INTERNATIONAL COOPERATION IN INVESTIGATING AND PROSECUTING HARDCORE CARTELS AFFECTING DEVELOPING COUNTRIES THE CASE OF ZAMBIA

Transcription

1 INTERNATIONAL COOPERATION IN INVESTIGATING AND PROSECUTING HARDCORE CARTELS AFFECTING DEVELOPING COUNTRIES THE CASE OF ZAMBIA Contribution by ZAMBIA Submitted to UNCTAD's Seventh Session of the Intergovernmental Group of Experts on Competition Law and Policy, Geneva, 30 October to 2 November 2006.

2 ZAMBIA COMPETITION COMMISSION Promoting a Culture of Fair Competition for the benefit of Business and Consumers International Cooperation in investigating and prosecuting hardcore cartels affecting developing countries The Case of Zambia Communication submitted by Zambia 1

3 Introduction The number and importance of successful international cartel prosecutions have continued to increase since the early 1990s. These high-visibility prosecutions have involved complex, globally extensive and sometimes long-lived conspirations and have resulted in the imposition of record-breaking penalties against domestic and foreign defendants alike. Corporate fines have become almost commonplace in our domestic legislation and, increasingly, prison terms for individual defendants. More and more competition authorities around the world, especially those of developed countries are making enforcement efforts against cartels a top priority. This has in turn increased the detection and successful prosecution of cartels. Greater detection and access to information necessary for prosecution appears to be attributable at least in part to several cooperating arrangements among and between competition authorities, coordination of efforts and the introduction of the corporate leniency programme. In recent years, there has been heightened discussions, research and literature on hardcore cartels. While the average person in the street may not understand why a cartel is wrong and meriting criminal sanctions, the anti-cartel enforcer knows that hardcore cartels are the equivalent of theft and should be met with unequivocal public condemnation. In Zambia, cartels in the fertiliser, grain and oil procurement and marketing, are projected to cost hundreds of millions of United States dollars annually. However, due to a low competition culture, these matters have not received the attention they deserve to warrant public expenditure on investigations and prosecution of individuals. The cost of these activities, which have never been unquantified, have had a telling effect on the State treasury and on the competitiveness of industries dependent on these products in Zambia. Unfortunately, since the State is a party to these activities, the Competition and Fair Trading Act of Zambia does not apply to activities where the Government of the Republic of Zambia is a party. While about five (5) cartels have been investigated by the Zambia Competition Commission between 1998 and 2004, it is estimated that in only 20 cartel cases investigated in the United States in the 1990s, the annual worldwide turnover in the affected products exceeded US $30 2

4 billion. 1 In as far back as 1997, the World Trade Organisation (WTO) also highlighted the growing significance of international cartels for policy makers, noting that these cartels undermine international integration and decrease the benefits of liberalisation to consumers. 2 It is undoubted that aggressive prosecution of cartels should be enhanced, but the sustainability of such a fight is possible only where there are effective means to gather evidence and put a stop to hardcore cartel activity. While Zambia s cartel provisions under Section 7 and Section 9 of the Competition and Fair Trading Act prohibit cartels outright and prefer criminal sanctions of imprisonment, the enforcement of the provisions have been ineffective due to various reasons that shall be explained later in this paper. Section 9 of the Act specifically addresses the following practices and are prohibited per se: (a) Price Fixing. (b) Collusive tendering; (c) Market or customer allocation agreements; (d) Sales and production quotas (e) Collective action to enforce arrangements (f) Concerted refusals to supply goods and services to potential purchasers; or (g) Collective denials of access to an arrangement or association which is crucial to competition. Due to lack of a precedent prosecution, there is no sufficient deterrent effect to cartel activity in Zambia. The word cartel in Zambia, like in many developing countries, does not usually connote any punishable offence to the reasonable person. This makes the Competition Authority in such countries to be the lone voice in cartel investigation and prosecution. While cartels are theft and distort both domestic and international trade and create market power for a few companies and their agents, it yet remains to be proven as to how much Court sympathy that cartel cases would receive. To experts, students and victims of cartels, cartels bring about waste and inefficiency in industries whose markets would otherwise be competitive without the cartels, such as the aforesaid grain, fertiliser and oil sectors in Zambia. While cartel activity continues to be sophisticated, complex and perhaps undetectable, the problem with the matter would also be alluded to the high resources and man hours required to fully investigate a so called hardcore cartel, especially by developing competition authorities. At international level, there is a recognised difficult in getting evidence, interviewing and even extraditing defendants. This calls for 1 Evenett Levenstein and Suslow - International Cartel Enforcement: Lessons from the 1990s 2 World Trade Organisation, 1997 Annual Report 3

