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Enterprise Bill

Enterprise Bill

Column Number: 145

Standing Committee B

Tuesday 23 April 2002


[Derek Conway in the Chair]

Enterprise Bill

The Chairman: Before I call the hon. Member for Eastbourne (Mr. Waterson) to resume the debate, I remind the Committee, so that hon. Members may check their diaries, that the programme resolution enables us to sit until 9.55 pm today. I presume that there will be a refreshment break at a convenient point this evening, depending on who is in the Chair.

Clause 179

Cartel offence

Amendment moved [18 April]: No. 88, in page 131, line 20, at end insert:

    '(9) This section shall not enter into force until three years after the entry into force of the European Commission's reforms of Community competition law'.—[Mr. Waterson.]

10.30 am

Mr. Nigel Waterson (Eastbourne): It is a great pleasure to be here again. We will do our best to tailor our remarks to meet the guillotine, but the prospects of finishing our discussions on this part of the Bill by then are remote.

I shall remind the Committee of what amendment No. 88 would do. It is an imposition on anyone in business to introduce new legislation on cartel offence only a couple of years after 1 March 2000, when the Competition Act 1998 came into force. The amendment would give business a settling down period, allowing that legislation to bed down, and an opportunity to see what will happen in the European modernisation programme of this part of the law. That is a sensible precaution, as the Government are rushing too soon into further legislation. I am interested in what the Under-Secretary has to say.

The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson): The amendment would defer the coming into force of the cartel offence until three years after the proposals for the modernisation of European Commission law are finalised and brought into force. We do not know when those proposals will be completed and brought into force, and in the meantime there is no reason to delay the introduction of the cartel criminal offence against the individual.

The criminal offence is separate from, but compatible with, the EC civil regime. The United Kingdom criminal offence targets individuals, while the EC civil regime covers broader competition breaches committed by undertakings. The proposals for the modernisation of the EC regime are not yet finalised. As the negotiations continue progress, we will focus on avoiding any possible conflict with the new offence. In its response to last year's White Paper, the Commission said that modernisation did not preclude criminalisation. There is no inconsistency between EC law, modernisation and the proposed

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criminal offence. The offence is being introduced to tackle serious criminal activity, and there is no reason to delay it by awaiting the outcome of the continuing modernisation negotiations. I therefore ask the hon. Gentleman to withdraw the amendment. If he does not, I regret that I shall ask the Committee to oppose it.

Mr. Waterson: We shall have a much broader debate on the ambit of clause 179 in a moment, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Chairman: For the assistance of the Committee, the Under-Secretary does not have to move the clause, as it is part of a Bill that has been given a Second Reading. Hon. Members may speak at random, and the Minister may conclude, or speak first if that is her wish.

Question proposed, That the clause stand part of the Bill.

Mr. Waterson: It might assist the Committee if, at least on this occasion, I speak first, as I want to raise several issues on the criminalisation of cartels, especially those issues raised by bodies such as the Confederation of British Industry. It would also help to have the Under-Secretary comment on my remarks.

The clause deserves a detailed debate. A key issue in the Bill is whether it is helpful or necessary to imprison individuals as part of cracking down on cartels. It is perhaps an interesting coincidence that we meet to debate it on the day that the newspapers are full of reports of the sentencing to a year in prison of Mr. Alfred Taubman. He, you will remember, Mr. Conway, as I am sure you frequent that institution, was involved in a price-fixing scheme with Christie's on behalf of Sotheby's, which he acquired some years ago.

I am sure that part of the justification for the Government's wish to bring criminal sanctions, including imprisonment for up to five years, into the cartels regime, is a comparison with the American system, where such sanctions have been in place for some time—hence Mr. Taubman's fate. I suspect that there will be an attempt to draw a parallel between our debate and that case, in which Mr. Taubman, sadly, is about to go to some rather upmarket ''Club Fed''. According to The Times he has the choice of a variety of places. One in Louisiana

    ''has weight rooms, computer terminals, bingo nights and sunbathing area.''

All in all it does not sound like a particularly arduous regime for Mr. Taubman and other white collar-criminals.

A comparison will be drawn between Mr. Taubman's fate and that of Sir Anthony Tennant, who was also involved in the matter at Christie's. As Sir Anthony is not an American citizen and because, possibly wisely, he has not set foot in America since the investigation began, he is immune from both extradition and prosecution in the US. He would be well advised not to take any holidays there for the foreseeable future. Extradition is an issue that we come to a bit later. I understand that the sentencing judge,

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having heard a lengthy plea in mitigation on behalf of Mr. Taubman—not least that he was a substantial donor to charities—rather waspishly remarked that the fact that he had given to the poor did not mean that he could steal from the rich. That is an interesting reversal of the Robin Hood principle.

