The Hindu Business Line : Continental crackdown on corporate collusion

Established oligopolies should not have to act as cartels, fixing prices by meeting in secret. Signalling prices is sufficient, and eliminates the need to conspire and leave a paper track. Anti-trust groups can look perilously at obvious signalling, but there is not much they can do about it legally. So, Coke and Pepsi, ExxonMobil and Shell, can by and large set prices at levels that equal mutual profit requirements, with neither price wars nor clandestine meetings.

Busting Cartels

Nevertheless, cartels still come to pass. The enticement is there and it is effortless to do. We recognise it happens because some companies get wedged and fined. The companies generally confess nothing, but often pay the fine. And this is probably just the tip of the iceberg. There are others that are foolish enough to be easily detected and who allow a case to be built against them. Here are some examples of recently busted cartels, in Europe:

The European Commission fined Microsoft $357 million for failing to comply with an antitrust order, even as the company faces more battles with European regulators over its next big product — Windows Vista operating system.

Lufthansa Cargo is among nine airlines accused of violating antitrust laws by fixing prices in the $50 billion global air cargo market. European Union and US authorities requested information from at least 12 carriers in February; the inquiry focused on surcharges for fuel and security risks.

The European Commission accused Dutch brewer Heineken and its Danish counterpart Carlsberg of colluding to avoid head-to-head competition in each company's home beer market. The two brewers agreed not to compete in the other's home territory from 1993 to 1996, the commission contended.

MasterCard was accused by European Commission of restrictive business practices in the European credit and debit card market. If the commission rules against MasterCard, the company could be forced to end a transaction charge known as a cross-border interchange fee.

Fluent in the opaque jargon of big business, Roswitha Köllner can make a vigorous case for why `synergy effects', `vertical integration' and `network costs' have driven up energy prices around Germany. However, the European Union's Competition Commissioner, Neelie Kroes, turned up the heat on Europe's energy sector, warning gas and electricity suppliers that she would initiate individual antitrust investigations in the sector.

The EU started liberalising its energy markets more than six years ago, but in many countries, large companies still dominate the gas and power business, keeping prices high and making it difficult for newcomers to gain a foothold. Long-term contracts between production and retail companies block access for newcomers. And, there is still too much `bundling' in which a single company is active in both production and retailing.

Across Europe, formerly docile cartel authorities are cracking down on collusion in economically weighty sectors such as telecommunications, construction, energy, chemicals, banking and even beer!

Brusselswants to shake up everything, including the way it regulates Mergers and Acquisitions. Europe's deal-makers say they are already reaping the benefits. Today, the European Court of Justice (ECJ) has given companies a stronger hand in their poker game-like negotiations with EU competition authorities.

Price-Fixers Beware

The focus is clearly shifting to cartels, and the fight against them is becoming a very serious business in Europe.

There has been an alarming rise in the number of price-fixing cartels and the growing eagerness among regulators to slap hefty fines on not only companies, but also individuals caught participating in `hard-core' corporate cartels such as price-fixing and bid-rigging.

And though the punishments meted out still vary from one EU member state to another, some experts believe it is just a matter of time before the European Commission throws itself into the fray and starts leading investigations.

European companies are getting prepared for even tougher fines as commissioners aim to make an example out of the price-fixers they catch.

Criminal Sanctions

Moreover, one expects more European countries to follow the lead of the UK, which passed a law imposing criminal sanctions for price-fixing. The new law targets individuals who set up cartels and senior executives or directors who condone them, and sets a maximum sentence of five years in prison and/or an unlimited fine. At present, Ireland is the only other EU nation to class price-fixing as a criminal offence, but that will change. The deterrent effect of having to spend time in prison is much higher, compared to a steep fine.

Compliance Programme

So, how are European companies preparing if cartel-busters come knocking? European companies are adapting to this changed environment. The new risks companies face, make it unwise not to have rigorous competition compliance systems. Most companies, regardless of the jurisdiction, have a well-designed compliance programme, in place.

A good compliance programme, among other things, provides staff with guidelines on what they should and should not do as investigators start rummaging through computers and filing cabinets. For example, staff should be co-operative, but must avoid getting sucked into a conversation with an investigator, especially without the presence of a lawyer.

Whistle Blowers

Another trend in Europe is that members of a cartel could find themselves in a rush to be the first to report their wrong-doing to investigators to receive leniency. That is what happened in a recent pan-European case that resulted in {euro}147.5 million of corporate fines. As the whistle-blower, Dutch chemicals company Akzo Nobel got off scot-free.

But there is a hitch. To get clemency you've got to make a clean breast of it. You've got to dish the dirt on your chums in the conspiracy, and provide continuous co-operation. For European corporate executives biting their nails, wondering whether a jail term is around the corner, that might seem like a small price to pay.

Adam Smith's name is often brought up as the champion of free-market capitalism. But he foresaw the perils of excessive concentration and urged legislators to consider carefully any change in laws pushed by the class of stock owners and dealers. Adam Smith had it correct, and he would be dismayed at the way in which big money from oligopolies sway and even dictates economic and social policy. As Smith points out, what makes individuals rich is not the same as what makes a nation rich.

(The author is a former Europe Director, CII, and lives in Cologne, Germany. Feedback may be sent to mohan.murti@t-online.de)

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