Speaking notes for Colette Downie Assistant Deputy Commissioner of Competition Criminal Matters Branch

Competition Bureau of Canada

The Fix is in Detecting Cartels in Canada

The Australian Competition & Consumer Commission Cracking Cartels Conference
Sydney, Australia

November 24, 2004

(PDF: 36.5 KB)

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Introduction

Good afternoon everyone. I'm honoured and pleased to participate on this panel in the company of such fine individuals. My thanks to the organizers for making this happen in such a wonderful part of the world.

Like my colleagues beside me, I'm going to talk to you about how Canada's competition authority, the Competition Bureau, tracks down and breaks up cartels. During the course of my brief presentation we will undoubtedly notice similarities with other jurisdictions and we will notice that there are inevitable differences as well.

In a world where boundaries are increasingly porous, it's not really very surprising that trends in Canada might have echoes in Korea or Germany for example and most certainly in the UK. Also, with initiatives like this one taking place more frequently and at different levels among various organizations, there is bound to be and there should be a certain amount of cross-border harmonization of laws, policies and procedures.

What is fascinating, however, are the differences. It is my hope that at the end of this presentation, the differences in how we do things will contribute to a healthy and lively discussion about how we might more effectively deal with a common challenge at home and across borders.

Here's how we do it in Canada.

The Competition Bureau - A Snapshot

For those of you who aren't familiar with our competition authority, here's a very short description of who we are. The Competition Bureau ("Bureau") is an arms-length enforcement agency that operates within Industry Canada. The Bureau administers and enforces the Competition Act, the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act.

As a competition advocate, the Bureau advises government on competition policy and it intervenes before federal and provincial regulatory boards, commissions and tribunals when required.

The Bureau employs approximately 400 people, one quarter of whom are located in regional offices across the country. The employees are primarily investigators, lawyers and economists who work in one of four enforcement branches: Civil Matters, Criminal Matters, Fair Business Practices and Mergers. The head of the Competition Bureau is the Commissioner of Competition, Sheridan Scott.

Criminal Matters Branch - Enforcing the Law

The core of the Competition Bureau's antitrust work is the Competition Act, which has its foundation in competition laws that were passed in Parliament in 1889.

It is the Bureau's Criminal Matters Branch that is responsible for enforcing the criminal anti-cartel provisions of the Competition Act. Our anti-cartel provisions include conspiracy and bid rigging. These offences are prosecuted before criminal courts that may impose fines, order imprisonment, issue prohibition orders and interim injunctions, or any combination of these.

When a breach of the Act has occurred the Bureau can and does initiate investigations. In general however, the Bureau relies extensively on a complaints-based system before launching costly and time-consuming investigations. In most cases investigations are launched after a customer or an actual informant complains of collusion. These preliminary investigations focus on gathering facts, authenticating information and developing a theory of competitive harm to determine whether there are enough grounds for a formal inquiry.

We believe our record over the past 12 years clearly demonstrates Canada's commitment to preventing and detering cartels aimed at Canada. Since 1992, more than 40 convictions under the Competition Act have been entered against corporations and individuals in relation to cartels involving a variety of products. These were all the result of guilty pleas. In one case, a former employee was sentenced to a nine-month term of imprisonment. Further, since 1991, the courts have imposed more than $180 million Canadian in fines for offences under the Competition Act.

Cartels - An Overview

In Canada, as in other market-based economies, cartels have been a part of the corporate landscape for as long as there has been competition. It was only in the 1990's, however, that competition authorities in Canada and elsewhere began to detect and address large numbers of international cartel cases in a concerted way. Why this was so would make an interesting topic for another day. It is sufficient to say that, whatever the reason, it has led to an avalanche of international cartel cases.

Aptly characterized recently by ACCC's Chairman, Graeme Samuel as a "…cancer on the economy, a silent extortion..." cartels carry on being worthy of our concerted efforts to detect and destroy them.

In fact, over the past 10 years, international cooperation through the harmonization of laws and investigative techniques, treaties, inter-agency agreements and multilateral fora such as the International Competition Network's Cartel and Leniency Workshops hosted by the ACCC this week, have led to many successes. Given the rate of success, it certainly behoves us to continue working to improve and develop anti-cartel measures that not only work domestically, but internationally.

