Billion-rand fines for cartels

Tiger Brands can count itself lucky that the fines imposed on it and its subsidiaries for participation in the bread and pharmaceutical cartels only amounted to R152-million.

The consumables giant would have had to hand over more than a year’s worth of profit (R2,6-billion) to the Competition Tribunal if new amendments to the Competition Act, which are being proposed by the Competition Authorities, were in place at the time it was prosecuted.

The competition authorities appeared before the parliamentary committee for trade and industry this week and called for the Competition Act to be amended to allow fines to be imposed on culprits’ profits for every year that a cartel is in operation, not just the last financial year.

Tiger was fined R98-million for its participation in the bread cartel, which equates to 6% of its 2006 bread businesses profits, and R53-million for its subsidiary Adcock Ingram Critical Care’s (AICC) participation in the pharmaceutical cartel, which equates to 8% of AICC’s 2006 profits.

However, the Competition Commission claimed that the bread cartel had been operating for 13 years and the pharmaceutical cartel had been operating for eight years.

A simple calculation that maximises the fines to the allowed 10% of annual turnover and then multiplies these fines by the number of years that the cartels were in operation, gives a sense of the scale of the fines that could be imposed by the tribunal if the amendments are accepted.

Tiger would have had to fork out R2,1-billion for the 13 years of the bread cartel and R535-million for the eight years of the pharmaceutical cartel – a whopping total of R2,6-billion.

Tiger’s 2006 profit after tax was R2,3-billion and it’s profit after tax for the six months to March 31 2008 was R1,1-billion.

Fines of this magnitude would act as a huge disincentive to companies contemplating collusive acts with their competitors and would also ensure that shareholders held companies more accountable for anti-competitive practices as the hit to the share price that a billion-rand fine would cause would be severe.

Competition Commissioner Shan Ramburuth and Competition Tribunal chairperson David Lewis appeared before the parliamentary committee for trade and industry this week arguing that the introduction of “personal liability” for directors and the new offence of “participating in a complex monopoly” would weaken the agencies rather than strengthen them.

“The agencies support the policy objective of deterring cartel activity in the South African economy, especially in cases where such cartel activities cause harm to the poorest of the poor,” says the authorities’ written submission. “However, we are of the view that the proposed provisions will lead to some unintended consequences and may in fact have the effect of weakening rather than strengthening the agencies.”

The competition authorities argue that the proposed criminalisation of collusive behaviour by senior managers and executives would undermine the competition commission’s tools in fighting cartels such as consent order agreements and corporate leniency policy (CLP) and that it is also open to a constitutional challenge.

They argue that criminalisation will severely impact on the CLP, whereby companies who cooperate with the commission in the prosecution of their fellow cartel members are granted immunity.

The authorities argue that directors are less likely to apply for immunity for their company if their cooperation opens them up personally to criminal charges that would be lodged by the National Prosecuting Authority.

They also argue that because the Competition Tribunal uses the civil standard of proof – balance of probability and a criminal proceeding would use the beyond-reasonable-doubt standard of proof, a host of technical difficulties would be introduced into the investigative and judicial processes.

Instead the competition authorities are proposing steeper fines, which are dependent on the number of years a cartel is in operation.

“The Act should be amended to permit an administrative penalty based upon the number of years for which the anti-competitive conduct has been practised,” their submission reads.

The competition authorities are also proposing that penalties for offences such as non-disclosure of information to the commission, hindering an investigation, failure to obey a summons and lying under oath, be severely increased. The majority of these offences carry penalties of a fine not exceeding R2 000 or imprisonment of six months, or both.

“We propose that these be increased exponentially,” the submission reads. “We also propose the introduction of a general offence for obstruction of justice which would include interfering with witnesses or destroying documentary and electronic evidence.”

The Competition Commission has criminally charged two senior executives with perjury in the past three months. The first was AICC’s managing executive Arthur Barnett and the second was an unnamed female Vodacom executive who is accused by the commission of intentionally providing false information to mislead the commission – in contravention of the Competition Act.

The competition authorities are also arguing that the new chapter in the Competition Act that seeks to create a new offence for the behaviour of complex monopolies is unworkable.

“We must stress that in our view this provision is not capable of implementation,” reads their submission. “Our proposal to address this concern is to increase the powers of the Competition Commission to investigate these markets in order to explore in-depth whether or not there is indeed underlying anti-competitive conduct which it would then use its prosecutorial powers to remedy.”

They have recommended that the chapter dealing with complex monopolies be deleted in its entirety.

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