“Does the defence have anything to say in mitigation?”
“Yes, my lord. Before robbing this bank, my client walked past three others, repeating to himself, ‘I must not rob banks.’ So he would like his sentence for robbing the fourth bank reduced on account of his not having robbed the first three.”
“Yes, my lord.”
This is absurd, but it is very similar to a campaign by some multi-national corporations to reduce their – potential future – fines for breaking competition rules. The analogy isn’t perfect, but it’s closer than they would like.
If a company has a competition compliance programme – they argue – then if they are nevertheless found to have broken the competition rules, their fine should be reduced. The French competition authority has put forward a draft proposal, currently in public consultation, encouraging the introduction or the improvement of a compliance program as a commitment in the context of settlement procedure; the UK’s OFT has a general rule that compliance programmes should not lead to lower fines, though they accept that they may be justified in individual cases if a set of strict criteria for compliance programmes are fulfilled, and the US authorities take a similar approach. By contrast,
European Commission Vice President Almunia has ruled out fine reductions for compliance programmes: “I am often asked whether companies should be rewarded for operating compliance programmes when they are found to be involved in illegal commercial practices. The answer is no.”
The Commission published guidance on compliance issues – Compliance Matters – clarifying that although companies will not face higher fines if they put in place a compliance programme which then fails, nor will they receive a reduction.
The arguments on both sides are complex, but the starting position is straightforward: fines for breaking the competition rules are necessary and are very high.
Most economists think that high fines in competition cases are thoroughly justified. Breaking the competition rules – if it goes unpunished – can be a lucrative business. If you get caught, the fine has to be high if it is to both punish and deter.
Although it’s difficult to know if cartels are more or less prevalent than they were, say, twenty years ago, the European Commission continues to uncover cartels that began only recently, and cartels affecting modern consumer products. For example, in the recent detergents case, two companies were fined a total of 315 million euros for their complicity in a cartel to fix the price of washing powder from 2002 to 2005. In a separate case, six companies were fined nearly 650 million euros for fixing the prices of LCD screens from 2001 to 2006.
The problem of cartels therefore continues, and high fines continue to be necessary. As a result, it is understandable that companies want to find legitimate arguments to lower the fine. The question is whether having a compliance programme is indeed a legitimate argument? The benefits of compliance programmes are obvious – both for the companies involved and for competition authorities who have to enforce the rules. They can be more than just a mantra – they can educate company staff about more than the consequences of breaking the competition rules, they can educate them as to why the rules are the way they are, and why breaking them is bad for the company and for society as a whole.
Companies should put in place compliance programmes. No one argues about that. The question though is whether having put one in place but nevertheless having broken the rules and being faced with a fine, that fine should be reduced because of the existence of that programme. There are two obvious counter-arguments.
First, for our bank robber, the benefit of the mantra, “I must not rob banks” being successful for three banks out of four is that he is being sentenced for the robbery of one bank, not of four. For companies that have a compliance programme, the benefit is in avoiding illegal activity in the first place.
Second, if, notwithstanding repeating the mantra, our bank robber has still robbed a bank, why should he be rewarded? For companies that have a compliance programme, but have still entered into a cartel, why should they be rewarded for a compliance programme that has failed?
Of course even the best run companies with the most effective compliance programmes can still fall victim to a rogue employee who involves employees involving the company in a cartel. That though is an argument about the level of complicity of the company – was it a rogue employee or did involvement reach up to the highest levels within the company?
The rogue employee is likely to be a much rarer beast than some imply. If a cartel affects several countries and lasts for several years with changes of employees during that time, then it’s no longer the action of a rogue employee. In 2010 the European Commission fined cartels that had run for 18 and 34 years.
The companies involved in the campaign to get the European Commission to reduce its fines therefore use a more subtle argument. The Commission should take account of compliance programmes not to benefit the companies involved, but to further the cause of competition enforcement.
If – again they argue – the Commission offers lower fines to companies with compliance programmes, then all companies will have a greater incentive to set up such programmes, making it less likely that they will engage in anti-competitive behaviour. So the cause of competition policy will be furthered.
