Perspectives on Effective Cartel Enforcement

Jim O'Connell is the deputy assistant attorney general for international, policy, and appellate matters in the Antitrust Division at the US Department of Justice. His principal duties include serving as the Division's point person on international antitrust issues and overseeing the Division's appellate litigation and policy development programmes. Mr O'Connell previously served as the Division's chief of staff and as counsel to Assistant Attorney General Thomas Barnett and his predecessor R Hewitt Pate.
Prior to joining the Antitrust Division in late 2003, Mr O'Connell was in private practice at Shearman & Sterling LLP, in the firm's global antitrust group. At Shearman & Sterling, Mr O'Connell advised clients in a wide range of industries on the antitrust aspects of mergers and acquisitions, joint ventures and other business collaborations, unilateral conduct, and intellectual property licensing. Mr O'Connell also represented clients in antitrust litigation matters and grand jury investigations.
Mr O'Connell received his Juris Doctor degree, with distinction, from the Emory University School of Law, where he served as the executive managing editor of the Emory Law Journal and was elected to the Order of the Coif. He also holds a Bachelor of Science degree in Industrial Management and Economics from Carnegie Mellon University.
Mr O'Connell currently serves as the co-chairman of the merger working group of the International Competition Network. He is a member of the Bars of New York, the District of Columbia and the US Supreme Court. He is also a member of the American Bar Association's section of antitrust law, for which he has served as co-chair of the federal civil enforcement committee since 2006.

Throughout the Americas, antitrust enforcers are cracking down on cartels. Detecting and prosecuting cartels has long been the highest priority of the Antitrust Division of the US Department of Justice, as well as a major focus of the Canadian Competition Bureau, and now enforcers in Brazil, El Salvador, and elsewhere are increasingly sharing that approach. But why are cartels getting so much attention? Put simply, they impose enormous costs on consumers with no corresponding benefit to anyone but the cartelists. Fixing prices, rigging bids, and allocating output and markets have no plausible efficiency justification. In the United States, we prosecute hard-core cartels exclusively as criminal violations, and we encourage other countries to do the same.
Nations on at least five continents, including Brazil, Canada, Japan, the United Kingdom, Israel, Ireland, Korea, and Australia already have, or are in the process of adopting, laws providing for criminal sanctions.

Leniency and settlement programmes

Cartels are often highly profitable, so they can only be deterred through vigorous prosecution and severe sanctions. Most cartels operate in secret, and cartelists have become increasingly adept at eliminating any evidentiary trail, either by destroying documents or not creating them in the first place. To conceal their activities, they often adopt code names, use pre-paid calling cards so that their communications cannot be easily traced to their business or home telephones, and falsify documents.
Because cartels are so difficult to detect and prosecute, the US has developed a robust leniency programme that encourages cartel members to confess cartel conduct voluntarily. A programme that offers leniency to the first cartel member to confess provides a powerful incentive to come forward with evidence that can be used to prosecute co-conspirators vigorously. Under our programme, a company that self-reports under the programme and qualifies for leniency avoids a criminal conviction, pays no criminal fine, and keeps its cooperating executives out of jail. A company that loses the race for leniency - even if by only a matter of days, as has been the case on numerous occasions - is ineligible for full immunity and faces serious penalties.
In the United States, we also have a settlement programme for those who do not qualify for leniency. Under this programme companies that come forward after leniency has been granted, but that offer timely cooperation in the investigation, often enter into plea agreements and have their fines reduced. One of the key benefits of settlements to enforcement agencies is obtaining the cooperation and evidence from the settling defendant. The settlement saves the government from using time and resources to prosecute the defendant while providing evidence against co-conspirators. The vast majority of our major international investigations have involved the cooperation of a corporate leniency applicant. Over the past 20 years, more than 90 per cent of corporate defendants charged with an antitrust offence have entered into plea agreements where they admitted guilt and cooperated with our criminal investigations.
Antitrust agencies across the globe have realised the benefits that leniency programmes have to offer and in recent years have adopted their own programmes. Examples in the Americas include Brazil, which launched its programme in 2000 offering full immunity to the first cartelist to confess or, if enforcers were already aware of the cartel, sometimes partial immunity to the first cartelist to come forward. Canada has had a leniency programme in place for quite some time, and Chile is in the process of adopting one.
At the International Competition Network's (ICN) annual conference in Kyoto earlier this year, the ICN Cartel Working Group issued a report on cartel settlement programmes stating that 'settlements are regarded by many as a 'win-win' anti-cartel enforcement tool that can provide a multitude of benefits to enforcers as well as to settling cartel participants.'1 The report also noted the 2007 amendments to Brazil's competition law establishing a settlement programme and highlighted Brazil's first four negotiated cartel settlements under the programme.
There are two underlying aspects of our enforcement system that I would like to emphasise as critical to the success of any effective anti-cartel regime: the threat of severe sanctions; and strong investigative tools. Without them, even the best-designed leniency programme stands little chance of succeeding.

