. The most serious cartel conduct would be pursued under

the criminal provisions, and other cartel conduct would be litigated civilly.

To ensure consistency with international best practice, the legislated definition

of cartel conduct in Australia under both the civil and criminal regimes will

accord with the OECD’s definition of serious cartel conduct, that is,

agreements, practices or arrangements that fix prices, rig bids, restrict output

or establish quotas and share or divide markets by allocating customers, suppliers,

territories or lines of commerce. In 1998, the OECD recommended members ensure

their competition laws halt and deter these cartel activities.

The Australian Government also recognises that the current civil per se prohibition

of price fixing and exclusionary provisions could be made more effective. In

addition to the criminal cartel offence, revised civil per se prohibitions for

cartel behaviour will reflect the OECD recommendation, so that they separately

address cartel activities. This ensures consistency in the way in which the

revised civil prohibitions and the new criminal offence are applied.

The OECD recommendation specifically excludes activities permitted or authorised

by law, including efficiency enhancing arrangements, such as those that reduce

costs or enhance output, from its definition of serious cartel behaviour. Protections

for these types of arrangements are discussed below.

The cartel offence will capture price fixing, output restrictions, bid rigging and market sharing. In addition to the dishonesty element, the physical elements of the cartel offence (all of which must besatisfied)shouldcomprise that: an agreement is made between or given effect to by two or more parties; the parties who made the agreement are competitors in the supply or acquisition of goods or services in a particular market; and the agreement contains a provision to fix prices, restrict output, share or divide markets or rig bids. These activities will be explicitly defined in the cartel offence. Those cartel activities proscribed by the criminal offence will be prohibited per se in the civil regime. There will be no requirement for dishonesty in order to breach the civil cartel provisions.

 

The Dawson Review recommended that a criminal cartel offence should apply to

individuals as well as corporations so as to strengthen its deterrent effect.

To achieve this, it is proposed the offence will be incorporated in Part IV

and the Schedule of the Trade Practices Act. The Australian Government will

seek the agreement of the states and territories to this change in the context

of the Conduct Code Agreement.

Consistent with the conclusions of the Dawson Review, the offence will also

apply to all businesses, with investigations and prosecutions being targeted

at serious cartel conduct that causes large scale or serious economic harm.

The criminal cartel offence will not apply to activities which are currently

lawful under the Trade Practices Act.

The Act currently exempts a range of conduct from constituting a contravention

of the restrictive trade practices provisions in Part IV of the Act, for example,

conduct specifically authorised by a Commonwealth, State or Territory law. The

Act also does not apply to the non-business activities of the Commonwealth,

States and Territories and certain local government activities.

Further amendments to the Trade Practices Act will flow from the Dawson Review

recommendations relating to joint ventures and the report of the Intellectual

Property and Competition Review Committee. These amendments may permit certain

types of conduct where it does not substantially lessen competition.

Legitimate joint ventures and intellectual property arrangements will not be

penalised under the cartel offence and will only be penalised under the revised

per se civil prohibitions where they substantially lessen competition.

The criminal cartel offence will apply to: individuals and corporations by incorporating it in Part IV of the Trade Practices Act 1974 and in the Schedule of that Act (making it state and territory law under the Competition Code); and all businesses, regardless of size. The criminal cartel offence will be drafted so it will clearly not prohibit activities permitted under the Trade Practices Act.

INVESTIGATION AND PROSECUTION

Criminal sanctions will only be pursued where they can be clearly justified.

The ACCC will undertake the investigation of, and the DPP will prosecute, criminal

cases.

To ensure that the cartel offence targets serious cartel conduct that causes

large scale or significant economic harm, the DPP and the ACCC will enter into

a formal, publicly available Memorandum of Understanding (MOU), establishing

procedures for the investigation of cartel offences and the circumstances in

which the ACCC will refer a case to the DPP for prosecution instead of pursuing

civil penalties itself. The intention is that the ACCC will not ordinarily refer

relatively minor matters to the DPP for criminal prosecution.

The MOU will set out factors that the ACCC must consider before referring a

matter to the DPP for possible criminal prosecution. The ACCC would need to

consider whether:

• the alleged conduct was longstanding or had, or could have, a significant

  impact on the market in which the conduct occurred; or

• the alleged conduct caused, or could cause, significant detriment to the

  public, or a class thereof, or caused, or could cause, significant loss or

  damage to one or more customers of the alleged participants; or

• one or more of the alleged participants has previously been found by a

  court to have participated in, or has admitted to participating in, cartel

  conduct, either criminal or civil.

Thresholds will also be included in the MOU to provide further guidance. The

ACCC would need to consider whether the value of affected commerce exceeded

$1million within a 12month period, that is, where the combined value for all

cartel participants of the specific line of commerce affected by the cartel

exceeds $1million within a 12month period. For bid rigging cases, the value

of the successful bid or series of bids would need to exceed $1million within

a 12month period.

