Criminalization and Leniency – Will the Combination Favourably Affect Cartel Stability Patrick Massey Director Compecon Limited

What do we mean by leniency? Waiver of all penalties = immunity Waiver of all penalties = immunity Reduction of fines = leniency Reduction of fines = leniency Implications are quite different. Implications are quite different. De facto leniency often used to refer to both of these options which may give rise to some confusion. De facto leniency often used to refer to both of these options which may give rise to some confusion. In discussing combination of criminalisation and leniency – really talking about immunity. In discussing combination of criminalisation and leniency – really talking about immunity.

Individual Criminal Sanctions Necessary to Deter Cartels. Cartels involve decisions by company executives – who may gain personally Cartels involve decisions by company executives – who may gain personally Moral hazard if company is fined Moral hazard if company is fined Fine a cost of doing business Fine a cost of doing business Cartels are not a crime passionelle Cartels are not a crime passionelle Fining individuals ineffective – firm may pick up the tab. Fining individuals ineffective – firm may pick up the tab.

Leniency Programmes Aim to Encourage Whistleblowing by Firms

Impact of Leniency Programmes. Leniency programme – attempt to tilt incentives in “prisoners’ dilemma” type games in favour of competition agencies. Leniency programme – attempt to tilt incentives in “prisoners’ dilemma” type games in favour of competition agencies. Counter-arguments – Risk of reduced penalties can actually increase incentives to collude (see e.g. Motta and Polo, 2003) Counter-arguments – Risk of reduced penalties can actually increase incentives to collude (see e.g. Motta and Polo, 2003) Threat of criminal sanctions can strengthen cartel discipline. (Spagnolo) Threat of criminal sanctions can strengthen cartel discipline. (Spagnolo)

Does Leniency Increase Incentive to Collude? Not if only one firm can obtain leniency – no one can be sure they will be first – unlikely to reassure would be conspirators. Not if only one firm can obtain leniency – no one can be sure they will be first – unlikely to reassure would be conspirators. Many programmes involve reduced penalties for those who are not first in - reduces potential penalty for most if not all cartel participants. Many programmes involve reduced penalties for those who are not first in - reduces potential penalty for most if not all cartel participants.

Impact of Leniency Programmes Difficult to Quantify In case of many types of crime can measure impact of initiatives both in terms of detection rates and deterrence i.e. reduction in incidence of criminal activity In case of many types of crime can measure impact of initiatives both in terms of detection rates and deterrence i.e. reduction in incidence of criminal activity Cannot directly measure impact of cartel leniency programmes: Cannot directly measure impact of cartel leniency programmes: No way of knowing how many cartels exist. No way of knowing how many cartels exist. Cannot measure detection rate. Cannot measure detection rate. Cannot observe deterrent effect. Cannot observe deterrent effect.

Results of Leniency Schemes US application per year US programme reformed 1993 applications increased to 20 per annum approx. EU programme introduced Initial low level of applications. Increased significantly following revisions. UK – 16 Applications in 2003/4. Korea programme introduced application. Ireland programme introduced December Authority will not disclose number of applications received – but no signs of prosecutions.

Results suggest that leniency schemes can make a difference. Results suggest that leniency schemes can make a difference. US results indicate that properly designed scheme will increase detection. US results indicate that properly designed scheme will increase detection. Applications 20 times higher since 1993 – unlikely that there are 20 times the number of cartels. Applications 20 times higher since 1993 – unlikely that there are 20 times the number of cartels. 50% of applications involved cartels not previously known to authorities. 50% of applications involved cartels not previously known to authorities. Mixed outcomes suggest other factors important also. Mixed outcomes suggest other factors important also.

