New criminal sanctions for cartel behaviour - what do they really mean?

The Federal Government has announced that it will amend the Trade Practices Act 1974 ("TPA") to introduce criminal penalties for serious cartel conduct. Although no Bill has yet been released, the Government has revealed some aspects of the new regime. In this Alert, we’ll look at the implications of the proposed regime.

The penalties under the new criminal regime are significant.

The maximum term of imprisonment for an individual convicted of a criminal cartel offence will be five years, with a maximum fine of $220,000.

The Government has introduced the Trade Practices Legislation Amendment Bill that will amend the civil penalty regime for breaches of the competition laws. The maximum fine for corporations convicted of a criminal cartel offence will mirror these new penalties. The maximum penalty will be the greater of $10 million, or three times the value of the benefit from the cartel, or where the value cannot be readily ascertained, 10% of the annual turnover of the body corporate and all of its related bodies corporate.

The introduction of criminal penalties, together with the proposed increased penalties in civil proceedings, increase the need for corporations to take trade practices compliance responsibilities more seriously than ever.

The cartel offence

The cartel offence, which will apply to individuals as well as corporations, will prohibit a person from making or giving effect to a contract, arrangement or understanding between competitors that contains a provision to:

• fix prices;
• restrict output;
• divide markets; or
• rig bids,

where the contract, arrangement or understanding is made or given effect to with the intention of dishonestly obtaining a gain from the customers who fall victim to the cartel.

The Government has indicated that dishonest intent will be proved if a jury is satisfied that the cartel arrangement was dishonest according to the standards of ordinary people, and the defendant knew it was dishonest according to those standards.

The inclusion of the "dishonesty" element will therefore exclude from the criminal provisions conduct engaged in inadvertently or that the defendant genuinely did not believe to be illegal or improper. However, that kind of conduct can still be penalised under the civil standard of the existing TPA, which is strict liability.

Interaction between the civil and criminal provisions

The Government has also proposed the introduction of a new civil cartel offence into the TPA. There will be no requirement for dishonesty in order to breach the civil cartel provisions.

It is envisaged that the most serious cartel conduct would be pursued under the criminal provisions, and other cartel conduct would be litigated civilly.

It is unclear how the cartel offence will interact with the existing prohibitions on exclusionary provisions and price fixing. This is something that will need to be considered closely in the drafting of the new cartel provisions.

Joint operations of the ACCC and the DPP

The Australian Competition and Consumer Commission will investigate, and the Commonwealth Director of Public Prosecutions ("DPP") prosecute, criminal cases. Cartel proceedings would be tried before a jury.

It is proposed that the DPP and ACCC will enter into a formal, publicly available Memorandum of Undertaking, establishing procedures for the investigation of cartel offences and the circumstances in which the ACCC will refer a case to the DPP for prosecution instead of pursuing civil penalties itself.

When deciding whether to refer a matter to the DPP for possible criminal prosecution, the ACCC must consider whether:

• the alleged conduct was longstanding or had, or could have, a significant impact on the market in which the conduct occurred; or
• the alleged conduct caused, or could cause, significant detriment to the public, or a class thereof, or one or more customers of the alleged participants; or
• one or more of the alleged participants has previously been found by a court to have participated in, or has admitted to participating in, cartel conduct, either criminal or civil.

The final form of the Memorandum of Understanding and the interaction between the ACCC and the DPP will be critical to the operation of the criminal regime in practice.

When the Australian Securities Commission first began briefing the DPP when serious criminal offences were introduced for breaches of the Corporations Law, there were considerable difficulties and prosecutions were very slow. Mr AG Hartnell, the then Chairman of the ASC, said:

"The only way I know to speed up the process is to integrate the offices of the DPP more closely with the offices of the ASC from the start of a serious (ie. perceived as significantly criminal) investigation."

A similar approach has taken place in the Canadian Competition Bureau and the UK Office of Fair Trading upon the introduction of criminal penalties. In those countries, criminal prosecutors have been co-located with the competition regulators for the purposes of prosecuting cartel offences.

The final form of the MOU will determine the effectiveness and closeness of the co-operation between the DPP and the ACCC. It may be that, as in overseas jurisdictions, it provides for the DPP to become involved in cartel matters at an early stage. This could quite dramatically change the nature of the ACCC's investigations.

Small business carve out

It is proposed that the ACCC would need to consider whether the value of affected commerce exceeds $1 million within a 12 month period or, for bid rigging cases, the value of the successful bid or series of bids exceeded $1 million within a 12 month period, before referring a case to the DPP. Thus, some cartel behaviour by small concerns will escape criminal sanctions.

Immunity and leniency

The ACCC has, over recent years, developed a comprehensive Leniency Policy in relation to cartel conduct (it is currently under review). However, this policy applies only to civil proceedings by the ACCC.

To deal with leniency applications under the new criminal regime, the Prosecution Policy of the Commonwealth must be amended so that immunity can be granted to cartel whistleblowers at an early stage in the investigation. The Government has foreshadowed that immunity can only be granted if the ACCC is not already aware of the conduct, and recommends to the DPP that immunity be granted. It is proposed that the applicant must also meet the following conditions:

• they are the first to come forward;
• they are not a clear individual leader in the cartel;
• they did not coerce others to join the cartel; and
• they co-operate fully with the ACCC and attend court to give evidence if required.

It is unclear whether any form of immunity also will be available to subsequent applicants, nor whether the ACCC will amend its Leniency Policy in respect of civil proceedings to make it consistent with the Prosecution Policy.

This aspect of the regime will become clearer as the details of the legislation and the amendments to the Prosecution Policy are released.

More about penalties

In addition to the jail sentences and financial penalties, proposed amendments to the TPA will give the court the option to disqualify an individual implicated in a contravention from managing a corporation.

The criminalisation of cartel conduct means that the Proceeds of Crime Act 2002 will apply. Broadly, this Act enables a court to order that proceeds of a criminal offence be forfeited to the Commonwealth. The implication of this is that revenue that a company achieves as a result of a market sharing or price fixing arrangement could be forfeited to the Government, in addition to any financial penalty imposed.

The importance of compliance

The proposed introduction of criminal penalties, together with the proposed increased penalties in civil proceedings, highlight the need for corporations to take trade practices compliance responsibilities more seriously than ever.

A corporation's compliance program will be important for three main reasons:

• it should assist in preventing cartel conduct from occurring;
• it will be a relevant factor in the penalty phase of cartel proceedings;
• if a company faces a significant financial penalty (for example a penalty based on the company's turnover), the absence of an effective compliance program could leave the door open in some cases for shareholders to take action against company directors for breach of directors' duties.