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LENIENCY PLUS: REWARDING COOPERATION TO UNCOVER HIDDEN CARTELS



This post, the second runner up entry of the RFMLR-CAM Blog Series Competition on Emerging Trends and Developments in the Competition Law Regime, is authored by Swetha Sree. M, third-year student of Damodaram Sanjivayya National Law University, Visakhapatnam (DSNLU).


Introduction:


Hardcore cartels are considered to be the most serious form of violation against anti-competition practices. A cartel refers to a collusion of corporate manufacturers or sellers aiming to boost their combined profits through methods such as fixing prices, restricting supply, controlling production, distribution, or engaging other controlling measures. Such methods adversely impact the existing market, hamper the growth of other competitors, and lead to loss of competitiveness and rising levels of unemployment. Such anti-competitive conduct in a cross-border scenario extends beyond merely distributing the resources between producers and consumers, but involves draining of wealth from the impacted state to the state hosting the violators.


Cartel detection and deterrence are the universal objectives shared amongst anti-trust agencies. Leniency programs have been the most effective method for identifying cartels and acquiring evidence to demonstrate their presence and curb their activities. They play a pivotal role in assisting competition authorities in detecting, investigating, and prosecuting hard-core cartels. In essence, it means a reward for co-operation (carrot) in exchange of substantial evidence(stick), which is usually in the form of immunity and reductions in penalty. The members of cartels are required to confess their involvement, cease cartel operations, and actively co-operate by furnishing substantial evidence to assist in legal actions against other cartel participants. Initially introduced in 1978 in the United States, these initiatives enable corporations or individuals engaged in cartel practices to receive immunity if they voluntarily disclose their involvement and report the cartel.


Leniency Plus in India:


The Competition Act, 2002 prohibits cartelization under Section 3(1). The leniency programme in India is governed by Section 46 of the Competition Act, 2002 and the Competition Commission of India (Lesser Penalty Regulations) 2009. Recently, in 2024, the Ministry of Corporate Affairs (MCA) notified Leniency Plus or Lesser Penalty Plus regime in India, which aims to provide incentives to an existing applicant to provide full and vital disclosures about a second cartel, which is previously not in the knowledge of CCI.


The prime objective of the Leniency Plus method is to detect more cartels. In return, the company or individual not only gains immunity regarding its involvement in the second cartel but also receives additional reductions in penalties up to 30% for its participation in the initial cartel activity which is under investigation (thus termed the 'plus'). The leniency plus mechanism is targeted at multimarket cartelists (companies operating solely within a single market are ineligible to benefit from it). However, two other concepts are included in the leniency plus programme: the omnibus question and penalty plus, which is incorporated in the US Leniency Plus Policy, however they are not included in Indian competition law, as these two provides for criminal sanctions which the Indian law does not permit in its competition law regime. The Penalty Plus Concept, stipulates that if a cartelist is discovered by the regulatory body to be a member of a second cartel after having failed to disclose their involvement in the first during the leniency proceedings, this failure to disclose will be taken into account when calculating the applicable penalties. Conversely, the Omnibus Question is an investigative instrument that legally requires witnesses to reveal all relevant information throughout the leniency process.


Challenges to Effective Implementation of Leniency Plus in India:


Leniency programs contribute to destabilizing collusion among the existing members, but can also be abused to generate adverse effects. Despite its success in the detection and deterrence of cartel operations, there is still room for improvements and revision in its optimal design. Any leniency program can be effective only when it adopts the three essentials in its implementation.


  1. Severe Sanctions:

In order to maintain deterrence, antitrust laws must effectuate the threat of strict sanctions for those who engage in anti-competitive practices. Cartel operations are treated as civil or criminal offence as per their distinct jurisdictions. Many times, it is argued that leniency policies have shown a high rate of success in jurisdictions which criminalise cartel activities. It is often criticised that the Indian doctrine of imposing civil penalties is ineffective in creating a deterrent effect as it lacks enforcement of penal sanctions. It is viewed, that, penalties imposed under civil law may be considered as just another cost of doing business. Conversely, criminal sanctions have the potential to impose not only fines on companies and sanctions on individuals, but also reflects the public judgement as to improper conduct. Thus, it is a popular view, that criminal sanction in leniency programmes gives additional leverage.


That said, this raises a crucial question of whether a jurisdiction can claim to have a successful leniency policy if it does not consider cartel offences to be crimes. According to Hammond, the program's effectiveness may still be maintained in civil jurisdictions that mostly rely on monetary fines; but, these fines ought to be particularly severe and rigorously enforced in order for success in applications for leniency.


