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The inexorable rise of EU fines

The inexorable rise of EU fines

04: Global Investigations: reading the signals

Tough EU financial penalties alone may not be acting as an effective deterrent to anticompetitive behavior, and are instead having other unwelcome impacts

The European Union (EU) last year handed down record fines for anticompetitive behavior totalling €1.9 billion or US$2 billion. That's more than double the fines imposed by antitrust authorities in the United States and ten times more than those in China.

In the last five years, the EU has imposed antitrust fines of more than €8.6 billion in ever-increasing amounts and has the ability to levy fines of up to ten per cent of a company's — or its group's — annual global turnover.

Amount of EU antitrust fines in last five years Source: European Commission

This year looks set to be another bumper year with ongoing probes into the auto parts industry, among others.

The scope and targeting of the EU's fining policy is also being expanded. This year, for the first time, a private equity fund was fined just over €37 million by virtue of its controlling stake of a suspected cartelist in the power cables case, without there being any evidence that it was aware of any infringement.

In what is a clear warning to private equity firms, European Commissioner for Competition Joaquín Almunia highlighted "the responsibility of groups of companies up to the highest level of the corporate structure to make sure that they fully comply with competition rules."

"These responsibilities are the same for investment companies who should take a careful look at the compliance culture of the companies they invest in," he said.

In response to criticism, EU chiefs continually insist their regime of tough financial penalties acts as a deterrent. The bigger the fine, the bigger the deterrent, the story goes.

But not everyone is convinced. In a 2013 paper entitled Antitrust fines in times of crisis, Massimo Motta, now chief economist at the EU's Directorate-General for Competition, concluded that "even very large corporate fines may not be able to achieve deterrence." Indeed, cartels continue to form, and each year the EU launches a number of new investigations, ultimately imposing large fines on a number of companies.

"EU authorities have a tendency to use the size of fines as a benchmark to show they are doing a good job," says James Killick, a competition law partner at White & Case in Brussels. "The underlying idea is that the best way to get people to comply is to fine their companies increasing amounts of money. On top of that, each successive competition commissioner wants to show they are more successful than the previous one, so there is a tendency to increase fines."

"But the outcome is that competition fines are far higher and disproportionate compared with those imposed for other regulatory breaches, such as health and safety, violation of consumer protection rules or major environmental damage, for example."

Boris Kasten, head of competition law at global elevator and escalator group Schindler, agrees. "It's a race to the top in terms of EU fines, without much reflection on whether this alone, without reflecting companies' specific compliance systems, really serves as a deterrent," he says. "There may even be an international trend to impose giant fines on corporations as a sort of competition among enforcement agencies."

The EU should recognize when companies have done a proper job in trying to get their workforce to respect the rules.
Charles Balmain, Partner, White & Case, London

That said, in the United States, which has a long history of antitrust enforcement, fines are much lower due to more sophisticated types of punishment, involving fines and criminal sanctions against the individuals guilty of violations, according to Dr. Kasten.

Individuals who fix prices or allocate markets as a way of ensuring business outcomes, for example, which may not actually be in the company's interest, are subject to criminal sanctions under national law in the United States, the UK and several other EU member states. "A fine of double a manager's annual earnings or possible incarceration would act as a deterrent," he says.

Large EU fines on companies also impact economic growth. Research by Oxford Economics shows that the most likely resulting scenario is the company will reduce the amount it spends on investment. This will generally mean fewer jobs are created within that company.

Firms will also purchase fewer inputs from their suppliers who, in turn, will employ fewer people. And these suppliers will themselves purchase less from their own suppliers, and so on, with additional effects on potential employment and household spending.

Therefore, a large fine on cartel participants will have a knock-on effect across the economy as a whole, also impacting firms and workers who were not involved in the original offense.

Reading the signals: Antitrust compliance measures

With competitors
- Don't discuss prices or sales
- Don't discuss rebates, discounts or other pricing terms
- Don't discuss production capacities, investments or stocks
- Don't discuss or engage in concerted action
- Don't discuss customers or suppliers
- Don't discuss marketing
- Don't exchange sensitive business data
- Always be prudent

In trade association meetings
- Obey the same rules
- If others break the rules, make an objection and leave the meeting

With customers and suppliers
- Don't terminate supply or distribution contracts without first checking with the legal department
- Don't force customers to maintain resale prices or respect set margins
- Don't restrict where and to whom your customers may sell
- Don't require a customer not to buy competing goods

According to Oxford Economics, a €250 million fine on a European manufacturing firm could result in potential employment losses across a national economy of more than 2,000 jobs.

However, despite imposing such high fines, the EU system does not afford companies the usual criminal due process guarantees.

"The same officials act as prosecutor, investigator, judge and ultimately jury, deciding whether you're guilty and how much you should be punished. I'm not saying that the officials don't try to do their job honorably, but they have too many inconsistent roles," says Mr. Killick. "And the final decision is taken by a political body that is sensitive about whether the press portrays them as tough and effective."

Dr. Kasten adds, "Separation of powers is lacking, and we know from history that this tends to lead to flawed decisions. This is not to say that the European Commission deliberately makes incorrect decisions, but due to human nature, you cannot rule out prosecutorial bias in the Commission's decisions. There are no appropriate checks and balances."

In addition, the appeal process before the EU Court of Justice in Luxembourg is inadequate, he says. "It is clearly flawed because there is no hearing of witnesses and no full review by the court. The court in Luxembourg is just engaged in a plausibility check."

In the current environment, it is even more critical for companies to embed a robust compliance program.

Dr. Kasten recommends the Antitrust Compliance Toolkit compiled by the International Chamber of Commerce, which, if implemented, would show a company or corporation's strong commitment to implementing a robust and credible compliance program.

Before imposing a heavy fine, he urges the EU to take into account whether a company has introduced an appropriate compliance program, arguing that such a compliance defense should allow for smarter and more rational, balanced sanctions.

Trade associations and consultancies should also consider compliance programs to ensure their clients stay on the right side of antitrust rules. Swiss consultancy firm AC Treuhand is currently battling against a fine imposed on it by the Commission for facilitating a cartel in the chemical industry despite not being active in the market itself.

"If an organization has engaged in compliance to the maximum degree, then it makes little sense in terms of general prevention to still fine the company but take no action against guilty individuals," Dr. Kasten says. "Paradoxically, the EU Commission and courts have begun to argue that parent companies should be liable precisely because of parental crime prevention programs, as their existence showed influence on group companies. Instead, the emphasis should be on the individual if you can show they have been properly trained in compliance, but still choose to break the rules."

Commercial litigation partner Charles Balmain adds: "I think the EU should recognize when companies have really done a proper job in trying to get their workforce to respect the rules. There should be a lot more focus on the individual who has done something wrong. There is now criminal law at a national level, which is a way of making the punishment fit the crime when it is the individual who was at fault."

The appointment of the new European Commission president and team of commissioners offers an opportunity for reform. As Dr. Kasten concludes, "Hope rests with the new Commission taking notice of what research clearly shows — the present system of giant corporate fines while disregarding compliance within organizations and the guilt of individual perpetrators is not achieving the desired level of deterrence."


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