Good afternoon and thank you for inviting me to discuss the Commerce Commission's approach to cartels and collusion.
The Commerce Commission's approach to cartels is simple. Discover cartels and collusive behaviour through investigations, and our leniency and cooperation policies. Aggressively pursue cartel participants through the courts and seek maximum penalties for companies and individuals. And educate the business community about the harm caused by cartels and the dangers of belonging to them.
As with most simple theories, the corresponding practice of dealing with cartels is much more complex, difficult and subtle.
Cartel work is not easy. Gathering and analysing vast amounts of data, dealing with uncooperative and secretive individuals, and navigating complex legal and jurisdictional arguments takes time, skill, energy and persistence.
Today I will discuss why the Commission pursues cartels: the harm they cause to consumers, competitors, and the New Zealand economy.
And I will look at how the Commission investigates a cartel, including the relatively new tools of our Leniency and Cooperation Policies. It is nearly two years since the Commission introduced its Leniency and Cooperation Policies, and it is worth noting how these policies are working, and how they compare to similar policies overseas.
And with reference to recent cases in the wood chemical and cardboard box markets, I will consider how the Commission overcomes the many difficulties it faces in pursuing cartel participants, and deals with the legal challenges and obstruction it can encounter along the way.
The Harm Caused by Cartels
The Commerce Commission's purpose is to promote dynamic and responsive markets so New Zealanders benefit from competitive prices, better quality and greater choice.
The mission statement of a cartel would be the exact opposite. Their purpose is to create fixed and unresponsive markets, to make higher profits than they would in a competitive market, and in doing so to deny New Zealanders the benefits of choice and competition.
Cartel behaviour is opposed to the public interest, but it is not always easy for the public to understand how cartel activity affects them.
This is because cartels often exist in industries that do not sell directly to the end consumer. They are most commonly found in industries that supply commodity or undifferentiated type products to a manageable number of manufacturers or service providers; these companies in turn add value and sell a product to the end consumer.
It may be hard for even those who deal directly with a cartel to see the harm being done. Rather than feeling harmed by high prices, the companies who deal with a cartel may think they are getting a good deal, because they are paying the same as other New Zealand companies for a product or service.
Of course, there should be little comfort in the thought that all customers are being overcharged equally by the cartel.
Cartels can also damage New Zealand's economy and its international competitiveness.
Competition generally ensures that market signals are clear and that they provide appropriate guidance for future investment decisions. Distorted signals can have a harmful impact on the allocation of the country's limited resources. Caretels can result in inefficient firms surviving when that is not in the country's economic interest.
In lessening competitive forces, cartels have a negative impact on the country's economic performance. Companies that are faced with vigorous competition are continually pressed to become more efficient and more productive. They know that if they do not, their market share may shrink, if not evaporate completely.
Similarly, competition is an important driver of innovation. With a lessening in competition, innovation will decline and the economy will lose international competitiveness.
So cartels not only harm consumers and competitors. They can also undermine the dynamic functioning of markets and remove incentives for innovation and efficiency. It's easy to see why there are such tough penalties for collusive behaviour.
International Fines
I would like to take this opportunity to highlight the recent fines imposed in some significant international cases.
Last year the US Department of Justice obtained the largest fine ever for a purely domestic anti-trust investigation, $29 million for a company which fixed the price of concrete in the Indianapolis area.
The Department of Justice also obtained the second highest ever criminal antitrust fine in US history, in the D-RAM case a fine of $300 million was imposed on Samsung and its US Subsidiary. This brings the total fines imposed in that case to over $646 million. In addition, several executives, including non-US citizens, have been sentenced to jail terms[1].
In January 2005 the European Commission imposed 217 million euro of fines on a cartel for MCAA (an obscure but extremely important chemical product). Participants in an industrial thread cartel had to pay over 43 million euro in September and 65 million euro was the fine imposed on a raw tobacco cartel[2].
Most recently, in January, the Canadian Superior Court of Justice imposed a record Canadian fine of $12.5 million for each of the parties to a cartel in the carbonless paper market. In addition key personnel were removed from positions in the participating companies[3].
New Zealand Penalties
New Zealand Courts now have the opportunity to impose record penalties. Penalties were increased significantly in 2001 and the first case since this change is now before the courts. As most of you are well aware, section 80 of the Commerce Act now provides for a significant maximum penalty.
For companies the penalty is the higher of $10 million; or three times the value of any commercial gain, actual or expected, resulting from the breach; or if the commercial gain is not known, 10% of the turnover of the business.
The penalties for individuals are up to $500,000 and guilty parties can be excluded from management of a business. Of course, there are other consequences for individuals found guilty of cartel conduct. The economic and personal cost for cartel members - and their families - can be much greater than any fine imposed.
