Cartel criminalisation – six months on

Six months on from criminalisation of cartel misconduct, MinterEllisonRuddWatts’ Organisational Integrity team look at why criminalisation remains a ‘game changer’, the inevitability of a first criminal prosecution, and why having a plan that recognises the special nature of criminalisation is an important part of your risk management strategy.

Criminalisation of cartel misconduct

Six months ago, cartel misconduct became a criminal offence under New Zealand law.  Whilst the first criminal cartel prosecution is yet to be taken, it is only a matter of time before the Commerce Commission elects criminal charges over civil ones for blatant cartel misconduct.

The adoption of cartel criminalisation was a ‘game changer’, and criminal law, and the processes and consequences it brings, means that:

  • it is even more important to ensure that you have plans in place to prevent cartel misconduct occurring in your business;
  • you should have criminal misconduct experts on hand, to assist you should allegations of misconduct be raised regarding your business; and
  • this is an excellent opportunity to consider your broader organisational integrity risks, and what plans are in place to manage them.

A recap on the new law

After over a decade of legislative proposals, consultation, discussions, and international pressure, New Zealand criminalised cartel misconduct effective from 8 April of this year.  The move brought New Zealand into line with international norms, including major trading partners Australia, England and the United States (where it has been a criminal offence for more than 100 years).  The move also follows criminalisation of other corporate misconduct, such as insider trading, and beefed up criminal sanctions and liability for other organisational integrity matters, including money laundering, and bribery and corruption.

For cartel conduct occurring after 8 April 2021, the Commerce Commission can elect to file civil or criminal proceedings against any organisation or individual alleged to have entered into, or given effect to, a cartel arrangement.  The Commission has indicated that criminal cartel prosecutions are likely to be reserved for the most egregious breaches of the law, but significantly, that philosophy is enshrined in the Commission’s enforcement policy rather than the law itself, and any intentional entry into an arrangement which contains a cartel prohibition is open to prosecution by the Commission as a criminal offence – it is not necessary for the actor to have known they were undertaking a criminal act.

Section 82B of the Commerce Act 1986 provides for imprisonment of up to 7 years, or fines of up to $500,000, or both, for individuals who engage in cartel misconduct.  For organisations, the potential fine is up to $10 million, three times the commercial gain from the illegal activity, or up to 10% of the turnover of the organisation involved, whichever is the greater.

Organisations or individuals engage in cartel misconduct if they enter into a contract or arrangement, or arrive at an understanding, that contains a cartel provision, or act to give effect to a cartel provision.

A cartel provision is one which facilitates:

  • price fixing;
  • the restricting of output; or
  • market allocation.

Because it is a criminal law prohibition, Parliament has adopted a requirement that the offender intend to engage in price fixing, restricting output, or market allocating, or intends to give effect to one of these things.  However, it is important to note that this mens rea requirement does not require the offender to know that the effect of their actions is illegal, or that they undertake their actions with dishonest or fraudulent intent.

In addition to the usual criminal law defences, there are statutory defences available, which go to the question of a lack of intent (or mens rea).  These rely on the offender holding an honest and reasonable belief that what they were doing fell within one of the exceptions to cartel misconduct contained in the Commerce Act.  That is, that the defendant held an honest and reasonable belief that their actions were reasonably necessary for:

  • the purpose of a permitted collaborative activity;
  • vertical supply contracts; or
  • joint buying and promotion agreements.

However, these exemptions are not open-ended, and require certain conditions to be met.  In addition, because the new provisions are criminal in nature, Parliament has also extended various criminal law powers and obligations to the Commission’s work in this area.  This includes powers under the Search and Surveillance Act 2012.

Prevention is better than cure

Avoiding misconduct is always better than tidying up the mess after it occurs.  Accordingly, ensuring you have good and effective policies and training addressing the risk of cartel misconduct in place, and clearly setting out your organisation’s expectations of how your team operate, is critical.

It is essential not only to try and avoid misconduct occurring at the outset, but also as part of a forward looking defence should misconduct occur.  It is an important plank in being able to show that the organisation itself, and senior leaders (including directors), did not encourage, acquiesce, or aid misconduct committed by potential rogue employees.  This is a critical part of a broader defence strategy should the business get caught up in cartel misconduct in any way.

Policies and procedures should be simple to understand, pragmatic and effective.  They also need to involve training, and re-training, to ensure complacency doesn’t creep in.  Keeping records of the training undertaken is also an important part of an effective policy.

Since criminalisation was seriously mooted, and since April especially, we have seen New Zealand businesses take a more cautious approach in interactions with competitors.  This includes using protocols for situations where an organisation’s employees or officers are meeting with their counter-parts in competitive organisations.  Business or industry forums, commercial meetings (e.g. contracting, or merger or acquisition discussions), and the recognition that in a small market like New Zealand, general catch-ups and interactions will inevitably occur, driving the need for clear protocols alongside training and policies.

There is significant value added by using external counsel in the implementation of your policies (particularly training) in addition to drafting and advising.  This approach allows subject matter expertise and sends a strong message regarding the seriousness with which this topic is being treated, particularly at more senior levels of your organisation.