Accordingly, the Competition Bureau is taking steps to improve its ability to detect, investigate and prosecute conspiracies. We are reviewing our current conspiracy provision with a view to modernizing it and particularly, to keep abreast of current economic thinking. We are strengthening our investigative ability by clarifying our Immunity Program and deepening our cooperation and relationships with other enforcement agencies. Part of these efforts includes information sharing, and promoting convergence towards best investigative practices.

Today I will share with you what we've observed about optimal conditions for the growth of cartels. I also want to talk to you about some of the signs and patterns of collusion that have brought cartels to our attention. Finally, I will also talk about one of our most effective tools for detecting cartels, namely, our Immunity Program.

Cartels - Conditions for Growth

Generally, we've found that cartels come about in very specific circumstances. Of course, when these circumstances prevail, it does not automatically mean that a cartel has formed. For example, many of the cases in our branch concern shrinking markets or declining industries. Cartels also tend to arise in markets where there are a smaller number of competitors or a few larger ones. As you might imagine, the smaller the number of competitors and/or conspirators, the easier it is to manage covert relationships and agreements.

Usually, cartels crop up in markets where products are homogeneous or basically interchangeable. Some famous examples include compressed gases, chemical products, vitamins, and food or feed additives, to name a few.

Naturally, it is easier to conspire when companies share similar products and markets where social networks are fairly well established and closed. Oftentimes these social contacts are promoted through trade associations. This is not to say that where there is a trade association there is always a cartel. Most trade associations are formed and operated for perfectly legitimate purposes. However, many of the cases we have investigated in the past have involved the use of a trade association to promote and coordinate the goals of the cartel.

Social networks play a role where players in an industry are located in a common geographic area, for example in the same small town or city or where a raw resource is being extracted and refined. In industries that concentrate certain kinds of expertise or knowledge, there is also a tendency to see the same people moving among companies. When conditions permit it, the potential and perhaps the temptation to conspire increases, possibly because corporate insider knowledge is circulating through such hiring practices and personal friendships and business relationships are well established.

Strong social networks of the kind just described also enable cartels to thrive because the element of trust is far more likely to be present. Trust is important to a successful cartel, yet, and this is where we find an intrinsic contradiction, it is precisely the unscrupulous nature of these kinds of relationships that make cartels inherently unstable. No one participant in a cartel can be absolutely trusted to honour any agreement that is reached because, among other things, each individual involved has agreed to step over the line. They've decided to break the law; at which point any expectations of integrity are naïve at best.

But trust is not the only unreliable element in a cartel. Market conditions must also be stable and remain stable to give a cartel a good chance to succeed - even if those very markets are shrinking or in decline. For example, it helps if there are no new entrants trying to shake things up. Stable market conditions are also less favourable to cheating by co-conspirators - signs of cheating are more easily detected in such conditions.

Other conditions that can make fertile ground for cartels are those where bid processes are open and transparent and situations where the same group of competitors regularly bid to make the same purchases or sales. This is another circumstance that makes monitoring for cheating easier.

The great irony here is that a group of people who have agreed to cheat the system watch each other for signs of cheating while they're cheating. It all sounds more exhausting than anything.

We have also found that companies will form cartels to end a price war resulting from lower trade barriers or to deal with shrinking demand for their products. We've heard some individuals say that that they formed the cartel to "stop the bleeding" or to "discipline the market."

What has become clear over time is that many of the conditions for the growth of cartels rely on one consistently unreliable factor and that is the human factor, the least predictable of them all. Fundamentally, it is human nature that impels the establishment of cartels and it is human nature, that is often their downfall. What has become obvious is that we are dependent, to a great extent, on the unpredictability of human nature. We have seen it betray cartels to us time and time again.

In the end, many of our cases are straight from the textbook, falling into what the economics of cartels often predict. In fact, this is reflected in the Bureau's recently revised Merger Enforcement Guidelines (MEGs), which take into account these very considerations. The MEGs make it clear that in conducting merger reviews, the Bureau will assess whether a merger makes such coordinated behaviour among firms more likely or effective by taking into account the very factors mentioned above.

