Managerial Behaviour and Competition law
This article was originally published in French. A translation in English is available below.
Cartel and managerial behaviour: Detecting, sanctioning and... preventing
Emmanuel Combe Vice-President, Autorité de la concurrence, Paris University Professor, University Paris 1 Panthéon Sorbonne Professor, Skema Business School, Paris/Lille Constance Monnier-Schlumberger Senior Lecturer, University Paris 1 Panthéon-Sorbonne
1. Four years after the founding article of the journal Concurrences on the role of managers in the commission of competition infringements [1] such as cartels, this dossier takes stock of the various tools that make it possible to better prevent them, in particular through compliance programmes and individual sanctions. We asked practitioners, researchers and academics to identify advances and new issues on this fairly innovative subject.
2. The idea that cartels are inefficient practices - since they lead to the freezing of competition without any counterpart in terms of efficiency - is not debated in economics and public policy. However, the question of how to deter firms from engaging in such anti-competitive practices remains open.
3. In this regard, economic theory provides a useful starting point. We can start from a counterfactual world, based on restrictive assumptions, but one that leads to a powerful and simple result on a theoretical level. This counterfactual world can be explained by starting from the theory of optimal sanctions, which is based on the economic analysis of crime (Becker, 1968) [2]. A firm does not commit a crime until it estimates ex ante that the gain it will derive from it will exceed its cost. This principle refers to the notion of rationality of economic agents, which leads them to always weigh the gains against the costs before making a choice. In the case of a cartel, the gain from the infringement is quantifiable: it corresponds to the difference between the cartel price and the competitive price, multiplied by the volume of transactions.
4. On the cost side, the participant in a cartel knows that he is liable to a financial penalty if the practice is detected by the antitrust authorities. The cost to the firm can be broken down into two distinct elements: the financial penalty and the likelihood of being detected. Let us assume that the firm is "risk-neutral": when it decides whether or not to engage in a cartel practice, it makes its choice solely on the basis of the expected gains and costs. In this case, the company does not violate antitrust laws if the expected cost is greater than the illegal gain.
5. It would "suffice" for the antitrust authorities to threaten ex ante to impose a sanction on companies such that the expected cost would be greater than the illegal gain, so that no company would break the law again. The optimal sanction here has a deterrent function. The objective is not primarily to punish ex post those who are caught, but to send a credible message ex ante as a general deterrent to companies that might be tempted to engage in cartel practices.
6. If companies are fully informed and convinced that the optimal sanctions will be applied ex post, they no longer have any ex ante incentive to break the law: no sanctions are imposed as long as there is no further infringement.
7. As a ripple effect, since it is the shareholders who pay the penalty and the infringement is no longer profitable, they have a strong incentive to "discipline" the managers. If they control them perfectly (no information asymmetry), the costs of control are zero. The competition education carried out by competition authorities is useless since it is in the best interests of companies to do so.
8. One can even go further: since detection is costly (in terms of public finances), antitrust authorities should set detection probabilities close to zero, combined with sanctions close to ... infinity. For governments, the expense would be minimal, since detection would be limited and violations rare, if not non-existent.
9. This counterfactual world would then lead to a "triple dividend": zero offences, zero sanctions, zero public expenditure. This world does not exist, of course, because it is based on restrictive and questionable assumptions.
10. In the first place, it is assumed that companies knowingly violate antitrust laws. While this assumption is largely borne out in the case of large companies which have an internal or external legal department, it cannot be excluded that, in the case of SMEs, cartels are formed in ignorance of the penalties incurred and the risks of detection. The public authorities have an essential role to play here: if they want to prevent "negligent infringements" or "lack of knowledge", which are costly to detect ex post, they must disseminate ex ante sufficient information on the illicit nature of cartels, the penalties and the risks taken, particularly to SMEs. As internal compliance may be lacking in SMEs, it is up to the public authorities, throughadvocacy, to take over, by specifically addressing this target (like the SME guide published in 2020 by the Competition Authority).Advocacy should focus primarily on the immoral dimension of cartels: for example, the CMA communicates the idea that cartels are comparable to theft.
11. Second, the assumption that governments can set the probability of detection close to zero (to minimize government spending) is subject to an agent behavioural bias: if the probability of detection is set too low, agents will consider it to be zero and ... break the law. This is an "availability bias" well known in psychology: when an event is rare, agents tend to consider that it does not exist. It is therefore necessary for antitrust authorities to maintain a certain level of detection of cartels, even if it comes at a cost. Zero public expenditure" is not a credible option.
12. Third, antitrust authorities cannot apply the theory of optimal sanctions to the letter. First, because in practice the legal criteria for determining an antitrust sanction rarely use the notion of "illicit gain" or "probability of detection". For example, in France, the sanction is determined on the basis of factors such as the seriousness of the infringement or the damage to the economy. Secondly, in order to be able to take into account the probability of detection, the antitrust authorities would have to know the exact value, which is not the case. Similarly, the antitrust authorities cannot apply optimal sanctions insofar as the maximum amount of sanctions is legally capped, usually as a percentage of the company’s turnover: in Europe and France, this ceiling is set at 10% of worldwide turnover. Finally, if the antitrust authorities were to impose optimal sanctions, the amounts would potentially not be financially sustainable for the companies, thus forcing them into bankruptcy. It would be paradoxical if the imposition of antitrust sanctions, imposed in the name of maintaining competitive law and order, had the effect of reducing competition in the market.
13. It follows from the above that antitrust sanctions, even though they have increased sharply since the 2000s, probably remain below their optimal level in terms of deterrence, as confirmed by a posteriori empirical studies. For example, Combe and Monnier (2011) [3], based on a sample of 64 cartels convicted in the period 1969-2009, conclude that the European Commission has become tougher but has not crossed the red line of "over-deterrence".
14. There is therefore a residual incentive, even with strong antitrust sanctions, to engage in cartel practices: the "zero infringement" and, by a knock-on effect, the "zero sanction" do not exist.
15. The question of incitement to infringe antitrust laws is complicated by the fact that in practice every enterprise is composed of economic agents with different objectives. In particular, shareholders’ main objective is to maximise profit, while managers (and more generally employees) may have as a goal their career progression or their own short- or medium-term remuneration. Depending on the situation, these interests may converge or diverge, in particular with respect to compliance with antitrust laws. Two polar cases are particularly interesting to study from a public policy perspective.
16. A first polar case is where shareholders, anticipating that sanctions will be suboptimal, wish to engage managers in cartel practices, without their knowledge or against their will (case 3 in Table 1). They may, for example, not set up a compliance program, so that managers are not fully informed of the illicit nature of these practices. They may also try to understate the seriousness of the infringement in the eyes of managers by presenting it as a "necessary evil" to achieve a lawful result, namely a high profit (Stucke, 2011) [4]. A more radical solution is to develop a form of "toxic management", by setting profitability targets for managers that cannot be achieved by lawful means: managers are somehow "forced" to break the rule in order to "meet their targets".
17. The public authorities have an essential role to play since internal compliance will be lacking: they must disseminate information to a wide public on the illicit nature of cartels, in order to dissuade managers from committing themselves to them. Public communication must focus as much on the illegal and harmful dimension as on the immoral aspect of these practices: according to an Ifop survey [5] on the perception of cartels in France, they are subject to strong moral condemnation. The majority of French people consider it to be a "dishonest" and "hidden" practice (the fact that customers pay more is not the first factor of reprobation). This result is in line with that obtained in similar studies in other countries.
Table: Behaviour of managers and shareholders with regard to antitrust rules cf. pdf version of this article.
18. A second polar case is that in which managers intend to violate antitrust rules, against the will and without the knowledge of the shareholders (case 2 in Table 1). This case is problematic for shareholders: in the event of antitrust lawsuits, they will not be able to escape liability by invoking the isolated behaviour of a manager, insofar as his action commits them. It is therefore in the shareholders’ interest to dissuade managers from violating antitrust rules by using internal tools such as training, disciplinary sanctions (which can go as far as the threat of dismissal or the reimbursement of variable compensation in the event of a breach), the implementation of a compliance program, the adoption of an internal whistleblower procedure, etc.
19. However, it cannot be ruled out that, despite the best efforts of shareholders, managers who are particularly "risk-taking" may violate the rules of law, especially if they are subject to biases such as "overconfidence". For example, some compliance programmes only deter employees who are averse to risk and unethical behaviour when the company’s policy is essentially informative and not repressive. Similarly, the threat of a refund of the bonus or premium if the manager has engaged in an illegal practice is difficult to put in place, as is the threat of sanction in the employment contract.
20. The public authorities have a role to play again: it is not a question here, as in the previous case, of doing advocacy in place of companies. It is a question, in addition to internal compliance and alert programmes, of engaging the personal responsibility of managers through sanctions such as fines, imprisonment or disqualification.
21. Between these two polar cases, we find the situation that is probably the most likely in practice (case 4 in Table 1): managers and shareholders, although pursuing different objectives, may have a convergence of interests in violating antitrust rules. On the shareholders’ side, since the sanctions are not optimal, they may ’let the managers get away with engaging in cartels. On the managers’ side, they may want to form a cartel to boost their performance, which will result in an acceleration of their career or in additional remuneration. This convergence of interests is all the more likely since cartel practices, unlike other frauds, are mutually beneficial to shareholders and managers. In this respect, a PwC study [6] has shown that competitive compliance is often the poor relation of compliance policies within companies, compared to the fight against corruption or embezzlement.
22. In this case, only a combination of sanctions against companies and individuals can limit these converging incentives.
23. We can therefore see that there is a wide variety of concrete situations that can lead shareholders and/or managers to engage in cartel practices.
24. Contrary to our initial theoretical framework, antitrust policy cannot therefore be reduced to a binary arbitration between sanction and detection: it must also include an advocacy policy to prevent the formation of cartels, in addition to the internal compliance action implemented by companies.
25. Similarly, public policy cannot be limited to detecting and punishing legal persons: it should be extended, in accordance with arrangements to be defined, to natural persons through criminal sanctions.
26. In this respect, it can be noted that for the time being - and despite the existence of legislation in 25 jurisdictions - the implementation of criminal sanctions against natural persons remains rather rare, with the exception of the American case.
27. In France, although Article L. 420-6 of the Commercial Code has since 1986 provided for a prison sentence of 4 years and a fine of 75 000 euros "for any natural person to fraudulently take a personal and decisive part in the conception, organisation or implementation" of a cartel, it remains little applied. David Viros analyses the various characteristics that limit the contribution of the French criminal sanctions system to the deterrence of cartels, and in particular the question of the inadequacy of the resources devoted to investigations.
28. It is likely that this reluctance - and especially the use of prison sentences - is only a reflection of the low stigmatization of cartels in society: cartels are not seen as practices serious enough to lead to such sanctions. In this respect, in France, the Ifop poll conducted in 2017 shows that the majority of respondents (75%) remain opposed to the imposition of prison sentences, although they are not opposed in principle to the idea of imposing sanctions on individuals. Conversely, if the United States makes fairly frequent use of the criminal weapon - during the period 2009-2018, no fewer than 524 individuals, American or not, were prosecuted for participating in a cartel and 264 of them were sentenced to prison terms averaging 19 months - it is because cartel practices, which are equated with a veritable "conspiracy against the market", are the subject of strong moral condemnation in American society.
29. Assuming the use of the criminal weapon, it remains to be seen what kind of sanctions could be imposed. If one follows a purely economic reasoning, since a prison sentence can be converted into a fine, it is more profitable for society to impose fines on individuals in order to avoid incarceration costs. According to this approach, prison can only be justified once the individuals in question no longer have the financial capacity to pay the full amount of the fine: the use of prison appears here as a residual measure, intervening if the individual is unable to pay the fine. This approach in favour of monetisation of penalties is debatable:
- In practice, fines are often capped at low levels, in relation to the earnings of company executives. For example, in the United States, over the period 2008-2017, the average fine per person was 84 600 dollars. In addition, it is always possible for a company to financially compensate the fine paid by its employee;
- it is difficult to determine the "optimal" amount of a fine in the case of an individual (what was the private gain of the cartel for the individual?) and, if so, the fine may exceed his financial capacity ;
- a fine is implicitly based on the idea that it is sufficient to pay the tax in order for the offending behaviour to be "laundered": its stigmatizing effect is therefore weak.
30. Conversely, the imposition of a prison sentence has several characteristics in terms of the deterrent effect of the sanction:
- it is obviously stigmatizing for the individual (particularly in relation to his family and friends) in that it leads to a judgment of immorality of the behaviour in question;
- the prison sentence sends a strong signal to its reference group (usually "white collar" workers in the case of cartels) insofar as it is widely publicized ;
- the threat of a prison sentence increases the effectiveness of leniency programmes when it is extended to criminal sanctions. Indeed, an individual will more readily agree to cooperate with the anti-trust authorities if he anticipates criminal immunity.
31. 31. Prison is only justified in the eyes of public opinion when there is strong moral condemnation of cartel practices, which is not the case in Europe. It is therefore useful to consider other, less "stigmatizing" sanctions than prison, such as disqualification measures: a manager or corporate officer who has directly contributed to violating competition rules or who has "let managers get away with it" in full knowledge of the facts may be banned from holding any position of responsibility within a company for a certain period of time. This mechanism, adopted for example in the United Kingdom through the "competition disqualification orders" system, provides for a maximum period of incapacity of 15 years. Disqualification negatively affects the reputation of the manager and his or her career prospects, while minimising costs to the community (no incarceration): it therefore has a strong deterrent effect. It should be noted that the CMA has used this mechanism on several occasions, particularly in a case involving a cartel between real estate agencies: two officers were disqualified for 3 years and 3.5 years for having participated directly in organizing the cartel.
32. As the criminal solution is currently limited in Europe, it is useful to turn to prevention policies, implemented by the companies themselves through compliance programmes.
33. As explained above, compliance action within companies is not antithetical to maintaining high antitrust sanctions: rather, it complements them. The challenge is not to diminish the responsibility of shareholders, on the grounds that they have set up a compliance programme, but to encourage greater compliance with competition rules by managers upstream. Moreover, as David Viros points out, the European doctrine on the question of the company’s responsibility towards its employees is constant: even if employees have been trained beforehand in competition law, the imputation of an employee’s anti-competitive actions to his or her employer is akin to an irrefutable presumption.
34. It may even be considered that the implementation of a compliance programme will be all the more effective the higher the perceived risk of antitrust sanctions. Marie-Pascale Heusse reminds us in this regard that the growth of competitive compliance within large companies can often be explained by an awareness of the magnitude of the financial risks associated with it. These risks are of a twofold nature: monetary sanctions but also possible damage to the company’s reputation (through, for example, the publication injunction). Moreover, the rise in the number of claims for compensation has led to an increase in the level of these financial risks, and thus the need for a genuine preventive policy. Marie-Pascale Heusse thus pleads for a right to compliance: the right to be informed and trained for individuals, especially if they incur a legal risk.
