Author: Niall Hearty
12 July 2021
7 min read
Niall Hearty of Rahman Ravelli outlines cartel legislation, its enforcement and the options available to those accused of it.
In simple terms, a cartel is an agreement between businesses not to compete with one another. The agreement is usually secret and is more often than not an informal agreement that works to the detriment of the business’ customers. It will relate to matters such as prices, production, supply, which customers and / or areas will be supplied and who should win a contract (which is referred to as bid rigging).
If a business is dependent on the supply of goods or services then it is open to the possibility of cartel manipulation. Some sectors are more susceptible to cartel agreements than others. Cartels are most likely to arise in situations where:
In the UK, cartels are prohibited by Chapter I of the Competition Act 1998. This prohibits agreements, decisions and concerted practices between or among undertakings or associations of undertakings which have as their object or effect the restriction, distortion or prevention of competition within the UK and which affect trade within the UK. Arrangements which infringe the Chapter I prohibition are void and unenforceable. In addition, participants to such arrangements are exposed to damages claims from third parties who have been detrimentally affected and, most significantly, can be fined up to a maximum of 10% of their worldwide turnover. A breach of The Competition Act 1998 can also lead to an individual being sent to prison for up to five years and a company director can be disqualified from acting as a director for up to 15 years. Assets could also be confiscated under the Proceeds of Crime Act 2002. In March 2015, the cap of £5000 for summary conviction was removed and specific offences now attract a fine of any amount.
Agreements between competitors whose total share of the market does not exceed 10% or between non-competitors who each have a share of less than 15% of the market they are in will not be considered significant enough to have had an effect on the market. But if the agreement contains as its object the prevention, restriction or distortion of competition, it will be considered to have had an effect on the market.
Chapter II of the 1998 Act prohibits anti-competitive conduct by undertakings which benefit from being dominant in their relevant market. Chapter II is based on its EU counterpart (Article 102 of the Treaty on the Functioning of the European Union) and prohibits abusive conduct by one or more undertaking which, either singly or collectively, hold a dominant position in the market; and which may affect trade within the UK. Abuses under Chapter II can be justified if the conduct is either reasonable in order to protect commercial interests, due to technical or commercial constraints, reasonable in order to promote efficiency or in the public interest.
The ability under the Competition Act to fine a company up to 10% of its global turnover for such behaviour was thought to have an effect on major companies but be of little use as a deterrent for individuals. But this changed in June 2003, when Part 6 of the Enterprise Act 2002 came into force, targeting individuals. Directors and employees of a company can be prosecuted for the offence. It carries a maximum penalty of five years imprisonment and / or an unlimited fine for individuals if tried in the Crown Court, with the maximum penalty in the magistrates’ court being six months imprisonment and/or a fine up to £5,000. Under Section 204, directors can be disqualified from being a director for a maximum period of 15 years.
Section 188 of the Enterprise Act 2002 set out the definition of the new criminal cartel offence. Under Section 188, an individual is guilty of the offence if they have agreed with another person to make or implement (or cause to be made or implemented) an arrangement between at least two parties to fix prices, limit supply or production, share customers, share supply or to enter into bid-rigging arrangements. In respect of arrangements restricting pricing, supply or production, the offence requires that the restriction is reciprocal (Section 188 (3)) and that the arrangement relates to undertakings operating at the same level of the supply chain (Section 189).
The offence will not be committed in the case of arrangements that:
As section 188 of the Enterprise Act was viewed as not having met expectations, reforms were contained in the Enterprise and Regulatory Reform Act 2013 (ERRA), which came into force in April 2014.The major feature of the Act was the merger of the Office of Fair Trading (OFT) and Competition Commission to form a single Competition and Markets Authority (CMA) to enforce competition law.
Until the Enterprise and Regulatory Reform Act 2013 came into law, the prosecution had to prove that the individual had acted dishonestly. That is no longer the case. Section 47 of ERRA removed the dishonesty element from the offence, introduced circumstances where an agreement could not be considered a criminal cartel and introduced three substantive defences to the offence of cartel behaviour.
Section 188A of the 2013 Act provides three situations in which an individual cannot be considered to have committed the cartel offence:
When customers are given the relevant information about the arrangements entered into between the parties for the supply of the product or service.
Regarding bid-rigging arrangements, when the person requesting the bids is provided with relevant information about the arrangement.
