CRIMINILISATION OF CARTELS: A POTENTIAL CURE WITH SIDE EFFECTS

LEGAL BRIEF MARCH 2016Competition authorities particularly in the United Kingdom, the

United States and Australia have enacted and entrenched criminal

penalties for cartel behaviour. South Africa seems to desire to follow suit

although the amendments to our Competition Act, (“Competition Act”)

in relation to criminal sanctions have yet to come into operation.

INTRODUCTION

Punishing cartel ring-leaders, the offenders, seems to be an obvious

solution for cartel behaviour. But is it? We submit that a closer look

reveals side effects, which could bring about the very problems

criminalisation is intended to prevent.

Cartel activities in terms of the Competition Act relate to inter alia

price-fixing, dividing markets and collusive tendering or otherwise

referred to as bid rigging. The penalties in place for taking part in

cartel activities are different throughout the world although there

has been a steady shift from civil sanctions to criminal sanctions by

competition authorities.

CURRENT SA LAW

The highest penalty that can be imposed currently in South Africa

for taking part in a cartel is 10% of the company’s annual turnover.

However, with the amendment of section 73A, the Competition

Act now potentially provides for new criminal sanctions to be

imposed on individuals. These criminal sanctions provided for in the

Amendment Act, 2009 are yet to become effective and are set to

remain ineffective for some time, will allow for a fine not exceeding

R500 000 and a prison sentence of up to 10 years for individuals.

WHY CRIMINAL SANCTIONS?

The ultimate goal of competition law is to promote consumer welfare

through the regulation of anti-competitive practice in the market.

In order to achieve this goal of consumer welfare consumers must

have quality products and services available to them that are sold to

them at reasonable prices. This can only be achieved through vigorous

competition in the market, which forces companies to produce a

larger quantity and better quality of product and at a price point that

will convince consumers to buy the better quality and priced product

from the most efficient competitor in the market.

On the other hand a market is manipulated through price-fixing

and market sharing and thereby consumers may be forced to pay

higher prices for lower-quality goods. This manipulated market

situation can have extremely detrimental effects on the poor and

vulnerable. An example would be in the “bread cartel” case. The

competition authorities concluded that the bread cartel resulted in

many people, particularly in rural and poor communities of South

Africa where bread is a staple food, being forced to pay much

higher prices for bread.

The reason for the introduction of criminal sanctions into cartel

practices is to crack down on the individuals involved, to deter future

cartel activities. The need for a harsher penalty comes from the fact

that the market activities of powerful companies driven by their

leaders can have drastic effects on ordinary people who depend on a

fair and competitive market for their day-to-day survival.

By Ahmore Burger-Smidt, Director: Werksmans Advisory Services (Pty) Ltd and Wesley Fletcher, Vacation Student

PROBLEMS WITH CRIMINAL SANCTIONS

Although the purpose of imposing criminal sanctions on those

participating in cartel practices is to protect the position of the

consumer, there are problems in proving the existence of cartel

behaviour. The higher standard of proof in criminal cases, “beyond a

reasonable doubt”, has been a problem overseas particularly in Australia

and criminal proceedings regarding cartels have also been scarce

in the United Kingdom. The Australian Competition and Consumer

Commission have been reluctant to prosecute criminal cases that might

be unsuccessful rather than to pursue civil cases, where the burden of

proof is less onerous.

It has also been stated in Australia that the criminalisation of cartels

has caused “a chilling effect on pro-competitive behaviour” because

so many firms are concerned about being caught up in allegations of

cartel behaviour.

New Zealand has adopted a different strategy as a means of promoting

pro-competitive behaviour in markets. The Amendments to the Cartels

Bill, December 2015, as put forward by Paul Goldsmith, the Minister

of Commerce and Consumer Affairs in New Zealand, will remove the

criminal sanctions in New Zealand for cartel behaviour and allow

for companies to collaborate with one another, if that collaboration

promotes competition and enhances efficiency.

CONCLUSION

Those countries, including South Africa which are considering

introducing criminal sanctions for cartel behaviour, regard consumer

welfare as the ultimate end. In practice though there have been

problems implementing criminal sanctions. The difficulty in proving

criminal offences as opposed to civil offences is one such problem.

Another issue faced by these countries has been that pro-competitive

behaviour in the market has been diminished by the fear of criminal

sanctions. The difficulty then, with regard to stamping out cartel

behaviour in the market, is to balance the sanctions imposed against the

effects of those sanctions on pro-competitive behaviour.

Although the point of criminal sanctions is to support the most

vulnerable consumers in a society, if the sanctions instil a chilling effect

on competition and innovation specifically, the sanctions may bring

about the very evil they are designed to prevent.

Legal notice: Nothing in this publication should be construed as legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisors for guidance on legislation which may affect their businesses.

© 2016 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.

ABOUT THE AUTHOR

AHMORE BURGER-SMIDT

Title: Director, Werksmans Advisory Services (Pty) Ltd

Office: Johannesburg

Direct line: +27 (0)11 535 8462

Email: aburgersmidt@werksmans.com

Ahmore Burger-Smidt specialises in Competition Law and Data Privacy. She has extensively

advised clients in relation to both competition law as well as data privacy-related matters;

including clients in numerous African countries. She advises on all aspects of competition law

including applications for leniency and for exemption from the Competition Act.

She has significant expertise in the competition-related aspects of mergers and takeovers

and in dealing with complaints of alleged anti-competitive conduct. She also undertakes

compliance audits and programmes and is the principle driver of the Werksmans competition

law risk assessment and e-Learning tools. Prior to joining private practice, Ahmore was Deputy

Commissioner and headed the Enforcement and Exemptions Division of the South African

Competition Commission. She assists clients in relation to data privacy compliance programme

development and implementation.

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