Reform of Leniency Programme Not the Only Change in US. Lysine cartel case and those that followed resulted in substantial increases in fines compared to previous cases. Lysine cartel case and those that followed resulted in substantial increases in fines compared to previous cases. Cases also signaled intention ‘to apply tough, “blue-collar” investigative techniques to hat had formerly been treated as a gentle ‘white-collar’ activity” Cases also signaled intention ‘to apply tough, “blue-collar” investigative techniques to hat had formerly been treated as a gentle ‘white-collar’ activity” J.M. Connor Global Cartels Redux: The Amino Acid Lysine Antitrust Litigation (1996) in White and Kwoka: The Antitrust Casebook J.M. Connor Global Cartels Redux: The Amino Acid Lysine Antitrust Litigation (1996) in White and Kwoka: The Antitrust Casebook

“The variable record of the Justice Department in prosecuting big cartel cases in the past was on one view at least attributable to its then (possibly over- gentlemanly) preference for using enquiry methods more appropriate to civil litigation over crime detection tools.” “The variable record of the Justice Department in prosecuting big cartel cases in the past was on one view at least attributable to its then (possibly over- gentlemanly) preference for using enquiry methods more appropriate to civil litigation over crime detection tools.” J. Joshua, (2000), The Criminalisation of Antitrust Leniency and Enforcement: the Carrot and the Stick. A View from Europe, International Bar Association, Amsterdam, mimeo p.7. J. Joshua, (2000), The Criminalisation of Antitrust Leniency and Enforcement: the Carrot and the Stick. A View from Europe, International Bar Association, Amsterdam, mimeo p.7.

Does EU Experience show that Leniency does not need criminal penalties? Outcome cannot be viewed in isolation. Outcome cannot be viewed in isolation. What happens in other jurisdictions matters. What happens in other jurisdictions matters. World wide or EU only cartels. World wide or EU only cartels.

Leniency boosted Commission enforcement activity “Without perpetrators coming forward, the Commission was only starting investigations when it had the virtual certainty of obtaining the ‘hot’ documents” (J. Joshua, Leniency in US and EU Cartel Cases, Antitrust, summer, 2000). “Without perpetrators coming forward, the Commission was only starting investigations when it had the virtual certainty of obtaining the ‘hot’ documents” (J. Joshua, Leniency in US and EU Cartel Cases, Antitrust, summer, 2000).

Role of Courts Important in Criminal Cases Judges may be skeptical of evidence that is perceived as “self-serving”. Judges may be skeptical of evidence that is perceived as “self-serving”. Such witnesses likely to be exposed to detailed scrutiny. Such witnesses likely to be exposed to detailed scrutiny. If courts dismiss evidence of former conspirators – leniency programmes may not be sustainable. If courts dismiss evidence of former conspirators – leniency programmes may not be sustainable.

On balance threat of imprisonment is likely to concentrate the mind.

US and EU Experience Show that Detail Matters Leniency programme must provide the right incentives. Leniency programme must provide the right incentives. Poorly designed programmes don’t work. Poorly designed programmes don’t work. Illustrates need to evaluate results and learn from mistakes. Illustrates need to evaluate results and learn from mistakes. Why Irish Authority’s refusal to disclose number of applicants is misguided. Why Irish Authority’s refusal to disclose number of applicants is misguided.

Penal Sanctions Must be Credible Ireland has had criminal sanctions since 1996 – to date no prosecutions have been brought on indictment. Ireland has had criminal sanctions since 1996 – to date no prosecutions have been brought on indictment. Flaws in former legislation and lack of resources undoubtedly a problem in the past. Flaws in former legislation and lack of resources undoubtedly a problem in the past. Competition Authority Annual Report 2003 – Authority capable of referring one case per year to DPP Competition Authority Annual Report 2003 – Authority capable of referring one case per year to DPP Authority Chairman “never intended that powers to arrest suspects to be used”. Authority Chairman “never intended that powers to arrest suspects to be used”. Indicates that criminal sanctions are not serious. Indicates that criminal sanctions are not serious. Leniency programme unlikely to work in those circumstances. Leniency programme unlikely to work in those circumstances.

Thank You