In this light, the European Union (EU) Leniency Regime, serves the purpose. The fines imposed by the EU are much higher than criminal penalties imposed in the United States, which are imposed at 10% of the total turnover of every participating member in the cartel. The computation of penalties is based on meticulously drafted guidelines, which have been issued in calculating fines. Such an approach ensures transparency and certainty to leniency applicants.


 The scenario in India, as noted by the Competition Law Review Committee, the actual realisation of penalties is quite low. This is attributed to the protracted litigation on penalties which seem excessive in amount, followed by the absence of guidelines on penalty computation. This was reflected in Excel Crop Care Ltd v. CCI and Ors.Excel Crop Care Ltd v. CCI & Or’s, wherein the Supreme Court substituted the term “total turnover” with “relevant turnover” to subsist with the objectives of the Act and in line with the doctrine of proportionality and opined the lack of specific penalty guidelines, it could be disastrous to impose fine on total turnover. It laid down two-step method for computing the penalty under Section 27(b); i.) Calculating the entity's relevant turnover, or the turnover related to the goods and services that were impacted by the violation; and ii.) Determining an appropriate penalty percentage based on aggravating and mitigating factors.

 The committee came to the conclusion, that the word ‘turnover’ need not be amended however decided to issue penalty guidelines, which is based on the concept of “relevant turnover” and “doctrine of proportionality”. Such an approach as viewed, will maintain the deterrent effect and does not expose to abuse by the cartelists.

 

  1. Fear of Detection:

 A corporation is more likely to reveal its acts in exchange for leniency if it is concerned that the government may find out about its involvement in a cartel. It is admitted, that leniency cannot be used as a stand-alone strategy when it comes to developing an enforcement regime with a real risk of detection; rather, it must be used to complement with the entire range of other domestic enforcement strategies. There is an existing imperative to boost the authority’s detection capabilities by building and maintaining synergy with other law enforcement and regulatory agencies at all levels.


  1. Transparency and Predictability:

The efficiency of a leniency regime can be judged on the highest degree of transparency it ensures.  Transparency must not only include explicit statements on policies and procedures but also encapsulate clarity in the exercise of discretion. In India, CCI is vested with discretionary powers in issues pertaining to grant of reductions in penalties to the company, depending upon the significant value addition to the already existing evidence.

 The CCI may grant lighter penalties to an applicant who ceases to be a cartel member basing on the ‘marker system’, which determines the applicant’s spot in the queue for lesser penalty, securing a priority status, is not a guarantee for receiving reduced penalties and the actual grant is determined at the stage of final orders passed by CCI, which is subject to fulfilling all necessary conditions as determined by the authority.

In the context of cartelization related to tenders issued by the Pune Municipal Corporation for Solid Waste Processing, all involved parties submitted their leniency applications subsequent to the initiation of the investigation. The CCI in this instance awarded a "up to 50%" decrease in fines to the initial leniency applicant, but did not award reduction to the subsequent applicants. The likelihood of prospective applicants coming forward is directly tied to the predictability and certainty regarding their acceptance into the program. If a company cannot reliably anticipate how, it will be treated following its confession, experience suggests that it is less inclined to report its misconduct, particularly in the absence of an ongoing investigation in another cartel. Uncertainty surrounding the qualification process can discourage lesser penalty regime.

 

 

Post-Investigation Leniency:


The Lesser Penalty Regulations in India, is often criticised for its failure to attract a substantial number of applications, with its first order passed in 2017. The same can be attributed to the US Amnesty policy, which hardly attracted one application per year in 1978, however with its revised policy in 1993 it created an alternative leniency for corporations that apply post/after an investigation is begun. Leniency is automatically granted under Type A of the policy, which is applicable prior to the investigation, provided the applicant meets six criteria. An applicant may be eligible for leniency under the alternative Type B leniency described in the updated 1993 policy if they do not meet the Type A requirements, which saw a rise in cartels being reported.


