Are Criminal Sanctions the Ultimate Weapon against Cartels Or would there be any alternatives

1. Prof. Floris O.W. Vogelaar GCLC 4th Annual Conference Brussels, 19-20 June 2008 Are Criminal Sanctions the Ultimate Weapon against Cartels? Or would there be any alternatives?

2. (My) Assumptions Yes, criminal sanctions are the ultimate (ultimum remedium) weapon against cartels! Overwhelming research and studies point in that direction � Alternatives seem too weak to work effectively No substantive counter arguments have been published originating in either private practice or the academic world. Counter arguments seem to be of technical nature mainly (no moral support, too complicated to legislate, etc.) Then, why have such sanctions not been adopted in all Member States?

3. Trend setting Research and Conferences Amsterdam Center for Law & Economics, ACLE, conference in 2005 with full publication of all materials and discussion, including Wouter Wils� landmark analysis Conferences at Universities of Cambridge and East Anglia in May/June 2007, culminating in very convincing contributions in the Competition Law Review, of which Peter Whelan�s paper is an absolute must!

4. Convincing arguments in favour Maximum of administrative law sanctions is too low for (a) deterrence and (b) punishment Both damaging effects and illegal gains of cartels are generally believed to exceed such maxima (Connor 2004 and OECD 2002 and 2005) Lack of incentives for individuals not to organize cartels � almost on the contrary! Detection rate estimated at 1:6 (OECD 2002) although Leniency Programmes may (artificially) contribute to a somewhat higher detection ratio Emergence of the Homo Enronicus (SBO Act)

5. Topic is eminently timely Experiences within the EU are of fairly recent date: Ireland, 2006 Home Heating Oil cases, in which 15 individuals were convicted of whom one individual got a six months suspended jail sentence (Guide prices scheme) UK, 11th June 2008 Marine Hose cases, in which three individuals were convicted to 24-36 months in prison ? Close cooperation between the DoJ, DG Comp and the OFT (Price fixing). No UK stand-alone case as yet. In a somewhat more distant past, bid-rigging cases in Germany and price cartels in Estonia led to criminal sanctions

6. Legal basis within the EU? No direct basis in EC Treaty � Cf. also art. 23(5) of Reg. 1/2003 and art. 14(4) of Reg. 139/2004 Doubtful whether those provisions are ECHR-proof provisions in the light of ECHR-case law (Strasbourg). Does the EU have the possibility to install criminal sanctions in its First Pillar? Presently not on Community level but maybe at national level through ECJ C-176/03 of 13th September 2005 (Commission v. Council), in particular recitals 38-51, and consequently deciding on some degree of harmonization of national laws (top-down) Debate on legal basis and the necessity therefor is essentially similar to the debate on harmonization efforts in the context of Private Enforcement (Cf. White Paper 2008)

7. Tendencies towards sanctioning of individuals (1) Hungary and Romania introduced criminal sanctioning of individuals, but there are no precedents yet In the Netherlands Parliament has ordered the Cabinet to introduce criminal sanctions. No proposal for legislation yet. Certain voices in the Netherlands Parliament to raise national fine level maximum to 30% of turnover (seems rather counterproductive!)

8. Tendencies towards sanctioning of individuals (2) In the Netherlands administrative fines (up to max. 450,000 euros) may now be imposed on those who ordered to organize a cartel or factually were leading cartel activities. These notions (coming out of criminal law) are to be applied in administrative law by analogy! Similar provisions exist in Denmark, Germany, France, Ireland, Latvia, Malta, Slovenia, Spain and the UK, sometimes even without a formal maximum. Some of these are of a criminal and some of an administrative nature

9. Commonly heard counter arguments (i) No social or moral acceptance of criminal enforcement amongst the business community as infringements are not thought to be embedded sufficiently in economic welfare thinking (as beneficiaries might be tax authorities, shareholders, salaries and wages, Trade Unions) (ii) Competition law norms are (economically) too open for criminal application. Risk of arbitrary application! (iii) Too complicated to achieve in concurring enforcement (administrative for undertakings, criminal for individuals) (iv) Public prosecutors and criminal judges lack specialized knowledge (v) Loss of efficiency of leniency programmes

10. Counter arguments not convincing (1) Other (comparably damaging to public welfare) conduct has been labeled a White Collar crime throughout the EU (tax fraud, insider trading, embezzlement, social security fraud, environmental misbehaviour, etc) all leading to a deadweight loss for consumers and the unjustified transfer of wealth from consumers to producers Competition Law compliance should be seen as part of the standard Corporate Governance package Concurring enforcement (administrative and criminal) is seen in other areas of the law (e.g. in tax laws). Concurring or �dual� enforcement would have my distinct preference, provided �.

