Leniency – a good tool but could be sharper

Uncovering price fixing in the business is a dilemma for senior management and directors. Suddenly you are faced with a series of important and career-defining decisions about how you will respond and, particularly, whether you will approach the Commerce Commission to make a voluntary disclosure under the Commission's leniency policy.

Leniency programmes offer discounted fines, or even immunity, to parties who approach the authority to confess their involvement in anti-competitive behaviour and agree to cooperate. They were first introduced by the US Department of Justice (DOJ) in the 1990s and have become the cornerstone of cartel enforcement the world over.

Practically every national antitrust authority – the New Zealand Commerce Commission included – has come to recognise the value of leniency as a tool for destabilising and uncovering cartels. However, we consider that the design could be improved to deliver better results.

Design is critical

The effectiveness of the policy depends upon the level of certainty it can offer. Without predictability, cartelists are less likely to come forward and less likely to actively assist the authority's investigation. This point was made forcefully recently by the former head of criminal antitrust enforcement in the US, Gary Spratling, when he identified a loss of “collegiality" and trust among lawyers and officials as undermining the scheme's integrity.

In the European Union and United States, however, the authorities are explicit about the level of penalty discount that will be available for varying degrees and timeliness of investigative assistance. The European Commission's policies, for example, provide certainty as to how the starting point for fines will be calculated, and certainty as to the level of discount: 30-50% for the first cartelist to provide significant added value to the investigation, 20-30% for the second, and up to 20% for all subsequent parties to come forward.

This combination of certainty as to starting point and certainty as to discount enables companies to assess the value of cooperation and, crucially, gives boards a concrete basis for a decision to go in early and cooperate fully.

Whereas in New Zealand…

In New Zealand, there is significantly less certainty around the calculation of the starting point for fines and the level of discount that cooperating parties can expect to receive.

The Commission's approach to calculating the starting point for fines might generously be characterised as a 'finger in the air' - at least as far as parties' experience is concerned. And on discounts, the Commission's policy provides only that the Commission “may consider recommending reductions in the penalty that might otherwise be considered appropriate in the range of 25 per cent to 40 per cent".

In practice, the result has been that parties that cooperate early and fully often end up no better off than parties that adopt a 'wait and see' approach, and decide to join settlement discussions at a later date. In contrast to almost every other country, therefore, there is no clear benefit in being proactive. Going in early does not guarantee a better outcome and, conversely, hanging back does not necessarily produce a worse outcome.

As a consequence, the Commission's leniency policy falls short of its objectives. It doesn't optimally incentivise confessions and cooperation. It doesn't do as much as it could to destabilise cartels. An allegation of price fixing in New Zealand does not prompt the competitive 'dash to the regulator' that occurs in Europe or the United States.

Fortunately, there is an easy fix

While acknowledging that the imposition of fines is ultimately a question for the Court, the Commission, in its policies, needs to offer greater certainty as to its methodology for identifying starting points for fines, and should commit to explicit categories of penalty discount based on:

  • the timeliness of cooperation, and
  • the value added by the cooperating party.

These changes would bring the Commission into line with international best practice, and create the right incentives to come forward with information.

Our thanks to Lucy Cooper and Simon Peart for writing this Brief Counsel.

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