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Preventing business cartels

02 November 2018 by Karen Campbell-White

Preventing business cartels

Breaking competition law can happen in different ways but some of the most serious ones are also the least understood

Fair competition is fundamental for a progressive, innovative economy. Where businesses try to avoid competing with each other, they undermine this principle with harmful consequences. The founder of modern economics, Adam Smith, spoke of collusion as a ‘conspiracy against the public’. To put it in even more frank language, we see it as ripping people off.   

Business cartels can include activity such as price fixing, market sharing or bid-rigging but many still don’t recognise how little it takes to end up involved in these practices. What all business cartels have in common is a culture where an opportunistic disregard for fairness in the pursuit of profit prevails. Gordon Gekko famously said ‘Greed is Good’. Ultimately, cartels are fuelled by greed and are a form of cheating by manipulating the odds: they deprive customers of a fair deal, including other honest businesses – stopping them from being able to compete and prosper on a level playing field.  

Investigative measures

The Competition and Markets Authority (CMA) is determined to root out and stop cartels. Currently we are investigating 15 competition cases across a mix of sectors ranging from construction to estate agents. In the last three years we’ve fined businesses over £150m following investigations into anti-competitive practices. We’re also increasingly flexing our director disqualification powers – with three disqualifications under our belt and more in sight. All the more reason for those at the top to sit up and take notice – if they haven’t already. 

Our latest research reveals that many businesses are still unclear about what cartels look like and the risky business behaviours that could put them in danger of breaking the law are as follows:

  • Only 57% of those polled know that it is illegal to fix prices and 41% don’t know that attending a meeting where rivals agree prices is illegal 
  • Over half (59%) don’t know that agreeing to split up and share customers with competitors is illegal.  
  • Just under half (48%) don’t know that bid-rigging – where competing bidders secretly agree who will win a contract and submit fake bids – is illegal

These misconceptions should ring alarm bells because the consequences of breaking the law are serious and could result in the following: 

  • Businesses can be fined up to 10% of their annual worldwide turnover 
  • Individuals can face personal fines
  • Directors can be disqualified from acting as directors for up to 15 years
  • In the most serious criminal cases – individuals can face prison

However, despite the dangers, competition law risk remains low on boardroom agendas. Just 18% of those polled said their business had senior level discussions about it, trailing far behind health & safety and employment law.  

Educating and encouraging 

We recently launched a ‘Stop Cartels’ campaign to educate businesses and the wider public on what cartels look like and encourage more reporting. This builds on the success of a similar campaign last year that led to a 30% increase in tip offs to our Cartels Hotline. So, what are we doing differently with this latest campaign? After speaking with businesses to understand how best to encourage reporting we have made the process easier with:

  • A refreshed campaign page that explains what cartels look like in practice and can be found at gov.uk/stopcartels
  • Real life case studies  that lift the lid on where other businesses have broken the law and what the lessons are for others 
  • New online tools such as an online quiz and a ‘cartel checker’ to help users understand if what they have seen is illegal
  • A new online reporting form that makes the reporting process quicker and easier
  • A reporting film that explains what happens next when you report

Competition law enforcement in the UK is ramping up. The risk of getting caught and punished for being in a cartel has always been high but is even more so today. Our message is that any profits you may seek to gain from being in a cartel aren’t worth the gamble. To ensure your business doesn’t fall foul of the law a culture of compliance with competition law, led from the top down, is essential. This is where company secretaries and those who advise on governance play a key role in challenging and motivating senior teams to take cartel risks seriously.

So how can you convince your board to care about competition law? There are three points to raise. Firstly, your employees may not know where the line is between legal and illegal behaviour and this could come back to bite you. People who are most at risk of breaking competition law include those in roles involving pricing and commercial strategy, such as sales. CMA research conducted amongst frontline sales professionals shows that the majority have a poor understanding of competition law.

What’s even more worrying is that, when quizzed about day-to-day behaviours that would likely break the law, they showed similar levels of ignorance. Directors have a special responsibility to be informed about what is happening in their business – negligence, as well as active involvement, can put them at risk of disqualification. If you’re in charge and a cartel happens on your watch, you could be disqualified. 

“All business cartels have a culture where an opportunistic disregard for fairness in the pursuit of profit prevails”

Secondly, competition law applies to all business types. By way of example, let’s consider two very different sectors where businesses broke competition law: the production of galvanised steel tanks (used for water storage in large buildings such as schools or hospitals, and in fire sprinklers) and the online market for posters and frames featuring the likes of Justin Bieber. Would you say, at first glance, that these two sectors had much in common? Both of these sectors harboured cartels. Cartels can occur in any market.

