Trying to smash cartels

'When a company is in the danger zone and there is a risk that the authorities will expose cartel activities, the lawyers turn up with an application form for leniency. There are lawyers who fly all over the world to save companies from huge fines and directors from prison sentences. As soon as they smell trouble for a company, they get in touch with the competition authorities so that they can apply for amnesty from prosecution.' In Norwegian

22.03.2012 - Sigrid Folkestad

January 1995, in a hotel room in Atlanta: The FBI and the FTC are trying to track down the global lysine cartel. The FBI already has a great deal of surveillance material. Now, agents have rigged a hidden camera in the hotel room where the big bosses of the cartel are going to meet to agree on prices and divide up the markets. The secret recording shows the following:

There is a loud knock on the door to the hotel room. Cartel members flown in from all over the world are sitting around the table. They are joking and saying that it is probably someone from the FTC (Federal Trade Commission). A man enters. He appears to be a hotel employee, but is in reality an FBI agent.

Mark Whitacre is also sitting at the table. He is FBI's witness from inside the cartel and one of the most famous whistleblowers in history. The lysine cartel - famous from the book The Informant(2000) and the film featuring Matt Damon as the main character - is one of the most infamous cartels in the world.

Judgment was pronounced in the lysine cartel case in 1998. It was the first successful American prosecution of an international cartel in more than 40 years. Not many cartels are exposed, nowadays.

'Well, let me speak for the USA. When the American competition authorities are working on a case, they are very aggressive. The problem is the general policy, not whether they are aggressive enough,' says Joseph E Harrington Jr, professor at Johns Hopkins University in the USA. Professor Harrington is regarded as one of the world's foremost academic experts on cartels. This autumn, he took part in an international conference at the Norwegian School of Economics (NHH). The conference Antitrust enforcement in the presence of leniency programs was organised by the Institute for Research in Economics and Business Administration as part of a project financed by the Ministry of Government Administration, Reform and Church Affairs.

'Are American authorities doing all they can to expose cartels?'
'Hardly,' says Professor Harrington.

A cartel consists of two or more companies that cooperate on fixing high prices and limiting competition. This means that customers and consumers pay artificially high prices. The big cartels earn billions and collaborate across both national borders and continents. Professor Harrington believes that the penal sanctions are too low, both in the USA and in Europe. Stricter sanctions would have deterred more people.

'The fines imposed on the companies could have been tougher. Of course, it is possible for individual countries to impose bigger fines. The question is whether they are willing to do so. And the sanction level does not act as a deterrent when it is so low.'

He points to the case against Hoffman-LaRoche in 1999, in which this world-leading pharmaceutical company in the vitamin segment was convicted in the USA and had to pay a fine of USD 500 million (see the facts box).

'The United States Department of Justice's guidelines for sanctions in such cases were between USD 1.3 and 2.6 billion. Perhaps the department thought it was enough to impose the largest fine in history?' asks Professor Harrison.

Companies must dismiss people

He believes that the business community does not practice what it preaches.

'An illegal collaboration on prices is probably in the best interest of the shareholders,' says Professor Harrison. 'Therefore, the management doesn't want to scare anyone from participating in such collaborations. Companies need to take measures to deter managers from participating in cartels, for example by institutionalising effective anti-trust programmes and punishing executives who use illegal methods to influence competition.'

He believes that the authorities must develop whistleblowing programmes to get employees, customers and competitors to blow the whistle if they have information about illegal price-fixing. A whistleblower's company should be offered an opportunity to apply for leniency, Professor Harrington believes. That would strengthen employees' incentive to raise the alarm, and if the company submits a leniency application, that would increase the whistleblower's credibility.

But the professor is not sure what the consequences would be.

'The question is whether the management actually wants the company's anti-trust programme to work. We have to investigate what consequences managers' contributions to and participation in cartel activities have had for their careers. Until companies begin firing employees who participate in cartels, they have not really demonstrated that they are taking the issue seriously,' says Professor Harrington.

Professor Maarten Pieter Schinkel believes that we need more aggressive investigators and bigger fines.

'I think that they need a team that consists of people who are more distrusting than is currently the case. The competition authorities do not have ties to the business community and can investigate financial dealings using more sophisticated methods.'

Professor Schinkel has specialised in cartel activities. He is a legal scholar and economist and is co-director of the Amsterdam Center for Law & Economics (ACLE). He is very critical of how authorities all over the world pursue cartels. The business community is cynical and lawyers know how to take advantage of the leniency system, which they do.