35. The first issue of compliance is that of its dissemination within society, as Andreas Stephan points out. A survey conducted in 2018 by the British Competition and Markets Authority (CMA) among 1 200 companies revealed in this respect that only 25% of them had a good knowledge of the competition rules and 16% said they had never heard of them. According to Andreas Stephan, any relaxation, even temporary, of antitrust enforcement rules would weaken the scope of a compliance policy: it would give managers the feeling that antitrust rules are not intangible and depend on circumstances. Any relaxation would thus erode the sense of moral wrongdoing associated with cartels. Furthermore, Andreas Stephan points out that some "arrogant" (hotheads [7]) individuals remain impervious to any culture of respect for the rule of law.
36. This dissemination of compliance may be based on the fact that employees, particularly among the younger generations, are particularly sensitive to ethical considerations, alongside environmental issues. They are more interested in the impact of their professional commitment on society. For example, one can imagine that business schools are developing more ethics training in their students’ curricula.
37. On a completely different note, it may also be useful to develop compliance within professional associations, which can play the role of a true "supporter" of the agreement. In this respect, Chloé Le Coq and Catarina Marvão, studying a sample of 2 261 "legal" cartels registered in Sweden during the period 1947-1993, show that in 48% of cases the cartel includes a professional association. This presence may help to reinforce the legitimacy of this type of practice in the eyes of managers.
38. The second compliance challenge is to incorporate the increasing complexity of competition rules. In particular, the effects-based approach to certain anti-competitive practices (moving away somewhat from the classic cartel, prohibited by object), the treatment of information exchanges and pricing algorithms, the importance of economics in competition law, imply adopting a more global approach to compliance, which goes beyond mere knowledge of the legal rules. Training courses should not be limited to teaching a set of pre-established rules but should also aim to develop in managers a genuine understanding of the market and the competitive role of the company and its interactions. In this respect, the responsibility for implementing compliance programmes should not be limited to lawyers or legal departments alone, but should also involve economists, particularly in changing sectors in which rules evolve rapidly (digital, technological, etc.).
39. The third compliance issue is the provision of positive incentives to comply with the rule of law. Philippe Coen rightly points out that managers have not been rewarded for their compliance skills, and that as a result the legal culture has difficulty irrigating the governing bodies. It is not often, unlike in the United States, that employment contracts and remuneration schemes are conditioned or take into account the issue of compliance. More prospectively, Philippe Coen advocates the adoption of new tools by companies, in the form of "pushes" to encourage managers to prevent the formation of cartels. In his view, an anti-trust rating system could, for example, be set up and included in company rankings, following the example of what is being developed in the environmental sector (a rating system with a compliance barometer).
40. Through its various contributions, this dossier aims to contribute to the debate - which is emerging in Europe - on the need for managers to take responsibility in the fight against cartels. Between a purely repressive approach and the mere prevention of anti-competitive behaviour, the right answer is probably to be found in a combination of the two types of policy, both at the level of companies and public authorities.
Is competition law soluble into managerial behaviorism?
Philippe Coen Head Lawyer Founding President, French Company Law Ethical committee, Paris Honorary President, European Company Lawyer association, Brussels General Secretary, UNIFAB, Paris Board member, In-House Counsel Worldwide, Paris
I. Introduction
"Thou shalt not (illicitly) monopolize, cartelize, subsidize, restrict, fix price, evict nor predatorily misbehave. ”
1. This indeed looks like the dream mantra of an antitrust expert, but the concept is far to be as clear for mainstream managers. The solubility of antitrust rules into managerial behaviorism is an interesting question as it raises the sense of self-awareness of the red line in the way managers apprehend their roles. A parallel could be drawn with the carbon emission fraud that did tarnish the automotive industry sector at the end of the 2010s: How come so many managers (almost 100) for so long have been able to conceal the fraud without complaint nor whistleblowing nor raising the ethical alarm to flag a lack of compliance motivated by attraction of profit?
2. Managerial behavior study brings light to the better understanding of the human aspect of the company management drivers. Management taking a special interest in workers makes them feel like part of a special group. Having a management being fully prepared and aware to take antitrust principles and competition law principles in its business strategy is more an ideal than an actual reality.
3. Managers typically rely upon the support functions of the company to instill legal principles into their daily management and entrepreneurship. Part of the support functions stands the legal department and company lawyers, who themselves are seconded by outside counsel. To clarify things, no entrepreneur wakes up in the morning wondering which breach of competition law he or she will entertain. In the mind of enforcement authorities there may subsist a negative mindset due to the way public servants are viewing entrepreneurs and their managers. Both populations, managers and competition authorities, usually only meet when a case gets into litigation. The two groups do not always know much of each other, and there is sometimes a natural defiance among them.
4. When apprehending daily business life with a competition law sensitivity, one can arguably claim that the two topics are antagonist. Competition law fundamentals are centered around the prevention of abusive company behaviors, prevention of illicit cartels, limitation of illicit state aids, protection of new entrants, facilitation of innovation, eventual interest of the economy, and therefore employment and consumers. Managerial behaviors vis-à-vis competition laws still remain terra quasi incognita in spite of many educational efforts from the legal and compliance teams. Future trend of competition law must factor in this dimension. Understanding what drives a manager to breach competition laws or to comply with them needs to be explored in order to add efficiencies to the design of competition laws. Competition laws have impacted our societies since the early 20th century with this fiction in mind that companies are disincarnated structures and without any real interest for the men and women managing their boards. At the origin of antitrust laws, there was the enactment of the Sherman Act back in 1890, a federal statute which prohibits activities that restrict interstate commerce and competition in the market place.
II. What it takes to be a great manager or a delinquent?
5. Today’s managers are incentivized to work extra hard to the price sometimes to not being able to reason all of their actions. Valuing management and ethics remains a recent trend in company’s culture. The rules have not been built by managers nor by brains cognizant of the socio-psychology of managers. This gap between the architects and the inhabitants of the antitrust house has led to a complex set up not necessarily user-friendly for the average John Doe manager. The traditional typical skills attached to the function of great managers are: sense of planning, communication, decision-making, delegation, problem solving. When listing these elements, it strikes the mind that the notion of compliance is alien to these values.
6. Managers have not traditionally been rewarded for compliance skills and too few lawyers are part of the CEO club, which makes the legal culture having some hard time to inundate the mindsets of the higher managers although we acknowledge a rise of company lawyers in the boards and management teams. The reward for breaching the law may have been quite obvious for companies with aggressive business objectives. Understanding what drives a manager to breach the law is becoming a necessity in order to evaluate the need to reform antitrust norms.
III. Competition law compliance as a managerial skill per se?
7. In family ventures, where the shareholding is only in a few hands, the cross-fertilization with other approaches and compliance cultures can be more of a challenge. Shareholding, structure of the market, recruitment criteria of news managers, positioning of the legal function within the company, country where the head office is located, litigation history, tell a lot about the compliance spirit one can find in a company. There are some steps to be taken in order to reach this level of cultural approach. Compliance programs, trainings, messages from the top and self-assessments are key elements for a successful compliance approach in order to dilute any ambition to breach the law.
8. Compliance in general is hardly a skill per se, valued by the top management of companies. In cartel behaviors, once a company is involved into a cartel, it is hard to spontaneously move out from it as a cartel corresponds to a systemic protocol. There is a kind of routine attached to the involvement into a cartel practice.
9. Therefore, it can be inferred that compliance with competition law does not come enough as a natural skill per se. Managers learn fast, hence, most of them get the rule and get how to apply it and command others to do so, but the "per se" concept i.e., the fact of being naturally prone to compliance? needs to improve with no doubt with the help of the company’s legal team. Competition law is not the exclusive business of the (too rare in organizations) competition law department, hence the suggestions proposed in this paper to review how to foster the sense of competition law compliance per se.
IV. Are management skills compatible with competition law skills?
10. There is nothing obvious in entrepreneurship. A manager is expected by its organization to be intimate with risk-taking decisions and competition is most of the time fierce in all sectors, regulated or not. Managers recognize the need to refer to easy-to-read regulations and to have the same rules for all players. Managers are not averse to training nor culture relating to the competition law fundamentals, they are just often not exposed enough to this type of logic. A manager will be particularly influenced by the level of fines which may be inflicted to his/her business and to his/her person, or his/her team or management. A strong competition law case may ruin a company and its reputation these days.
11. Managers are prompt to complain also about the time a merger control can take to get reviewed and cleared for instance in the event two ventures plan to merge. This process can sometimes take up to 24 months with protracted negotiations in order to divest here and there some interests but the fundamentals of competition laws which basically claim that the law of the jungle is not tolerated and the law of the strongest cannot prosper are naturally consensual. In various instances (such as the French cleaning product matter [8] heard by the French Competition Authority back in 2014). In this instance, the company claimed in vain that the managers responsible for putting together a cartel procedure did not act with the required authority nor in the interest of its shareholders . This raises the issue of what process was put in place by the company to deter its manager to act that way-in this case, the work contracts or the power of attorneys were silent and did not operate as a deterrent. A typical test we commonly use in training programs to test the reputational effect of a practice is: How would you react if this email or practice were on the front page of your preferred newspaper? The absence of legibility of the rule of law in competition matter and the fact that it is now in the hand of experts as this competition law became a complex science make it less easy to read and understand. In this respect, it means that the authorities also have a real responsibility to make the norm be more clear, communicated and easy to understand. Also, the fact that the company lawyers’ legal privilege is not recognized under EU laws and in a number of countries self-limits the willingness and ability of the management to go and confess its doubts to the legal department, which cannot appear for what it is: the confident and trusted adviser of the business. The risk to breach the law can also come from a misunderstanding of the norm or it can come for the toxic saying we often hear in the business place: "I did the thing as we always did," which enables the ability to question a business practice or behavior.
12. An entrepreneur is also a responsible finance person and typically when reviewing a matter, the manager will measure his/her risk aversion and will wonder about the cost to breach the law, the percentage of risk to be apprehended, the cost to defend the case and the cost of the harm to reputation, and possibly the cost of the sanctions.
13. It is very unusual to see a company inserting in its work contracts and bonus long-term incentives, stock options and promotion schemes incentives toward legal compliance as being a road stopper toward internal promotion. This scheme is probably the easiest low-hanging fruit human resources could experiment in order to change the cards of the compliance game. When a company and its managers do engage its name to sign an ethical charter this serves as a self-moderating tool to prevent the company from misbehaviors. This is quite a modern pledge to be made in order to move the compliance spirit out of the exclusive hands of experts.
V. Soft skills vs. hard laws
14. Compliance programs, training, policies, booklets, e-learning modules designed for the company are now part of the DNA.
15. Managerial quality behavior is directly connected with knowing oneself. Understanding oneself translates in company into self-assessment and ability to reflect about your own structure and personality. Self-competition assessment means to be able to regularly evaluate what the structure can learn from its own actions and behaviors. Happy and productive companies are now known as the ones where positive image and happiness at work are highly rated.
16. The development of soft skills in order to infuse the anti-trust compliance mind across the managerial community is yet to be nurtured. The ICN Competition Advocacy Working Group stated: "those activities conducted by the competition agency related to the promotion of a competitive environment by means of non-enforcement mechanisms, mainly through its relationships with other governmental entities and by increasing public awareness of the benefits of competition. "In this type of advocacy approach lies the modernization to be thought through about a reform of competition law enforcement. This does not mean that the concept of financial sanctions or injunctions should be discarded. Fines and Injunctions are part of the regulators ammunitions as first, the OFT released a study indicating that a sanction bears three times its direct effect; and second, the OFT further acknowledged that between 2000 and 2006 it Identified companies that have abandoned five cartels as an after effect (post sanction) of its rulings.
VI. Incentivizing managers and competitiveness benefits
17. What makes someone misbehave or carry on to breach the law? How disrespect of the rules of the game gets built over time? How can a manager err on the side of illicit antitrust behaviors? What allows an internal corporate system to allow knowingly or candidly that the compliance frontier is the object of an oversight? The answers to these questions are a mix of psychology, sociology, and legal culture. According to Emmanuel Combe, a prominent economist and the vice-president of the French Competition Authority, who has studied this phenomenon [9] in context of cartels, one has to wonder about the hope for personal gains and the lack of legal culture which encourages the manager to sustain an illicit behavior.
18. One of the most obvious remedies to illicit competition behavior is probably as simple as the incentives to be imposed upon top management. In other words, making sure that a manager is appraised and incentivized monetarily in accordance with compliance criteria is probably where companies and human resource departments have a great space for demonstrating progress.
19. The more the firm product or service is substitutable, the more the firm is in a position to provide stronger incentives to its managers to reduce costs in a context of volatile profits and change the marginal value of investments. [10] The challenge we need to address is-in a context of economic tensions and business turmoil-how to convince managers to be induced to take competition law compliant business decisions. In such a context, the temptation is great to push managers and employees to "work harder," but no compelling message to work hard while making the right decision. Pay for performance helps to align managers’ goals with the shareholders’, but also entails agency costs. By increasing the elasticity of firms’ demand functions, greater competition increases the value of making good decisions, and then firms will provide stronger incentives in response.
VII. Are the managing competition authorities behaving exemplarily?
20. Companies and nonprofit trade associations and to a certain extent Member States are under the radar of the competition laws but what about the compliance and manager behavioral skills to be demonstrated by the competition authorities themselves? Equal rationale, equal approach, equal treatment should be the rule. Therefore, the managers of the competition authorities should also be part of the protocol of the ethical and compliance revolution. Managerial skills are not a privilege for private companies and private sector. This also applies to public sector, independent authorities, and competition authorities. The dissemination of the culture of compliance and the pedagogical effort around antitrust compliance have a lot to do with the exemplarity of the competition authority and its communication skills. Exemplarity regarding managerial behaviors needs to clearly not miss the management of the competition law authorities especially in a world of hyper-transparency.
VIII. Competition culture and corporate social responsibility vibes
21. Over the years and over generations of companies and lawyers, the role of the legal department has been tremendously evolving and is more seasoned than ever. The penalties and the fines imposed by authorities are no more the main driver of compliance. New managers nowadays want to join company not only to grow a business together but primarily also to "make an impact," to help a corporation to do good. Human resource departments are aware of that dimension. The best tip in terms of compliance culture is not to solicit the legal department after the fact but upward in the process. This approach is more usually utilized in common law countries, where the cost of law suits is more fatal probably.
22. In a time of ethical and planet consciousness, the wave of compliance and transparency can only benefit to competition law compliance mindset and culture.
IX. Conclusion
23. In sum, is competition law soluble into managerial behavior? The solubility and the compatibility elements become material in an evolving competition law centric context. Contrary to a common belief, managers are not typically incentivized within their organization to become collusive. Such an anchored belief can be shared among enforcement authorities. Risk aversion is not the only incentive to compel a manager to become compliant. Legal and ethical education within business schools does nowadays contribute a great deal to drive future managers toward a compliance spirit. Corporations need to identify new tools in the form of nudges to incentivize their managers to prevent entering into illegal collusive agreements. In the event the company is subject to profit shocks, if its utility function is concave in profits (e.g., because of risk aversion), and if it incurs opportunity costs (e.g., by violating a social norm), then we are in a red-flagged competition law zone. The model supports the empirical observation that if collusion is to be established and sustained in a state with low profits, then this state must be quite persistent. It also indicates that compliance with antitrust laws can be ensured best by combining a zero-tolerance policy with a strategy of forgiveness. Management by fear or greed is progressively diming. Companies like more and more to refer themselves as social impactors or view themselves as civic ventures and great places to do business or to grow a career. Such tag lines will help us identify the right modern remedies vis-à-vis the fraud temptation. Such mantras are not necessarily empty promises or type of moral or green-washing type of marketing stances, these commitments are now part of large companies, big brands, positively obsessed with their reputation and brand image and could be secured by appropriate procedures (such as auditing and scoring).
