No stitches for snitches: Role of leniency in dismantling cartels

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Instead, the word cartel actually derives from the Italian cartello, meaning “leaf of paper”. As time evolved, the “leaf of paper” in question became one of a written agreement between parties, regulating certain conduct. Accordingly, it is from this utilisation that the modern interpretation of the word was born.

Cartel conduct

For the avoidance of doubt, cartel conduct is exactly that – an agreement between parties to act in a predetermined way so as to ensure that there is collaboration and mutual benefit for all those involved. Whilst mutual benefit may be the goal at heart, such benefit does not usually extend to those outside of the group.

By fixing prices, norms and other particulars in relation to the provision of a specific service or product, cartel members are able to engineer circumstances to their own benefit, usually to the detriment of consumers and the market as a whole. This is because one of the key fundamental principles of a free market is its ability to self-regulate.

Essentially, if two or more competitors are vying for top spot in a particular market, they will be driven to keep innovating in order to provide their goods and/or services at a higher quality and for a lower cost than their competitors. If one entity is able to do so, they will in theory, attract more customers – thereby increasing their market share.

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In turn, their competitors will be forced to adapt to these market conditions and find new ways of staying relevant and competitive. If, however, these competitors were to agree to offer their goods and/or services at the same quality and for the same value – there would be no innovation or advancement in those markets, and consumers at large would be forced to purchase whatever the colluding entities are offering and for whatever price, owing to the lack of credible alternatives.

In light of this, perhaps the connotations surrounding the term cartel are not so far off.

Regulatory environment

Prior to the introduction of the Competition Act No. 89 of 1998 (as amended) (the Act), cartel conduct was fairly commonplace in South Africa. Section 4(1)(b) of the Act sought to change that – specifically outlawing the custom through the prohibition of any agreement, concerted practice or decision between firms engaged in a horizontal (competitor) relationship, concerning any of the following specified practices:

1. Price-fixing or the setting of trading conditions;
2. Dividing markets through the allocation of customers, suppliers, territories or specific goods and/or services; or
3. Collusive tendering.

However, to prohibit a practice is merely the first step towards abolishing its existence. No matter how stern the wording, or how onerous the potential sanction, there is simply too much to gain from successful collusion to deter recalcitrant entities entirely. In light of the prohibition, colluding cartels operate in extreme secrecy, and anyone who is involved is on a strict need-to-know basis.

If such conduct were to get out, the participating firms could face punishment in the form of an administrative penalty, up to 10% of their annual turnover in South Africa – as well as a potential criminal sanction for those individuals found guilty of perpetuating the prohibited practice.

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As such, competition authorities devised an ingenious way to unravel scrupulous cartels – and such a solution is more likened to playground antics than large-scale corporate collusion. Whilst the term “leniency application” may sound erudite – by offering a cartel participant softer treatment if they come forward with information that leads to the breaking up and prosecution of their fellow cartel members – competition authorities are essentially rewarding a divergent entity for “snitching” on their collusive counterparts.

Whilst section 4(1)(a) of the Act casts a wide legislative net – catering for any kind of anti-competitive behavior between parties in a horizontal relationship – it does however contain the caveat that such anti-competitive behavior can be potentially justified if the offending firms can demonstrate that any technological efficiency or pro-competitive gain resulted from such conduct, which outweighs the possible negative effects.

Conversely, the offences outlined in section 4(1)(b) are deemed to be so egregious, that the Act offers no countervailing condonations. Accordingly, these practices are considered to be the pinnacle of cartel conduct, and it is for this very purpose, that competition enforcement bodies such as the Competition Commission (the Commission) seek to employ whatever means necessary to eradicate their existence.

It is at this juncture that the leniency application comes to the fore.

Application

The Commission has – as they are empowered to do in terms of section 49E of the Act – developed and implemented a Corporate Leniency Policy (CLP), aimed at curtailing prohibited horizontal conduct, specifically in respect of the offences identified in section 4(1)(b).

Accordingly, the CLP allows for a firm who has committed – or suspects that they have committed – a 4(1)(b) contravention, to approach the Commission and apply for lenient treatment, in exchange for their full cooperation and assistance in investigating and prosecuting the other offending cartel members.

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Because the per se offences outlined in section 4(1)(b) are considered to be of such a flagrant nature, the CLP has imposed stringent requirements that must be met before an erring firm can be granted the immunity being sought. As such, a leniency application has to comprise of the following aspects:

1. The cartel participant has to be self-confessing and elect to approach the Commission of their own accord;
2. The applicant must be completely honest and truthful with the Commission, disclosing all evidence, documentation and information pertaining to the prohibited conduct, as well as offer the Commission their full cooperation and participation throughout the prosecution process;
3. The firm must be the first of the cartel members to approach the Commission with the aforementioned information;
4. The applying entity must not alert any of the other cartel members or third parties to the fact that it has applied for leniency and the entity must immediately cease participating in the concerned cartel activities; and
5. The whistleblower must not destroy, conceal or misrepresent any of the facts pertaining to the Commission’s investigation.

Only if the leniency application encompasses all of the aforementioned aspects, will the Commission decide to award conditional immunity. Conditional immunity seeks to protect the applicant from prosecution whilst the Commission conducts its investigation and finalises the infringement proceedings.

Only once the Commission refers the matter for adjudication to the Competition Tribunal or the Competition Appeal Court – and such an adjudicative body has made their final decision in respect of the matter – will the Commission decide to award the applicant total immunity.

If, however, at any point in the process, the Commission is of the opinion that the leniency application falls short of the required threshold – the Commission can opt to offer no immunity. In such an instance, the applicant will not be afforded any protection from the Commission’s investigation and will be at the mercy of the relevant adjudicative body’s proposed sanction, notwithstanding the fact that they elected to approach the Commission out of their own volition.

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Risk versus reward

Therefore, whilst a leniency application may appear to be an enticing egress for a cartel member in fear of being caught – they run the risk of exposing themselves and their co-conspirators to the Commission’s wrath, if their application does not embody all of the requisite elements.

Further, in making an application to the Commission, the offending firm will likely expose a host of other anti-competitive behaviours and activities that they were involved in, which stem from their involvement in the cartel conduct. Thus, if total immunity is not granted, the forthcoming cartel member could face a litany of investigations from the Commission, over and above the cartel conduct under scrutiny.

Nonetheless, leniency applications are an incredibly useful tool to entice whistleblowers (provided that they offer their full cooperation) and help the Commission root out and abolish the most egregious horizontal cartel practices – as the anti-competitive effects occasioned by such conduct is not only harmful for the relevant market, but also for consumers at large.

Given the potential “get-out-of-jail free card” that a leniency application offers a cartel participant – it would therefore appear that the old adage is not always correct, as sometimes, snitches don’t get stitches, but rather – immunity.