The MOU will also set out that, if the ACCC does refer a matter to the DPP,

then the DPP will make an independent assessment of whether to prosecute the

case, based on all of the evidence available and on the Prosecution Policy

of the Commonwealth (the Prosecution Policy). In addition, the MOU

will specify that in making an independent determination whether to prosecute

a cartel offence, the DPP will consider:

• the impact of the cartel on the market;
• the scale of the detriment caused to consumers or the public; and
• whether any of the alleged members of the cartel have previously been found

  by a criminal or civil court, or admitted, to have engaged in cartel behaviour.

The Government will maintain the distinction between the investigation and prosecution of a matter in criminal cartel cases. The ACCC will undertake investigations of, and the DPP will prosecute, criminal cases. To ensure the cartel offence is targeted at cartel activity causing large scale or significant economic harm, a publicly available Memorandum of Understanding will specify factors that the ACCC will consider in determining whether to refer a matter to the DPP, and factors that the DPP will consider in making an independent determination whether to prosecute a cartel offence. The intention is that the ACCC will not ordinarily refer relatively minor matters to the DPP for criminal prosecution. The ACCC would need to consider whether: the conduct was longstanding or had, or could have, a significant impact on the market in which the conduct occurred; or the conduct caused, or could cause, significant detriment to the public, or a class thereof, or caused, or could cause, significant loss or damage to one or more customers of the participants; or one or more of the participants has previously been found by a court to have participated in, or has admitted to participating in, cartel conduct, either criminal or civil; and the value of affected commerce exceeded $1million within a 12month period; or for bid rigging cases — the value of the successful bid or series of bids exceeded $1million within a 12month period. The DPP will consider: the impact of the cartel on the market; the scale of the detriment caused to consumers or the public; and whether any of the cartel members have previously been found by a criminal or civil court, or admitted, to have engaged in cartel behaviour.

IMMUNITY

It is proposed that the DPP and the ACCC put arrangements in place to provide

immunity from prosecution for cartel whistleblowers. Immunity will be available

to individuals and corporations.

The detection and exposure of cartels often depends on a cartel member breaking

ranks. Therefore, the protection provided to cartel whistleblowers to encourage

them to break the cartel can assist in discovering serious cartel conduct. An

immunity policy is a low cost compliance tool for cartel enforcement —

international experience suggests that immunity programmes have been highly

successful in combating cartel activity. Therefore, an immunity policy enhances

the deterrent effect of criminal penalties.

An immunity policy is generally accepted to be more effective when immunity

can be offered in the early stages of an investigation. However, in Australia,

the discretion to provide immunity from criminal proceedings is currently exercised

by the DPP at the conclusion of an investigation. The exercise of this discretion

is guided by the Prosecution Policy.

It is proposed that the Prosecution Policy be amended to enable immunity

to be granted at an early stage in an investigation. This would be on the recommendation

of the ACCC, and where the applicant meets certain conditions.

From OECD member countries’ experiences with immunity programmes, it

appears that placing special conditions on the granting of immunity will assist

with cartel enforcement.

An incentive for potential whistleblowers to come forward is the certainty

that they would receive preferential treatment relative to others involved in

the cartel conduct. To maximise this incentive, the first party to approach

authorities before they are aware of the cartel should receive the most favourable

treatment. If parties delay until there is sufficient evidence to institute

proceedings or they are not the first to approach the authorities, they should

not receive immunity.

The grant of immunity will be dependent on the following:

• the ACCC was not already aware of the conduct;
• the party was the first to come forward (subsequent applicants for immunity

  should be dealt with under the existing provisions in the Prosecution Policy);

• the party was not a clear individual leader in the cartel;
• the party had not coerced anyone to join the cartel; and
• the party fully cooperates with the ACCC and attends court to give evidence,

  as required.

Canada has a similar arrangement under its immunity policy and it appears to

operate smoothly. Close and early cooperation between the Competition Bureau

(which investigates competition cases) and the Department of Justice (the prosecuting

body) when a party approaches the Competition Bureau for immunity, means the

Canadian Attorney General, their DPP equivalent, usually follows a Bureau recommendation

to grant immunity.

The Prosecution Policy of the Commonwealth will be amended so that immunity can be granted to cartel whistleblowers at an early stage in the investigation. The ACCC must not already be aware of the conduct, and must recommend to the DPP that immunity be granted. The applicant must also meet the following conditions: they are the first to come forward; they are not a clear individual leader in the cartel; they did not coerce others to join the cartel; and they cooperate fully with the ACCC and attend court to give evidence if required.

 

A clear understanding of the availability of immunity, and the conditions under

which it will be granted will be critical in ensuring it provides sufficient

encouragement for cartel whistleblowers to come forward. Published guidelines

will enable its promotion in business and legal circles.

The Government proposes that the ACCC develop, publish and publicise such guidelines.

The ACCC will publish and publicise guidelines on the immunity policy to ensure potential whistleblowers are aware of the policy.

MANAGING PARALLEL CIVIL AND CRIMINAL PROVISIONS

The Government has decided that there will be parallel civil and criminal prohibitions

on cartel behaviour, so as to provide for appropriate and proportionate enforcement

action.