Lastly, informing staff about cartel risks doesn’t have to be onerous. You don’t have to be a competition law expert to understand cartel behaviours and the law. And, while there is certainly a considerable lack of awareness around competition law – within small to medium-sized enterprises in particular – there is guidance available to help businesses stay on the straight and narrow. The CMA has a range of introductory competition law guides – short videos and one-pagers looking at different aspects of competition law in a brief, accessible way. 

Now you have everyone’s attention, and bearing in mind the ultimate responsibility of the board for managing cartel risk and internal control, how can you help challenge the business on compliance?

Questions to ask:

 

  1. Do we have a clear compliance programme for competition law and are we communicating this through the business adequately?
  2. What are our present competition law compliance risks?
  3. Which activities in our business model are likely to create situations where competition law becomes an issue?
  4. Do we have a healthy culture in our organisation in respect of risk?
  5. What are the high, medium and low risks?
  6. Do we provide good channels for staff to get advice on possible problems easily?
  7. What measures are we taking to mitigate cartel risks in our business?
  8. When are we next reviewing the effectiveness of our risk mitigation activities/ compliance programme?

The consequences of not getting to grips with cartel risks can be serious and the repercussions for the business can be long lasting – as recent CMA cases prove. 

Cartel case study 1: Amazon marketplace seller fined over £160,000 for price-fixing

In 2016 two online sellers of popular posters and frames, featuring the likes of Justin Bieber and One Direction, took part in an illegal price-fixing cartel by agreeing that they would not undercut each other’s prices for products sold on Amazon’s UK website. They used automated re-pricing software to monitor each other’s prices and run the cartel.

The CMA took action and one seller was fined over £160,000 and disqualified from acting as a director for 5 years. Lessons learnt from this case were as follows:

  • Competition law applies in online markets as well as sales through traditional bricks-and-mortar outlets
  • You must not agree with competing businesses not to undercut each other on price, or agree what prices you will charge for your products or services. This is a form of ‘price-fixing’ and is illegal
  • Competition law applies to small businesses as well as large ones. The two online sellers in this case were small businesses

Cartel case study 2: Household fuel suppliers fined over £3.4 million for rigging competitive tenders

In 2018 two of the main suppliers of bagged household fuels to large national supermarkets and petrol stations were fined over £3.4 million for rigging competitive tenders to supply Tesco and Sainsbury’s.

For each of the tenders concerned, they agreed that one of them would deliberately submit a higher bid that was designed to lose, so that the existing supplier could retain its customer. From this case it was clear that:

  • Regardless of when it occurred and how long it lasted, illegal business practices can come back to haunt you. The conduct in this case dated back to 2010-11
  • It’s not only formal written agreements with competitors that can break competition law – ‘gentleman’s agreements’ and informal arrangements can be illegal too
  • Even if the cartel members themselves keep quiet about the breach, you can’t assume that you won’t get caught - this case started after intelligence work by the CMA following a tip-off to its cartels hotline

Cartel case study 3: Water tank suppliers fined over £2.6 million for multiple illegal business cartel activities

Galvanised steel tanks are used for water storage in large buildings, such as schools or supermarkets, and supply the water used in fire sprinkler systems.

In 2016, a number of water tank suppliers were fined over £2.6 million for breaking competition law by agreeing to fix the price of certain tanks, dividing up customers and rigging bids for contracts. In a separate decision one company was fined £130,000 for sharing commercially sensitive information at a single meeting that was secretly recorded by the CMA. Lessons from this case included:

  • Agreeing with your competitors that you won’t undercut each other on price or compete for your customers is illegal
  • Sharing information with competitors, even at a single meeting, can also be illegal

If you are approached to join a cartel or to get involved in anti-competitive arrangements you should: immediately reject the approach, clearly and unequivocally and leave the meeting, making it clear that you refuse to take part in anything illegal.

If you think you may have been involved in a cartel then it’s better to ‘Be Safe, Not Sorry’ and report it to us first, as you may benefit from immunity from fines and prosecution if you report before others do.If you think you’ve witnessed others breaking the law, do what’s right and report it to usin confidence. You may benefit from a financial reward.For more information on what a cartel is and how to report go to: gov.uk/stopcartels or call the CMA cartels hotline on 020 3738 6888

Karen Campbell-White is head of campaigns and compliance at the CMA

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