24. The future is behavioral and company lawyers supported by their outside service providers are the designated natural catalysts called to achieve the now mature manager behavioral revolution.
25. Will the legal compliance culture and the growing influence of the legal department within companies suffice to overcome and largely eradicate illicit behaviors? Will compliance and ethical education at school, at university, in business schools and then as continued legal education suffice to reduce the workload of competition authorities? The debate to come in Europe is at which point the United States approach will diffuse its principles and if the personal sanctions against managers is the solution to render more soluble managerial behavior Into competition law compliance. Brainstorming the efficiency of sanctions is a useful debate for the future. Criminal law enforcement does not appear to have the modern impact we are looking for as typically collusion is made by so many employees of the same company that to be fair, the prosecutor could not only focus on top management but onto all the accomplices of the fraud who did sometimes knowingly commit a fraud without using the whistleblowing tools and the alerts and trainings provided by the legal department. Brand reputation matters a lot nowadays to companies and its managers. Extra-financial notation has become the modern scoring and benchmark to rate companies. Including competition law compliance principles. The extra financial scoring of undertakings could help a great deal managers to realise their interest to develop a compliance culture. A negative international scoring linked with internal and independent antitrust compliance audits can have more efficiency than sentencing to jail a couple of executives who will long be past managers at the time the sentence is issued in practice. Therefore, the future of solubility of competition laws into managerial behavior is correlated with the ability of the law and the enforcers to connect with the reality of the business and the drivers for managers. Scoring companies helps investors, consumers and employees to make choices. A sound regulation is a regulation that helps transform the society in a positive way for its citizens. In an era of transparency and hypersensitivity to reputation, fear for its reputation and its ability to trade is swifter than most of injunctive reliefs, fines or even criminal prosecutions. Scoring stakeholders including governmental bodies, trade associations and state agencies would be an innovative fashion to evangelize respect of competition law fundamentals. A creative approach consists in setting up an Antitrust Scoring System-to be featured in rankings of companies with grades and traffic such as what gets developed in the environmental sector or the anti-cyberviolence tool kit. This would be the grail of the competition law incentives. Companies and regulators do both need a permanent compliance barometer scoring system helping managers to reflect and visualize easily where they stand as a benchmark, in the global landscape of antitrust compliance. Reinventing the compliance cultural education and the compliance by design mindset is our challenge to come. In a time when new emerging monopolies are dangerously Increasing prominence, especially post-Covid era our managers ought to be the optimal barriers vis a vis anti-trust temptations. Company leaders are far from being resistant per se to the concepts of competition laws. It is up to the competition law community to be more creative and explanatory in the way to help managers to identify their true raison d’être and assist them at being at all times do good competition leaders.
Competition Law Compliance Strategy: A Banking Example
---- Marie-Pascale Heusse Head of Competition Law / In charge of the Competition Law Compliance Programme, BNP Paribas Group, Paris
Introduction
1. Leading by example is one of the key competencies for a 21st century manager. A skill that is in line with the codes of conduct that have been flourishing for several years within companies, as concrete results of an internalised and integrated compliance culture.
2. Compliance has evolved into a more global concept, imported from the United States, compliance, a culture of respecting the rules to ensure a more solid and sustainable [11]performance . It determines how far to go to ensure the safety of operations, preserve the company’s reputation and avoid civil and criminal [12]liability. The implementation of compliance programs constitutes a strategic and organizational element to accompany this change in culture. This approach involves defining and assessing risks, raising awareness among all stakeholders of their importance and the need to adopt responsible behaviour in order to transform these risks into opportunities while ensuring the company’s relative legal security. It gives meaning to everyone’s actions in a context where not only financial but also extra-financial risks, such as reputation risk, which is one of the company’s main assets, are increasing. Companies are now showing their willingness to deploy a compliance culture that is rigorously applied. Thus disseminated, understood and integrated, the compliance culture should enable all employees to work successfully within the framework of their missions without incurring individual risks or causing the company to incur major risks.
3. Respecting a code of conduct today implies for an employee and even more so for a manager to act and decide in accordance with the ethical values and principles enacted by the company while complying with legal, regulatory and deontological standards. But how can one act, decide and manage by example without having all the keys? No one is supposed to ignore the law. In a context where compliance has acquired its letters of nobility, and where the company requires an unfailing commitment from its employees, employees must have a right to compliance: the right to be informed, made aware, trained in accordance with the expectations of the company, regulators, authorities and public institutions. All the more so when the rules to be complied with are behavioural, such as those relating to anti-competitive practices.
4. In order to do so, the company must implement an effective compliance strategy. Experience shows that "one size does not fit all". This strategy must take into account many parameters and not become a mere adjustment variable. An incomplete or minimal strategy would be almost as ineffective as no strategy at all. Companies must therefore be ambitious, building programmes that make it possible, of course, to learn from illicit practices, but also and above all to engage in prevention in order to anticipate and control risks, while at the same time enhancing the resulting gains. This is all the more important in a rapidly changing economic context that requires adaptation and innovation.
5. Examining the creation and implementation of a competition law compliance program in this regulated sector makes it clear that the mission is sometimes challenging. A real organisational challenge in an industry where compliance is king when it is imposed by regulation, but where it can become subsidiary in the absence of a regulatory requirement. A challenge that may seem insoluble when added to normative inflation and the multiplication of training courses that already weigh heavily on managers, the lack of clarity in the rules. How, indeed, can one successfully manage without excess or omission when one is overwhelmed by a continuous flow of information and rules, some of which may seem difficult to grasp or even counter-intuitive?
I. Competition Compliance Programme: A Banking Example
1. Banking sector and compliance. The banking and financial sector has seen the emergence of compliance as a direct result of the financial scandals of the late 1990s. At the international level, the Basel Committee has begun a process of reflection to formulate specific proposals on how to control the risk of non-compliance [13]. In France, the principle of compliance was enshrined in CRBF Regulation 97-02 [14]in 1997. In the early 2000s, a central compliance function was set up at all banks to identify, assess and control compliance risk. At that time, this mission was essentially aimed at compliance with regulations specific to banking and financial activities. However, over the years, compliance obligations for all activities have multiplied so that the Compliance function has grown very strongly within banking groups.
2. Compliance with competition rules. In France, banks have long believed that they were under the exclusive jurisdiction of their sector regulator. And it is true that, until 2003, concentrations in the sector were controlled exclusively by the CECEI [15]. Since the early 2000s, the competition authorities have imposed heavy sanctions on banks, particularly in the context of cartel cases (e.g. the mortgage credit cartel in France [16] and the so-called Club des Lombards cartel in Austria [17]), which are economic activities par excellence and de facto subject to competition rules. However, the legal functions did not have a specialised department, nor did the compliance functions have their own specific arrangements.
1. Creation of the first banking programme for the anticipation and management of competitive risk
8. In a sector where the culture of compliance was constantly developing and in view of the constant increase in competitive risks, the legal function found in the Europe Economics study, carried out in 2008 at the request of the Competition [18]Council, an effective and decisive lever for developing and launching its competition law compliance programme in 2009. Its primary objective: to prevent and anticipate competitive risk through information, awareness and training.
9. It will nevertheless take more than ten years to move from a training obligation imposed on certain employees identified as being particularly exposed to competitive risks ("employees at risk") to a training obligation imposed on all (cf. paras. 12 and 13).
10. When the BNP Paribas Group’s competition law compliance programme was launched in the midst of the financial crisis, the retail banking business, but also and above all the corporate and investment banking business, found itself in turmoil, facing numerous requests for information and the opening of proceedings by the competition [19]authorities. The Group’s senior management then qualified the competitive risk as major and integrated the competition rules into the culture of compliance and soon to be compliance that should be infused into the Group.
11. From now on, the Group’s compliance program is based on documentation on a dedicated intranet page, which is intended to be exhaustive but also educational. This documentation is built around a guide detailing competition rules and related risks, as well as practical recommendations for operational staff and a "first aid kit" identifying best practices in the event of dawn raids. The programme also includes on-site training courses delivered on request to business lines (from COMEX to local teams), which are systematically adapted and tailor-made. But it is also and above all via an e-learning tool launched in 2010 that the competition culture is supposed to be widely disseminated within the Group.
2. Prevention strategy: from segmented training to compulsory training for all
12. Obligation to train employees at risk. The strategy put in place at the time was essentially based on the identification of "at-risk" employees (so-called "segmented" training according to the population). Two guidelines had been drawn up for this purpose: a legal framework for the identification of high-risk practices and a framework describing the teams and types of functions considered particularly exposed in view of the high-risk practices. It was then up to the Compliance function, in conjunction with Human Resources, to identify these employees at risk. In 2015, an inventory of the situation will be carried out. The first positive finding is that all of the Group’s business lines claim to be concerned by competition law and have taken the habit of referring their problems to the team of specialists based in Paris, via competition correspondents, which is now known as the Competition Law Practice. Another observation, much more mitigated this time: only 30 000 out of 180 000 Group employees (i.e. less than 15%) are actually trained.
13. Obligation of "all staff" training. Faced with this lack of awareness in a context of high exposure to competitive risks, the legal department obtained the creation of mandatory training for all staff, an essential lever for anchoring the culture of competition in a homogeneous manner within the Group. Two years will then be necessary to (i) build the tool using practical cases drafted internally by the Practice; (ii) translate it into 19 languages; (iii) create a database of employees to be trained, including exemptions [20]; (iv) check any local regulatory constraints such as prior validation of the training by employee representatives; and finally (v) assign the training module to all employees (excluding exemptions). In 2018, the mandatory training, Competition Law & You, will be assigned individually to the Group’s employees. The completion of the training has since been monitored by the entire management and human resources chain.
14. In summary, the prevention of competitive risk within the Group could resemble a walk in the park with proven effectiveness. The reality is quite different. If there is one lesson to be learned from this experience, although far from complete, it is mainly the impact of the human factor on the prevention/training process. A parameter that can only increase the inherent randomness of any training process and make it less effective.
II. Human impacts in competition compliance
1. Human factor and implications for the prevention strategy
15. Even in the presence of compulsory "all-staff" training, it is an illusion to hope to train all staff effectively. This difficulty in disseminating a homogenous competitive culture increases if the prevention strategy only targets employees identified as "at risk".
16. Training on the identification of employees at risk. Where training is not mandatory for all, its implementation is based on a chain of human responsibilities. To be effective, prevention requires uniformity in the coverage, processing and distribution of information and awareness materials. Human intervention, on the other hand, requires heterogeneous and therefore random implementation.
17. Random implementation and asymmetry of managerial support. After five years of deployment of the program within the Group, such an observation has clearly emerged. Numerous disparities were identified between business lines in the identification, assignment and, ultimately, training process. The disparities identified are as great as the number of people involved in this process: compliance officers, business unit/business line training managers and managers.
- Identification of the target: identification is the responsibility of the compliance officers. Some have become fully involved, others less so, mainly due to a lack of (i) knowledge of the subject, (ii) understanding/apprehension of the identification guidelines, (iii) involvement of management, or even (iv) willingness to carry out the identification within the timeframe and under the conditions required by the legal function, which is the primary sponsor of the training but has no hierarchical link.
- Training planning and assignment: planning and assigning training to employees is part of the mission of the training managers of each business line and entity. However, in the absence of an exhaustive roadmap of training to be carried out annually, the planning of training and the actual assignment of training is the responsibility of each business line/entity within the Group. These will then be assigned by the training manager according to his or her sensitivity to the subject.
- Monitoring of training and awareness: the manager has a major role in supporting his or her employees, particularly in developing skills and disseminating the Group’s culture and values. They are a natural lever for giving meaning to their teams and thus convey the importance of training, by naturally and regularly bringing up the subject of competition law. Individual follow-up with each employee ensures that each person completes the training courses assigned to him or her within the required timeframe. However, managers, from top management to local management, must be convinced of the value of training, and in this case of the value of training their employees in competition law. Otherwise, as was the case when the programme was first rolled out, the prevention process becomes less effective. It was thus clear at the time, given the varying number of requests for advice and their ability to anticipate risks, that some of the Group’s businesses had been much more aware of the subject than others.
18. Mandatory training for all. Mandatory training is clearly considered to be of strategic importance for the Group. They help to raise awareness among teams and develop the attitudes and behaviour expected of all employees with regard to the strictest legislative, regulatory and ethical standards, to strengthen lines of defence but also to protect the Group, its activities, its customers and its employees.
19. Automatic implementation and strong and consistent managerial support. A compliance strategy based on mandatory training for all is therefore the one that will provide the most comfort in terms of efficiency from the outset. The political message sent by top management aimed at strict compliance with competition rules is then combined with the organisational strike force to raise awareness and train all employees within a given timeframe. The message will be relayed (from top to bottom) by the managerial chain within all business lines and central functions, especially since senior managers in particular will see their variable shares impacted if training is not carried out. This is an incentive that each senior manager will pass on to his or her own managers and employees. Each manager and employee will be assigned to the training and will be retaken until it is validated. Within the Group, this strategy has made it possible to increase the effective completion rate of competitive e-learning from 15% to 95%. This strategy also included an innovative communication campaign consisting of a web series in four episodes. Dealing with the subject of inspections, it played the deterrence card and was intended to be attractive and differentiating.
20. However, this type of training, which is a must, is becoming more difficult to obtain every year. The HR Group, the temple’s guardian, examines with great acuity the requests for mandatory training for all but also the recurrence of those already in place. As the legislative and regulatory requirements in terms of prevention through training increase from year to year along with the risks to be covered [21], Group HR has set up a policy in this area. In addition to the Group standard that it imposes, this policy now includes a very strict arbitration of training courses. One of the reasons for this arbitration, if not the main one, is the information overload, which inevitably results in a multiplication of the number of training courses. More than ever, the professions are more than ever upwind of this massive and continuous flow of information. While the majority of professions and managers today understand the need for such training for themselves and their teams, few are inclined to accept it annually for all their teams.
21. Recurrence of training v. degraded strategy. Training employees in competition law in a sector where regulatory requirements are increasing, but where competition is precisely not one of them: a good reason to remove competition training from compulsory training and opt for a degraded strategy. Within the Group, the first organizational challenge has been met. The second challenge is looming on the horizon: to increase and sustain a uniform level of awareness within the Group. This challenge is all the more necessary since it cannot be denied that these training courses do not always have the expected impact on learners, whether they are managers, employees, very experienced or inexperienced.
2. Behavioural biases and impact on prevention effectiveness
22. Manage wisely. Managers today must manage, as mentioned above, masses of information, train themselves and their teams in multiple risk situations. Evoking with them the fact that knowing the rules is a gain and not a constraint is important to improve processes, but above all because it corresponds to a reality. However, this will not prevent some of them from considering these rules as too numerous, too strict, too constraining, too ambiguous, too vague, or even irrelevant. But whether these observations are right or wrong, it is clear that a wise manager is worth two.