Lawyers are flown in

'The authorities just sit back and relax, waiting for leniency applications to be submitted. In some member states, we also see that the size of the fines is subject to considerable political influence. In the Netherlands, there is clear evidence that the members of a big cartel in the construction industry were not handed the fines they deserved.'

'How can cartels and cartel members be discovered more easily?'
'There are many ways to achieve this,' says Professor Schinkel. 'To begin with, they should have had a team that reads the newspapers. That would help,' he laughs.

'And the use of leniency programmes is one way to catch cartels?'
'Yes, but you shouldn't rely too much on such programmes. If the competition authorities do so, the companies will know that the likelihood of being caught as a result of a cartel investigation is virtually zero. As long as the companies avoid leniency applications, they will not get caught.'

Cowboy mentality in Norway

Lars Sørgard, professor at NHH and chief economist of the Norwegian Competition Authority from 2004 to 2007, says that there was a period when Norway had the kind of distrusting types that professor Schinkel is calling for.

'From the early 1980s, there was an almost a "cowboy-like" mentality in what was then called the Price Directorate, the predecessor of the Competition Authority. Some people at the directorate bypassed all the normal rules and procedures - legal scholars shudder when they hear what they got up to - but they did expose many cartels. More than thirty cartels were exposed between 1985 and 2005. That is a lot. But they did use untraditional methods.'

'Did they go too far?'
'Yes, in legal terms, they went too far. For instance, one case fell apart because one of the investigators had confronted a witness one night to talk to him before he was to testify in court. When this was discovered, the case was dismissed because these methods were dubious.'

Today, the Competition Authority abides by laws and regulations, says Professor Sørgard.

'However, protection of privacy and human rights considerations mean that it is more difficult to expose illegal price-fixing. Cartels are harder to find. They have become better at hiding, and, in practice, the authorities' freedom of action has become more limited because of normal rules of law.'

'The leniency system is mild. People report themselves and the other members of the cartel and get away with not have to pay a fine themselves?'
'Some people would take a negative view of this and see it as rewarding informers. They inform on other cartel members.'

'It sounds as if you think this is ethically problematic?'
'I think it's good that we have this system. Some cartels are exposed, but I see they point that Professor Schinkel is making, namely that the competition authorities lean back and do not devote enough resources to tracking down cartels themselves. The risk is that the authorities become passive, and why should companies turn themselves in then?'

Harsher sanctions for the worst offenders

'Harsher sanctions will make the leniency programme more effective,' says Professor Schinkel.

Professor Lars Sørgard agrees that we need bigger fines if the system is to become more effective. The question is whether the authorities focus on the deterrent effect.

'The level of fines in Norway must increase. We should have some high-profile cases in which big fines are imposed, so big that the authorities would have to go to court to defend them. That would draw attention to how serious this problem is. Of course, you would have to have some big cases first, where it is right to impose big fines. Eight years ago, a cartel with roots in Norway was smashed in the USA. The tanker shipping company Odfjell pleaded guilty to illegal price-fixing in the chemical tank market after Stolt Nielsen had applied for leniency. As a result of a settlement, Odfjell was required to pay a fine of around NOK 300 million, and two employees had to serve prison sentences.'

'If the case had gone to trial, more people would probably have been imprisoned and the fine would have been many times bigger. This is similar to the vitamin cartel - and it is closer than you might think.'

Professor Joseph E Harrington believes that the problem is that cartels are still being started, but that the competition authorities are unable to bring them under control.

'Everyone encounters the same challenge: How are we to measure the problem? No one knows how many cartels actually exist at any given time, which is why it is also difficult to measure the effects of the authorities' methods. Who knows whether the number of cartels has been reduced?' he asks. Nor is Professor Harrington convinced that the companies are entirely sincere when they adopt internal ethical programmes.

'I think some companies are taking cosmetic measures,' says Professor Sørgard.

'Everything looks fine on the outside, but in reality it is not. There are examples of people who have been convicted of cartel activities who go on to enjoy good careers afterwards. In the Odfjell case, one of those convicted became a top executive in Frontline, John Fredriksen's tanker shipping company, not long afterwards. It was said that the shipping company had checked thoroughly whether the market would react negatively, but it hired him, so it clearly hasn't led to any reactions. That is thought-provoking.'