How oversight killed the criminalisation of cartels

The coming into effect of section 73A of the Competition Amendment Act from 1 May 2016 is likely to raise concern among many executives. 

The provision makes criminal the conduct of directors and/or managers who cause the firm to become involved in any practice that involves price fixing, dividing markets between competitors and collusive tendering. 

The provision targets for criminal liability not only the director or manager who actually "caused" the firm to become involved in one of the prohibited practices, but also those who simply "knowingly acquiesced" to the conduct. 

This appears to be a rather low threshold considering that directors and/or managers may be criminally liable for a fine and imprisonment. It is evident that the purpose of section 73A is to provide a further deterrent to parties who engage in the abovementioned prohibited practices, over and above the penalties that are already in place. 

Yet, the coming into effect of section 73A raises two questions: firstly, is section 73A constitutional and secondly, how effective will it be? If the answer is no to at least one, then the only effect it will have on competition law is likely to be a negative one. 

There is nothing inherently unconstitutional about criminalising cartels – various other jurisdictions, such as the United States of America, Australia, Canada and the United Kingdom, have criminalised competition offences. The question is more specifically whether section 73A itself is unconstitutional. 

When section 73A was passed by parliament in 2009, there were numerous constitutional objections to its subsections (5) and (6). The constitutional objection to subsection (5) was that it imposed a "reverse onus" on directors and/or managers and thus infringed their right to be presumed innocent. The constitutional objections to subsection (6) were: it violates the director’s rights to a fair trial – especially the right to choose legal practitioners; and it violates the right to freedom and security by prohibiting the company from paying the fines and legal fees. 

These constitutional objections in conjunction with the potentially chilling effect it may have on the CLP appeared to be the key reasons why the promulgation of the provision was delayed since 2009 (seven-and-a-half years). 

Interestingly, the proclamation in the Government Gazette specifically excluded subsections (5) and (6) from coming into effect, thus removing the most likely constitutional challenges. The fate of these subsections remains to be seen, but one would think it is unlikely they will be brought into effect. 

As we have considered the constitutionality of section 73A, the next question is how effective it will be. 

At the outset it should be pointed out that section 74 of the Competition Amendment Act, the provision that contains the penalty of imprisonment of up to 10 years and/or a R500 000 fine, has not come into force. As a result, it appears that judicial officers will not be bound by the abovementioned period/amount and will have the discretion to impose a substantially larger penalty. 

Theoretically, this should be a greater deterrent to cartel conduct; however, this will only be the case if there is a well-functioning CLP in place. This is because the CLP is the most successful tool for detecting, deterring and prosecuting cartel activity in South Africa, and the world. Accordingly, the effect section 73A will have on the CLP is highly significant. 

The hallmark of cartels is that they are secretive, deceptive and conducted through a conspiracy among a number of firms. As a result, detecting a cartel is a daunting task for competition authorities without co-operation from a member within the cartel itself. Consequently, the CLP sets out to do exactly that: gain co-operation from a cartel member. 

Its strategy is simple: if a firm is found guilty of participating in a cartel they may be liable for an administrative penalty of up to 10% of the firm's annual turnover. Thus, the CLP provides immunity to the first cartel member who confesses that they are a member of a cartel and hence disseminates distrust among all members of the cartel. 

This dissemination of distrust in conjunction with granting immunity from the penalty has made the CLP the most effective tool for detecting and prosecuting cartels. Nevertheless, it must be emphasised that a company is only likely to apply for the CLP where the associated uncertainty is minimal. 

The problem is that section 73A poses a risk of eroding the effectiveness of the CLP due to the uncertainty it creates. Although the Competition Commission may grant immunity to a cartel member, the NPA has the final discretion to grant criminal immunity to directors and/or managers. The Competition Commission can only recommend that a cartel member is "deserving of immunity". 

As there is uncertainty whether the NPA will grant immunity to directors, the provision will inevitably deter firms from using the CLP to blow the whistle on their fellow cartel members. It is not difficult to imagine that the uncertainty around the risk of incarceration for directors and/or managers will dramatically decrease the effectiveness of the CLP, as it is the directors who make the decision to apply for leniency.

The effect of uncertainty is not new to the CLP and it was one of its major weaknesses before it was comprehensively amended in 2008. The wording of the original CLP was rather ambiguous with the result that it created a great deal of uncertainty. 

Moreover, a number of commentators view that the major drawback of the original CLP was that the Competition Commission had wide discretionary powers to decide whether immunity should be granted and further; the Commission would not grant immunity if the applicant was deemed to be the "ringleader" of the cartel. 

If uncertainty was one of the reasons for its initial failure, it is rather worrying, as it appears that section 73A has once again resurrected uncertainty around the CLP. 

As it stands, criminalising cartels as per section 73A appears to have circumvented the most likely constitutional challenges but appears to have produced uncertainty around how the CLP will operate. This will inevitably discourage cartel member from using the CLP and, to the contrary, will encourage them to be more secretive and deceptive. 

For that reason, section 73A will not have its desired effect – if cartels cannot be detected, they cannot be held criminally liable. 

It remains to be seen how the Competition Commission will handle this anomaly. They will at least need to establish a Memorandum of Understanding between the Competition Commission and the NPA, setting out in detail how immunity will be handled between them. 

This appears to be the route taken in other jurisdictions such as Australia and the United Kingdom. However, it must be said that there have only been three successful criminal prosecutions in the United Kingdom in the last 13 years and none so far in Australia. 

What is certain at this point is the need for the Competition Commission and the NPA to create a secure and predictable environment in order to have any chance of ensuring that cartel members apply for leniency in terms of the CLP. 

As published in Legal Times and Business Law & Tax Review in June 2016.

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