Severe sanctions

First, sanctions for cartel behaviour need to be severe. Penalties should reflect the enormous harm that cartels inflict on consumers. To be an effective deterrent, fines must be large enough to remove the financial incentive to participate in a cartel, because cartelists are motivated by financial considerations and can factor the risk of detection and the size of possible fines into their decision making.
In our experience, however, fines alone are not enough. Although companies participate in cartels, it is individuals - their executives - who make the decision to enter into those cartels. Our investigators have found that nothing deters those individuals as effectively as the threat of substantial jail time in a United States prison. We have, for example, encountered international cartels where the participants purportedly carved the United States out of their price-fixing agreement. The reason stated was fear of prison. The message we send is a clear one: if you are caught participating in price fixing, market allocations, bid-rigging, output allocations, or other 'hard-core' cartel activities, you will very likely go to jail.
It should be reasonably clear that strong sanctions for cartelists are critical if the punishment is to fit the crime and create an effective deterrent. However, what may be less obvious is that they are also vital in creating incentives for cartel members to seek shelter in a leniency programme. Seeking leniency will not be seen by cartelists as an attractive option unless the consequences for failing to obtain it are severe. Faced with the prospect of a significant criminal fine for the corporation and jail time for culpable executives, cartel participants may well decide that it is in their best interest to apply for leniency and then confess and turn over evidence against their co-conspirators.

Strong investigative tools

The second aspect of our system that I would highlight is the strong investigative powers we have to pursue cartels. Those strong powers increase our ability to uncover cartels and prosecute their members. Our goal is to instill a genuine fear of detection and punishment among cartelists. Strong investigative tools and our leniency programme, working together, create a cycle that increases the odds of uncovering cartels. When cartel members perceive a genuine risk of detection, a leniency programme can build on that fear and sow unease within the cartel, destabilising it. The cartel members no longer trust one another; the rewards for self-reporting are great, and the consequences of getting caught are severe. This dynamic can create a race to be the first to the antitrust enforcer's office.
The cycle hinges on having the tools to detect cartels, because without a likelihood of being discovered, there is little incentive to self-report. In the United States, we use a full range of investigative techniques, from search warrants to wiretaps to informers wearing recording devices. We involve FBI agents who are specially trained in criminal interrogation, forensics, and detection of corporate fraud. We also use Interpol 'Red Notices' and extradition to track cartelists and, where possible, return them to the United States to face prosecution. A 'Red Notice' is essentially an international 'wanted' notice that many of Interpol's 186 member countries recognise as the basis for a provisional arrest with a view toward extradition.
Canada takes a similar approach. To cite just one recent example, the Canadian Competition Bureau used a combination of investigative tools, including wiretaps and searches, as well as its immunity programme, to uncover and prosecute a gasoline cartel in Quebec. Its highly successful investigation has already resulted in the filing of criminal charges against 13 individuals and 11 companies, with three companies and an individual pleading guilty and agreeing to cooperate.2