Conversely in India, no lesser penalty plus application is entertained post-investigation receipt by CCI. Introducing post-investigation leniency allows the antitrust agency to perform strictly better when investigations are unlikely to succeed in the absence of cooperation, but it also opens the door to potential abuse. Companies may strategically exploit the program by reporting only when an investigation is initiated. However, by allowing the agency to adjust the leniency rate post-investigation, antitrust authorities can maintain its effectiveness, ensuring it remains at least as robust as it is absent post-investigation leniency measures. It can destabilise the cartel either by encouraging the members to deviate and report or simply to report in case of investigation. Adopting such a strategy in India, the post-investigation leniency enables the original informant to retain their eligibility, even after an investigation has commenced. Also, being lenient may encourage members of cartels to break collusive agreements and reveal the cartel, but it also broadens the range of collusive tactics. There is a chance that such a generous programme will have an adverse effect, given that it permits cartelists to pay lower fines, it might have an ex-ante pro-collusive impact. Strategies like a collude-and-report approach may be adopted. This means that reporting the cartel becomes part of the collusive agreement, participants collude and apply for leniency to take advantage of reduced fines.


Leniency plus in Developing economies:


In developing countries, where trust and personal relationships often hold significant sway in business dealings, and business networks are relatively tight-knit and familiar, informal penalties may be prevalent, which undermine competition law. Furthermore, members of international cartels may be less inclined to opt leniency in a developing country where there is low chance of detection and punishment. A developing country may feel more uncertain about the level of leniency, and a less developed country may perceive a bigger risk of leak of information from one country to another, which can hinder its investments.


The adoption of leniency plus in such countries may mutually enhance the incentives for international cartelists. However, it is imperative to approach with a caveat, while attempting to expand the application of leniency policies to the majority of countries, the model that works well for developed nations might not work as well for developing nations because, from a competition standpoint, there is no one-size-fits-all solution. It is an acknowledged fact that fighting cartels cannot be solely left on others. A country cannot always rely on others' leniency policies. The efforts by one jurisdiction to combat international cartels could be undermined if other jurisdictions impose hefty penalties on cartels without adopting adequate leniency programs. This inconsistency in the risk of prosecution across jurisdictions that are not on the same page, reduces the probability for cartelists to pursue leniency. Coordinated cartel investigations are made possible by parallel leniency applications in several jurisdictions and waivers permitting the exchange of confidential information.  When combined, these steps suggest that nations can benefit together when they step up their efforts to combat cartels and implement successful leniency policies. As a result, developing nations receive technical support and capacity building from more experienced ones. In developing countries, the investment required to build institutional capabilities may be comparatively higher. Additionally, their legal systems might offer settlement agreements for the subsequent applicants in penalty reductions that serve as an adequate alternative, as in the case of South Africa. Leniency Programmes can be mutually reinforcing, only when countries actively fight against cartels.


Conclusion


For any economy, to reap the benefits of leniency plus, the law must be imposed with vigour, and competition agencies must be active in detection and deterrence, failing which it would be a futile process. Such a program should be based on a foundation of severe sanctions, high detection rates, and transparent enforcement policies. Research has shown, corporate culture and the emphasis placed on compliance are crucial in preventing anti-competitive behaviour. Besides this, demographic, socio-economic and personal attitude such as risk aversion play a role in deciding whether to collude or report such conduct.


An increasing number of countries are adopting screening techniques to identify anticompetitive activities. These are empirical techniques that assess market and corporate activity using A.I and digital information in order to detect traits and trends and make assessments regarding the possibility, danger, or existence of anti-competitive behaviour. These screening techniques, are broadly classified into Structural and Behavioural Screens, the former seeks to identify markets where a cartel is likely to form and the later seeks to identify where a cartel is already formed.  For instance, Brazilian Authority for Competition CADE has created a programme called Cérebro,  known as the "Brain," uses statistical tests and data-mining to identify doubtful bidding patterns in public procurement markets. The Competition and Consumer Commission of Singapore (“CCCS”) has developed, a ‘Bid Rigging Detection Tool’ to assist competition authorities in investigation by analysing bid prices, and patterns basing on quantitative inputs, and flags suspicious behaviour in the market.


Increased detection could be achieved by formal or informal international cooperation amongst competition authorities. It facilitates a seamless exchange of information and data, which improves the capacity to identify and bring charges against cartels.


Improving detection tools that can complement leniency programs is crucial in the Indian Competition Law policy. Cartel screens, supported by robust digital, data science, and IT expertise, are essential for detection. In addition to investing in these innovations, reforms in conventional methods, such as complaint systems, whistleblowing programs, and national and international cooperation, can enhance the efficiency and effectiveness of leniency programs.


The CCI has adopted a realistic approach that not only encourages erring entities to come forward under the leniency programme and cooperate with the regulator. Accordingly, it boosts efforts in the direction of uncovering the existence of a cartel but also in the establishment of cartel offences. It is anticipated that the regime of leniency plus will encourage more applicants to come to the light with disclosures about different cartels in another market, saving time and money on its investigation of cartels.

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