With myriad critical issues vying for the attention and resources of legal departments during the current economic crisis, antitrust compliance may not be at the top of the in-house counsel priority list. But companies in markets susceptible to cartels may want to take a moment to consider the magnitude of these risks. Recessions often bring a heightened temptation on the part of businesspeople to engage in cartel behavior, and this fact, coupled with the ever-increasing risk of detection by an energized and global anti-cartel enforcement community, can create a perfect storm of criminal antitrust risk. Because the penalties for cartels include fines that could cripple even reasonably healthy corporations (as well as jail time for executives), cartel violations in the present climate can result in economic disaster for vulnerable companies. Reducing or deferring compliance efforts, antitrust audits, and investigations of potentially questionable behavior may therefore come at a very high price indeed in an atmosphere where cartel offenses are both more probable and more likely to be uncovered.
Heightened Risk of Violations
History teaches that difficult economic times foster a business environment ripe for increased anticompetitive behavior, making the current global downturn cause for sharpened vigilance. The temptation to forge market stabilizing agreements with competitors is stronger when employees are faced with some of the conditions seen more frequently in periods of economic distress, such as:
- Weaker Internal Training, Prevention, and Detection Efforts. With in-house lawyers’ time and resources stretched increasingly thin, it becomes more likely that routine training, monitoring and compliance programs, as well as investigation of questionable activity, will be scaled back or eliminated to save costs or will simply be neglected by overtaxed attorneys trying to juggle both their regular duties and new obligations brought on or worsened by the recession. Legal staff resource and personnel cutbacks exacerbate this problem.
- Employees Desperate to Perform. When faced with pressure to perform at levels rendered difficult or even impossible in the current conditions, employees may take unwise actions in attempts to protect their positions or compensation levels. If sales or performance goals established six months ago are no longer attainable but continue to be pushed, a company unwittingly may be incenting employees to engage in illegal behavior including price fixing, bid rigging, or market allocation.
- Less Intense Managerial Scrutiny. Managers and executives also feeling pressure may be too busy to notice their subordinates’ transgressions or may turn a blind eye to them, or they may even encourage or participate in illegal behavior. In tough times, more experienced (and therefore more expensive) employees are sometimes laid off or retired. These employees may know better than to engage in anticompetitive activity and may not have the same incentives to overlook, condone, or otherwise involve themselves in such behavior; therefore, their removal from the workforce may increase the possibility of a violation.
Economic recessions also can enhance criminal antitrust risks where there is an influx of large amounts of government money into projects designed to stimulate the economy. The Department of Justice’s Antitrust Division recently issued a terse notice to companies competing for government stimulus dollars, warning that “[t]he potential risk of fraud and collusion increases dramatically when large blocks of funds, such as those associated with the Recovery Act, are quickly disbursed.” The Department of Justice has set up a citizen complaint center to process tips about suspected irregularities in the procurement or spending of recovery funds and has vowed to monitor disbursements closely for anticompetitive activity.
Even when budgets are tight, companies may want to carefully consider reducing their attention to antitrust issues (and preparedness in the event of a potential violation), because energetic enforcement is unlikely to let up and the cost of monitoring and compliance may be a worthy investment in light of the massive financial and business impact from a cartel violation.
The aggressive criminal antitrust enforcement efforts of the past five years – both domestically and internationally – are expected to continue and even intensify in the coming months and years, unaffected by the weakened state of the global economy. U.S. enforcement is likely to be forceful as the Obama administration seeks to reassure beleaguered U.S. consumers that their government is protecting them from the economic harms posed by manipulated markets and particularly by cartels. Internationally, countries are criminalizing cartel conduct and beefing up enforcement and collaboration efforts at a remarkable pace. Massive fines levied in the large cartel cases more than pay for enforcement costs, ensuring that where there is political support for their mission, these competition agencies will continue to be provided with the funding they need to pursue cartels.
