Jail threat only way to deter business cartels, says lawyer

Prison might be the only way to deter businesspeople from taking part in cartels, says Auckland lawyer Aaron Llyod. Photo / Richard Robinson

Criminalising cartels may be the only way to deter some businesspeople from engaging in cartel behaviour, says a prominent litigator.

A Ministry of Economic Development discussion paper released this week proposed criminalising cartels, increasing penalties for individuals to as much as $5 million, better rewards for whistle blowers and more resources for enforcement.

Aaron Lloyd, a partner in law firm MinterEllisonRuddWatts, believes cartels are likely to be present in many sectors of the New Zealand business community. There would be two main implications of criminalising this behaviour, he said.

First, the prospect of prison terms for those engaged in cartels would be unpleasant enough to act as a deterrent.

The current civil penalties were simply thought of as "the price of doing business" by some companies, said Lloyd.

"Second, it will have the flow on effect that businesses are going to have to invest more in their risk management," he said.

Lloyd said the threat of jail time had worked as a suitable deterrent in overseas countries where cartel behaviour had already been criminalised.

The MED report describes 'hard-core' cartels as those formed by rival firms agreeing not to compete with each other.

Cartels allow firms to raise prices above the competitive level without losing customers to rivals. Behaviour includes price fixing, bid rigging, market allocation and output restrictions.

Such cartels are already prohibited under the Commerce Act but only subject to civil sanctions.

"The anecdotal evidence is that it's not until you start really hitting the individuals concerned personally that it tends to change behaviour," said Lloyd.

He said our current regime did have the ability to hit individuals, but it was "just a financial cost".

Cartel behaviour was almost certainly present among Kiwi businesses, said Lloyd, with "almost all industries" vulnerable to cartel activity.

Roger Kerr, executive director of the Business Roundtable, said he did not believe cartel conduct was widespread in the New Zealand business scene, and it was not clear whether criminalising such conduct was a "wise move".

"I'm sceptical that cartels are a big issue," said Kerr.

He said the discussion paper released from the Ministry of Economic Development did not contain a regulatory impact statement that tried to justify the move.

There were a number of situations where people getting together to price their business activities was "the way to go", Kerr said, such as grape growers working collectively to bargain with wine makers.

"The question to ask is, where's the mischief?"

He said cartels had "a habit" of breaking down by themselves - as one partner always had the incentive to break ranks.

"All in all I'm kind of unsure whether this [criminalisation] adds up to a well considered proposition."

Last year Prime Minister John Key said criminalising cartel behaviour was a legitimate issue for New Zealand to consider as it was one of the areas where the Commerce Commission and its Australian counterpart the ACCC differed in their operation.

"There are a number of different factors to consider, but certainly differences between the ACCC and the New Zealand Commerce Commission are something I know the Commerce Minister [Simon Power] is considering," said Key.

A Commerce Commission spokeswoman said the commission currently had 17 cartel cases either in litigation or under investigation.

She said ten of those cases were international cartels that affected New Zealand markets, and the other seven were "purely domestic" in scope.

International studies calculated that, on average, cartels caused prices to be 20 per cent higher than they would be in a competitive market.

The highest fine imposed in New Zealand for cartel conduct in recent years was in the Koppers Arch case in 2006, where a fine of $3.6 million was imposed jointly on wood chemicals company Koppers Arch NZ Ltd and Koppers Arch Investments Ltd.