Colluding Constructions: Lucky break?
18 July 2013Routledge Modise
The recent fines imposed by the Competition Commission on 15 construction companies have resulted in wide-spread public out-cry. This article examines whether individuals involved in the anti-competitive conduct of these companies can or should be held personally liable and accountable.
Recently these construction firms reached settlement agreements with the Competition Commission in relation to collusion and bid-rigging. Combined fines of R1.46 billion were imposed after an investigation into collusion over certain building contracts, including those to build stadiums for the 2010 Soccer World Cup. The Commission investigated 140 projects in both the private and public sectors tendering between 2006 and 2011. Shan Ramburuth, head of the Commission, told reporters that it is the biggest collective fine ever imposed on South African companies.
However, the amounts of the fines have not impressed most observers. Cosatu has called for the directors and chief executives directly involved to be arrested and jailed for treason. An article by Ellis Mnyandu, editor of the financial daily Business Report, suggests that the Commission erred in not sending a clear message that fraud would not be tolerated. He suggests that the fines imposed are a drop in the ocean for these multi-billion rand corporations and that further punishment is a necessity.
As a public custodian of South Africa's economy, the competition authorities are expected to uphold the strictest standards of fair trade in a free market.
This article addresses suggestions made by various commentators that, in order for the law to effectively address cartel conduct, the individuals responsible be personally fined or imprisoned. In analysing the extent of personal liability in competition law, I will consider international jurisdictions which have implemented a so-called "cartel offence" in comparison with section 73A of Competition Amendment Act which is yet to be enforced in South Africa. Further, I will consider the effects that such a penal provision will have on the successful implementation of the corporate leniency policy issued by the Competition Commission.
Too many bricks and too little cement
It has been suggested that the buck should not stop with the corporations; punishment should be extended to the individuals involved. Business Leadership South Africa (BLSA) has called on the penalised companies to reveal what action has been taken against those involved and how future collusion will be prevented.
In the case of these construction companies, however, South African competition law does not currently make provision for personal liability. This has not deterred those seeking to enforce further punishment. According to Legalbrief,spokesperson for the Directorate for Priority Crime Investigation (the Hawks) Captain Paul Ramoloko stated that there are "strong allegations of fraud in this case". It is under the auspices of The Prevention and Combating of Corrupt Activities Act, 2004 (Corruption Act), which applies to corruption in both the private and public sector, that the Hawks wish to pursue those involved in the cartel. The Corruption Act stipulates that it is an offence for anyone to offer or accept a "gratification" in order to "improperly influence" the procurement of a contract or the fixing of a price, or to make a tender which has as its aim to cause the tenderee to accept a particular tender. Individuals convicted of section 12 and 13 Corruption Act offences may face fines as well as prison sentences. Whether there is in fact evidence of "gratifications" having been offered to individuals remains to be seen, and it is far from clear at this stage that the commission of any offences under the Corruption Act will be proven.
Anashrin Pillay, an analyst at Stanlib Asset Management, said in a interview with Bloomberg news that the fine imposed was lower than the market had expected. This emphasises the need to set a precedent that such corruption will not be tolerated and avoid a case of such fines being demeaned to a mere "cost of trading".
David Lewis (executive director of Corruption Watch) disagrees with the perception that the Commission has not acted strongly enough. He was quoted in the Business Report of 3 July 2013 as stating that he does not believe that the Competition Commission should be blamed for inadequately dealing with the construction companies' collusions. In fact, he praises the Commission as being a "hero" for its role as the "only public sector investigative and prosecutorial body that is consistently tackling corruption."
Does the "cartel offence" work?
Under the current South African competition law provisions, individuals cannot be held accountable for a company's anti-competitive conduct. Further, the Corporate Leniency Policy issued by the Competition Commission3 provides that a self-confessing cartel member, who is first to approach the Commission, will be granted immunity for its participation in the cartel activity under certain conditions.
The Competition Amendment Act (the Amendment Act) has introduced a "cartel-offence", which criminalises cartel activity, following the implementation of a similar provision in other jurisdictions such as the United States and, more recently, the United Kingdom and Australia. On 28 August 2009 President Zuma assented to the Amendment Act, but it is yet to come into effect.
Section 4(1)(b) of the Competition Act prohibits certain agreements or concerted practices between parties in a horizontal relationship. These prohibitions include, specifically, fixing purchase or selling prices, dividing markets through allocation of customers, suppliers or goods, and collusive tendering.
Section 73A of the Amendment Act introduces criminal sanctions for infringements of section 4(1)(b) of the Competition Act by directors, or persons occupying positions of management authority within a firm.
This provision mirrors legislation in various international jurisdictions. In the United Kingdom, the Enterprise Act, 2002 amended and reinforced the Competition Act 1998 in many ways. In particular, it introduced a criminal "cartel offence", which can result in the imprisonment of individuals for up to five years. Part 6 of the Enterprise Act establishes the cartel offence, which is restricted to horizontal agreements. In order for the authorities to succeed in prosecuting individuals, two criteria need to be met: proof of "dishonesty" and proof of an actual agreement to cartelise a market.
In the South African context, section 73A requires either that the firm must have acknowledged an infringement of section 4(1)(b) of the Act in a consent order, or that the Competition Tribunal or Competition Appeal Court have made a finding of infringement of section 4(1)(b). If these requirements are met, the Act prescribes that a director or person having management authority be prosecuted.
The section is undoubtedly appealing and provides a framework to adequately address an extremely damaging form of corruption. Practically, however, the implementation of this provision may prove to be arduous. The National Prosecuting Authority in South Africa has been given exclusive jurisdiction over the enforcement of section 73A. The challenges that will be faced by a body with no expertise in competition law cannot be denied.
In terms of section 73A(4)(a) the Competition Commission is prevented from requesting that the National Prosecuting Authority prosecute an individual if the Competition Commission has certified that the company is deserving of leniency. As a director of a company one would be almost certain to think twice before approaching the Competition Commission for leniency without guarantees that one's own liberty is not at risk.
Lewis has suggested that as a result of the agreement to cooperate by some corporations, vast resources were saved in both the investigation and prosecution phases of the construction cartel. Whether the investigation would have been as successful without such corporation is questionable.
Where to from here?
Currently, competition law regulations do not provide for the prosecution of individual managers or directors for their involvement in cartel conduct. This means that the individuals involved in the construction cartel will certainly not face prosecution under the Competition Act. Whether the Hawks will succeed in prosecuting those involved under the Corruption Act is yet to be established.
While cartel conduct is undeniably a damaging form of corruption, whether section 73A will be capable of practical implementation by the South African authorities is dubious. As a result of corporate leniency, firms that settle have admitted to colluding and thus civil claimants do not have the burden of proving this collusion. This removes some pressure of having to satisfy the already higher burden of proof required for criminal, as opposed to administrative, sanctions. If firms are unwilling to cooperate then such proof will be more difficult to establish.
Lewis is, however, accurate in noting that the rigging of public sector bids is worse than those in the private sector due to the public contributing both as consumers and tax payers. The effects of cartel activity in the public sector are thus further reaching and should be severely punished.
It is submitted that individuals responsible for such corruption should be held accountable and used as an example of the intolerance for anti-competitive conduct in a free market. Whether such prosecutions are appropriate under the auspices of competition law (the Competition Amendment Act) or criminal law (the Corruption Act) remains contentious. It would seem that, in their current form, both raise practical concerns that would need to be addressed to provide an effective solution.