Cartel criminalisation is on the cards for New Zealand

At the end of January, Minister of Commerce Simon Power released a discussion document proposing criminalisation of cartel conduct in New Zealand. It would bring New Zealand into line with countries such as Australia, which has recently criminalised cartel conduct, and the United States, which has seen enforcement agencies routinely seeking imprisonment since the 1970s.

The discussion document is lengthy and is accompanied by an occasional paper (which reviews the theory of cartel behaviour and its treatment, and examines the evidence on the performance of different treatments for responding to cartel behaviour).

What is cartel conduct?

Cartel conduct includes provisions that:

• Fix prices;

• Restrict outputs in the production or supply chain;

• Allocate customers, suppliers or territories;

• Rig bids.

Criminalisation of serious cartel conduct has been considered previously in New Zealand. In a January 1998 discussion document, "Penalties, remedies and court processes under the Commerce Act 1986", the Ministry of Commerce concluded that "hard core cartelisation is a far more serious offence than the civil law offence of insider trading ... and the consequences of price fixing to New Zealand society seem to be more akin to tax and customs duty evasion".

Discussion document

The key features of the proposal put forward in the latest discussion document include the following:

• The Ministry of Economic Development (MED) is concerned that New Zealand's existing civil penalty regime does not effectively deter cartel behaviour. MED considers that the "single intervention most likely to have a significant impact on deterrence and detection is the possibility of imprisonment" and it notes the introduction of criminal penalties in Australia, where the ACCC has reported a subsequent increase in leniency applications.

• Harmonisation of business laws with Australia is also an important factor in MED's thinking. The Single Economic Market Outcomes Framework has a medium-term goal that firms operating in Australian and New Zealand markets face the same consequences for the same anti-competitive conduct.

• MED's preferred option appears to be based on the Australian legislation, which came into effect in July 2009. The Australian legislation criminalises "hard-core" cartels – price fixing, bid rigging, market allocation, and output restrictions – which it refers to as "cartel provisions".

• The necessary mental element of the proposed offence is likely to be intention together with knowledge or belief that the agreement contains a cartel provision.

• Subject to proof of that mental element, it would be an offence to make or to give effect to a contract, arrangement or understanding that contains a cartel provision.

• Criminal liability would apply to both individuals (executives and managers involved in the cartel) and the corporation.

• The jurisdiction of the offence may extend to cartels formed outside New Zealand, as for conspiracy offences under section 310 of the Crimes Act.

• The Commerce Commission would carry out the investigation of a suspected offence and make the decision whether to prosecute.

• Prosecutions would be carried out by a panel of senior barristers in private practice, as for the Serious Fraud Office.

• Trials would likely be by judge alone, rather than jury trials (applying section 361D of the Crimes Act 1961).

• A maximum sentence of between five and seven years is proposed.

• Extradition of suspects may be possible under the Extradition Act and/or Convention Against Transnational Organised Crime and Extradition Act.

The discussion document raises a number of other issues, including whether rewards for whistleblowers should be adopted.

Arguments for and against

Whether to criminalise cartel conduct is a complex issue. The arguments in favour of criminalisation can be clearly articulated, but these need to be considered alongside questions about:

• the appropriateness of criminalising cartel conduct in New Zealand;

• whether the gains from doing so would outweigh the costs (which are substantial, as anyone involved in Commerce Commission investigations and proceedings under the current civil regime will appreciate); and

• if a criminal regime is to be introduced, how it should be designed to provide certainty to businesses and individuals, avoid stifling competition, and ensure that suspects are treated fairly and in accordance with the New Zealand Bill of Rights Act.

Submissions

MED is calling for submissions on the paper and Bell Gully will be canvassing its clients and the wider business community in the course of compiling its response. Submissions are due by 31 March.

We will keep you updated with further developments. In the meantime, if you have any questions or would like assistance with making a submission of your own, please contact your usual Bell Gully adviser or:

Phil Taylor
Partner

Torrin Crowther
Partner

Simon Ladd
Partner

Jenny Stevens
Partner

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.