11. Counter arguments not convincing (2) The issues are carefully legislated: ? Is the criminal enforcement accessory to enforcement against undertakings or can it be enforced on stand-alone basis? It shouldn�t be an objective in itself! ? Rights of the defense in the criminal context ? Wouldn�t it be advisable to write strict infringement definitions into the Criminal Codes (like in Section 188 of the UK Enterprise Act 2002) ? Imposition of criminal sanctions by Criminal Courts only and not by the NCA�s ? Preferably, parallel investigation and indictment in the two tracks and in close cooperation

12. Counter arguments not convincing (3) Public prosecutors might have an initial lack of specialized knowledge and should be helped by specially trained officers from within the NCA�s Judges cannot be said to lack knowledge. If they are deemed fit to apply art. 81 in its entirety, they should be fit to apply criminal sanctions in that context as well Member States should with the help of DG Comp make a good effort to educate prosecutors and judges in this field of the law

13. Counter arguments not convincing (4) Initially, there may be a genuine fear that (especially custodial) sentences will be too low, as can be seen in the Irish Home Heating Oil cases or in some notorious financial fraud cases in the Netherlands There seems to be a general hesitation in Europe to prosecute and punish white collar crime actively and severely There is a notable under-deployment of already existing common criminal law provisions in a cartel context: ? Cooking the books � False accounting ? Forgery of documents for gain ? Defrauding creditors and investors All of which serving to conceal the existence of a cartel and thus bringing the cartel within criminal law reach already

14. Counter arguments not convincing (4) Negative impact on Leniency programmes may be remedied by including repentant individuals in those programmes Maybe by taking away the potential conflict that might arise between individual and undertaking, e.g. by granting the undertaking concerned the no. 2 position when strict criteria are met (immediate cooperation, full disclosure, abandonment of practice, etc.) Criminal sanctions should made to enhance, not to impede such ancillary enforcement tools

15. What is needed? The political will in Member States to go the criminal route in addition to the administrative law enforcement against undertakings (conviction, cost efficiency, legislative feasibility, national enforcement traditions) Criminal sanctions should be for well-defined hard core forms of cartel making only (price fixing, market allocation, output and/or investment allocation, bid-rigging) And should be used as an ultimum remedium Bottom-up convergence may be triggered by EU top-down harmonization measures facilitating such national initiatives � the �useful effect� of competition rules!!

16. Some Criminal Sanction Principles Criminal sanctions should at all times at least be subject to the following principles: ? Efficiency (does the sanction indeed repair the damage and have a sufficiently deterring effect?) ? Opportunity (careful selection of cases � clear hard core cases; cartels only as not suitable for dominance cases) ? Proportionality (careful balancing all interests against sanctions to be imposed) ? Accessory application, i.e. no criminal sanctions without also prosecuting the undertakings concerned ? And should be transparent and predictable, preferably throughout the EU

17. Flanking Measures obviously welcome Known alternatives (disqualification orders, administrative fines, enhanced private enforcement implying potential individual Board members� liability, etc.) are not to be discarded. However, in the long run such alternatives should be ancillary, not substituting measures Further measures of that kind could be: ? EC Company Law harmonization with Directive providing for Annual Reports liability in case of cartels ? Obligatory labour law consequences for individual offenders once convicted (EC harmonization needed in that respect?)

18. Is it going to happen? And when? In the long run, YES ! In the shorter run, maybe: hesitating Member States may be more likely to follow UK and Ireland example if more successful precedents emerge However, the legislative technique may be complicated and the actual enforcement potentially expensive Political climate is influenced by strong counter pressures from the business community DG Comp should continue to issue positive signals towards national criminalization in every manner available (including harmonizing flanking measures) In the meantime, the alternatives should be pursued to gain experience with ever tougher deterring measures

19. Sources and Some Literature OECD �Report on the nature and impact of hard core cartels and sanctions against cartels under national competition laws�, 2002 OECD Round Table Report on Cartels: Sanctions against individuals, 2005 Criminalization of Competition Law Enforcement � Economic and legal implications for the EU Member States (K.J. Cseres, M.P. Schinkel and F.O.W. Vogelaar Eds), Edward Elgar Publishing 2006 (incl. Wouter Wils� paper) Competition Law Review, Vol. 4 #1, 2007 (incl. Peter Whelan�s paper) F. Vogelaar, �Interface: EC and Dutch Competition Law � In Which Fields or Areas Would The Netherlands Still Have Autonomous Regulating Powers?� in: Interface between EU Law and National Law (D. Obradovic and N. Lavranos Eds), Europa Law Publishing, Groningen 2007 Katalin Cseres, �The Interface between EC Competition Law and the Competition Laws of the New Member States: Implementation or Innovation?�, in Interface (Op. Cit.)