The Government wish to bring that regime into our system so that a 78-year-old diabetic with a number of other medical conditions would go to prison for a year. I am not quite sure what purpose that would serve. I suppose that the argument is that it would be a deterrent to others. Again, we say that that is another example of the Government's rather superficial affection for the American system. Based on the Sherman Antitrust Act 1890, that attitude is ingrained in the US system. In other respects, as we have pointed out consistently, the United States have a much lighter regulatory touch than we have here.

For the avoidance of doubt, should any mischievous Government Back Benchers want to make an issue of it, our position on cartels is clear. Cartels are a bad thing. They cost consumers money and they also cost good businesses and good business men money. They may affect their market share and even put them out of business. No one is in favour of cartels. The only issue is what is the most effective way to tackle them.

The Library briefing is very helpful on some of the background to cartels. As the clause makes clear, the Government want

    ''to apply criminal sanctions to individuals . . . where that individual dishonestly''—

that word ''dishonestly'' is important—

    ''engages in what are described as 'hard-core' cartels.''

The Organisation for Economic Co-operation and Development defines a hard-core cartel as

    ''an anti-competitive agreement, anti-competitive concerted practice or anti-competitive arrangement by competitors to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets by allocating customers, suppliers, territories, or lines of commerce.''

The US competition authorities estimate that cartels, on average, lead to a 10 per cent. increase in the price of goods or services affected. Estimates of the total vary. It is a bit like trying to estimate the effect of crime on the economy: there is what criminologists call the dark figure, which is almost impossible to estimate. Varying estimates of the effect of cartels run to 20 per cent. of the total volume of commerce.

Of course, it is abundantly clear that this country is no less likely to suffer from cartels than America or anywhere else. Only in the past year or two, the Office of Fair Trading has launched investigations into eight possible cartels in markets such as, interestingly, services to local authorities, services to domestic consumers, milk, construction materials and fabricated metal.

In the short debate on amendment No. 88, I mentioned that there was a misunderstanding about whether the measure would bring us into line with other European jurisdictions. Certainly in the US, as I

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said, there have been criminal penalties in that regard since 1890. During the 1990s, the US Department of Justice successfully prosecuted an average of 35 people a year for such crimes. That is quite a record, because each investigation must have been massive in terms of resources and cost. The US authorities have also acted against cartels with worldwide effects. In the recent vitamins cartel case, they imposed fines of $500 million and $225 million respectively against a Swiss and a German firm. Incidentally, I think that that problem was brought to light by a whistleblower working for one of the Swiss companies. As I shall say in more detail in a moment, I believe that one side effect of the Government proposals will be that whistleblowers are deterred rather than encouraged.

I said that the concept of dishonesty was relevant. It is a perfectly common concept in English criminal law and should present no particular difficulties. I think that it first surfaced in a major way in the Theft Act 1968 and then in other more recent legislation. According to the explanatory notes—as you know, Mr. Conway, I like to mention the explanatory notes so that those who laboriously prepared them know that someone has read at least some of them—the offence applies only to agreements across the same level of the supply chain: horizontal agreements. I think that the Minister is nodding, which is a good sign. The concept of vertical agreements is not dealt with directly in this legislation, but it might be helpful if she told us at some point about the Government's attitude to them. I understand that there are proposals to amend or scrap regulations on vertical agreements.

Sir Anthony Hammond and Roy Penrose prepared an interesting report on these issues, which set out some of the effects of criminalisation. Since the previous legislation came into effect—the chapter 1 prohibition in March 2000—the OFT has imposed only one fine. Two bus companies in my original home town of Leeds were found to have colluded in a market-sharing agreement on bus routes in the Leeds area, and substantial fines were handed out. Both companies had compliance programmes that were designed to ensure that staff were aware of the law, and they provided internal forms for staff to record contact with competitors. However, no staff member reported the relevant meetings that took place in a hotel in Wakefield. I think that I am right in saying that that was the first fine imposed under the 1998 Act.

The law firm Allen & Overy made some interesting points during consultation about the criminal cartel offence. It pointed out that that did not depend on a prior civil infringement of competition law by the individual or undertaking. The firm was concerned that juries in criminal courts could have to decide what might be complex questions of civil competition law as part of the cartel offence.