When details of arrangements are published in the specified manner before they are implemented.
This section means that individuals will not be prosecuted if the agreements entered into are made public and the consumer becomes aware of the agreement.
Section 188B of the 2013 Act provides three defences to the cartel offence:
Before making the agreement, the individual entering into it took reasonable steps to ensure that its nature would be disclosed to legal advisers for the purpose of obtaining advice about doing so before it was made or implemented.
As with the Competition Act 1998, cartels were prohibited under Article 101 of the Treaty on the Functioning of the European Union (TFEU). But as was to be expected, Brexit has affected the investigation of cartels. With the Brexit transition period having now ended, cartel investigations into conduct in the UK which would previously have been matters for the European Commission are now the sole responsibility of the CMA; unless the Commission had initiated an investigation before the transition period ended.
Section 60 of the Competition Act 1998 was revoked by the Competition (Amendment etc.) (EU exit) Regulations 2019 and replaced by a new Section 60A; which gives the CMA and UK courts a discretion to depart from EU case law. UK courts are no longer able to refer questions of interpretation of EU competition law to the EU Court of Justice; which increases the likelihood of UK competition law diverging from EU competition law over time. Divergence, if it happens, is not likely to be sudden, as Chapters I and II of the Competition Act 1998 have been refined by EU case law over the years.
Section 60A of the Competition Act states that the CMA and UK courts will continue to be bound by an obligation to ensure consistency between UK competition law and pre-Brexit EU competition case law, but that the CMA and UK courts can depart from such pre-Brexit EU competition case law if it is considered appropriate in light of specified circumstances. These specified circumstances are broadly defined and include differences between the UK and EU markets, developments in economic activity, accepted principles of competition analysis and the application of such principles, decisions made by the European Court after the UK’s departure from the EU.
Yet there will need to be cooperation agreements between the UK and EU in place, as the international nature of many cartels may prompt both CMA and a European Commission investigations; creating a need for evidence sharing and coordination of activity. It should also be remembered that the European Commission can still enforce EU competition law against UK companies whose conduct has an effect on trade within the European Union. UK companies are also bound by competition law that is in force in any country where they trade.
Self-reporting involvement in UK cartel activity and subsequent cooperation with the CMA investigation can led to a more lenient penalty being imposed.
The CMA offers different types of leniency. The most far-reaching guarantees immunity from fines, prosecution of individuals and director disqualification. Yet this will only be offered to the first company or person that reports and supplies evidence of a cartel that the CMA is not already investigating or does not have sufficient information about. Gaining this type of leniency requires the company or individual to admit cartel involvement, provide the CMA with all relevant information, cooperate fully during the investigation and have no further participation in the cartel activity. Such leniency will not be offered if the company or individual had forced another part to take part in the cartel.
If an investigation has already begun and a company or individual is the first to seek this leniency, they may be able to receive the aforementioned benefits. But this will be for the CMA to decide. Some leniency can be available – at the CMA’s discretion - to those that provide evidence of cartel activity but are not the first to apply for it.
The scope for leniency and the benefits of obtaining it mean that self-reporting has to be considered when any business or individual becomes aware of cartel behaviour. Taking the appropriate legal advice and acting in accordance with it will maximise the chances of obtaining a less severe penalty.
It should be emphasised that a response to an allegation of cartel behaviour.
Any intelligent response to accusations of anti-competitive behaviour has to be done quickly. No response or a slow one can make it more difficult to obtain the best possible outcome. The speed and quality of the response can be the difference between being charged and successfully challenging the allegations before any charges are brought - or the difference between gaining immunity and being prosecuted.
Self-reporting in the EU involves notifying the European Commission. The Commission’s leniency policy offers companies that self-report and hand over evidence of cartel activity either total immunity from fines or a reduction on the fine imposed. Companies who do not self-report but are found by the Commission to have participated in a cartel can settle their case by acknowledging their involvement in it and receive a smaller fine in return. Under this procedure, introduced by the Commission in 2008, parties that have seen the relevant evidence in the Commission file can choose to acknowledge their involvement in the cartel and their liability for it. In return for this acknowledgement, the Commission can reduce the fine imposed by 10%.
Niall has a wealth of corporate crime expertise and an ability to coordinate global bribery and corruption cases. His achievements in such investigations have made him a logical choice for corporate clients.