International cooperation

Many of the cartels that we investigate today are international in nature, and cooperation among antitrust enforcers has become essential. We collaborate with many nations, and I think it is safe to say that now is the most dangerous time in history for companies to enter into cartels, given the breadth and depth of international collaboration in cartel enforcement and the increasingly severe penalties imposed around the globe.
Our recent investigation of the marine hose industry is an excellent example of successful cooperation. In May 2007, the Antitrust Division and the FBI arrested eight foreign executives from the United Kingdom (UK), France, Italy and Japan for their roles in the marine hose conspiracy and conducted multiple searches in the United States. On the same day, UK and European antitrust authorities searched locations in Europe, and later the Japan Fair Trade Commission conducted searches as well.
The marine hose plea agreements reached between the Antitrust Division and three British nationals in December 2007 are particularly noteworthy and demonstrate what is possible when antitrust authorities work together.3 Not only were the prison sentences under the US plea agreements the longest ever agreed to by foreign nationals for antitrust offences, but for the first time, the plea agreements anticipated the criminal prosecution for a cartel offence in another jurisdiction. After the defendants entered their guilty pleas in US District Court, and in keeping with the terms of the plea agreements, the court deferred US sentencing and the defendants were escorted in custody to the UK to cooperate with the Office of Fair Trading's cartel investigation and plead guilty there.4 Ultimately, the defendants were sentenced by the UK court to jail terms that were higher than those contemplated by the terms of the US plea agreements, such that, under the terms of the plea agreements (which allowed for the possibility of concurrent prison sentences in the US and UK), they will satisfy their US sentences by serving their prison sentences in the UK.5 This was the first successful criminal prosecution for the UK under its Enterprise Act. The cooperative investigation and dual plea agreements have raised the stakes, providing a strong deterrent message for would-be cartel participants who seek to victimise consumers in multiple jurisdictions.
Similarly, we have coordinated our air cargo investigation with antitrust authorities on five continents. The air cargo conspiracy, which involved a multi-year international cartel to raise the price paid to ship billions of dollars of consumer goods of all types - including electronics, clothing, produce, and medicines - ended in February 2006, when search warrants were executed simultaneously on target locations around the world. Our air transportation investigation, which is ongoing, has so far resulted in major global airlines - British Airways, Korean Air Lines, Qantas Airways, Japan Airlines, KLM Royal Dutch Airlines, SAS Cargo Group A/S, Martinair Holland NV, and Cathay Pacific Airways - and two airline executives agreeing to plead guilty and, in the case of the airlines, agreeing to pay record fines that total approximately US$1.275 billion. These are among the largest and most far-reaching antitrust conspiracies ever detected by the Antitrust Division.

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Antitrust authorities around the world increasingly share our commitment to fight cartels. Though cooperation among enforcers in the Americas is still developing, we have every reason to be encouraged. Together, as fellow antitrust authorities armed with a common purpose, we can ensure that there will be no safe place for cartel participants to hide, either in this hemisphere or elsewhere.

Notes

1 'Cartel Settlements: Report to the ICN Annual Conference,' April 2008, available at www.icn-kyoto.org/documents/materials/Cartel_WG_1.pdf.
2 See Press Release, Canadian Competition Bureau, Competition Bureau Uncovers Gasoline Cartel in Quebec, available at www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/en/02694e.html.
3 See Press Release, US Department of Justice, Antitrust Division, Three United Kingdom National Plead Guilty to Participating in a Bid-Rigging Conspiracy in the Marine Hose Industry, available at www.usdoj.gov/atr/public/press_releases/2007/228561.htm.
4 See Plea Agreements in United States v Peter Whittle, United States v Bryan Allison, and United States v David Brammar, available at www.usdoj.gov/atr/cases/allison.htm.
5 See Press Release, Office of Fair Trading, Three Imprisoned in First OFT Criminal Prosecution for Bid Rigging, available at www.oft.gov.uk/news/press/2008/72-08.

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