This is a plausible argument. But is it right? There are a few problems.
Lowering fines in the presence of compliance programmes would place the Commission in the difficult position of having to judge the merits of a compliance programme. Is it really ensuring compliance? Or is it about covering their tracks better? Was our bank robber walking down the street saying “I must not rob banks” before adding, sotto voce, “and get caught” and “so that the act will not pay off for my boss”? The UK’s OFT thinks that it can surmount this problem. It has published guidance on compliance, and companies that have programmes that comply with the guidance might – just might – get a reduction.
This first difficulty is perhaps easily overcome then: most compliance programmes are legitimate attempts to comply with the law.
Nevertheless there is a greater difficulty:
Rewarding compliance programmes would require the Commission to differentiate the fines of companies who may, objectively, not differ in culpability. Does our robber really deserve a lesser punishment than someone of previously impeccable character, who had never before found the need to recite a mantra to keep himself honest, and who wandered past a few banks but then decided to rob one of them? They have both robbed one bank.
Let us compare two companies:
- One has a strong ethical tradition and no history of breaking any law, but does not have a specific compliance programme.
- The other has no particular ethical tradition, but has had some brushes with the law in the past and is mindful of the consequences of breaking the competition rules. As a consequence it has put in place a legitimate competition law compliance programme.
Assuming their fines would otherwise be equal, does the latter really deserve a lower fine than the former?
What about two more companies?
- One is a small SME, with only a few employees, has no previous experience of the competition rules, either as perpetrator or victim.
- One is a large multi-national with an army of inhouse lawyers, and compliance programmes on everything from Antitrust to sensitivity towards Zoroastrians, and whose CEO had to explain to the board of the last company he worked at, why they had to pay a 100 million euro for a price fixing cartel.
Again, assuming their fines would otherwise be equal (because their turnover within the cartel and the length of their participation was roughly the same), does the latter really deserve a lower fine than the former because of its compliance programme?
A “compliance” reduction may sound good in the abstract, but applying it in the real world it has real practical difficulties.
Still, companies lobby the Commission and Parliament asking the Commission to surmount these difficulties. There is one obvious reason for scepticism about this lobbying. If a company is spending money to lobby for lower fines, it is reasonable to expect that it is doing so because it expects to be paying fines in the future. “Don’t shoot the messenger” is a legitimate argument, but so is, “follow the money”.
Still, any scepticism would be irrelevant – and perhaps the practical difficulties set out above could be ignored – if the benefits were plausible, if companies really would be encouraged to roll out compliance programmes.
This is the real flaw in the argument. Companies will not have a greater incentive to roll out compliance programmes if they were to be promised a reduction in fines.
Why? Because there’s already a massive incentive to roll out such a programme – the reduced risk of breaking the competition rules and getting fined as a result.
The benefit of a compliance programme, just like the benefit of our bank robber’s mantra, is in the illegality and the punishment that you avoid.
If a company stays out of just one cartel because of the compliance programme, the fine that it avoids will pay for the programme many times over. If you think compliance programmes are expensive, try non-compliance. And if that isn’t a sufficient incentive, a reduction of a fine where they have engaged in a cartel will make no difference at all.
[Note: this article was originally published in the online magazine ESharp in 2011. The publication date of this blog post reflects the date of original publication.]
There does seem to be a case for different treatment, based on regulatory good practice, between
i) a company that established a compliance programme with a normally-effective self-inspection mechanism that failed because of a problem in the design of the programme, or a lapse somewhere in the information chain; and
ii) a company that did not bother with a compliance programme because it believed that such things were a bureaucratic burden rather than a sensible self-protection, and screwed up as a result.
This distinction seems reasonable when we are talking about lapses that are administrative failures (comparable, say, to a safety lapse that caused a potentially dangerous situation but no actual injuries, which might still attract a high fine) but not blatant illegality in cases that, in this piece, you compare to bank robbery. So there is a grey area somewhere between the two. Is the difference here between behaviour resulting in criminal as opposed to civil action?