The challenge for the Commission is to ensure that New Zealand courts are well appraised of the damage associated with cartel activity. We would welcome fines which adequately reflect that damage and provide a powerful deterrent.
How We Discover Cartels
Now I would like to examine how the Commerce Commission discovers, investigates and prosecutes cartels.
Cartels are by their nature secretive, and cartel participants are by definition dishonest. One of the challenges of investigating cartel behaviour is that at every step of our investigative process, we are likely to encounter obstruction, uncooperative attitudes, and outright lies.
In 1998 the OECD Council for Competition considered cartels " 'the most egregious violations' of competition law and hence a principal focus of competition policy and enforcement"[4].
The survey confirmed that the parties to cartel agreements, for the most part, are not honest business people who inadvertently become involved in a technical violation. Rather, they fully realised that their conduct was harmful and unlawful, causing them sometimes to go to great lengths to keep their agreement secret[5]. Unravelling these secret agreements is one of the biggest challenges faced by enforcement agencies.
An investigation into alleged cartel behaviour may be opened for a variety of reasons. In the oil company[6] investigation it was consumers who advised the Commission that a number of petrol companies had simultaneously removed their free carwash deals.
In the Eli Lilley[7] investigation, which involved price fixing in relation to animal remedies, it was a disgruntled ex employee who advised the Commission of an attempt to price fix. The newest tool in uncovering cartel behaviour is the leniency policy.
Wood Chemicals Investigtion
Many of you will be aware of the Commission's investigation into an alleged cartel in the wood chemicals market and I would like to talk a little about how that investigation was opened and has progressed. The case is currently before the courts, so there are limits to what I can say. Naturally, the allegations I am discussing are just that, allegations. Only the courts can decide if the Commerce Act has been breached.
The investigation was opened in May 2002 following a complaint from TimTech, a new entrant to the wood preservative chemicals market. TimTech alleged that Koppers Arch New Zealand and Osmose New Zealand were operating a cartel, undertaking market sharing, price fixing and bid rigging.
The use of the Commission's information gathering powers under section 98 has ultimately been successful in securing crucial evidence in this investigation, but along the way the Commission has been misled and had important documents withheld from it. This obstructionist behaviour has resulted in criminal charges being laid against companies and individuals.
Some have already been before the courts, with Koppers Arch NZ Ltd fined $25,000 (of a possible maximum fine of $30,000) and its former General Manager, Roy Parish fined $8,000 (from a maximum of $10,000).
In that instance the Commission had requested documents and information pursuant to its section 98 (a) and (b) powers. Roy Parish, the manager responsible, signed a notice saying that all documentation had been provided and that nothing was held back.
We discovered there had been a deliberate strategy to withhold information, with documents removed entirely from the company's premises and stored in a secret location
Other actions are still before the courts and a warning has also been issued by the Commission.
The business community needs to hear the message of these convictions. The Commission will not tolerate obstruction of its investigations. Not only will the Commission consider prosecution under s103 of the Commerce Act, but will also consider prosecutions under the Crimes Act for obstructing the course of justice. This charge carries a maximum penalty of seven years' imprisonment.
Those who try to hide their business dealings from our scrutiny must realise that failure to cooperate with a Commerce Commission investigation is a serious criminal offence.
Chemicals: Legal Challenges
As well as the challenges posed by those trying to obstruct our activities, the wood chemicals investigation has faced numerous legal challenges. Like many companies operating in New Zealand, the companies involved in this investigation have parent and sister organisations in Australia.
In this investigation, the Commission faced action under the Declaratory Judgement Act challenging our jurisdiction to serve a s98(c) notice on an Australian resident. After two hearings the Commission was able to use s101 of the Act to deem Koppers Arch NZ as a representative of the overseas resident, as he was a director of Koppers Arch based in Australia.
The Australian resident did spend time in New Zealand on occasion and Commission staff tried hard to locate him and to serve him personally.
The message to cartels and would-be cartels in New Zealand is that having an overseas location will not stop us pursuing parties in an investigation. If cartel conduct has had an effect on New Zealand markets, it will be pursued by New Zealand authorities. The Commerce Commission has excellent relationships with its equivalent agencies in Australia and further afield. Multinational companies should take note that they are not the only ones with global reach.
Companies should also be aware that obstruction and a failure to co-operate in the early stages of an investigation will significantly influence the Commission's view on entering into a cooperation agreement further down the track. In order for the Commission to consider cooperation in such circumstances there must be a significant advantage to the prosecution of the cartel.