As you have just heard, there are plenty of conditions that provide incentive and opportunity to form cartels, particularly in a rapidly changing economic environment. From declining markets and market share to strong social networks and ease of communication, the temptation is evidently too strong for some.

Cartels - Common Signs of Collusion

Human nature is never more apparent than when we look at the signs or clues that often point to collusion among companies.

Here are some of the many clues and patterns that have, in some cases, brought cartels to our attention. Frequently, it's customers, whistleblowers, insiders or other players in the market who report them to the Bureau.

Overnight Sensation

One of the most obvious signs of conspiracy occurs when the market changes overnight with no clear explanation for the sudden shift. Such a change may include the complete elimination of competition in a short period of time. Yet another, is the sudden elimination of discounts and implementation of price increases at regular intervals. One example that comes to mind involved a group of compressed gas manufacturers, which adopted a new common format for their respective price lists. This was considered suspicious. In offering an explanation, those involved indicated that they had done so to "introduce some discipline into the market" a term that's now familiar to us.

Owning the Customer

In some cases, complainants have been advised that they "belong" to a specific supplier and can't go elsewhere. There are actual cases where suppliers have arbitrarily decided who will provide product and to which buyer, without the buyer in question having any say in the matter. These are not just smaller businesses either. Often, they're some of the bigger players in the market.

Sometimes, cartel agreements become so entrenched in the way business is done in an industry that participants become nonchalant. They let down their guard and no longer keep their unlawful agreement a secret from outsiders.

Other clues include the situation where a supplier tells a customer that they "won" their business in backroom transactions with another supplier, or that the supplier was "owed" some business by the other supplier. Obviously, where there are "paybacks" or other forms of compensation, there's real reason to speculate on the legality of the relationship in question. In these cases, it is plain overconfidence that betrays the conspiracy.

Behavioural Patterns

We think it's wise to watch for patterns of behaviour as well. For example, we've observed conspiracies in cases where the geographic area being served didn't make sense. Suppliers were covering areas that wouldn't normally be part of their territory perhaps because of long distances and shipping costs.

Other suspicious patterns include cases where a number of supplier companies appeared to be receiving an equal amount of business over a period of time or on a rotational basis. Cases have also come to light when firms announced the same price increases simultaneously or in a common pattern. We've found that these may be signs that something has been worked out.

Similarly, when a company consistently wins a client's business or when another company bids for business but never seems to get the contract, there may be good cause to investigate.

Finally and recalling that the unpredictability of human behaviour is often what betrays a conspiracy, we've also seen schemes come to our attention because they've been announced in a press release or announced to customers in an official joint letter. This doesn't happen frequently, but, to our great amazement, it does occur.

Strange but True

Other signs of nefarious undertakings can simply be characterized as oddities: occurrences that stand out because they are strange.

Buyers do, and rightly should, get suspicious when suppliers hike their prices significantly and in lock-step with no obvious related rise in actual costs.

Similarly, there may be cause for concern when a supplier hikes prices despite business being scarce or when the prices on a contract are much higher than estimated and higher than comparable products on the market. Or when suppliers don't compete for lucrative business, which they would have the ability to win.

In cases of bid rigging, we've seen human error rear its unpredictable head many times. For example, companies have submitted bids written in the same handwriting or same envelope. One bidder that I know of submitted its bid along with an entire file of correspondence to and from its competitor about the agreement they had struck. Some of the bids we've seen contain the same company names or the same spelling mistakes. Obviously, bids like these catch our attention.

Getting Together to Talk

It is surprisingly common to hear from customers that have been told that suppliers have met and fixed prices. They are sometimes informed of upcoming price fixing meetings as well.

We found out about one price fixing agreement because a group of competitors was seen sharing a meal at the local steakhouse. Meetings of this kind are, more often than not, a sign that something's being cooked up. Don't laugh. In one story I know of, the group of people involved in a cartel consistently got together over a BBQ - they eventually got burned.

Immunity Program - One of Our Most Effective Tools

As you've just heard, there are numerous and obvious signs of collusion which can alert the Bureau to the possibility that a cartel might be in the making. While clues like those described above can lead to breaking a case, getting a conspirator to cooperate by leveraging the inherent instability of cartels is the best of all possible scenarios.