23. Prevention and behavioural biases. Once trained, the individual’s behaviour in the face of the rule must conform to it, and it is up to the company to combat any form of deviation. However, no one is immune to cognitive biases that can affect rational thinking, judgement and decision-making on a daily basis. Indeed, as research in behavioural economics has shown, every human being - and a fortiori every manager - is exposed to unconscious and automatic psychological mechanisms. These mechanisms can lead them to make judgements and decisions quickly and intuitively, i.e. without any analytical reasoning that would take into account all relevant [22]information.
24. Certain biases are certainly reduced through preventive actions. But for most of these biases, prevention is neutral.
25. Prevention and reduction of the Dunning-Kruger effect. "Ignorance breeds self-confidence more easily than does knowledge," said Charles Darwin. This is precisely what two American psychologists, D. Dunning and J. Kruger, have shown by describing in their work the effect of overconfidence [23], a cognitive bias whereby people who are less qualified in a field overestimate their knowledge. This would be explained by the fact that the absence of knowledge does not measure the degree of ignorance. An automatic and homogeneous training process should therefore make it possible to limit, or even neutralise, these cognitive [24]biases.
26. Aversion to ambiguity. Although it has a positive effect on the overconfidence bias that can affect some managers, prevention has no effect on ambiguity aversion, which can reduce the effectiveness of compliance programmes. A negative finding at first glance. However, thinking about the phenomena that create or reinforce ambiguity, and therefore aversion to ambiguity, makes it possible to identify the brakes and, conversely, the levers that need to be activated to enhance the effectiveness of the compliance efforts deployed by companies.
27. Ambiguity aversion is a known bias that describes people’s attitudes towards ambiguity. In decision economics, ambiguity refers to the difficulty of making a choice in a situation where the probabilities of possible events are imprecise, doubtful, uncertain: "When a decision-maker can only make imprecise probability judgements, because he has only imperfect knowledge of the phenomenon at stake and/or lacks statistical data, for example, the situation is said to be ’ambiguous’ [25]".
28. Imprecision of the rule of law and legislative inflation. Indeed, it is impossible to predict what a manager’s attitude would be in the face of an ambiguous situation which might, for example, result from an imprecise rule of law. The clarity of competition law has an obvious impact on compliance behaviour. The clearer a rule of law is, the more likely it is that the signal it sends is understood by managers. Conversely, the more confused the signal sent by the rule of law is, the more likely managers are to develop "dissenting" behaviour towards the misunderstood rule. And in a context marked by normative inflation, this observation can only worsen. Thus managers, who, faced in their daily activity with an information overload, are supposed to follow imprecise rules, will certainly be more likely to develop procrastinating, avoiding or even rejecting behaviour; behaviour against which even the most effective compliance strategy would be in vain. The imprecise nature of the rule makes it impossible to form and anticipate risks efficiently. The clear example in competition law is the interpretation - strict or extensive - of the concept of restriction by object, which has been the subject of fierce debate for years and has not yet been definitively settled. However, the more uncertain the legal environment, the lower the awareness of legal risk and the higher [26]the cost of compliance.
29. The factors for optimising a compliance strategy would therefore not only be in the hands of the company. But what are they? The idea is not to try to draw up an exhaustive list, especially since once again "one size does not fit all". In this case, the idea is to draw from the experience gained some avenues for improvement, always bearing in mind that, in managing change, one must know how to identify and copy what works.
III. Optimization of the competition compliance strategy
30. Optimization tracks. Competition law and the compliance approach that is now associated with it have become established in all sectors, including the regulated ones. However, it is clear from the experience mentioned, which is fairly commonly shared, that competition law rules do not impose themselves as forcefully within companies as other behavioural rules, such as anti-corruption rules, to name but a few. What could be the organisational or contextual levers and factors that could be activated to reinforce this weight?
1. Optimization of internal processes
31. Internal organization and areas for improvement. In organizations, as in projects, the important thing is to make sense. In groups in which the Legal and Compliance functions coexist, cooperation should be natural or, failing that, unavoidable. This cooperation on all subjects would make it possible to manage all projects coherently, from creation to implementation, while at the same time objectivizing priorities. Thus, the implementation of compliance programmes on competition and anti-corruption could benefit from a similar treatment even though training on anti-corruption would benefit from a stronger legitimacy insofar as it results from a legislative requirement (Sapin II).
32. Communication campaign focused on value creation. While compulsory "all staff" training based on an e-learning tool is a prerequisite, just like face-to-face training, a positive communication campaign targeting all managers would help to optimise the effectiveness of the approach. Focusing the campaign on deterrence speaks to some but frightens others. On the contrary, focusing this communication campaign on the gains resulting from a good knowledge of competition rules is undoubtedly unanimously agreed. While not being sanctioned is already a gain, knowing the rules and disseminating good practices to be able to (i) identify situations in which companies could themselves be victims of anti-competitive practices, (ii) stay in the race for tenders and (iii) obtain good CSR ratings is a real added value for the company. Positive communication should make it possible to get managers, who are already overburdened, to adhere to the competition law compliance approach.
2. Contextual optimization
33. Professional associations and reinforced compliance strategy. Professional associations have an active role to play in raising awareness among their employees and members. Ensuring that good practices are also understood and relayed within them helps to strengthen the compliance strategy of each member [27]company. It is indeed fundamental that all players in the sector have the same knowledge of the rules of competition law and therefore of the risks to which they may be exposed in this area. The more uniform the dissemination within the sector, the less risks will be shared by all [28], since the error of some may be reflected on all the others.
34. And this acculturation work, which must be carried out within each of the companies and representative associations, must also be carried out by the public authorities. Many projects are in fact launched on the initiative and under the aegis of the public authorities. In the present case, however, the status of the "principal" means that, with or without real pressure, the undertakings which are members of the associations will tend to do what they are asked to do even when they have doubts as to the lawfulness of the request for concerted action in the light of competition law. A good knowledge of the rules by the public authorities would therefore also help to avoid risky situations for professional associations and their members.
35. Contextual improvement: clarity of the rule and normative disinflation. While the majority of the avenues for optimising the compliance strategies deployed by companies are internal to them, we have also identified at least three external factors that could play in favour of the effectiveness of these strategies: the adoption of clear and precise rules, decision-making practice and case law interpreting these rules unambiguously, and finally a reasoned normative activity.
Conclusion
36. Competition law compliance programmes are not infallible and never will be. That is a fact. There is no such thing as zero risk.
37. However, today, there are no more codes of conduct or reference documents without mention of compliance with competition law rules, no more RFPs [29] in the context of a call for tenders without a statement as to the existence or absence of a conviction in this respect, and no more CSR ratings without taking into account the efforts made by the company in this area.
38. Competition law and the compliance approach associated with it have become established in all sectors, including the regulated sector. However, it is clear from the above-mentioned experience, which is fairly commonly shared, that competition law rules are not imposed as forcefully within companies as other behavioural rules. Nevertheless, areas for improvement can be identified to optimise compliance strategies. This is a task for companies, but not only for them. Institutions also have a role to play.
39. They are now expected on prevention. The Competition Authority has just taken the field by making prevention one of its 2020 [30] priorities and by publishing a guide to competition explained to SMEs [31]. We can only welcome this.
Managerial incentives to repeatedly collude: Frequency, partners and governance rules
[32]
Chloe Le Coq Professor of Economics, University of Paris II Panthéon-Assas (CRED) Research Fellow, Stockholm School of Economics (SITE) Catarina Marvão Assistant Lecturer of Economics, School of Accounting and Finance, Technological University (TU) Dublin - City Campus, and Stockholm School of Economics (SITE)
I. Introduction
1. Recidivism in any criminal setting is often considered a failure of the system in fighting such behavior, as well as a clear sign of the limited effectiveness of its enforcement tools. Recidivism in collusive behavior is no exception. The fact that many cases of recidivism have been discovered among convicted cartel members is often perceived as a result of the limited efficiency of competition policy (Levenstein et al., 2016).
2. Several reasons have been put forward to explain cartel recidivism. The current literature argues that recidivism, just like explicit collusion per se, is more frequent in industries with a high degree of market concentration (e.g., Pirrong, 1992), with inelastic demand (e.g., Grout and Sonderegger, 2005), or where a culture of collusion was established over time (e.g., Spar, 1994). Recidivism can also be explained at the managerial level, since the decision to collude is often taken by higher-level managers. Ashton and Pressey (2012) document that marketing and sales managers were involved in 43% of 56 cartels convicted by the European Commission (EC) between 1990 and 2009 and were frequently those deciding to enter a collusive agreement. More recently, Bloomfield et al (2020b) examine the position of all the individuals named in EC cartel fines (1996-2020) and indicted by the US Department of Justice (DOJ) (1984-2011) and find that chief executive officers and chairs are named/indicted in only 12% of EC and 7.5% of DOJ cases, whereas general and division managers are named/indicted in 41% of EC and 34% of DOJ cases. Levenstein et al (2016) also discuss a learning-by-doing effect, where firms (and managers) collude because they imitate their peers-previously involved in successful cartels-and, in doing so, develop a set of capabilities and expertise that encourages collusion in the industry. Cartels may also be easier to organize if firms with previous collusive experience (or "multi-cartelist" firms) are involved. The incentives for managers to collude have also been linked to the firm’s organizational structure (e.g., Connor, 2008), the corporate culture (e.g., Eichenwald, 2012), and the type of executive compensation packages in place (e.g., Bloomfield et al., 2020a).
3. In this article we analyze the link between recidivism and cartel features. In particular, we examine whether managers’ decision to repeatedly collude is associated with specific cartel characteristics. This allows us to discuss the types of incentives that managers may have when deciding to repeatedly collude.
4. While valuable, the above-mentioned literature suffers from an inherent issue of sample selection bias, as it examines only the detected and convicted cartels. In fact, Ormosi (2013) calculates that only 20% of all cartels are detected. Therefore, to the extent that undetected cartels differ from detected ones in relevant dimensions, the results reported by the papers described above will be biased.
5. To tackle this issue, we use a novel dataset of a population of cartels, which were legal in Sweden up until 1993. Given that these cartels were legal, firms (and managers) were not legally limited in the number of cartels they could be involved in. Using a dataset of a population of cartels [33] allows for sharper inferences and eliminates the need to construct a control group of matched firms (which may contain undetected cartels), as is done in other studies. In particular, our analysis allows us to account for recidivism in a much more accurate way and sheds some light on the recent debate about the extent to which recidivism is or is not an important issue (Connor, 2010; Werden et al., 2011; Marvão, forthcoming). Since recidivism is usually linked to illegal cartel agreements, we label firms that were involved in more than one multi-cartelists (MCs) cartel.
6. We have four main results. First, in our legal cartel setting, we find that about half of cartel members participated in more than one agreement and few MCs being involved in up to 63 agreements over a period of 46 years. Further, the majority of cartels included at least one MC and many were composed of only MCs. These numbers are much higher than those found in studies of convicted illegal cartels (Connor, 2010; Werden et al., 2011; Marvão, forthcoming) but suggest that absent cartel enforcement, managers will form and/or participate in many cartel agreements.
7. Second, we show that cartels with MCs included more similar firms. In particular, they included fewer foreign firms and had less entry and exit over the lifetime of the cartel. Relatedly, we find that cartels with MCs were more likely to include one or more trade associations (TAs), but there is no clear trend between the number of collusive agreements per firm and the involvement of a TA. The latter result is rather surprising, as it has been argued that TAs might play a major role in inducing managers to collude (e.g., Levenstein and Suslow, 2011).
8. Finally, we find that cartels with MCs imposed less strict governance rules, such as holding fewer meetings, engaging in less voting, and having hierarchical scheme, as collusion may be easier to implement and/or sustain.
9. Buccirossi et al (2013) find that the quality of cartel enforcement is the most crucial determinant of the effects of competition policy on total factor productivity growth. In the last decade, antitrust fines have increased exponentially. However, cartel fines are well below the legal cap of 10% of a firm’s turnover, and a new phenomenon of leniency inflation (i.e., many cartel members receiving large fine discounts in exchange for cooperation with an investigation) has been documented in the EU (Marvão and Spagnolo, 2018). Cartels remain a widespread phenomenon which is not well understood for at least two reasons: first, since cartels are illegal, cartel studies are biased to the extent that undetected cartels may be numerous and different from detected ones; second, while cartel dynamics per se have been extensively studied (e.g..., Harrington, 2004), studies of cartel formation and/or participation at the managerial level and their regulatory consequences are few and recent (see, e.g., González et al., 2019; Bloomfield et al., 2020b; Combe and Monnier, 2020).
10. Some authors have addressed the first issue through case studies (e.g., Asker, 2010), while others have addressed the second issue using data, at the cartel level, on legal cartels (e.g., Hyytinen et al., 2019). We simultaneously address these issues by using firm-level data on a population of legal cartels. Our analysis offers some important insights. If recidivism can also be explained at the managerial level, designing optimal competition policies requires integrating this dimension. Further, using a population of legal cartels provides less biased estimates of not only the true number of cartels in the economy, but also the characteristics of cartels and cartel members, such as cartel duration and welfare effects.
11. Combe and Monnier (2020) discuss the "psychological cost related to public stigmatization of cartels or to damages inflicted to others." In this sense, the involvement of one or several TAs in the cartel may establish a norm among peer firms. We therefore see two opposite effects of TAs with respect to incentives to collude. If TAs facilitate coordination between members (Schuldt and Taylor, 2018), this "help" might be less required and/or less desirable in cartels with MCs that have past (or contemporaneous) experience in colluding. Alternatively, if TAs facilitate collusion by setting "collusive norms," MCs might be more receptive and more likely to join cartels where TAs are involved. [34]
12. This article is also related to the literature on trust in dynamic games. In line with the experimental literature on infinitely repeated games (e.g., Bigoni et al., 2015, or Dal Bó and Fréchette, 2018), meeting in different cartels might facilitate trust between members. Additionally, this element of trust might be easier to establish between similar firms which belong to the same TA and in cartels where entry and exit are limited. [35]
13. We also contribute to the literature on optimal deterrent cartel fines. For example, although the current EU fine guidelines of 2006 state that firms involved in "repeated infringements" should receive a fine increase, the EU Leniency Notices are not explicit as to whether or not recidivists should receive a lower fine reduction, if any. Marvão (2016) finds that recidivism is one of the main factors which positively influence the granting and scale of EU leniency reductions. As such, our results on how widespread recidivism is, in a legal setting, are significant.
II. Legal cartel data and variables
1. Our approach and dataset
14. Although the majority of cartel studies focus on detected and convicted illegal cartels, these studies suffer from a well-known issue of sample bias selection. This makes it challenging to study the true extent of recidivism and how managers’ decisions to repeatedly collude relate to specific cartel and firm characteristics. We address this issue by using a novel dataset of legal cartels in Sweden.
15. Despite obvious differences in cartel enforcement, there are numerous common features between legal and illegal cartels. In both, cartels form because they are beneficial for the cartel members (theoretically, the participation constraint must be fulfilled). Moreover, cartel duration depends on how profitable it is to deviate from the cartel agreement, partly due to the punishment strategies in place (theoretically, the incentive compatibility constraint must also be fulfilled). These similar cartel features make our analysis relevant to the analysis of the efficiency of current antitrust enforcement and they provide insights not only on the prevalence but also on the features cartels would ideally contract on, given the possibility of doing so.