Information Gathering
How to best secure evidence of the cartel behaviour is one of the key questions for the Commission's investigative teams. The Commission can rely upon voluntary provision of evidence and attendance at interviews. We can use our section 98(a) and (b) powers and compel people to provide documents and information, or require people to attend a 98(c) hearing. Section 98 notices requiring documents and information were relied on in the wood chemicals investigation, and failure to comply with them resulted in the criminal charges.
The Commission also has powers to search. Under section 98A, a search warrant may be issued when there are reasonable grounds to believe it is necessary.
The Court of Appeal decision on the Tranzrail search warrant provides guidance on when it is "necessary" for the Commission to exercise its power to search. In that case the Court considered that the evidence supporting the Commission's fear of destruction of documents was entirely general; no concerns specific to the case were advanced.
The Court also noted that the Commission had begun its investigation using s98 notices. "…in all these circumstances … a notice under s 98 was a reasonable alternative to a s 98A warrant," the Court concluded.
The Commission was later advised by Tranzrail that their Chief Financial Officer did order the destruction of documents in this case.
The Commission learned a great deal from this case and now explains to the Court the full reasons behind its choice of information gathering options, and explains in detail why a warrant is necessary particularly where the Commission has real concerns, for example, about destruction of documents. Cartel members act dishonestly and can be adept at covering their tracks; and the Commission's experience is that few "turn over a new leaf" and behave honestly once an investigation is underway.
Electronic Evidence
While boxes of documents hidden in basements and cupboards are not entirely a thing of the past, electronic evidence gathering is now a hugely important - and time consuming - aspect of cartel investigations.
In its investigation into the cardboard industry, the Commission developed its approach to electronic evidence. Following its experience in that case, and further Court precedent on electronic evidence, the Commission has refined and will continue to refine its protocols for accessing electronic information. One of the major issues for the Commission is the considerable cost involved in having material reviewed by independent counsel.
Accessing and analysing electronic information is a slow, painstaking business, but the benefits of electronic evidence are significant. In addition to simple electronic documents, the Commission can obtain deleted data and emails and also what is referred to as "meta data".
Meta data is "data about data". It includes information about the author, when the document was created, when it was accessed and any revisions of the document. Meta data can give extraordinary insights into the functioning of a cartel. The Commission is developing its experience and expertise in the area of electronic evidence in order to maximize this opportunity.
The Commission considers its power to search is the best way to secure evidence of cartel behaviour. In addition, electronic evidence represents a real opportunity for the Commission to develop powerful new investigative techniques. Cartel members may feel that the computer is the perfect place to hide their illegal activities, but the data trail is proving even more fruitful for investigators than the paper trails we have relied on in the past.
Leniency and Cooperation Policies
Now I would like to turn to two relatively new tools we have for discovering cartels: our Leniency and Cooperation Policies.
As I noted earlier, New Zealand does have severe penalties for cartel behaviour. But for the deterrent effect of these penalties to work, those involved must have a real fear of being caught. With this in mind, the Commerce Commission introduced its Leniency and Cooperation Policies in 2004.
Under the Leniency Policy, the Commission will grant immunity from Commission-initiated proceedings to the first person involved in a cartel to come forward with information and cooperate fully.
Under the Cooperation Policy the Commission can agree to a lower level of enforcement action should participants be willing to cooperate. This, in exceptional circumstances, can go as far as agreeing not to prosecute the cooperating party.
A Leniency Policy increases the chance of detecting a cartel by creating distrust among its members. The Commission's policy offers amnesty to the first through the door, but not for others, even if they are second by a matter of minutes.
This sense of distrust is heightened because individuals, as well as companies, may apply for leniency. Companies face a race to the enforcement agency both at a corporate and an individual level. Not only do companies involved in cartels need to fear each other, they must also face the possibility that one of their senior executives or directors may go to the Commission, leaving the others in the gun.
We certainly had early evidence of the Policy's impact: we received two applications for leniency the day after it was launched, and a further two shortly thereafter. In total the Commission has now received six leniency applications. In respect of one of those the Commission determined that it had no jurisdiction, and the remaining five are progressing.
Cease and Desist orders are another tool available to the Commission. We have developed a policy on the use of Cease and Desist orders and routinely consider the appropriateness of making such an order.
For a Cease and Desist order to be issued, the Commission must be satisfied at first sight, on the face of the evidence, that there is anti-competitive conduct occurring and the Commission needs to act urgently[8]. In appropriate cases the Commission will consider using Cease and Desist orders in conjunction with leniency and cooperation.
Review of Leniency Policy
It has been two years since the introduction of the Leniency Policy and the Commission intends to stand back and review its effectiveness.
In 2005 the ACCC reviewed its leniency policy. Some of the major changes included:
- Applications can now be oral.
- Full immunity is now available up until the point that the ACCC has obtained legal advice on the evidence.