5 international cooperation with other anti-cartel enforcement agencies, where such cooperation is critical to the success of the investigation. Cartels and developing countries Cartels naturally operate secretly and gathering of evidence is a critical process in establishing such conduct. Evidence gathering is a primary function of any law enforcement agency, and its scope and usefulness is relative to the powers of the law enforcer. Evidence gathering in cartel cases includes any relevant documents, statements, other electronic or non-electronic records, eyewitness accounts and whistle-blower confessions. The complexity of hardcore cartel cases entails that where prosecution is planned, the Courts would likewise require hardcore evidence, in the case of Zambia, beyond reasonable doubt. This is because cartel activity is an offence attracting criminal sanctions. While some countries have legislations regarding evidence e.g. the UK and Ireland, some countries would rely on common law principles of evidence e.g. most Commonwealth Countries, including Zambia, Zimbabwe, Canada and Australia. According to the Agency for International Trade and Information Cooperation 3, large-scale merger reviews or cartel investigations are seldom restricted to a single jurisdiction; mergers can be reviewed in as many as 60 jurisdictions. The competition authorities that examine these transactions already cooperate. However, a good number of governments believe there is scope for more cooperation in this field, perhaps within the framework of multilateral rules. Further, there is a view that the tendency to exercise extraterritorial reach in merger and cartel reviews enhances the value of a clearer international framework of cooperationthough not everyone believes it should necessarily be within the WTO. The Agency has observed that Cooperation in the pursuit of anticompetitive behaviour has been developed substantially on a bilateral basis, notably by the EU and US, indicating that a multilateral approach remains illusive due to the many legal and policy impediments. Bilateral agreements allow for a variety of instruments. "Positive comity" provides for one party to an agreement to request the second to take enforcement action against anti-competitive conduct by one or more companies located in that party. "Negative comity" simply requires each party to consider the important interests of the other in its competition enforcement activities. Other instruments provide for notifications, the exchange of information and enforcement coordination. 3 Thematic File: Post-Doha Agenda, The Singapore Issues: Interaction between Trade and Competition Policy, www. 4

6 Frederic Jenny 4 has observed that there has generally been a perception created that developed countries are not likely to fully cooperate with least developed countries in tackling hardcore cartels. Thus has been alluded to concerns over the presence of sufficient benefits in areas of interest to offset the obligations. In particular, there are doubts whether developed countries would cooperate, for example, to assist in tackling international cartels if cooperation is purely voluntary. In a Policy Research Working Paper 2917, 5 the World Bank has recognised that under the "effects" doctrine (or subjective territoriality), countries may take action against foreign practices that have negative effects in their markets. Export cartels were observed to be a restriction on exportation. In the 1990s, both the EU and US investigated a number of cartels in industries such as vitamins, steel, and animal feeds (ICPAC, 2000). The cartels that were identified often affected more than one national market. Levenstein, Oswald and Suslow (2002) analyze the purchases of developing countries of sixteen goods whose supply was found to internationally cartelized by European and/or American enterprises at some point during the 1990s. They found that in 1997 developing countries imported US$36.4 billion of goods from a set of 10 industries that had seen a price-fixing conspiracy during the 1990s. This was estimated to represent 2.9 percent of developing country imports and 0.7 percent of their GDP. These results appeared to have updated the earlier work by Levenstein and Suslow (2001) which found somewhat higher figures. Their work is one of the primary pieces of evidence cited by proponents of WTO antitrust disciplines, e.g., 'countries without adequate competition law and access to international cooperative mechanisms are routinely victimized by international cartels that operate in many industries' (Anderson and Jenny, 2001, p.3). However, the Levenstein/Suslow analysis provides only suggestive and informal evidence on the price raising or welfare effects of the agreements. It is understandable that the above-mentioned types of cartels are generally illegal under domestic antitrust laws. Similar effects may result from export cartels-agreements between competitors that are designed to exploit market power on foreign markets or to allow firms to benefit from 4 The note by Prof. Frederic Jenny, dated 18 July, is on his Consultations on modalities in the area of trade and competition policy, which he conducted in his capacity as one of the four Friends of the Chair to help the General Council Chairman hold informal discussions on the four Singapore issues, 5 Hoekman and Mavroidis (2002) 5