2. The Swedish cartel register
16. The Swedish cartel register includes 4,777 agreements registered between 1947 and 1993. The legislation governing the register was not specific as to what constituted a potential anti-competitive agreement, which resulted in a variety of supposedly collusive agreements being registered. Although the structure of the files in the register was mostly similar, the registration practices were very imprecise: some agreements were withdrawn and some of these were replaced by new ones, other agreements included a "cartel" composed of a group of local "cartels," and others were bilateral contracts with individuals.
17. During the manual collection of the data, we started by identifying 3,231 unique agreements including at least two firms. Furthermore, there were 198 missing case numbers. However, since the register was transferred between four different authorities throughout the years, it is possible that the case numbers did not follow a specific order, such that the missing case numbers may not exist. Within the 3,231 agreements, we then categorized the type of agreement as vertical, horizontal, or vertical and horizontal.
18. We then coded them as collusive or non-collusive agreements. As per EU legislation, a cartel is defined as any horizontal agreement on pricing (including margins and discounts), market sharing (including quotas, discounts, and margins), or other restrictive practices, at local, national, or international level. Based on this definition, we classify 2,440 agreements in the register as cartels. For example, agreements concerning vertical collusion or agreements with no obvious competition-hindering clauses are not included. We also exclude industries such as civil service, defense, and public education, due to the lack of private actors in these sectors. Table 1 summarizes the different types of contract.
19. Although the register was founded in 1946, no agreements were registered in its initial year. New agreements were registered over 32 years, between 1947 and 1978, but 50% of the registrations occurred in the initial 13 years. Between 1979 and the end of the register, in 1993, when Sweden prohibited tender cartels, no agreements were registered.
Table one. Overview of the dataset (see pdf version of this article)
3. Accounting for recidivism
20. In our dataset, we identify the firms involved in each cartel. We code as a multi-cartelist any firm that participated in at least two cartel agreements, except where a new agreement substituted a previous one or where firms participated in contemporaneous cartels, in the same product and with the same group of cartel members. We measure multi-cartelism in terms of frequency, i.e., the number of cartel agreements they were involved in over the lifetime of the cartel register (1947-1993), and in terms of weight, i.e., the share of multi-cartelists per cartel.
21. These are true measures of the frequency and weight of multi-cartelists. However, we expect these numbers to be greater than in a context where cartels are illegal, since cartel detection and deterrence tools are likely to reduce the number of recidivists and the number of cartels they are involved in.
III. Cartel formation with multi-cartelists
22. In this section we address three specific questions: (1) How common are multi-cartelists when firms are allowed to form a cartel? (2) Are there substantial differences in internal mechanisms between cartels with and without multi-cartelists? (3) Who are the members in multi-cartelists’ cartels?
23. As we have argued already, our dataset is unique in the sense that if a manager wanted to enter a cartel, there was no legal obstacle to their doing so, and we assume that such an agreement is then registered and, thus, part of our dataset. Below we compare cartels with and without multi-cartelists.
1. Multi-cartelists: A widespread phenomenon
24. Recidivism is a highly debated issue. Connor (2010) suggests that there is evidence of a large amount of recidivism: he identified 389 recidivists worldwide between 1990 and 2009, which amounts to 18.4% of all convicted cartel members in 648 international hardcore cartels. Werden et al (2011) dispute Connor’s definition of recidivism and his calculation of the numbers of multiple and repeat offenders. The main discrepancy between the two arguments appears to be in how cartel members who merge and form a new firm are dealt with. Werden and others follow the legal practice (of the US DOJ and the EC), and therefore they suggest that no repeat offenders in US cartels have been fined since 1999. As for the EU, Marvão (2016) identified 63 multiple offenders (12%) and six repeat offenders (1%) since 1998, when the first leniency reduction was granted.
25. In our data, we find that 48% of firms (in a total of 2,839 firms) were involved in more than one cartel (see Figure 1). In fact, many firms (92) were involved in as many as 51 to 63 cartels. On average, the firms in the data participated in five cartels. These numbers illustrate the willingness of firms to enter into collusive agreements, in a setting where these were not illegal.
26. We also find that 78% of cartels included at least one MC and 16% of cartels were composed of 91 to 100% of MCs (see Figure 2).
27. These are important findings, as they suggest that recidivism is a widespread phenomenon. One explanation is the potential for "economies of scale" in being part of many cartels. This is related to the finding of Levenstein and Suslow (2011) that many (international and convicted) cartels with a large number of firms rely on the active involvement of a trade association. We explore this further in Section III.3.
28. Alternatively, if agreements involving MCs can increase cartel stability (as mentioned in the introduction), this may explain why managers decide to participate in several cartels. Figure 3 depicts this relationship. We show that average cartel participation was higher for MCs up to a given threshold (of around 30 cartels), after which it was lower than for single cartelists. It is noteworthy that we find no obvious trend in the relationship between average cartel duration and the share of MCs per cartel.
Figure 1 Number of cartels per firm
Figure 2. Share of multi-cartelists per cartel
Figure 3. Average cartel duration (years) (vertical axis) by number of cartels per firm (horizontal axis)
Figures are available in the pdf version of this article.
2. Cartel members
29. The group of firms that constitute a cartel is a crucial element for its stability. Our dataset includes some information regarding the cartel members, as shown in Table 3.
2.1 Nationality and cartel size
30. The average cartel included three firms, which is much smaller than the average size of six firms in EC cartels (Marvão, forthcoming), but cartels included up to 27 cartel members. This figure is similar for cartels with and without MCs. However, cartels with MCs included very few foreign firms.
31. We also examine net entry (i.e., the number of firms entering the cartel after the initial agreement minus those exiting the agreement). The data clearly shows that cartels with MCs were substantially more stable in terms of entry and exit.
2.2 Trade associations
32. It is often argued that a TA offers a propitious environment for cartel formation. Indeed, several EC cartel convictions indirectly involve an association. For example, in the lysine, citric acid, bathroom fittings, and car battery recycling cartels [36] (convicted in 2000, 2002, 2016, and 2017, respectively), trade associations’ activities were used to organize parallel "unofficial meetings" where prices and quantities were then agreed. In the lysine cartel, US food-processing company ADM "proposed that the producers attend trade association meetings quarterly to adjust their price and sales volumes according to their agreements. It explained how forming an industry association could provide a seemingly legitimate, but artificial, reason to meet, and thus conceal the fact that purported competitors were secretly meeting to discuss prices and sales volumes."
33. A second indirect role of associations is that they can be used to coerce new association members to join the cartel. In the citric acid cartel, the "General Manager of Cerestar Bioproducts was approached on that occasion by Hoffmann-La Roche’s World Head of Marketing Vitamins and Fine Chemicals, whom he subsequently met on 12 February 1992 in Basel where he was ’explained the basic mechanisms of the cartel’ which Cerestar Bioproducts eventually joined."
34. In the cases above, TAs serve to ease communication between the cartel members and find new cartel partners. However, TAs can also have direct involvement, organizing and/or enforcing antitrust violations such that a much larger number of firms can be effectively organized. For example, in the EU cement cartel (fined in 1994), [37] the European producers and their TA agreed on a market allocation scheme: each competitor would sell only in its home market and export the excess production at previously agreed terms. In the US supermarket chains’ cartel of 1971, [38] a cooperative association of supermarkets allocated markets geographically for Topco generic products, such that only one of its members would have the use of its brand name in any given area. More recently, in 2011, the EC fined a TA (Fachverband Verbindungs- und Befestigungstechnik) in the fasteners cartel [39] for organizing the price-fixing cartel.
35. Table 2 shows that trade associations were present in 48% of the cartels but were a lot more common in cartels with multi-cartelists. However, the number of cartels in which multi-cartelists participate does not seem to matter. A visual inspection of Figure 4 shows that there is no clear link between the number of cartel agreements firms were involved in and the involvement of TAs.
36. Levenstein and Suslow (2011) find that cartels that rely on TAs are less likely to end due to a "natural death." In our data, we find no link between cartel duration and the involvement of TAs in a cartel agreement, while Karlsson et al. (2020) find only a weak effect of TAs on cartel formation and cartel death. Levenstein and Suslow (2011) also find that many cartels with a large number of members are sustained by the active involvement of a TA. Once more, we find no clear trend between these two variables. As we argued in the introduction, this finding may be the result of two opposite effects: (i) TAs should contribute to the cartel’s stability by setting the norm or facilitating the coordination of cartel members; and (ii) with more experienced cartel members, TAs should be less "necessary.
Table two. Cartel members
Figure 4: Cartels per firm, with(out) trade association(s)
Figures are available in the pdf version of this article.
3. Cartel governance
37. Due to the illegal nature of cartels, very little is known about their internal governance. This is because, cartels do not usually formalize sanctions, hierarchy, and other internal mechanisms. However, many legal cartel agreements were explicit about whether they included sanctions, fines, formal meetings, a dispute resolution mechanism, a strict voting mechanism, and an explicit hierarchical system.
38. Table 3 summarizes these results. For example, the data shows that 44% of the cartel agreements included explicit sanctions in case of a deviation from an agreement. These ranged from a short suspension from the agreement to full exclusion or the member having to sell their product under conditions (e.g. to another member for a low price or to specific customers).
39. The sample is also split between cartels with and without MCs. While many characteristics are similar, two are worth highlighting. First, cartels with MCs were less likely to hold meetings. This may mean that these firms were also meeting for other cartels or that they had already established a (collusive) relationship which decreased the need for meetings. In fact, Levenstein et al (2016) argue that norms established during explicit cartel agreements ease the subsequent engagement of the members in tacit collusion without explicit communication.
40. Second, voting mechanisms were a lot less common in cartels with MCs. Overall, cartels with MCs appear to have less strict rules and less-formal mechanisms.
Table three. Types of internal mechanisms for cartels with(out) multi-cartelists (MCs). N = sample size
The Table is available in the pdf version of this article.
IV. Conclusion
41. This article sheds some light on cartel participation when managers of a given firm repeatedly collude. We use a unique dataset of legal cartels registered in Sweden, and which operated after the end of the Second World War and until the cartel ban in 1993. In particular, we are able to observe recidivism in a population of cartels, thus overcoming the usual issue of sample selection bias in studies of detected and convicted illegal cartels.
42. We describe some interesting differences between cartels with and without multi-cartelists. Our analysis shows that, absent legal cartel enforcement, firms collude in many cartels and most cartels include recidivists. Cartels with recidivists are also shown to include more-homogeneous firms and to be more stable in terms of cartel size. Further, we show that cartel agreements differ greatly in their internal governance when they include recidivists. Such cartels appear to have less strict rules, with fewer meetings, fewer voting mechanisms and a less delineated hierarchy. Finally, we find that cartels with and without recidivists do not differ in terms of size or involvement of trade associations. The latter result is rather surprising as it is often argued that trade associations might play a major role in inducing managers to repeatedly collude.
43. Our results contribute to the current debate on the importance and extent of recidivism, exploiting managers’ willingness to collude (repeatedly), absent law enforcement. These results help us in understanding recidivism in the current climate of (potentially) weak law enforcement in terms of detected cartels (e.g., Ormosi, 2013, estimates that 80% of cartels are undetected) and lack of optimal enforcement tools (e.g., Marvão and Spagnolo, 2018, argue that without criminalization, treble damages and with leniency inflation, EC fines are suboptimal).
44. However, our data does not allow us to account for individual (un)observable characteristics of managers (e.g., risk aversion and managerial compensation) that determine their repeated participation in cartels. This would be an interesting avenue for further study.
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Why managers form cartels and why it is hard to stop them
Andreas Stephan [40] Professor of Competition Law, UEA Law School, University of East Anglia, Norwich
This paper looks at the main drivers behind a manager’s decision to engage in cartel activity and the challenges of addressing them. Managers generally form cartels for three reasons: (i) ignorance of the law, or at least of its full application and consequences; (ii) crises or the fear of bankruptcy/loss of employment; and (iii) arrogance or a wilful disregard of the law. It is argued that weak popular understanding of cartels and the challenges of ensuring personal consequences for those who form them (whether state sanctions or internal corporate disciplinary tools) mean the current approach to cartel enforcement requires further development.
Introduction
1. Although reference is often made to the "rogue trader," the vast majority of cartels we know about involve more than just a small handful of individuals. We can usually identify the individuals who form a cartel, or those directly involved in cartel meetings and other activities aimed at its coordination. They will typically be supported by others within the firm who are either complicit, know it is occurring or are actively turning a blind eye to it. In extreme cases, there can be a culture of collusion throughout the firm and the industry, and this is especially so where cartels have governed the relevant market for many years. Yet even before modern cartel enforcement became more effectively used in the 1990s and fines reached very significant levels from 2000 onwards, cartels have always been characterised by clandestine activities. They are not organised using the institutional structures and procedures of the firm and great efforts are usually made to hide their activities from the authorities, from customers and often also from others within the same organisation. We can only assume that the ratcheting up of enforcement has simply made these efforts to hide cartelisation more sophisticated.
2. We do not know whether detected cartels are representative of what may be going on in the wider economy. They may simply represent the tip of the iceberg, or those cartels that failed because of distrust or poor management. Neither do we know with any degree of certainty how deterrent enhancing cartel enforcement is. Are markets genuinely more compliant with competition rules, or have they just become more sophisticated at avoiding detection and resorting to less risky strategies, such as more sophisticated forms of communication and the reaching of tacitly collusive outcomes? Yet we do know enough from the enforcement cases of the last twenty years to get a good sense of why managers choose to enter into cartels, regardless of whether the cartels were successful or not.
3. This paper sets out three key drivers of a manager’s decision to engage in cartel activity. These are: (i) ignorance of the law, or at least of its full meaning, application and consequences; (ii) the existence of crisis within the industry or fear of bankruptcy or loss of employment; and (iii) arrogance or a wilful disregard of the law. It then goes on to discuss why neither the current approach to cartel enforcement nor the company’s efforts to prevent such behaviour may adequately address these issues.
I. Why do managers engage in cartel conduct?
4. According to both the law and the economics literature on cartels, the key motivation for cartel behaviour is profits over and above those expected under competition. While this is clearly a driver of cartel behaviour, the individual motivations of managers for forming and maintaining cartel behaviour is more complicated in the real world. In particular, there appears to be little if any evidence that they undertake any kind of weighing of likely costs vs likely benefits of the cartel before creating it. This is in part because of the lack of full and accurate information about those costs (for example, what is the probability of being caught?), but also the particular circumstances that surround that decision. Such a cost-benefit analysis also risks circumventing the issue of moral wrongfulness and the individual’s perceptions of cartel conduct (although arguably that simply informs the calculation of costs and benefits). From what we know about detected cartels, it is possible to identify three key drivers of the decision to form the cartel: ignorance, crisis and arrogance.
1. Ignorance
5. The level of ignorance of competition rules should not be overlooked or underestimated. A 2018 survey by the UK’s Competition and Markets Authority (CMA) of 1,200 companies revealed that only 25% of them had a good knowledge of competition rules and 16% claimed to have never heard of them. [41] Importantly, the survey also showed that firms’ understanding of competition rules was limited, and two thirds of respondents had a poor awareness of the penalties for non-compliance with those rules.
