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Cartels

Jail is the normal punishment for serious wrongdoing, both to penalise the offender and serve as a warning to others. Until now though, business chiefs who cooked up schemes to hike their profits by ripping off consumers to the tune of millions of dollars have been safe from the threat of prison.

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While tax evaders and fraudsters look down the barrel of lengthy jail terms, those running cartels face only civil penalties. That changes this year when New Zealand steps into line with Australia, the United Kingdom and the United States by introducing criminal penalties for this behaviour.

Cartels involve rival firms agreeing not to compete with each other. The worst type of this behaviour is called hard-core cartel conduct. It’s illegal under our competition law. The conduct involves price fixing to charge customers more than they would otherwise pay, colluding on bids, restricting supplies of goods, and secretly allocating particular markets to specific companies.

Cartels disadvantage individual customers and have wider impacts on economies. Agreements to limit supply mean fewer goods are produced and productivity is slowed while revelations about secret deals undermine public faith in businesses.

Warnings issued

The Commerce Commission enforces the law about cartels. In less serious cases, it asks lawbreakers to acknowledge their behaviour and gives them a warning.

In the past 20 years, warnings have been issued to businesses in a range of industries.

In 2005, six Manawatu-based funeral directors were warned for agreeing on prices in a joint tender to police for a contract to transfer deceased people. Four years later, Christchurch’s Real Estate Network received a warning for adopting a by-law setting a minimum for commissions payable between its members.

In the same year, warnings were issued to Schindler Lifts and a current and a former employee for their participation in a long-standing cartel arrangement to share elevator installation contracts in the South Island.

In 2010, the Gisborne Farmers Market committee admitted it attempted to fix prices for produce sold at the market by introducing a rule requiring members to charge more than wholesale prices.

New Zealand consumers are not only affected by home-grown cartels but also by illegal deals that span borders. In the most serious cases, the Commerce Commission takes lawbreakers to court where they face penalties running into millions of dollars.

In 2011, the High Court imposed a penalty of $3 million on refrigerator compressor manufacturer Empresa Brasileira de Compressores SA after it and a competitor exchanged pricing and market intelligence information about refrigerator compressor supplies in New Zealand.

Between 2000 and 2006, 11 companies in New Zealand and overseas colluded to fix the prices of fuel and security surcharges for air cargo. As a result of settlements reached with the commission, the companies agreed to pay penalties totalling $42.5m. It’s estimated the cartel resulted in overcharging of $280m over seven years.

In 2013, Visy Board Pty was ordered to pay a $3.6m penalty and its former senior executive John Carroll was fined $25,000 for price fixing. Visy admitted liability for illegal arrangements with its competitor, Amcor, to divide certain trans-Tasman corrugated fibreboard packaging customers between them. The case involved Visy Board’s tenders for supplying packaging to Coca Cola, Goodman Fielder and Fonterra. The Commerce Commission’s Australian counterpart, the Australian Competition and Consumer Commission, also took action over the cartel. Visy was fined A$36m in Australia and Carroll was ordered to pay A$500,000.

Combating cartels

Cartels are extremely secretive. Under its Cartel Leniency Policy, the Commerce Commission offers deals, like immunity, to cartel members who provide information and co-operate with the investigation.

Companies can earn millions of dollars from colluding to cheat consumers. Even if they are caught, the amount of the fine may be far less than the profits made before the behaviour was detected.

That’s the reason some countries have been moving to make cartel conduct a crime. Many nations New Zealand trades with have passed laws providing that those involved in cartels can now be sent to jail.

Buddle Findlay’s Wellington partner, Susie Kilty, says criminalisation should “significantly sharpen” the focus of executives, managers and others to whom jail time could apply.

Once the new law takes effect, those found to have participated in cartels will be liable for prison sentences of up to seven years.

“We also see potential in increased whistle-blowing as individuals independently come to the conclusion that the risk of criminal sanctions, including jail time, is not worth any potential gain. Overall, if cartels are prevented or broken, consumers should get the benefit of firms competing fairly and vigorously – that is, products at a competitive price, not a price inflated by the prohibited conduct.”

Report by Catriona MacLennan.

Hidden in the garden

In 2007, the Commerce Commission began an investigation into alleged collusion by multi-national companies involved in supplying international freight-forwarding services to New Zealand. The probe began after a company made a confidential application to the commission for leniency. The businesses called themselves the “Gardening Club” and agreed to charge extra fees on air freight forwarding services from the United Kingdom to New Zealand and other countries.

Commerce Commission chair Dr Mark Berry said the cartel members attended covert, off-site meetings outside business hours and used code words to describe the surcharges. The investigation uncovered emails describing the extra fees as “the new price for asparagus for the forthcoming season” and “the price of marrows”.

When some members thought others were not keeping to their part of the bargain, they sent an email stating “I hear…concerns about the price of produce from the garden of Velcro, which appears to be operating as a charitable co-operative for the benevolence of vegetable eaters rather than growers”.

Five of the six companies involved later owned up to their behaviour. Three companies were ordered to pay penalties totalling $5.2m. Two others also admitted wrongdoing and were fined. The sixth firm, Swiss business Kuehne + Nagel, was ordered by the High Court in 2014 to pay $3.1m.

Drawing the line

Not all agreements between businesses are unlawful. Some forms of co-operation can result in benefits to consumers. For that reason, our competition law does not ban those types of deals. Examples include:

  • Joint buying: a group of small grocers might co-operate to purchase a large amount of tinned fruit in order to obtain a volume discount, or real estate businesses might jointly buy newspaper advertising.

  • Joint ventures: a group of small construction firms that could not individually tender for a large building project might collaborate to submit a joint bid.

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