7 economies of scale or scope through cooperation. Export cartels may be legal, that is, firms engaging in such practices may be exempted from national antitrust in their home market, if they have no detrimental effect on home consumers. Cartel-type arrangements that have serious detrimental effects on developing countries because they impact on enterprise-level competitiveness-include international air and maritime transport cartels. These are often legal in that the arrangements have been blessed by national (competition) authorities, but have been found to raise prices significantly for developing country shippers and consumers. For example, Fink et al. (2001) estimate that restrictive trade and anticompetitive practices raise maritime liner transport costs by up to $3 billion on goods carried to the US alone. A precondition for an export cartel to operate is that there are two distinct geographical markets. When defining markets geographically, competition authorities ask one question: within which geographical space are conditions of competition homogeneous? Geographical markets do not necessarily coincide with national frontiers: it could very well be the case that due to trade liberalization, conditions of competition are homogeneous between two national markets (e.g., Zambia and Zimbabwe); conversely, conditions of competition are not necessarily homogeneous within one national market. International cartels do not have to be export cartels; companies of different nationalities (hence, international) may behave in an anti-competitive manner (hence, cartel) in the same geographic market (hence, no export cartel). In principle, national competition authorities can enforce domestic antitrust law against export cartels. However, many developing countries have limited ability to do so. This suggests there are potential gains from international cooperation on combating export cartels. According to Messerlin(1994), this could be pursued through a multilateral agreement involving a ban on exemptions for export cartels. While presently a number of Competition Authorities appear to follow the whistle-blower leniency program direction in the enforcement of cartels, the effective use of such programs would depend on the level of competition culture in a particular country. It has been noted that in February 2002, the European Commission published revised leniency guidelines and plans to expand its enforcement tools by strengthening its information gathering powers. The new powers include searching company executives homes in the process of evidence gathering 6. The UK government also announced ground breaking set of reforms to combat cartels. As alluded above, the Zambian Act confers powers to search 6 Rosen (2003) 6

8 premises or conduct a dawn raid. These powers have not been used as yet. In Zambia, we have a procedure similar to a leniency program. The Constitution of Zambia empowers the Director of Public Prosecutions to turn an accused person into a State witness with a promise to spare him from prosecution, if he cooperated fully by providing vital evidence to the prosecution. As stated earlier, the Courts in Zambia for instance are yet to be tested as to their consideration of a cartel offence. Section 16 of the Competition and Fair Trading Act prescribes penalties applicable upon conviction to a fine not exceeding ten million Kwacha or imprisonment for a term not exceeding five years or to both. The financial penalty (about US$2,000!) and jail term of not more than five years may only be awarded concurrently at the Judge s discretion. It is likely that the parties to a cartel may escape with a fine of a maximum of US$ 2,000 and a stern warning and suspended jail term. In this regard, the criminal sanction remains an effective deterrent compared to a fine. The Law provides for relatively strong sanctions against hardcore cartels which include a fine and a criminal sanction of imprisonment. The fine has proved to be very low to achieve deterrence against future activity of that kind. The law provides for sanctions against persons for their participation in the conspiracy. The prospect of individual liability can add an important level of deterrence, and individual sanctions also have another beneficial effect they create an incentive for culpable individual store defect from the cartel and cooperate with investigations, in order to avoid punishment. In this regard, Section 16 of the Act is directed against company officials. Conclusions While cooperation in cartel investigation is resounded at international fora and levels, the Commission s experience shows that cooperation with various allied and interested institutions at the national level is also cardinal to a successful anti-cartel drive. In view of the above, it would appear a competition specific leniency programme may not necessarily be the panacea to effective cartel investigation and prosecution in the Zambian setting and perhaps, other countries at this level of development. The exchange of information and assistance rendered between competition authorities is an important feature of deepening cooperation. In our COMESA region, cooperation in cartel investigations is increasingly growing. In most cases, this takes the form of informal 7

