Over the last two decades, competition law has become one of the biggest liability risks for firms, making it a top priority in risk management. As competition authorities around the world further increase their enforcement efforts, board members need to ensure sufficient legal safeguards to reduce this liability risk. An effective compliance system takes a central role in these efforts.
Stringent cartel enforcement calls for compliance
Today, almost every country in which European companies do business actively enforces competition laws, which mostly provide for severe sanctions in cases of infringement. For instance, the European Commission can impose fines of up to 10% of the worldwide turnover of the offender’s company group, which has resulted in average total fines of more than EUR 1 billion annually during the last five years. This poses a substantial liability threat to companies and executives alike. Enforcement efforts of competition authorities are cross-sector and target small businesses and multi-national organisations equally.
In Germany and many other countries, individuals who were actively involved in a cartel can even be fined personally. The same applies to executives that have negligently failed to prevent anti-competitive conduct. The UK and US can also impose jail-time for competition law offenders, as does Germany for bid-rigging. The severity of these personal consequences cannot be emphasised enough, as the reach of competition laws may not halt at countries’ borders; a painful lesson that Keith H. Packer learnt when the former British Airways cargo manager was sentenced to imprisonment by US authorities for participating in the Airfreight Cartel (Case No. 39258, 2010) despite not having set foot on US territory during the infringement.
The extradition of Romano Pisciotti is another example of the US anti-trust laws’ long tentacles. Romano spent almost two years in jail for his participation in the Marine Hoses Cartel (Case No. 39406, 2009).
Executives may also face personal liability towards their own company if they fail to set up an effective compliance system. An omission to establish appropriate supervisory measures can result in executives being held personally liable for any damages the company suffers as a result of a cartel infringement (including fines, damages claims by cartel victims, or cost of the internal investigative process). The number of undertakings trying to recoup their damages from their executives is increasing.
Cartel victims are also increasingly chasing cartel members for damages caused by their illicit practices, triggering significant additional liability risk. Given the wrongdoers’ obligation to pay interest, the potential damages can easily add up to multiple millions of Euros – particularly for long-lasting cartels.
Private enforcement of competition law has a long history in the US, where cartel victims can claim threefold the damages actually suffered. Europe is now catching up and we are seeing an increasing number of claims by defrauded buyers. The new EU Damages Directive (which is due to be transposed into national law by the end of this year) will further facilitate private damages claims. The Directive is expected to boost private enforcement across Europe, exposing companies and their executives to increased liability risks.
Compliance as the silver bullet?
In light of the severe consequences of a competition law infringement, executives are called upon to protect not only their companies, but also themselves as their obligations are interpreted more and more strictly by courts and competition authorities. The most effective way to reduce competition law risks when doing business is by implementing an effective compliance system. An effective competition compliance system can reduce liability risks for both the company and its executives in several ways:
- most obviously, regular and compulsory compliance training will help to educate and sensitise employees and thus increase the chances of preventing cartel infringements in the first place;
- where a compliance system does not prevent an infringement, it may at least help to detect and end illegal behaviour in the firm. The value of such self-induced detection of an infringement cannot be underestimated. It puts the company in a position to blow the whistle with the relevant authorities and apply for leniency. Most competition authorities offer immunity or a significant reduction in fines to those revealing anti-competitive conduct, which usually benefits the company as well as individuals;
- a further benefit of being the ‘first to tell’ is beneficial treatment in subsequent private damages claims. The EU Damages Directive provides for a number of privileges and leniency for the applicant in follow-on cartel damages claims;
- more and more competition authorities also reward compliance efforts of companies. Amongst others, countries such as the UK (click here) France (click here) and Italy (click here). acknowledge the mere existence of an effective compliance system and may reduce or even waive fines entirely as a result. A change in policy (or law) is also subject to discussion in many other jurisdictions (including the EU);
- last but not least, a state-of-the-art compliance system will help executives to defend themselves against recourse to damages by the company.
Consequences for business
Compliance programmes, no matter how well they are designed and operated, may not eliminate the risk of rogue employees entirely. However they can significantly reduce the risks of competition law infringements.
Whilst there is no uniform ‘golden standard’ or official guidance (neither by competition authorities nor the courts) on exactly how a compliance system must look, it is clear that the standard is high. For instance, the US Department of Justice recently expressed that it would not consider mere online training as a sufficient compliance measure and would expect face-to-face training to be provided.
In essence, four elements characterise an effective competition compliance system. The list below is not exhaustive and only mentions the most essential instruments as examples.
- Risk assessment: the starting point of all compliance efforts is an assessment of the company’s risk profile. The specific challenges of the industry sector and market conditions which a company is exposed to command the appropriate compliance measures. There is a wide array of effective compliance measures which may come into play, depending on the company’s risk profile.
- Prevention: a key feature of a compliance system is the prevention of infringement. This requires clear and sufficient education and training of the relevant personnel. The most effective training method is face-to-face training which addresses the day-to-day issues of the business and relevant staff. Training should also include regular refresher sessions and an evaluation of the effectiveness and educational process of the training.
- Alongside training, it is advisable for businesses to provide their staff with guidelines for the most relevant issues (possibly supplemented by a code of conduct or handbook) for the daily business. Any such guidelines should take into account the specific challenges of the industry sector and market conditions concerned.
- Monitoring and detection: the third feature of an effective compliance system is to ensure that staff actually adhere to the relevant rules and any misconduct is detected immediately. Therefore, monitoring processes and internal audits should form an integral part of the compliance programme. Ideally, a company should also install a whistle-blowing/reporting system, an external ombudsperson, or internal leniency programmes.
- Disciplinary measures: any violation of the company’s competition compliance rules should attract clear disciplinary measures which are executed relentlessly. This is essential in order for a company to not only evidence its seriousness and commitment to its compliance efforts, but also to credibly transport the message that anti-competitive conduct has no place in the company’s business policy.
To find out more about implementing a compliance program for your business, contact our experts.