In the U.S., the Antitrust Division has been given both the mandate and the resources – financial support, sophisticated detection and investigation tools (including an expansive and highly successful corporate leniency program), and harsher penalties for offenders – to pursue its ambitious criminal enforcement agenda. As the Antitrust Division’s Deputy Assistant Attorney General for Criminal Enforcement, Scott Hammond, explained last year, “[t]he carrot and stick enforcement strategy of coupling the Division's Corporate Leniency Program with severe sanctions and use of all available investigatory tools to create a significant fear of detection, both inside and outside the United States, has succeeded in cracking dozens of international cartels, securing convictions and jail sentences against culpable U.S. and foreign executives, and obtaining hefty corporate fines. The Division has steadfastly emphasized the importance of individual accountability and stiff corporate fines to optimize deterrence of cartel conduct.”
Increasingly, the Antitrust Division also has the cooperation of other competition authorities around the world to assist in its enforcement pursuits. There are now over 100 countries with antitrust regimes, and over two dozen that have criminalized cartel activity. Christine Varney, the new Assistant Attorney General for Antitrust, has promised cooperation with worldwide antitrust authorities to promote the growth of a “healthy free market both at home and abroad.” AAG Varney has expressed strong support for President Obama’s goal of reinvigorating antitrust enforcement and she is expected to intensify the United States’ already active and successful anti-cartel program and to continue to work with other jurisdictions on harmonizing antitrust laws and strengthening global enforcement.
Increasingly Painful Penalties
The amount of money the Division obtains each year through plea agreements with antitrust offenders is impressive: over $1 billion in criminal fines have been assessed in U.S. antitrust cases already in 2009, and the total grows larger every year. When combined with the penalties imposed on these same companies and individuals by other jurisdictions for the same or related conduct, the numbers become truly staggering.
For some perspective on just how costly involvement in an international cartel case can become, take the example of British Airways, a company embroiled in the far-ranging and well-publicized air transportation investigation. BA already has paid $300 million in criminal fines in the United States, £121 million to the United Kingdom’s Office of Fair Trading, and $Au 5 million plus costs to settle the Australian competition authority’s cartel probe, and it faces additional – potentially sizable – fines in a number of other jurisdictions. That amounts to over $500 million to date in fines alone, not including what may be a very hefty penalty from the European Commission when it decides the cost to resolve its charges against BA. Notably, the fines levied by the EC in recent years often have been even higher than those in the U.S. In 2008, for example, the EC fined four auto glass makers a total of almost €1.4 billion, with one cartel participant in that case paying close to €900 million (roughly $1.1 billion).
The more than $500 million BA has paid out so far for its role in the air cargo cartel does not even include what it is paying around the world in attorney fees, civil and class action ‘follow-on” litigation and settlements, bad publicity, and innumerable hours and resources spent doing internal investigation, assisting competition authorities in ongoing investigations, and other business disruption expenses that – while difficult to quantify – are very real.
And if that isn’t all sobering enough, consider that company executives and other employees are going to jail in increasing numbers and for increasingly long periods of time in these cases. According to Division statistics, in fiscal year 2007 87% of defendants charged in antitrust cases were incarcerated and the average length of prison terms imposed on offenders was 31 months. Many other jurisdictions now have criminal statutes that prohibit cartel behavior and the rapid increase in criminalization of cartel activity around the globe has already resulted in incarceration in several other countries, and that is likely to increase.
A final noteworthy trend in criminal enforcement is the increase in the number of cartel participants convicted of “related” offenses, including fraud, obstruction of justice, and even a Foreign Corrupt Practices Act violation.
How can companies best protect themselves from becoming entangled in costly criminal antitrust problems during this difficult period in our economic history? Arm yourselves: be alert and informed; initiate or continue active monitoring and compliance programs; establish reporting and document management procedures and other internal controls that will aid in detecting and investigating potentially problematic activity and will facilitate quick and efficient assessment and response to potential problems; and in the event of a suspected violation, consult immediately with knowledgeable counsel who can inform you about the leniency policies and workings of the various jurisdictions in which you could be prosecuted. These steps will help promote quick decisionmaking that may save your company millions – or tens or hundreds of millions – of dollars. One thing you can count on for certain in this uncertain economic climate: antitrust enforcers around the world are stronger and more active than ever.