9 cooperation among heads of the competition authorities and/or case handlers. This is a result of regional seminars by UNCTAD, which have exposed case handlers in the region to develop close working relationships overtime. Zambia has also established through the Joint Trade Protocol, a formal cooperation agreement with its neighbour, Zimbabwe for the exchange of information in competition cases. As a result, there has been substantial case-specific cooperation through exchange of information involving specific cases or investigations. Further, the incidence of cross-border mergers in the COMESA region has increased informal and formal cooperation. This was the case in the assessment of mergers/takeovers involving Cadbury Schweppes and Coca-Cola, Lafarge in the cement industry, British American Tobacco and Rothmans of Pall Mall, etc. As regards institutional cooperation, Zambia and the other countries in the region have benefited from UNCTAD, OECD and the WTO in building working relationships among competition enforcement officials and between national competition agencies. We have also benefited in building consensus on best practices in competition law enforcement. A growing phenomenon in regional cooperation in competition law enforcement is the proposed enactment of the regional COMESA Competition Law and Policy, and the establishment of the Southern and Eastern Africa Competition Authorities Forum. The organisation provides for exchange of information, for coordination and investigations and proceedings, for positive comity and for consultations. It is possible that at international level, countries with different approaches to cartel enforcement may find it difficult to cooperate successfully. In South Africa for example, most of the information is under the cover of confidentiality and a foreign authority requesting for credible information to combat similar cartel activities in its territory may receive information that is inherently not useful to the cause, despite convergence of the laws. Countries with differing levels of development may also have difficulties in cooperation. While a developed country may have the resources to locate and collect credible evidential information, a less developed country may not reciprocate with similar information due to resource and expertise constraints. Notwithstanding the above, cooperation in combating cartel activity is a relevant starting point to effective enforcement as cartels become more secretive and complex. It is incumbent upon developed competition authorities and multilateral organisations to assist developing competition authorities with appropriate technical expertise and other means for them 8

10 to effectively attend to the cartel problem both domestically and in the context of international cartel cooperation. George K Lipimile Executive Director Zambia Competition Commission 4 th Floor Main Post office Cairo Road P O Box Lusaka Zambia Tel: Fax: zcomp@zamtel.zm Website: 9

11 REFERENCES Anderson, R. and F. Jenny "Current Developments on Competition Policy in the WTO," Geneva: WTO, mimeo. Evenett, Simon J. (the World Bank), Levenstein, Margaret C. (University of Massachusetts), and Suslow, Valerie Y. (University of Michigan Business School), International Cartel Enforcement: Lessons from the 1990s Fink, C. A. Mattoo and I. Neagu (2001), "Trade in International Maritime Services: How Much Does Policy Matter?," Policy Research Working Paper Hoekman, Bernard and Mavroidis, Petros C. POLICY RESEARCH WORKING PAPER 2917, Economic Development, Competition Policy, and the World Trade Organization, The World Bank Development Research Group, Trade, October 2002 International Competition Policy Advisory Committee (ICPAC) Final Report. U.S. Government Printing Office. Levenstein, Margaret C. and Valerie Y. Suslow. (2001). "Private Intemational Cartels and Their Effect on Developing Countries." University of Massachusetts, mimeo. At Levenstein, Margaret, Lynda Oswald and Valerie Y. Suslow. (2002). "Intemational Price-Fixing Cartels and Developing Countries: A Discussion of Effects and Policy Remedies," University of Massachusetts, mimeo. At maggiel/research.htm Messerlin, Patrick "Should Antidumping Rules be Replaced by National or International Competition Rules?," A ussenwirtschaft, 49: Rosen, Anthony (McDermont, Will & Emery, London), Enhanced Cartel Enforcement Rules Target Executives Homes, Spring