Criminal sanctions will only be pursued where they can be clearly justified.

As noted above, it will be for the DPP to determine whether a matter referred

to it by the ACCC should proceed to prosecution.

The Government proposes that the ACCC release guidelines, developed in consultation

with the DPP, which outline in general terms the factors relevant to determining

whether to pursue a criminal or a civil investigation.

Proving criminal cartel conduct will involve different procedures in both investigation

and prosecution than proving a civil contravention.

Therefore the Government proposes that the MOU between the ACCC and DPP also

provide a clear statement of the roles and responsibilities of investigators

and prosecutors.

There is a higher standard of proof — proof beyond reasonable doubt —

for a criminal conviction. There are also restrictions on the use of evidence

in multiple proceedings. This makes it desirable for the ACCC to determine early

in an investigation whether it will proceed civilly or criminally.

In addition to the matters set out above, the MOU between the ACCC and the DPP will: specify the responsibilities of each agency; establish standards of cooperation between agencies in the investigation and litigation process; outline channels of communication to establish adequate liaison; and specify processes for the consideration of immunity applications. The Government proposes the ACCC publish guidelines, prepared in consultation with the DPP, to outline the factors that will inform decisions as to whether to pursue a criminal investigation.

 

The existence of parallel civil and criminal provisions for potentially the

same conduct could give rise to issues concerning the order in which matters

are litigated and the appeals process. Therefore, statutory bars will be incorporated

in the Trade Practices Act to provide appropriate protection, for example, to

stay civil proceedings until criminal proceedings are completed, after which

time, if the defendant is convicted, the civil proceedings would be terminated.

The Government will introduce statutory bars in the Trade Practices Act 1974 to provide adequate safeguards concerning parallel civil and criminal proceedings.

PENALTY

In determining an appropriate maximum penalty for a criminal cartel offence,

the Government considered penalties for similar offences in other countries,

penalties for similar offences under Australian law, and pecuniary penalties

for cartel breaches under the civil provisions in the Trade Practices Act. Other

consequences of a criminal conviction also were taken into account. Criminal

convictions attract a strong social stigma, especially where imprisonment is

ordered, and may disqualify participation in certain activities.

In Australia, maximum terms of imprisonment for fraud related offences range

from five to ten years. Nine OECD countries prescribe maximum terms of imprisonment,

ranging from two to ten years for competition offences. The Government considered

an appropriate maximum term of imprisonment for the cartel offence to be within

the international range, but also reflecting the seriousness of the cartel offence

relative to other corporate criminal offences in Australia.

The Government will set a maximum gaol term for individuals, and maximum fines

for individuals and corporations who are convicted of the cartel offence.

By setting a penalty maximum, judges may use their discretion to determine

the penalty in the particular circumstances before the court, taking into account

a range of sentencing considerations, including whether there has been previous

offending, the circumstances of the victim or victims, whether the person has

cooperated and the deterrent effect.

The maximum term of imprisonment for an individual convicted of a criminal cartel offence will be five years. The maximum fine for an individual convicted of a criminal cartel offence will be $220,000 or 2,000 penalty units.

The Crimes Act also provides a default maximum fine for corporations, being

five times the fine for individuals.

However, a fine of this magnitude is significantly lower than that applying

in the civil regime. This is intended to be strengthened on the basis of the

Dawson Review reforms so that the maximum fine for corporations will be the

greater of $10million or three times the value of the benefit from the cartel,

or where the value cannot be readily ascertained, 10 per cent of the annual

turnover of the body corporate and all of its related bodies corporate (if any)

(recommendation 10.2.1 of the Dawson Review).

Adopting the default maximum under the Crimes Act would mean a corporation

convicted of a criminal cartel offence would face a lower maximum fine than

if convicted of a civil breach. Even taking into account the other consequences

of a criminal conviction, such as negative publicity, or ineligibility to obtain

certain licences or accreditation, the disparity is marked. The Government considers

financial disincentives for corporations who engage in cartel conduct should

be at least as strong in the criminal regime as in the civil regime.

The maximum fine for corporations will be a fine that is the greater of $10million or three times the value of the benefit from the cartel, or where the value cannot be readily ascertained, 10percent of the annual turnover of the body corporate and all of its related bodies corporate (if any).

There are a range of other remedies, existing and proposed, available under

the Trade Practices Act, such as the payment of compensation or injunctions

or adverse publicity orders. In addition Dawson Review recommendation 10.2.2

will give the court the option to disqualify an individual implicated in a contravention

from managing a corporation.

These remedies will also apply to individuals and corporations convicted of

the cartel offence.

In addition, the Government notes that criminalising cartel conduct means that

the Proceeds of Crime Act 2002 will apply.

The Government will extend the remedies available to the courts under sections 80, 86C, 86D and 87 of the Trade Practices Act 1974 for convictions under the cartel offence. Consistent with the Dawson Review recommendation 10.2.2, a person may be disqualified from being involved in managing a corporation if that person is convicted of the criminal cartel offence.