For decades, Western firms have been victims of “dawn raids” by the European Commission in Brussels. These unannounced searches and seizures on company premises are used to collect evidence of cartel activity. The evidence obtained is usually applied directly against the company raided, resulting in cartel fines of potentially hundreds of millions of Euros. In the European Union (EU), these visits, which are carried out by the Commission’s Directorate General for Competition (or DG Comp) are formally termed “inspections,” but they are usually referred to as dawn raids because the antitrust officials arrive at the start of the business day in order to maximum the element of surprise.
EU dawn raids are usually carried out simultaneously at all the EU headquarters offices of the suspected cartel members. DG Comp does not require a court warrant based on probable cause. They will usually carry out the raid based on uncorroborated grounds of suspicion. If the cartel is considered global, the EU will carry out its dawn raids in coordination with those organized by other antitrust authorities, such as those of the US, Canada, Japan and Korea.
These raids are highly intrusive, but they are usually very effective in uncovering evidence of cartel involvement.
The following questions will be addressed in this memorandum:
- Are mainland Chinese companies at risk of being subjected to intrusive EU dawn raids?
- If so, what can EU investigators search and seize?
- What are the penalties for non-compliance?
- What can Chinese companies do to protect themselves?
Are Chinese firms at risk of dawn raids?
Until now, mainland Chinese companies have managed to avoid being implicated in cartels investigated by the EU. This may imply that they have so far avoided the dawn raids associated with these investigations, and this is despite EU investigations of global cartels involving a multitude of industries and products.
There may be several reasons why mainland Chinese companies have not been targeted, but the principal one is undoubtedly that the ringleaders have considered the Chinese players to be unnecessary to achieve the objectives of the cartel because their market presence in the EU is deemed marginal. Where, on the other hand, the mainland Chinese firm has substantial EU sales, its participation in the cartel would be considered indispensable—and it is in these cases, that the mainland Chinese firm can expect to be dawn raided. As an illustration, this is what happened in the Commission’s recent LCD cartel investigation, in which Taiwanese manufacturers AU Optronics, Chimei InnoLux and Chunghwa Picture Tubes were collectively fined €425 million.
If the Chinese company is State-owned, this in itself would not necessarily dissuade the DG Comp from investigating it. This would depend on whether the Chinese company must comply with Chinese legislation as regards its commercial behavior. Even where the Chinese company is State-owned, it may be subject to the full enforcement of Articles 101 and 102 of the Treaty for the Functioning of the European Union, governing cartels and abuse of dominance, unless Chinese legislation prevents it from exercising commercial autonomy (e.g. freedom to set its own prices). Thus, if the company has no commercial autonomy solely because its conduct is subject to MOFCOM’s instructions, it likely remains subject to Articles 101 and 102 due to the absence of legislation restricting its behavior.
But as mainland Chinese companies acquire increasing market presence within the EU, they are also increasing their antitrust risk. This is because they may become subject to the same economic pressures facing other manufacturers to maintain high or stable prices. The risk is that they would be invited to participate in an EU cartel and join it in order to maintain their market share. The risk of a raid would be greatly increased if one of the other cartel members applied for leniency (as often happens), and implicated the Chinese firm.
What are DG Comp’s powers of search and seizure?
The implementing Regulation for Articles 101 and 102, Regulation 1/2003, sets out the powers of DG Comp inspectors. Pursuant to Article 20(2), inspectors are permitted:
- to enter any premises, land and means of transport of undertakings. . .
- to examine the books and other records related to the business, irrespective of the medium on which they are stored;
- to take or obtain in any form copies of or extracts from such books or records;
- to seal any business premises and books or records for the period and to the extent necessary for the inspection;
- to ask any representative of member of staff . . .for explanations relating to the subject-matter and purpose of the inspection and to record the answers.
It should be kept in mind that the above powers extend throughout the duration of the dawn raid, which means that a Chinese company could have many antitrust officials in its EU executive and sales offices for several days.
1. Article 20(2)(a): Power to “enter any premises, land and means of transport of undertakings”
Article 20(2)(a) standing alone creates the false impression that DG Comp inspectors may only search company premises, cars etc. In fact, according to Article 21(1), DG Comp may also search any private premises, including “the homes of directors, managers and other members of staff..., ” provided that it obtains a judicial warrant from the national court concerned.
2. Article 20(2)(b)-(c): Power to “examine the books and other records related to the business, irrespective of the medium on which they are stored”
The reference in this Article to “irrespective of the medium on which the [books and records] are stored” means that Commission officials may (and often does) search for documents and other evidence stored electronically. The powers of the Commission to conduct electronic searches are set out in its 2013 Explanatory Note on the conduct of inspections, which is available on the DG Comp website.
The Commission’s powers to conduct electronic searches are extensive. Typically, when they conduct their raid, they will come with DG Comp’s own specially-equipped laptops and IT experts. They will use search terms to locate specific types of emails and documents. They will search PCs, laptops, smart phones, tablets, CD-ROMs, USB sticks and company servers. DG Comp officials may remove and re-install hard drives, especially when they are encrypted. Servers may be searched regardless of their location, as long as they may be accessed from terminals situated in the EU.