Immunity is the most powerful tool in detecting, investigating and prosecuting cartels. Immunity programs are particularly important in international cartel enforcement in Canada since the targets and evidence usually lie outside of Canada. Our current Immunity Program, established in 2000, is loosely modeled on the US program and generally reflects all of the features identified by the OECD in its report as being key to a successful leniency program.

Under the Immunity Program, the Bureau recommends immunity in appropriate cases, but it is the Attorney General who decides whether to grant immunity from prosecution or another form of favourable treatment. The success of the program stems from its careful use of economic incentives to cooperate with antitrust agencies, which creates a "race to the confessional" effect. Faced with the realization that the antitrust agencies are armed with evidence from a cooperating party from inside the cartel, many potential accused are ultimately prepared to plead guilty as opposed to contest the matter.

Further, the presence of such programs in multiple jurisdictions compounds the incentives, as one guilty plea will, as often as not, spark other investigations elsewhere. Consequently, most immunity applicants will seek immunity in multiple jurisdictions.

There are six conditions that must be met in order to obtain immunity:

• The party must be first in to cooperate
• They must terminate illegal activity
• The party must not be the instigator or the sole beneficiary of the illegal activity
• The party must provide truthful and complete disclosure
• A party must be ready to provide timely and consistent cooperation throughout the investigation and prosecution
• Where possible, the party will make restitution for the illegal activity

If a party fails to meet any of the above-stated conditions, a recommendation for immunity will be withdrawn and another party that meets the conditions may be recommended.

The Bureau has also adopted the concept of Immunity-Plus. Essentially, this allows a party who is not first in on one case to reveal information about other related offences thereby receiving immunity for the second offence, and credit for cooperation on the first. In these cases, parties are often treated more favourably for the first offence than if they had not come forward about other conspiracies at all.

In the end, the Bureau is not so different from many other antitrust agencies in that it relies on a number of evidence gathering techniques that include public sources such as the media, witness interviews, wiretaps, search warrants, subpoenas, hearings and cooperation agreements. These tools can be extremely effective when used to corroborate what we already know in cases where immunity has been granted and the grounds for an in-depth investigation have been established.

I think the appeal of this program is self-evident for a culpable party, given the number of cases that have been investigated based on immunity. If nothing else, it demonstrates that the program plays on the very human drive to make the best of a bad situation.

Resolving international cartel cases, primarily with the assistance of the immunity policy, has been the hallmark of successful cartel enforcement in Canada. In the case of international cartels, their activities come to the fore largely through investigations in other jurisdictions and increasingly through applications for immunity.

Given the increase in applications for immunity and immunity-plus, we can't help but conclude that the program is successful. Despite our success, however, we are nevertheless committed to a process of renewal and improvement. In fact, we are currently beginning to review our Immunity Policy, to ensure that it is as effective as it can be.

Conclusion

We know that aggressive prosecution of cartels may deter collusion, but only where sufficient international cooperation exists to gather evidence and prosecute offenders so that cartel participants actually have something to fear.

Cartel enforcement in Canada -- and I would also suggest Australia -- is particularly important, given that many industries are characterized by high concentration levels and levels of production that are below minimum efficient scales. These natural economic conditions may facilitate and increase the likelihood of collusion. It simply means we have to be vigilant and we must work together as much as possible to ensure, at the very least, that violators have no other place to run to, no place to hide and no place to form another cartel, let alone get together for a BBQ!

As I alluded to earlier, there is a general consensus about the harm of international cartels and the need to take effective and appropriate action. In the cartel context, convergence with respect to, for example, legal standards, and procedures, can make it easier for parties to come forward to agencies as immunity applicants. Moreover, convergence in approaches can make it easier for agencies to cooperate in the detection, investigation and sanctioning of cartels, through, for example, the sharing of information and coordination of investigative steps.

The Bureau is an active participant in international fora, particularly the ICN and the OECD. The importance of these multilateral relationships can't be overstated in our case since most company headquarters are located outside our borders with ties in Canada. This means that the majority of cases that are being investigated are being investigated by multiple enforcement agencies. Given this reality, it stands to reason that those of us working in this field have everything to gain by encouraging complimentary laws, policies and procedures, not to mention cooperation and information sharing.

Thank you.