Given that cartels are a serious matter and need tackling, what issues arise? First, is it an inherently excessive reaction to introduce criminal penalties? Does the evidence of exploitation justify such penalties? Does foreign experience suggest that they are necessary or successful? As I said in the previous debate, few EC countries have criminal penalties and, even where there are such penalties, prosecutions are

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rare. Finally, will disqualification be imposed more frequently than at present under the Companies Act 1989? It is surprising how rare disqualification is.

I have read the briefings and considered the matter from our perspective; there are eight broad concerns about criminalisation, which I shall take in order, to help the Minister to reach a conclusion. First, criminalisation will raise the standard of proof in cartel cases. At present, the OFT applies a standard of proof of balance of probabilities plus, which is slightly higher than the normal standard required in civil litigation. To achieve a criminal conviction, the OFT would have to satisfy beyond reasonable doubt. There is anxiety that that would hamper rather than assist the OFT's investigations and perhaps make action less rather than more likely.

10.45 am

The second concern is that conducting a criminal case against directors at the same time as an administrative investigation may cause problems. A simpler parallel is that of a road accident. There may be a claim for civil compensation as a result, but that must take a back seat—if I may use such a phrase—until a criminal case has been dealt with. I should like the Under-Secretary to say how such a case would work in practice.

Thirdly, the OFT and the European Commission have the power to grant an exemption from the prohibition on cartels, although they do so only rarely. How will that power complicate the prosecution of a cartel? Could the possibility of criminal sanctions depend on the whim of whether an exemption on a prohibition is granted at the time? Could it be given retrospectively or at some time during the conduct of the criminal case?

Fourthly, the interplay between a prosecution and an investigation by the authorities will be even more complex when the investigation is conducted not by the OFT but by the European Commission. How will that work in practice?

The fifth issue, which is related to the fourth concern, is that co-operation between the competition authorities may be compromised. There are already reports that the Commission will be unwilling to supply information about a cartel which could be used for a prosecution in this country. For example, on 21 February, the Financial Times reported:

    ''Plans to jail British businessmen found guilty of organising cartels are set to hamper vital co-operation between the European Commission and the UK Office of Fair Trading. However, competition investigators in Brussels only enjoy civil powers and say they cannot share evidence with the OFT if it is used to support criminal proceedings''.

The article continued:

    ''But officials admit that a serious difficulty will come when deciding in advance what penalties may result from an investigation. British investigators are also likely to be wary of passing cases to Brussels if they feel there is sufficient evidence to inflict tougher penalties under UK jurisdiction.''

Clearly, there is anxiety about the matter. At the outset there is a potential effect on co-operation between national and European authorities and a likely drying up of lines of communication and the passing of information backwards and forwards.

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My sixth concern is that industry is bound to incur further compliance costs. It is not clear at present how many companies have invested in audit and compliance programmes ensuring that they do not infringe the provisions of the 1998 Act. As the Leeds bus case shows, programmes can be put in place, but still not work. Now there is to be a further bout of requirements on companies to produce yet further procedures. No doubt the prospect of going to jail will concentrate directors' minds even more.

The seventh concern is the human rights issue although, because I do not have the benefit of advice from the Matrix chambers, I cannot go into great detail about that. What about self-incrimination? The implications of that aspect of human rights legislation have yet to feed their way into mainstream British criminal law. How will such legislation affect the criminalisation of cartels?

The eighth concern is about leniency policy. Both the European Commission and the OFT operate a leniency policy that is designed to encourage people to blow the whistle. I cannot imagine many instances in which serious and particularly international cartels between major companies would come to light without someone within those companies—or perhaps a disgruntled ex-employee—blowing the whistle. Inevitably, such matters will be kept securely within the company.

Under the Government's proposals, whistleblowers might be exposed to criminal penalties. That is not the case in the USA; I understand that, unlike Mr. Taubman, who is looking for the right ''Club Fed'' to check himself into, and Sir Anthony Tennant, who apparently cannot go to the USA on holiday, Christopher Davidge, who worked at Christie's, won immunity from prosecution by providing federal investigators with information that formed the bulk of the charges. The Times states that Mr. Davidge

    ''is reported to spend his time travelling around the world'',

no doubt keeping well away from Mr. Taubman and Sir Anthony Tennant. Is that not the truth of cartels? Cartels will almost never come to light unless someone like Mr. Davidge is prepared to blow the whistle—yet the legislation would have the effect of discouraging that.


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Prepared 23 April 2002