In order to prevent the destruction (or deletion) of valuable electronic evidence, the Commission’s first task when carrying out the inspection may be to temporarily disconnect the company computers from the network and ask for the mobile devices of particular executives to be handed over to the DG Comp officials. It will also temporarily block email accounts.
The Commission will make copies of all documents and data deemed relevant and may bring back to their offices entirely copied hard drives for in-depth analysis. Increasingly, the Commission will do only part of its search on the company premises; that is, the DG Comp officials will return to their offices with forensic copies of all the documents to be searched.
It should be kept in mind that if an employee deletes electronic folders and emails in order to destroy incriminating evidence, the DG Comp inspectors are likely to find the evidence either on the computer’s hard drive or the company server. And if DG Comp learns of such efforts to obstruct the investigation, the company is likely to be heavily fined. The penalties are discussed later in this memorandum.
The Commission expects complete cooperation from the company during such searches, and it will punish efforts to obstruct Commission access to electronic documents. In 2012, the Commission imposed a fine of €12.5 million on a Czech energy company for changing a password on a company email account during a dawn raid, just after DG Comp had blocked the existing passwords and temporarily placed passwords known only to DG Comp inspectors on key company email accounts.
Although in the EU, companies have a right to counsel present during a dawn raid, their presence is not a pre-condition to the validity of the raid itself. As a practical matter, DG Comp officials are only willing to wait 15-30 minutes for the arrival of the company’s external counsel. With a longer delay, in their view, there is a risk that valuable evidence will be destroyed.
3. Article 20(2)(d): “Power to seal any business premises and books or records for the period and to the extent necessary for the inspection”
While the dawn raid is ongoing, the Commission will seal the business premises, much like a crime scene, to prevent any tampering with evidence. This could prevent the company offices from operating effectively for up to 72 hours (and theoretically even longer). Like other forms of obstruction, the breaching of the Commission seals may be penalized severely. In the first such case, which involved E.ON, an energy company, an E.ON employee had breached the seal on the first day of the dawn raid, resulting in a Commission fine of €38 million.
4. Article 20(2)(e): Power to “ask any representative of member of staff . . .for explanations relating to the subject-matter and purpose of the inspection and to record the answers”
At first glance, it would seem that Article 20(2)(e) allows company employees not to answer DG Comp officials when they “ask” for “explanations” relating to the investigation, since the this Article does not explicitly compel a response from the company employees concerned. However, a separate provision of Regulation 1/2003 states that a company may be fined for failing to provide a complete answer to a question, or for providing an incorrect or misleading answer.
It should be stressed that Article 20(2)(e) permits DG Comp to ask questions of any company employee on the premises. This is likely to place a unfair burden on companies to manage the answers that are provided to Commission inspectors, given that the Commission will ordinarily send a team of DG Comp and national officials, each of whom may ask questions of company employees. Fortunately, Regulation 1/2003 states that DG officials must give the company a time limit for the rectification of any answers given during the inspection.
What are the penalties for non-compliance?
As already indicated above, the Commission may fine companies rather severely if they obstruct an investigation. In fact, pursuant to Article 23(1) of Regulation 1/2003, they may be fined up to 1% of their total global turnover for intentionally or negligently breaching Article 20(2) by preventing the Commission from carrying out its investigative powers or by failing to answer Commission questions.
What can Chinese companies do to protect themselves?
Most importantly, the company should cooperate with the Commission inspectors. This is critical for avoiding fines for obstruction. Since the company has a legal duty to cooperate with a Commission inspection, the Commission will not reward compliance with the company’s legal obligation by reducing the fine.
Thus, it is imperative that the company’s EU-based employees are well-aware of the powers of Commission inspectors and that they do not commit any obstructive acts, such as deleting emails or by calling other companies who may be participating in the cartel. It is also important that company executives are well aware of their legal rights during dawn raids and that they do not allow the DG Comp officials to go on a “fishing expedition.” To this end, it could be helpful for the company to receive specific training on how to deal with dawn raids and to have in place a set of internal procedures. Some companies even engage outside antitrust counsel to conduct “mock” dawn raids on the company’s premises.
Most importantly, the company should take appropriate measures to prevent employees from engaging in anti-competitive activities that may trigger a dawn raid, particularly those involving competitors, which may involve price-fixing or sharing markets. By doing this, it becomes more likely that the damn raid will be fruitless for the Commission. In particular, it is recommended that the company adopt an antitrust compliance program (ACP). An ACP should include a written manual for all affected employees, training for all employees “at risk,” and possibly an audit of company emails and documents if illicit activity is already suspected by management.
The above preventative measures are not costly or intrusive. They are considered good corporate governance by most multinational companies. When implemented properly, they can substantially reduce the risk of employees doing anything anti-competitive.