6. Readers of this paper may be unconvinced that cartelists are truly ignorant of the law and they will very often be right. It would be very odd-especially now-for an industry to be cartelised with everyone involved honestly believing that the activity is lawful and legitimate. For one thing, if that were the case, individuals would not go to such lengths to hide their behaviour. The problem is that ignorance relates not only to whether managers have knowledge of competition law at all, but also to their perception of the law and the consequences of breaching it. The first problem is that while they may understand that bid-rigging or price-fixing amounts to fraud or theft, they may not realise that customer sharing or other cartel activities are treated as equivalent.
7. A good example of this is the practice of "cover pricing," where a firm bidding for a procurement tender contacts a competitor seeking a credible losing bid (or a "cover price"). Their motivation for doing this is typically that they want to participate in the process but not win the contract. This can be important to whether that firm will be invited to bid on future contracts. The anti-competitive effects of cover pricing can vary. If there are only two prospective bidders, it can be very harmful, but where the bidders are a lot less concentrated the effects are less obvious. When a large investigation was completed into construction in the UK in 2009, many in the industry and their lawyers (who usually were not competition law practitioners) were genuinely surprised that this activity was treated as hard core conduct. [42]
8. The fact cartelists hide their activities shows their awareness that it is wrong, but it speaks little of how wrong they believe it is or their understanding of the consequences. We now have a good body of literature covering public attitudes to cartels across at least six jurisdictions. These show that while most members of the public recognise that cartels are harmful, a significant number do not know whether they are illegal and there appears to be limited public appetite for cartel conduct to be treated as a crime. [43] The lack of awareness can also affect other key stakeholders as well, such as the media and members of the judiciary. [44] This means that many do not see an obvious comparison or equivalence between cartels and theft or fraud, as many competition authorities like to portray. There simply is not a strong level of moral opprobrium attached to cartel behaviour yet.
9. Studies like these are important because they highlight the need for continued public education and advocacy work by competition authorities. These activities will help strengthen the sense of moral wrongfulness managers attach to such behaviour. It is also important, as significant sanctions (whether corporate fines or those aimed specifically at individuals) will be of limited effectiveness if they are not known to prospective wrongdoers.
2. Crisis
10. One of the most common reasons for the formation of a cartel is the onset of crisis within the industry and the fear of bankruptcy or loss of employment. The problem is that the downturn causes a drop in demand and therefore overcapacity within the market. In economic terms, exit by the least efficient firm in the industry is desirable in this situation. That way the resources involved in that production can be reallocated and used more efficiently elsewhere in the economy where they are needed. [45] The problem is that firms will not necessarily be aware of which firm is the least efficient and therefore likely to exit the market. There may therefore be a tendency to cartelise (thereby compounding the problem of overcapacity) rather than risk competition and bankruptcy. There can be other drivers of this too. For example, it may be that there is the danger of new entry into the market and therefore a collective desire to either prevent that entry or to exert control over that firm through cartel conduct. The crisis or "fear of bankruptcy" driver can also be self-inflicted, where the company is placing unrealistic performance targets on individuals, whereby the only way for them to make enough money for their positions to be secure is to not play by the rules.
11. Crisis can also have a powerful effect on managers’ perceptions of cartel conduct. Where individuals fear losing their job or their company, their moral compass will be compromised, as the fear of failure begins to affect decision-making. Strategies such as cartelisation, which may be entirely off the table during normal times, can very quickly become viable ways forward. We know this because crisis can lead to some very odd and irrational decision-making. For example, the Carbonless Paper cartel was formed despite the inevitable decline of the industry in the face of new copying technology. For the most part, the cartel was wholly unsuccessful, but it did slow down the speed with which prices were dropping the industry. [46] In the Auction Houses cartel, the chief executive officer of Christie’s is said to have reacted to the price-fixing arrangement with Sotheby’s by saying, "This seems unnecessary (...). Sotheby’s and Christie’s always follow each other’s commission increases anyway. We can raise commissions without having to put our reputation at risk." [47] The two firms in the industry were essentially a duopoly, but the pressures and fear of the crisis in the art market at the time motivated them to form a hard core cartel, even though one might argue it was entirely unnecessary and irrational to do so.
12. Crisis can also affect the perceptions of those around the managers, who often assist the administration or the implementation of the agreement. For example, at the UK criminal trial of two individuals accused of price-fixing in the market for galvanised steel tanks in 2015, sales staff for one of the companies gave evidence describing one of the defendants as a "hero" for trying to save jobs. [48] The period immediately preceding the alleged behaviour in that market was characterised by very tight margins and fear of bankruptcy.
13. The idea that cartel behaviour may be associated with less moral wrongfulness, because of the perceived honourable intentions of managers, is not helped by the actions of governments during times of general economic crisis. In April and March 2020, competition authorities including the CMA and the European Commission published statements reassuring competitors that they would not take action against coordination undertaken to ensure the supply and fair distribution of essential scarce products and services. [49] Ormosi and Stephan argue that this reassurance or temporary softening of competition enforcement is entirely unnecessary and may cause more harm than good. [50] For the purposes of the present discussion, any softening of cartel laws or enforcement in response to crisis serves to reinforce the idea that the normal rules should not apply, and that coordination between competitors can be an effective way of dealing with a short-term crisis. It therefore further erodes the sense of moral wrongfulness associated with cartels.
3. Arrogance
14. There are instances of cartel behaviour where individuals appear to have a good understanding of the law and there is no obvious crisis, meaning that the main driver may have been arrogant. We should also refer back at this point to the profit incentive and the weighing of likely costs and benefits. In that context, we might describe these managers as "rational profit seeking individuals." Yet arrogance is a fitting label to unlawful conduct that individuals knowingly engage in, either because they do not think they will be caught or because they do not care. This category of behaviour is not specific to breaches of competition law and can be seen in other forms of white-collar crime too. It is also more common where the conduct is widely known and unchallenged within the firm or has become a normalised way of doing business. An example of this outside of competition law is the Enron scandal of the early 2000s. The extent, scope and level of involvement in wrongdoing within Enron, coupled with the sense everyone had that the company was too big or important to fail or face the consequences of those actions, were truly breath taking and will go down in history as one of the greatest ever failures in corporate compliance. [51]
15. In cartel cases, the arrogance of managers can be seen in a lot of the evidence unearthed by competition authorities. It is probably epitomised most in the covert recording of Lysine cartel meetings by the FBI in the 1990s. The individuals involved not only mocked competition authorities and joked about being in disguise, but their now infamous exchanges included the phrase "our customers are our enemies. " [52]The more recent Libor manipulation scandal equally demonstrates the extraordinary confidence with which some managers are able to consistently break the rules. One might argue that Libor setting was a morally ambiguous space, where banks were essentially incentivised to report a lending rate that influenced Libor in a way that was to their advantage. But what is extraordinary in Libor is the chat room exchanges between traders who largely trivialised the market manipulation that was being propagated. "Just give the cash desk a Mars bar and they’ll set whatever you want," is what one Citigroup trader is alleged to have said. [53]
16. As already stated in this paper, it is very difficult to identify cartels where there is genuinely a "rogue trader" who is responsible for the breach of the law, in an otherwise compliant company. It is more usual for groups of individuals who are either encouraged or tacitly enabled to engage in such behaviour by more senior managers. One of the reasons it is hard to identify rogue behaviour is that competition law enforcement is such that a company cannot avoid or significantly lessen its liability just by identifying that it was an individual employee who went rogue. Indeed, competition authority decisions rarely name individual employees and instead describe the actions of the firm. But firms under investigation do sometimes attempt to distance themselves from the behaviour of a rogue group of employees. For instance, in appeals following the Bitumen (2006) cartel decision in Europe, Shell claimed that the subsidiary subject to the infringement decision disregarded the parent company’s compliance policy and training. [54] This was rejected by the court, although they did reduce Shell’s fine by 25% on the basis that the Commission had wrongly identified it as the instigator of the infringement. Subsidiary behaviour poses a more general compliance problem for large multinationals, who have to manage diverse sets of risk including competition, anti-bribery and money laundering, across multiple jurisdictions and corporate entities.
17. There is a broader issue relating to arrogance that is worth identifying and it relates to the culture of cartel meetings themselves. Those who have studied transcripts of covert recordings in detail will know that they tend to be male-dominated settings, in which the conversation turns to sport, sex and other topics, as easily as it turns to the business of price-fixing. They can also rotate around social activities involving drink and food-especially if the individuals involved already know each other through legitimate interactions, such as trade association activities or meetings facilitated by a regulator. The socialising aspect amounts to bonding and the building of trust in lieu of a legally enforceable agreement. The cartel members are instead relying on a shared sense of camaraderie and comradeship, to ensure the cartel agreement is successfully implemented and that cheating is avoided. These activities coincide with extraordinary lengths to hide the activity, by meeting in neutral locations, using code words and suppressing all records of the meetings and communications, and by planning cartel restrictions in such a way as to avoid raising suspicions among buyers. [55]
II. Why is it hard to stop managers from engaging in cartel behaviour?
18. Competition law relies on two sources of control for the behaviour of managers. The first is public enforcement by competition authorities and the courts. The second is the internal compliance efforts of the employer. Corporate sanctions operate by inflicting pain on the business, thereby incentivising it to take compliance seriously and prevent a cartel infringement from being formed in the first place. Individual sanctions (including prison, personal fines, and director disqualification) seek to directly affect the behaviour of the. In principle, these sanctions come with secondary effects too. Punishment for breaching the law should have significant negative reputational effects for both the business and the managers responsible, including future career prospects. There is also the prospect of damages in private actions. In reality, the reputational effects vary depending on the firm and the market. For example, reputation is significantly more sensitive for a consumer-facing business than those operating upstream who largely sell to a small number of other companies. There is also the problem that the very characteristics that make a cartel possible (high concentration, high barriers to entry, a product with few substitutes) mean that customers usually have little choice but to continue buying from the former cartel members, regardless of how much their opinion of them has deteriorated.
1. Lack of effective personal sanctions
19. The exponential increase in corporate antitrust fines since the turn of the century is meant to reflect the harmful nature of cartels and have a punitive effect. In principle, high fines send out a clear signal to businesses that competition law compliance should be taken seriously and that there are severe consequences to failed compliance. Higher fines also serve to make the leniency programme more effective, by increasing the difference between the immunity prize and the sanction a cartel member will face if they are not the first to report an infringement. Although this incentive has arguably been eroded by the greater threat of follow-on actions in Europe and the increasing use of the European Commission’s settlement notice (which has the effect of discounting all fines, in addition to any discounts for cooperation through leniency). [56]
20. Yet there is some doubt as to whether even very high corporate fines pose an effective deterrence to managers. If we refer back to our three drivers of cartels for a moment, it is clear that sanctions will have little deterrent effect on managers who have incomplete understanding of competition law or of the sanctions that can be imposed. However, as in the case of cover pricing, they may wrongly conclude that their actions fall outside of the prohibition and therefore will not attract any punishment. Clearly, education and advocacy are what are primarily needed to deal with this group.
21. Where the motivation is chiefly to deal with a crisis, the threat of corporate fines may be equally ineffective; why worry about the danger of the business being fined when your fear is that it will go bankrupt anyway? These managers may simply feel they have got nothing to lose. Finally, what of the arrogant managers who are confident they will not be caught? Well, studies in crime and related disciplines tend to suggest that the likelihood of getting caught may be more important in deterring deliberate breaches of the law than simply increasing the sanction. [57] These managers may also be emboldened by the fact it is usually only the employer that is vicariously liable for their actions and also by the fact they may very well have moved on to another firm, or retired by the time the cartel is detected and the lengthy process of enforcement is complete. This might not be until 5-10 years after the initial efforts to enter the cartel are made.
22. There is a very strong argument that individual sanctions are needed to deal with both the crisis and arrogance drivers. Personal consequences coupled with a sense that there is a credible threat of being caught could drastically change the outlook and decision-making of these individuals. In particular, the threat of incarceration is likely to significantly reduce both any fears of bankruptcy/loss of employment and the feeling that the punishment is too remote to trouble arrogant managers. [58]
23. The problem is that individual sanctions are not imposed in most jurisdictions. While the criminalisation of cartel conduct has been a significantly spreading movement internationally over the last twenty years, there have still been very limited instances of successful prosecutions outside of the US. The US success mainly comes down to the use of plea bargains in lieu of a full criminal trial (which essentially allow the prosecutor and defendants to settle the case and agree the sentence) and also by the fact both the undertaking and the individuals are subject to a criminal process. [59] Most jurisdictions follow a system of enforcement more similar to that of the EU, where undertakings are subject to a civil or administrative procedure, under which a competition authority has the power to impose fines directly on firms involved in cartels. Attempts at hybrid systems, as in the UK, have proven unsuccessful because criminal cases are unpredictable, time consuming and hugely costly as compared to civil proceedings. They have also faced the danger of jury nullification-where a jury fails to convict cartelists-not because the prosecution has failed to demonstrate that an offence has been committed, but because they are simply unwilling to accept that the conduct should amount to a crime. [60] This is reflected in the survey findings discussed earlier in this paper. The most promising use of individual sanctions has been personal fines (not necessarily imposed under a criminal process) and also the use of director disqualification, but neither of these are thought to be as effective as a criminal conviction. [61]
2. Challenges to corporate compliance
24. Corporate compliance represents the second line of defence against managers who form cartels, but there are problems here too. First the assumption that businesses tend to be rule-following bodies that want to comply with the law appears accurate in principle, but the case law on cartels contains extensive evidence of directors encouraging, being implicit in, or at the very least turning a blind eye to cartel arrangements. When businesses break the law as organisations, they tend to ensure the illegality is kept outside the institutional framework of the firm to the greatest extent possible. In these instances where there is a culture of cartelisation in the firm and the industry, the infringement is so systemic that it is not particularly helpful to try and identify which individuals were primarily responsible. If the cartel has operated for many years and it has simply become an accepted way of doing business, then this exercise becomes impossible anyway.
25. For the purposes of this section, let us assume that cartels are operated by small groups of individuals within organisations where there is a genuine corporate commitment to comply with competition law. An effective compliance programme can be very successful at educating individuals within the firm and creating systems for reporting potential breaches of the law. This would certainly help reduce the first driver identified (ignorance). It can also go some way to reducing the danger of the second (crisis), where clear signals are sent from the CEO downwards that cartelisation is not an acceptable strategy under any circumstances.
26. The most challenging aspect of corporate compliance is dealing appropriately with managers who have ignored the compliance and chosen to deliberately break the rules. This will include some who fall into the "crisis" category and most who fall under "arrogance." Assuming it can genuinely be said that these individuals went against compliance training and company policy, the instinct to reprimand or fire the individual can quickly run counter to the businesses’ immediate concern, which will be to maximise any benefit available under the leniency programme. Acting swiftly could make the difference between getting immunity, or a 50% discount in fine, or only a much smaller reduction if other members of the cartel are already cooperating with the competition authority. Limiting liability and exposure on capital markets will also likely be shareholders’ primary concern at this stage. In order to ensure the leniency application is successful (especially if you are a multinational dealing with multiple leniency filings in many jurisdictions), you will require as much information about the infringement as possible. Given the secretive nature of cartel arrangements and the great care they take to cover their footprints, the most effective way of getting this information is by enlisting the cooperation of the manager(s) responsible. This means those individuals, perversely, may hold some of the cards. In return for cooperating they may demand assurances that their employment, pension and benefits are protected, and that the firm will pay for legal representation if they are subject to personal sanctions. [62] This paradox is often cited privately by in-house counsel as common in leniency scenarios.