Have a response plan in place should any allegations arise

In addition to policies, training, and protocols, it is important to have in place a ready-to-go response plan if allegations of cartel misconduct arise in the business.

This should include:

  • a ‘dawn raid’ response plan, setting out how your business will respond to the Commission, or any government regulator, executing a search warrant (including who will take responsibility for what tasks, and how you will contact and involve external counsel);
  • a plan for how any allegations of misconduct made internally, or received from an external (non-governmental) source, will be investigated; and
  • plans for how the business will respond to any inquiries by the regulator, including identifying who is responsible for liaising with the regulator, how external counsel will be notified and brought into the process, and what public statements will be made (if any).

Again, the use of external counsel as part of your response team, is invaluable.  Not only does this bring crucial objectivity, and subject matter expertise, but work done advising you on your legal position and the appropriate strategy is likely to be protected by legal professional privilege, meaning you can safely explore issues without the risk of compromising your position with the regulator.

Well prepared organisations will run trial simulations of raids, or inquiries, to ensure they are ready to deal with any action that a government regulator might take.  Again, this is something which external counsel can assist and manage.

Plans and simulations are not about hiding things – they are a legitimate way of preparing your organisation in case of erroneous allegations of wrongdoing, rogue employee action and inadvertent misconduct.  They are an important risk management tool, enabling you to prepare and manage the variable risks associated with potential misconduct and allegations of misconduct.

A criminal prosecution is inevitable

The Commission’s recent court action against Hutt and City Taxis Limited highlights the risks for directors and senior managers in their personal capacity, as well as the risk to business, of engaging in cartel misconduct.

Although that case was taken in the Commission’s civil jurisdiction (give the misconduct occurred in 2020), there is little doubt that the Commission would have considered criminal prosecution had this conduct qualified.  Obtaining a penalty of $150,000 against the business, the Commission’s press-release confirmed the deliberate nature of the breaches, and that directors were aware of the misconduct and approved it – a clear nod to analogous party-liability in the criminal context.

In Hutt City Taxis, the directors were issued formal warnings by the Commission, and the Commission’s referencing of the new criminal regime when announcing the outcome of the case, sends a clear message that similar conduct is likely to be pursued criminally in the future.

In our view, it is only a matter of time before the Commission instigates criminal proceedings against a New Zealand corporate, and potentially also individuals, involved in cartel misconduct.  The strong messaging around the Hutt and City Taxis directors also suggests the Commission will consider prosecutions of people in senior leadership or governance positions if they are aware of, and encourage or acquiesce to, the misconduct.

The opportunity to prosecute may even come in the form of cross-border cartel activity, given the Commission’s strong relationship with their counterparts overseas, and the long established practice of criminal enforcement of cross-border cartel activity in jurisdictions such as the United States, Japan, Korea, Australia and the United Kingdom.  From our experience, there is value provided to clients involved in cross-border matters of experienced New Zealand based counsel, working alongside leading counsel overseas, particularly in the United States, Australia, Asia and the United Kingdom.

Criminal expertise is critical

With the increase in criminal regulatory restrictions affecting business, it is important that your team, and those advising you, have criminal law expertise alongside corporate legal knowledge.  This is illustrated with cartels, where criminal law expertise, or even better, experience with criminal cartel matters in other jurisdictions, will provide an important edge in developing and implementing preventive measures in your business, as well as when preparing to respond to any allegation of cartel misconduct.

Criminal prosecutions proceed in a different manner than civil court proceedings, and it is important that you and your advisers understand this.  The criminal law provides a different landscape around investigative powers, court procedure (including the possibility of a jury trial), and the burden of proof.  These all impact on strategy.

The Commission’s own policies and approach will vary where it chooses to begin an investigation which could lead to criminal proceedings, and when taking criminal proceedings.  It is vital to consider and address the possibility of criminal proceedings early with any government regulator, and the Commission is no exception.  In the case of cartel misconduct, this possibility should inform your response strategy and also impacts applications for leniency or immunity, and decisions to charge (including the necessary involvement of the Solicitor General, and the application of the Solicitor General’s Prosecutorial Guidelines).

Use ‘cartels’ as a chance to get ahead of the curve on organisational integrity risk management

The increased white collar criminal and regulatory response to business misconduct provides an important platform for directors and senior leaders to pro-actively manage organisational integrity risk.

We know that government investigations and prosecutions of organisational misconduct will increase.  If you ensure your business is identifying, managing, and preparing to respond to this you are getting ahead of a curve that we know is coming.

The criminalisation of cartel misconduct provides an excellent opportunity for you to model, and implement, a strong organisational integrity risk management programme, specific to the risk of cartel misconduct.  For organisations already proactively managing regulatory and white collar criminal risks, a cartel risk programme can form part of that broader risk management setup.  For organisations yet to begin, it might provide an excellent place to start.

Please contact one of our experts to discuss cartel risk, or broader organisational integrity risks in your business.  We are passionate about managing risk and defending our clients – it is what we do, and we would be pleased to discuss it with you.

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