Eighteen months ago, David was sitting at his desk planning his next trip to his regular trade association meeting. He is not at his desk today. He is in jail, as are his friends, Peter and Bryan. All three worked in the marine hoses business and have also been stripped of over £1 million in assets and disqualified from being directors for between five and seven years. Their companies have had to pay over €130 million in fines.
The consequences of infringing competition law these days affect individuals in the boardroom as much as a company's bank balance. Personal liability is on the rise and understanding how to comply with competition law is now an essential survival tool for company directors.
Knowledge is an issue
You don't need to be an expert in competition law, but you do need to be aware of the basic rules, which will allow you to manage the risks of infringements. It is not relevant that you did not have actual knowledge of infringements; you can be pursued if you ought to have known.
What are the risks for directors?
- Directors (as well as others within a business) can be fined and even imprisoned for infringements. It is a criminal offence dishonestly to engage in cartel activity, including price fixing, market sharing, limiting production or supply or bid rigging - even if the agreement is not implemented. Those found guilty are liable to imprisonment for up to five years and/or to a fine.
- In addition, the Office of Fair Trading can obtain a disqualification order against the directors of a company which has infringed either EU or UK competition law. The court will look at whether the conduct makes a director unfit to be involved in the management of a company. Disqualification can last for up to 15 years.
- The Proceeds of Crime Act 2002 allows recovery of profits made by individuals as a result of a criminal cartel.
- Directors have a duty to promote the success of the company, having regard to its long-term interests. Anti-competitive arrangements may breach this duty, allowing the possibility of derivative actions against directors. A recent court decision granting leave to bring a derivative claim in Scotland illustrates this real risk facing directors.
- Failure to co-operate with investigations by competition authorities can also attract significant penalties, including fines and/or imprisonment. It is important to know how to handle competition raids to avoid these sanctions.
Recent developments highlight the risks. In June 2008, three company directors were convicted as a result of their participation in a cartel fixing prices and rigging bids for the supply of marine hose and ancillary equipment. They were sentenced to imprisonment for periods of up to three years and were disqualified from acting as company directors for periods of up to seven years. Confiscation orders were also imposed, recovering £1million of assets from the directors.
More recently, four BA executives were charged in relation to the fixing of air passenger surcharges. One of them was the commercial director. They now potentially face similar sanctions for their alleged involvement in this cartel.
The risks for directors are expected to increase further, as the OFT recently indicated that it intends to make greater use of directors' disqualification orders.
To date, the OFT has applied for disqualification orders where directors have been actively involved in the infringement, but they can do so where a director ought to have known of the infringement. This is a much lower test and places a burden on directors to find out what is going on throughout the business, or at least to have systems in place. The real risk is that it will be you that will face disqualification, imprisonment and financial penalties as a result of infringements taking place on the 'shop floor'. The need for effective monitoring and internal controls has never been greater.
In the US, the Federal Trade Commission is reported to be looking at whether, by sharing two directors on their boards, Apple and Google infringed antitrust law.
What can directors do to manage those risks?
Being aware of the main rules of competition law is an essential first step. However, to prevent personal liability, directors should take proactive steps to ensure that those within the company who are at risk of breaking the law understand the dos and don'ts. If a breach does occur, there should be mechanisms in place for reporting and dealing with this.
Internal controls help to ensure that directors comply with their obligations, by preventing breaches and rectifying them as they come to light. An effective internal compliance system can also mitigate a director's liability in the event the controls fail.
An effective method adopted by many companies is to implement a compliance policy, comprised of three key components: awareness, process and consequence.
Making all employees aware of competition law and how to stay within the rules is key to managing your risk.
In this difficult economic climate, spending scarce resources on risk management may appear to be a luxury. But the cost and time involved in implementation pale into insignificance compared with the consequences of infringement. The likelihood of employees engaging in secret cartel behaviour increases at these times. The implementation of a compliance policy need not be a cumbersome process. By introducing a solid competition compliance policy a company and its directors can effectively manage the risk.
If you would like more information on the online competition compliance programme please contact:
0141 303 2385
0141 303 2415
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