27. A further challenge is balancing the need to discipline clearly delinquent behaviour by managers, with creating a reporting culture that encourages employees to come forward when they have any concerns about potential breaches by those around them. The problem is the instinctive dislike that many in society have towards the act of informing on others. Many consider it dishonest and feel it reflects poor character. [63] Indeed, the experience of the whistle-blower can be far more miserable than that of the cartelist. The reader is reminded of the criminal trial discussed earlier in which those alleged to have engaged in cartel behaviour were described as "heroes" by sales staff. That hero status may simply be enhanced if those individuals also help the firm secure immunity from fines. For example, in a 2014 interview an anonymous Japanese car parts executive claimed to have been incentivised by his firm to plead guilty to a US antitrust charge. The employer is alleged to have promised to support the individual for the rest of his life in return for agreeing to serving prison time in the US. It is inferred that the employer did this to negotiate a considerably lower corporate fine under the US plea bargain. [64]
28. The problem is that the cartelist-even if acting alone or in a highly clandestine manner-will typically feel what they are doing is ultimately in the employer’s interests, especially if the potential profits of the infringement are significant enough to exceed any likely corporate fine. Contrast this with someone who reports the behaviour of others or, even worse, goes outside the business to report what they know to the authorities. Those individuals have typically found it difficult to seek employment elsewhere, for example. [65] One way of lessening any stigma attached to internal reporting is to build a no-blame culture, to the greatest extent possible.
Concluding remarks
29. The findings of this article should not be taken to suggest that cartel enforcement is not worthwhilewhile or that cartels cannot be significantly deterred. In the last ten years we have seen a steady drop in the number of cartels uncovered and an increasingly sophisticated approach by the European Commission and other authorities when dealing with evidence. It is now quite unusual to see the sorts of brazen behaviour that were had by members of the Lysine cartel, for example. What we do not know is whether there are fewer cartels out there because they have been deterred, or that they have simply become more sophisticated and harder to detect. It is notable, for example, that competition authorities have become over reliant on cases that involve leniency, possibly at the cost of a credible threat of detection without it. [66] Yet enforcement has undoubtedly raised the profile of cartel enforcement and resulted in many industries making very significant efforts to comply with the law and prevent recidivism. One must also remember that all enforcement makes life harder for cartels and the greater the challenges and risks they face in communicating, reaching agreement and ensuring the cartel is adhered to, the less the likely damaging impact on markets.
30. This paper has shown how the fight against cartels still faces significant obstacles and challenges. The identification of three key drivers of the decision to form a cartel helps us understand the motivation of managers forming cartels and how we might resolve them. Ignorance is still a very significant problem and authorities must not assume that high fines will automatically have an educative effect or that knowledge of them will be disseminated beyond a fairly small group of competition people and general in-house counsel. It is also clear that the punitive sanctions imposed on cartels are not yet reflected in popular perceptions. So continued advocacy and education is very important to promoting deterrence, compliance and ensuring that cartels are viewed with an appropriate level of moral opprobrium.
31. The second issue, crisis, is also very challenging and can drive otherwise law-abiding managers into adopting illegal strategies like cartelisation, in an attempt to avert bankruptcy and job losses. These individuals might be seen as heroes within their respective businesses or industries and any softer perception of cartels in crisis is not helped by competition authorities relaxing enforcement during periods of wider economic crisis. Businesses need to be particularly careful to ensure that the crisis driving cartelisation is not self-inflicted-for example where unrealistic sales targets are set or where employees’ job security is very closely linked to challenging short-term performance indicators.
32. The third, arrogance, is compounded by the remote nature of enforcement and the fact it typically results in only punishment for the firm. Both crisis and arrogance need to be dealt with through a combination of public enforcement and internal compliance efforts. There is a real need for further development of individual sanctions that are coordinated across jurisdictions and that ensure that punishment is dealt out where it is possible to identify individuals who were solely or primarily responsible for the cartel conduct. This is especially important given the extent to which businesses have typically failed to prevent cartel conduct internally, even though the existence of the conduct was widely known or largely ignored. It is also important given that it may not always be possible for a business to discipline an individual manager internally, or where the decision to form the cartel was more collective and involved a larger group or an entire subsidiary. Thankfully, corporate compliance does appear to be moving in the right direction and there is now a greater awareness of the need to take competition law seriously.
Staff and management’s involvement in anticompetitive practices: Lifting the corporate veil
---- David Viros Referendaire, European Court of Justice, Luxembourg
1. At times, competition enforcement is reminiscent of the Whac-A-Mole game, in which no matter how often the mallet hits the mole, it keeps coming back. A significant portion of European Commission infringement decisions are thus addressed, every year, to at least one repeat offender. [67] Against this backdrop of recidivism, there is an ongoing debate amongst scholars and practitioners on the contribution penalties can bring to optimal deterrence when targeted directly at management, and more broadly, at individuals involved in the commission of anticompetitive practices. This debate is in turn fed by developments such as the recent attention-grabbing extradition of a European executive to the United States on criminal antitrust charges, which highlights in a very potent way the implications of individual liability regimes. [68]
2. Before examining in more detail the objectives, variants and possible pitfalls of enforcement regimes aimed at natural persons (III.), this contribution will look at the elements of context that are informative of whether and how these regimes should be rolled out. These include the public perception of anticompetitive behavior (I.) and the role of incentives (II.). To conclude, we will draw attention to the status of individual behavior when liability is ascribed to an undertaking, as is the case under Articles 101 and 102 TFEU (IV.).
I. Public awareness and perception of competition law infringements
3. It is only to the extent that behavior is known to be proscribed that it can be deterred. With regard to competition law, a somewhat sophisticated body of prohibitions, these basic limitations to deterrence are not to be disregarded.
4. Subjective views on competition law prohibitions and value judgments expressed on anticompetitive behavior may likewise determine the inclination of individuals to abide by these rules. Moreover, these views in aggregate can have a crucial influence on policymakers’ decision to introduce or beef up individual sanctions in competition matters.
1. Public awareness of competition law prohibitions
5. It can be deceptive to discuss public awareness of what constitutes anticompetitive behavior in general, in view of the varied nature and complexity of the practices concerned. This notwithstanding, public awareness of cartel prohibitions can serve as a suitable proxy for establishing awareness of competition law prohibitions as a whole-and the potential for deterrence efforts to reach their targeted public.
6. It is also important not to equate negative judgments on cartel behavior with knowledge of the illegality of such behavior. Interestingly, in a series of surveys conducted in 2014 of a panel representative of the general population in the UK, the US, Italy and Germany, a strong majority (between 66% and 79%) expressed reprobation of price-fixing behavior but a significantly lower proportion thought that the latter was illegal-namely, 53% (IT), 53% (UK), 41% (US), Germany being the outlier (75%). [69]
7. Confirmation of this limited knowledge of what constitutes illegal cartel behavior amongst the public came, four years later, with the results of a survey of 1,200 representative businesses conducted on behalf of the UK Competition and Markets Authority. [70] Particularly damning were the findings that only 40% of the businesses surveyed knew that customer allocation was illegal while only 52% knew that this was the case with bid rigging. [71]
8. How should one go about broadening the awareness of what is illegal under competition law? The answer, it seems, lies in no small part in increased media coverage of competition enforcement and the issuing of fining decisions likely to make a strong impression on the public. For instance, Stephan suspects that the high awareness of the illegality of price-fixing in Germany observed in the 2014 study (see above) was a result of several high-profile cases and the targeting of consumer product sectors by the Bundeskartellamt when the survey was being conducted. [72]
9. Competition authorities have a decisive role to play in this respect. The implementation of an effective media strategy can go a long way towards increasing general awareness of what illegal cartel activity is. Investing heavily in a media and communications department within a competition authority is thus a matter of public interest, part and parcel of the overall drive for optimal deterrence. The author of this contribution witnessed firsthand the importance of maintaining strong, trust-based ties with journalists in order to ensure enforcement actions are both understood and talked about. This also means issuing press releases on a regular basis, [73] preferably without jargon and with explanations geared towards the wider public. [74] Another challenge facing competition authorities is the achievement of greater name recognition, with frequent renaming making this all the more difficult. [75]
10. At the international level, raising awareness of competition rules has been an ongoing concern, flagged nearly two decades ago by the OECD [76] and the International Competition Network, [77] which make available a wide array of publications and toolkits intended to support competition authorities in their advocacy efforts. [78]
11. Next to competition authorities, whose mandate includes raising awareness of competition rules, it is in companies’ self-interest to ensure their employees are aware of these. Compliance programs are thus set up with a view to informing and educating a company’s personnel on competition rules. In so doing, companies may reach certain constituencies that competition authorities are not successfully reaching through their advocacy initiatives. Moreover, they may be able to fine-tune their educational material based on their industry’s specific competition concerns. For instance, bid rigging will be emphasized by companies whose business turns around the award of procurement contracts; likewise for the pharmaceutical industry, in which specific infringement risks exist. [79] Of course, the smaller the company, the less likely it will implement a compliance program. This is why it can make sense for competition authorities to target their advocacy efforts specifically at SMEs, in which case a partnership with their business associations is key to ensure the message is heard. [80]
2. Public perception of anticompetitive behavior
12. Combe and Monnier have underscored the importance of looking at how the public perceives anticompetitive behavior, noting that a match between popular convictions and legal requirements increases compliance and support for law enforcement. [81]
13. Several authors have also stressed the importance of a broad consensus to support the strengthening of sanctions, in particular of a criminal nature. [82] Lack of such support can lead to unwanted knock-on effects which hamper enforcement, even as the provisions on which the finding of an infringement and the imposition of a sanction rest are in the books. For instance, Kovacic emphasizes the implications for a crucial constituency, namely, judges: if the latter tend to find that the sanctions attached to a conviction are too severe, they may be inclined to set the bar higher for the fulfillment of the substantive test. [83]
14. As mentioned earlier, well over half of the public surveyed in 2014 in four different countries found that the most blatant cartel behavior, i.e., price-fixing, was morally reprehensible. Likewise, in their report on a 2017 study conducted in France, Combe and Monnier mention that 59% of those surveyed found price-fixing damaging.
15. While it appears that the level of opprobrium is even greater in the other countries surveyed earlier, there may be French specificities at play here that are noteworthy. Indeed, collective boycotts and exclusionary abuses are viewed more harshly, with respectively 69% and 80% of respondents seeing them as reprehensible: the subtext here may be that the concerns over exclusion in France trump concerns over the distortion of prices. [84]
16. Another interesting lesson of the 2017 French study is that the stigma of secrecy is very strong. Indeed, when a given price-fixing agreement is referred to as secret in the survey, 73% of respondents deem it as damaging and requiring punishment, in line with the results of the 2014 surveys. [85]
17. Finally, in terms of relative gravity, the 2014 and 2017 studies reveal that for a (not necessarily overwhelming) majority of those surveyed, price-fixing is on a par with other offenses attracting criminal sanctions, such as tax evasion, fraud, insider trading or theft. [86] On the other hand, there is a shared reluctance to contemplate prison sentences for individuals involved in price-fixing, public support for these hovering between 20% and 30% in all countries surveyed, with the exception of the United States (36%)-but other less onerous individual sanctions are seen as adequate. [87] To sum up, the public generally views cartel behavior as grave, but not sufficiently so to warrant the full gamut of criminal sanctions. The implications are not necessarily to eschew altogether criminal enforcement of individual cartel behavior: as has been rightly pointed out, public opinion can shift towards finding cartel behavior (more) reprehensible upon witnessing official signals, such as the imposition of criminal sanctions. [88]
II. The role of incentives
18. Another facet to consider when contemplating holding individuals liable for breaches of competition rules relates to incentives. Which incentives does an individual have to engage in anticompetitive behavior? By which means in turn does one counteract these incentives?
1. Staff incentives versus company incentives
19. At the outset, it should be noted that were competition law not to exist, the incentives of the company and the management to pursue antitrust infringements would be prone to alignment, because the company stands to benefit from anticompetitive conduct in the form of increased profit or reduced losses. [89] This is a distinguishing feature of anticompetitive behavior in comparison with other infringements that are detrimental, or at least not beneficial, to the company, such as embezzlement, insider trading or receiving bribes.
20. Moreover, the greater the correlation between an employee’s remuneration and the employing firm’s commercial success or increased share value, the greater incentive he or she has to engage in anticompetitive conduct. The way an employee’s pay package is structured provides therefore a key to deciphering existing incentives, even if it does not tell the whole story. Indeed, being seen to improve your employer’s bottom-line can usefully serve your future career prospects, even if it does not result in immediate monetary satisfaction.
2. Counteracting the company’s incentives through corporate fines
21. There is a dual rationale for punishing companies. Firstly, it is the company and its shareholders that stand to benefit in principle from anticompetitive conduct. In order for the sting of the penalty to be felt by those who reap the rewards of illegal conduct, corporate fines are necessary. Secondly, companies are best placed to prevent the commission of these illegal acts through the levers they control, i.e., corporate culture, performance targets, hiring and remuneration practices, etc. [90]
22. Regarding the latter rationale, Combe and Monnier point out, however, that a number of limitations afflict these different levers, either because they are "captured" by those they are meant to discipline or because they require a systemic overhaul that shareholders will presumably be loath to implement. [91] They also point out that these levers’ effectiveness may be restricted by the high turnover witnessed in top management positions, as managers, more often than not, will not be around to face the legal consequences of their actions. [92] In this respect, while successful civil actions for compensation of a corporate fine for breach of competition rules, brought against former top managers, are not unheard of, [93] their capacity to discipline these managers is limited, in light of the high threshold for establishing liability and/or the potential offsetting of the fine with the benefits accruing from the anticompetitive practice. [94]
3. Counteracting management and staff’s incentives through individual sanctions
23. It is mostly in view of the limits of corporate fines in counteracting incentives to engage in anticompetitive conduct that calls for stepping up individual sanctions have been made. The perspective taken here is therefore not to replace corporate fines with individual sanctions but rather, with the help of the latter, to "jazz up" the deterrent effect of the former.
24. But is the premise, pertaining to the limits of corporate fines, actually valid? Is it not rather a matter of more effectively goading shareholders into implementing the kind of internal measures needed to ensure their agents, i.e., management and staff, refrain from breaching competition rules? The debate is open: comparisons between the fines imposed by the Commission for participation in cartels and the optimal fine in a rational choice model [95] have led to the finding that these are, with no exception, all suboptimal, sometimes by a very significant margin. [96] Similar findings were made, with a few exceptions, with regard to the fines imposed by the Competition Authority. [97] If both authorities have made some headway in drawing their average fine closer to the illicit gain made by the perpetrators of the cartel, following the application of their new fining guidelines, attaining an optimally deterrent fine level seems beyond their reach. However, this state of affairs may reflect objective and subjective hurdles to a further increase in corporate fines. On the one hand, imposing fines that duly reflect a relatively low detection rate of cartels, say between 10% and 20%, would lead to a massive increase in fine levels, which, presumably, a significant number of addressees may not be able to withstand financially. On the other hand, pruning a "bad apple" may generate less blowback from the wider public than the imposition of heftier fines on companies, which can have implications not only for shareholders but also for other stakeholders, especially employees, in a post-pandemic context of dramatic job losses.
