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Beware the comity of trans-Tasman nations: Australia's hunt for cartel criminals extends overseas

07 March 2008

After 25 years, Closer Economic Relations with Australia has undoubtedly seen the two economies become progressively intertwined. Naturally that means New Zealand companies crossing the border are subject to Australian laws and processes.

No worries? Think again.

Australia's competition laws are about to get much tougher, criminalising cartels and imposing jail sentences on anyone found guilty.

The changes are included a draft Bill to amend the Australian Trade Practices Act. The Bill runs to 73 pages and, even for those familiar with the labyrinthine style of Australian legislative drafting, takes obscurity to a new level. In essence, the proposal is to add two further tiers of prohibitions to the already convoluted restrictive trade practices prohibitions.

First, the Bill creates two criminal offences of making, or giving effect to, a contract, arrangement or understanding (CAU), if it contains a cartel provision and is done with the intention of dishonestly obtaining a benefit.

Under the Bill a cartel provision is a provision of a CAU that relates to price-fixing; restricting outputs in the production and supply chain; allocating customers, suppliers or territories; or bid-rigging by parties that are in competition with each other.

Second, the Bill creates two new civil cartel prohibitions that parallel the new criminal offences. These prohibit a person from making, or giving effect to, a CAU with a competitor that contains a cartel provision. There is no requirement with the civil prohibitions to have an intention of dishonestly obtaining a benefit.

The real sting is in the penalty. The maximum penalty for a company is a fine that is the greater of $A10 million or three times the benefit of the cartel, or where the value cannot be determined, 10% of annual turnover.

This is consistent with existing New Zealand penalties for price-fixing but it does criminalise the conduct. The major change is that individuals knowingly involved will face up to five years in jail and a fine of $220,000.

Five years ago the Dawson Committee on Australia's competition laws recommended criminal sanctions. Three years ago, the then treasurer said the government would apply this recommendation. In fact, nothing happened. But the Rudd government has moved quickly and the date for submissions on the proposal has already expired.

The judicial view of price fixing has also hardened. In the Federal Court, Justice Heerey said while imposing penalties in the Visy case: "Cartel behaviour of the kind with which this case is concerned is extremely destructive of the competition on which the prosperity of a free market economy depends …

"Corporations are constructs of the law; they only exist and possess rights and liabilities as a consequence of the law. Heavy penalties are indeed appropriate for corporations, but it is only individuals who can engage in the conduct which enables corporations to fix prices and to share markets."

The company was fined $A36 million for 37 contraventions. That's more than twice the highest previous penalty imposed in Australia.

Two of the individuals involved were also punished severely.  Visy Chief Executive Harry Debney – "a joint instigator of the cartel" – was fined $A1.5 million and General Manager Rod Carroll A$500,000.  Chairman Richard Pratt, who was not involved in the day-to-day running of the cartel, but “gave his personal sanction to an obviously unlawful arrangement" escaped a fine because as owner the penalty would fall on him in any case.

The implications for New Zealand executives do not just apply to doing business across the Tasman. The Trade Practices Act extends to conduct committed outside Australia by companies "carrying on business within Australia".

That brings New Zealand-based firms that transact some part of their business in Australia within the ambit of the Act and, prospectively, its new criminal sanctions. The result is that a New Zealand executive whose firm has entered into an agreement allegedly amounting to cartel conduct, or has given effect to cartel conduct, will face criminal liability in Australian courts.

The courts in Australia make no distinction between overseas parent companies and subsidiaries that operate in Australia. So, there is no protection for a New Zealand-based company – or those of its executives who are knowingly involved that has a cartel arrangement carried out by a subsidiary in Australia.

As long as the New Zealand company can be said to have directed or required its Australian subsidiary to implement the cartel arrangement, the separate legal personality of the subsidiary provides no protection.

All this simply reflects long-understood notions of cross-border jurisdiction.

The cautionary message for New Zealand firms – and executives – is obvious. As the trans-Tasman border erodes, so do the protections afforded by separate national identity.

New Zealand firms involved in commercial ventures in Australia must be aware that the simple act of communicating with an Australian business or subsidiary, or conducting the occasional Sydney meeting in conjunction with a Tri-Nations rugby test, may well expose the firm to dual enforcement mechanisms in New Zealand and Australia. Which could prospectively result in some executives watching successive Bledisloe Cup matches in a less salubrious environment than the corporate box.

First published in the National Business Review, 7 March 2008.

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