- A "marker system" was introduced, allowing people to reserve a place in the leniency queue. They will obtain leniency if those who applied before them are unable or unwilling to fulfil the requirements.
These are the types of changes that the Commission may consider when we review our own leniency policy, but New Zealand business people need to be aware that there is currently no marker system in place. Only an individual or company who has formally applied for leniency can be protected from prosecution in New Zealand.
Issues have been raised concerning the possibility of 'paperless' leniency processes. The Commission is addressing these issues on a case by case basis, and will include the issue of paperless processes as part of its overall review of the Leniency Policy.
Another message for would-be leniency applicants is that the granting of leniency confers them with a significant benefit, and they are expected to deliver full cooperation in return, including prompt provision of all information. The Commission's view is that co-operation involves a positive duty - that is the provision of information within days not months.
Perhaps it is optimistic to hope that participants in a cartel will be transparent and helpful in their dealings with the Commission. But we would remind them - and their advisers - that full cooperation is essential to maintaining their leniency status.
Global Cartels, Global Solutions
These days, multinational companies apply simultaneously for leniency with competition authorities around the world. Failure to do so would put them at risk in the country in which they did not apply. All leniency applications received by the Commission to date have related to alleged international cartels: the Commission is yet to receive a leniency application involving a domestic New Zealand-based cartel.
Yet previous Commission investigations show that domestic cartels do exist in New Zealand. I only have to remind you of cases such as the Toyota dealerships, petrol and meat companies. Perhaps a Leniency Policy might have motivated individuals or businesses involved in those cartels to share information with the Commission. The Commission currently has a number of investigations into domestic cartels, indicating that New Zealand businesses still need to be made aware of the benefit of the Commission's Leniency Policy.
The global nature of cartels and leniency applications means that competition authorities must increasingly cooperate with each other in cartel investigations. The most recent example is the coordinated search warrants exercised a fortnight ago by the Department of Justice and the European Commission at the premises of various airline companies.
New Zealand has decided to take international cooperation to the next level with new legislation planned. The Commerce Commission (Information Disclosure and Fees) Bill will allow the Commission to use its statutory powers (including its power to search) to assist overseas competition agencies. Last week the Australian Government announced it would be amending the Trade Practices Act in a similar manner.
The Commission will also be able to share with its overseas counterparts information it holds and obtained by compulsion, if that information indicates a likely contravention of overseas competition laws. This move was recognised and supported by other competition authorities at the ICN (International Competition Network) Cartel Workshop 2005.
In addition, you will have seen announcements by the Government that the Commission will be meeting annually on a formal basis with the ACCC. Regular meetings between the two regulators will strengthen our relationship and enhance our ability to work together on cartels.
We will also be developing a Australasian protocol for dealing with mergers. I anticipate that this protocol will be only a start. It will make sense to move from there to similar arrangements in relation to taking on cartels operating on both sides of the Tasman.
Conclusion
I have talked today about the economic harm caused by cartels. Cartels keep prices higher than they would otherwise be, are a disincentive for innovation, efficiency and entry by new players, and damage the New Zealand economy.
But there is an even simpler and more profound reason to stop cartel behaviour. Cartels reward dishonesty. They undermine trust. They damage confidence in a market economy.
The transparency and robustness of our economy are vital assets for New Zealanders. Within the structures of regulation and legislation, economies rely on trust, and the consequences of dishonest behaviour in business can be catastrophic.
I am pleased to be able to signal today that the Commission has just made a significant breakthrough in a cartel investigation, and we expect to be announcing this development in the next few weeks.
If the pattern we have observed in the past continues, we expect this announcement to lead to another round of leniency applications, as cartel members realise the danger they are in of being prosecuted by the Commission.
Cartels can be discovered as the result of a Leniency application, an investigation, or a consumer complaint. They can be domestic or international. They may involve many large players in vast market, or a couple of small operators in a niche industry. And they may be conducted with pen and paper, or with laptop and email.
The Commission does not discriminate. Wherever cartels may be, the Commission will use all the tools at its disposal to discover, pursue and attack them. New Zealand is a country where cartel participants should never feel safe.
[1] The Cartel Year in Review, Emil Paulis, Director for Policy and Strategic Support, European Commission, Presented at the ICN Cartel workshop, November 2005
[2] Ibid
[3] The investigation involved an agreement not to compete in the carbonless paper market
[4] Organisation for Economic Cooperation and Development, Report on the Nature and Impact of Hard Core Cartels and Sanctions against Cartels under National Competition Laws, 9 April 2002, p. 11
[5] Ibid
[6] Commerce Commission v Caltex NZ Ltd (1999) 9 TCLR 305
[7] Unreported
[8] Communique, November 2004