25. Finally, as far as individual incentives to commit an infringement go, individual sanctions may counteract these to an extent that a company not only would not, but also cannot. The separation, within corporations, of ownership (shareholders) and control (management) brings in its wake a number of problems inherent to an agency relationship, such as imperfect information and opportunistic behavior. [98] Better corporate governance, supported by a potent compliance program, can remedy these but cannot dissipate them entirely.
III. A few insights on individual sanctions
26. Establishing a regime of individual sanctions to complement a system grounded on corporate liability raises a number of issues. This contribution does not purport to cover them all, but rather to touch on certain aspects that are crucial for the maximization of the deterrent effect of individual sanctions.
1. Different organizational models
27. Policymakers have different, alternative, organizational models to choose from to buttress an individual sanctions regime. These do not fulfill to the same degree the objective of maximizing deterrence of individual anticompetitive behavior.
28. One key parameter relates to the powers given to the authorities with whom lies, in the main, the responsibility to enforce competition law to steer the investigation, prosecution and/or decision-making in proceedings leading to individual sanctions. It is submitted that the significant involvement of the national competition authority (NCA) in the conduct of these proceedings can yield positive outcomes, in terms of focused enforcement, greater transparency and optimal interplay with enforcement actions targeted at companies.
29. France epitomizes the model of limited involvement of the NCA. Individual sanctions for participation in anticompetitive behavior are criminal in nature and the Competition Authority does not have the power to initiate or steer the investigation and prosecution of such infringements. It can only assist the public prosecutor and/or the investigative judge at different procedural stages: by seconding case handlers to assist a criminal investigation pursuant to a letter rogatory, by communicating a case file of its own proceedings to the public prosecutor when it suspects the facts may warrant criminal prosecution and by providing an opinion at the request of the criminal judge in a given criminal case. Moreover, enforcement of these criminal provisions is carried out on a decentralized basis, by generalist, district public prosecutors. Finally, and for the most part, convictions reached are ancillary to a wider spectrum of criminal infringements, e.g., embezzlement or misuse of company assets. [99] Together, these features limit the French criminal sanctions regime’s contribution to overall deterrence, for lack of focused and publicized enforcement. The French government seems nonetheless to have caught on, at least, to the limits of decentralized enforcement of criminal competition rules: a bill, currently under review, contemplates allocating concurrent responsibility for such enforcement to the Parquet national financier. [100] While this is not full centralization, it is definitely a step towards centralized action.
30. Counterpoints to the French model are those prevalent, for instance, in the UK, Mexico or Germany. In the UK, prosecutions of the so-called cartel offense can only be brought by the CMA or another specialized body, the Serious Fraud Office. [101]
31. In Mexico, while the prosecution is entrusted to the Office of the Attorney General, its launch is conditioned on the competition authority’s discretionary lodging of a criminal complaint. [102] COFECE is therefore pivotal in the initiation of criminal competition prosecutions, even if it is not tasked with the prosecution itself.
32. Systems contemplating the imposition of administrative fines on individuals, such as in Germany, entrust the competition authority not only with the power to investigate and prosecute, but also with the decision-making power to impose the said fines on individuals. [103]
33. Regarding France, Mexico and the UK, the opposing policy choices just described as to whether to put the competition authority at the helm of criminal enforcement may reflect the circumstances under which the criminal prohibitions were adopted in the first place. In Mexico (2011) and in the UK (White Paper of 2001), these legislative changes reflected a deliberate effort to increase the profile of competition law and the level of general deterrence by emphasizing that individuals could be the target of enforcement and possibly face imprisonment. In France, by contrast, existing criminal law prohibitions were passed in 1986 in the context of a shift from criminal to administrative enforcement: the prime objective of policymakers at the time was to mark a clean break from a criminal system perceived as suboptimal. In this context, it is unsurprising that the focus was not on increasing the centralization and specialization of criminal antitrust enforcement.
2. How to give teeth to the threat of individual sanctions
34. Even if individual liability and penalties are provided for in the statutes, the perception of a real threat by prospective cartel participants, and the corresponding deterrent effect, hinges on enforcement action actually being taken-and, preferably, with a successful outcome.
35. In this context, it is important to look at the constituent elements of the infringement, together with the standard of proof. In France, besides the existence of an anticompetitive practice, proof of fraudulent intent must be adduced, as well as of a decisive and personal role of the charged individual in devising and/or implementing the infringement. This sets the bar high for conviction, while at the same time encompassing the whole array of anticompetitive behavior, i.e., beyond cartels. [104]
36. The need to satisfy exacting requirements may actually be a blessing in disguise, in the sense that it makes those adjudicating on criminal competition violations more at ease with heftier sanctions. Distinguished authors have put forward this argument in relation to the narrowing of the scope of criminal enforcement to cartels. Kovacic thus sees a link between the focus of the US Department of Justice’s criminal antitrust prosecutions on cartels and the increase in the number and severity of sanctions imposed. [105] The problem with the French criminal provisions lies with their combination of demanding subjective and objective conditions to establishing liability, together with a particularly wide material scope. The risk is that case law upholds a rigid view of these conditions in order to mitigate the risks associated with the wide material scope of the infringement.
37. It is also important to take stock of the investigative tools and resources made available to pursue such conduct. When enforcement is not vested with the competition authority or, at least, a specialized body, the risk is that scarce resources will be allocated to the investigation and prosecution of other infringements whose harm speaks more directly to the public. In France, the resource concern, while still very real as long as generalist district authorities are charged with the prosecution of the criminal competition offence, has been slightly mitigated by a 2014 reform allowing the investigative judge to request the assistance of the Competition Authority in the conduct of the investigation. [106]
38. As per investigative tools, criminal enforcement typically resorts to more potent, intrusive, means of investigation, e.g., wiretapping and interviews conducted while in police custody. For Wils, it is the "stronger procedural protections[ in criminal proceedings which] create in their turn the need for stronger investigative powers so as to avoid enforcement becoming ineffective." [107] If this assumption holds, it may call into question the legitimacy of using in evidence material collected pursuant to these criminal investigative powers to impose administrative/civil sanctions. [108]
3. The mitigation of unwanted side effects
39. The increased exposure of managers and staff to individual liability and sanctions, while conducive to greater deterrence, may also produce unwanted side effects, in particular by driving companies away from leniency applications for fear of exposing their personnel. On the other hand, if managers perceive that there is a significant risk that they may be held personally liable for their participation in a cartel, this can act as a potent driver of leniency applications provided these can provide immunity to them in addition to the immunity procured to the company they work for.
40. The Commission in its "ECN +" draft directive duly pursued this objective, even if it did come with some strings attached: "Such protection should be dependent on these employees and directors actively cooperating with the NCAs concerned and the immunity application predating the start of the criminal proceedings" [109] The conditions for being eligible to such protection evolved somewhat in the final text, with cooperation expected of the individual with "the competent prosecuting authority" in charge of the criminal antitrust proceedings-in addition to cooperation with the NCA on the civil/administrative leg of the case.
41. While conditioning the protection thus granted to the active cooperation of those who stand to benefit, the directive also provides Member States some leeway in its implementation. Member States may thus provide that "the competent authorities are able not to impose a sanction or [are able] only to mitigate the sanction to be imposed in criminal proceedings to the extent that the contribution of the individuals (...) to the detection and investigation of the secret cartel outweighs the interest in prosecuting and/or sanctioning those individuals.". [110] This reflects an underlying concern in some jurisdictions that an administrative authority’s decision as regards (administrative) liability should not tie down prosecutors and judges in criminal matters. In France, for instance, the existence of such a principled position in some corners of the judiciary got the better of early proposals for the criminal immunity of the staff of leniency applicants. [111] This being said, considering how risk-averse the individuals concerned-mostly senior staff and management-are, it is doubtful that an immunity from criminal liability that hinges on the "competent authorities"’ case-by-case balancing of the interests of promoting cooperation, on the one hand, and sanctioning impugnable behavior on the other will prove attractive.
42. Another issue is whether this criminal immunity should be extended to the staff of all leniency applicants, or only in relation to the successful immunity applicant. If the latter, this may weigh considerably on the incentives of applicants expecting lesser discounts on the administrative fine to apply nonetheless. The Competition Authority has accordingly stated, in its leniency notice, that it considers that the existence of a leniency application is a legitimate reason for abstaining from communicating the case file to the public prosecutor, without distinguishing between immunity and leniency applicants. This statement, made in 2006, was renewed in the four successive versions of the leniency notice. This wide personal scope of the protection thus offered contrasts with the choice made under Article 23 of the ECN + Directive to cover only immunity applicants-even if Recital 66 leaves open the possibility for Member States to decide to cover all leniency applicants. A middle ground could be for the prosecuting authority to commit not to use evidence thus submitted to charge the staff of the leniency applicant. Evidence provided by the leniency applicant is, by nature, applicant-centric and thus liable to support criminal charges against individual staff of the said applicant where the NCA’s case file may otherwise not. While not creating more incentives to apply for leniency, this measure would at least ensure individual staff members are not worse off because of their company’s leniency application.
IV. Disentangling individual and corporate liability: The example of EU law
43. Under EU law, an undertaking is an economic unit consisting of one or several natural or legal persons. Even as the undertaking is the subject of the prohibitions under Articles 101 and 102, this does not write off natural persons as addressees of a fining decision by the Commission, provided they can be assimilated to an undertaking-such would be the case of self-employed, unincorporated individuals. While it seems a natural person has never in fact been addressed a fining decision by the Commission, [112] other types of decisions taken for the application of Article 101/102 have. [113]
44. Beyond the consideration of natural persons as addressees of Commission decisions, exploring conditions under which individual behavior is ascribed to a company under Article 101/102 can provide further indications on companies’ incentives to prevent such behavior. Indeed, these incentives are to some extent a function of a company’s ability to hide behind the "rogue" nature of the employees involved in the anticompetitive practice.
45. In this respect, the case law of the EU courts creates conditions favorable to the enforcer seeking to hold a company liable for its employees’ actions. The net cast is wide and the odds that an employee’s actions will not be ascribed to its employer particularly slim. The Commission is under no duty to establish top management implication, nor does it need to demonstrate that the employee’s actions were known or authorized by management. The imputation of an employee’s actions to its employer is akin, therefore, to an irrebuttable presumption. Analogies with the parental liability regime are accordingly limited, as a defense put forward which emphasizes the rogue nature of a subsidiary, as opposed to an employee, to evade imputation will have to be considered in detail. [114]
46. In its judgment of 7 February 2013, Slovenská sporiteľňa (case C-68/12, EU:C:2013:71), at paragraph 28, the Court reaffirmed its long-standing position: "Article 101(1) TFEU must be interpreted as meaning that, in order to find that an agreement is restrictive of competition, it is not necessary to demonstrate personal conduct on the part of a representative authorised under the undertaking’s constitution or the personal assent, in the form of a mandate, of that representative to the conduct of an employee of the undertaking who has participated in an anti-competitive meeting. ”
47. The Court’s observations do not depart from what it had held earlier in its judgment of 7 June 1983, Musique Diffusion française e.a. v. Commission (joined cases 100/80 to 103/80, EU:C:1983:158), at paragraph 97: "For[ Article 101 TFEU] to apply it is not necessary for there to have been action by, or even knowledge on the part of, the partners or principal managers of the undertaking concerned; action by a person who is authorized to act on behalf of the undertaking suffices.".
48. The Court in its judgment of 21 July 2016, VM Remonts and others. (case C-542/14, EU:C:2016:578) summed up these dictums in a somewhat more straightforward way: "For the purposes of a finding of infringement of EU competition law any anti-competitive conduct on the part of an employee is thus attributable to the undertaking to which he belongs and that undertaking is, as a matter of principle, held liable for that conduct" (para. 24). At the same time, a more casuistic approach may be in order if the employee works for two undertakings concurrently: the judge examines in this case if the individual was taking part in the anticompetitive contacts in the interests of both employers. [115]
49. As the undertaking’s liability is not derivative of its personnel’s but direct (leaving aside parental liability), the constituent elements of an infringement have to be established with respect to it. Hence the necessary fiction that it is the undertaking which "took part" in an infringement or which "has knowledge" of the actions of co-participants. In practice, this also means that the undertaking is liable for its personnel’s actions, taken as a whole: the circumstance that the staff involved throughout the duration of the cartel changed has, in and of itself, no bearing on the undertaking’s liability, so long as the individuals concerned were acting on behalf of the undertaking. [116]
50. A further implication concerns the liability of an undertaking in respect of the conduct of the other co-participants in the context of a single and complex infringement. According to the CJEU’s case law, such liability can only be found if the undertaking intended, through its own conduct, to contribute to the common objectives pursued by all the participants and that it was aware of the offending conduct planned or put into effect by other undertakings in pursuit of the same objectives or that it could reasonably have foreseen it and was prepared to take the risk. [117] This presumed or actual awareness being that of the undertaking, the Commission is under no duty to establish such awareness with regard to each individual involved in the infringement on behalf of the undertaking.
51. This does not mean that the specifics of an individual’s personal knowledge of the co-participants’ infringing conduct will not be of relevance. For instance, the General Court has not found fault in the Commission’s conclusion that an undertaking began participation in a single and complex infringement as of the recruitment of two staff members who, prior to that, were active in the said infringement at the behest of other participants-this notwithstanding the fact that the first anticompetitive contact in which they took part in their new positions only occurred several weeks later. [118]
52. Finally, when the laws mandate that an offense be found against a natural person in order to derive liability against the undertaking, one would expect the level of procedural guarantees to increase in comparison with a situation in which the undertaking is the (sole) subject of the infringement. Such a "knock-on" effect exists, for instance, in the context of fining proceedings under German law, with regard to the material scope of the privilege against self-incrimination. Undertakings benefit from rights more akin to a right to remain silent than to the more limited privilege against self-incrimination defined in the Orkem [119] case law. [120]
V. Conclusion
53. Competition law infringements are not self-evident to the point of commanding widespread public awareness. While viewed as egregious, cartel behavior is seen by most as not warranting the severest of individual penalties, i.e., incarceration. This being said, commonly held beliefs are not static; authorities can build on the moral reprobation of cartels to evolve public perceptions towards admitting that, for at least the gravest instances of individual participation, the severest penalties are in order.
54. The way in which individual sanctions regimes are structured can help increase public adherence to the penalization of individual behavior and maximize deterrence. A narrow scope, together with centralized, focused, transparent and publicized enforcement, seems to be a winning formula to achieve these objectives. Maintaining the incentives to lodge corporate leniency applications is also paramount, for fear of otherwise driving down detection and, as a consequence, deterrence.
55. Finally, it is suggested that, with regard to the link between individual behavior and corporate liability, the EU courts’ case law provides for the right framework, in which companies cannot deflect responsibility for anticompetitive behavior onto their staff. This is consistent with the prevailing logic that individual liability is not a substitute for corporate liability but rather a complement in the pursuit of optimal deterrence.
