Whistleblower programmes – making cartel detection more effective

August 2020  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2020 Issue

Competition law prohibits agreements and arrangements that inhibit competition between businesses, harm consumer welfare and stifle innovation. Cartels, such as bid-rigging, price fixing or market-sharing, are prime examples of the most severe infringements of competition law. Because cartels lead to increased prices and make products less accessible for consumers, the detection and sanctioning of such practices has always been a top priority for competition authorities across the world.

To deter businesses from engaging in such practices, competition authorities are empowered to impose stiff financial penalties, which can reach as much as 10 percent of a company’s group worldwide turnover. Indeed, even multibillion fines are not uncommon in cases involving the most egregious competition law violations. For example, the highest penalty imposed in a cartel case – the trucks cartel – by the European Commission (EC), the EU’s top antitrust watchdog, reached almost €4bn.

From a public enforcement perspective, one of the main problems with cartels is detection. Cartel arrangements are not normally based on written contracts conveniently headed ‘cartel agreement’. On the contrary, cartels are inherently secret arrangements, involving closed-door meetings, ‘gentlemen’s agreements’ and covert communications. In light of the underlying risks, cartelists also take extra steps to protect the illicit nature of their practices. It is therefore particularly difficult to detect the existence of a cartel without some form of inside information.

The primary tools used by public enforcers for cartel detection are leniency programmes – i.e., systems whereby a company participating in a cartel can expose the anticompetitive practice by disclosing it to a competition regulator and by adducing supporting evidence. In exchange for such cooperation, the leniency applicant may receive a significant reduction in the financial penalties, which are ultimately levied on the infringers or avoid being fined altogether. However, leniency programmes are not a complete solution. Recent surveys in the EU and the US have found that the numbers of leniency applications have been declining. This suggests that competition authorities need to explore other channels for detecting illegal activity in order to maintain effective cartel enforcement.

In recent years, more and more competition authorities have been expanding their cartel detection tools by introducing whistleblowing incentive programmes for individuals, including directors, employees and executives. These whistleblower programmes have been designed to encourage individuals to provide antitrust regulators with inside information on anticompetitive practices in a secure, confidential and anonymous manner.

Rationale behind financial incentives for whistleblowing

To be effective, an antitrust whistleblower programme requires more than just a secure or anonymous reporting line. Whistleblowers can pay a high price for exposing wrongdoing, losing their careers and friendships with colleagues, and risking other forms of retaliation. To be effective, it is essential that whistleblower programmes operate as safety nets that offer adequate financial incentives for individuals, in order to protect, empower and reward their actions.

Financial rewards protect whistleblowers by operating as a form of unemployment insurance against the potential career-long loss of employment due to blacklisting. Faced with greatly diminished employment prospects and other retaliation if they speak up, many whistleblowers are unable to come forward in the absence of a financial reward to offset those risks, even if they feel strongly that it is the right thing to do. The sense of financial security a monetary reward provides can act as a tipping point to encourage whistleblowers to undertake the risks necessary to expose illegal conduct and thus facilitate regulatory investigations and subsequent enforcement actions. These two objectives, incentivising whistleblowers and strengthening competition enforcement, should form the basis of any antitrust reward system.

Examples of antitrust whistleblower programmes

Despite the rise in whistleblower tips to authorities in certain sectors, antitrust whistleblower programmes focused on incentivising individuals are relatively recent additions to the competition enforcement landscape. Only a select group of countries have incorporated financial rewards into their whistleblower systems. For example, the UK Competition and Markets Authority (CMA) offers whistleblowers a reward of up to £100,000 for information on illegal cartel activity.

While the CMA does not publish statistics on the number of rewards or amounts paid out, at least one newspaper has reported that the number of whistleblowing submissions has been gradually increasing. However, as the CMA’s chair has acknowledged, the cap on financial rewards should be increased further, because the current compensation level is not sufficient to offset the risks whistleblowers face in bringing the existence of cartels to light.

In other European countries, only Slovakia and Hungary offer financial rewards for antitrust whistleblowers. In 2014, the Slovak Antimonopoly Office introduced a ‘cartel informant reward’ system for individuals who are first to disclose significant evidence on illegal cartel practices, with rewards in the amount of 1 percent of the total fines imposed on infringers, capped at a maximum of €100,000. Interestingly, if a cartelist fails to pay the fine in time, the Antimonopoly Office pays out only 50 percent of the original amount to the whistleblower, capped at €10,000.

In Hungary, the Competition Commission offers a reward of up to 1 percent of the total fine levied in an infringement decision, with a cap of approximately €150,000. Although Hungary’s regulator has seen an increase in the amount of cartel reporting by individuals, it is our view that the level of reporting is probably still suboptimal because of the low level of financial incentives offered.

At a pan-European level, the EC launched an anonymous whistleblower tool in 2017, which allows individuals to expose anticompetitive conduct by email, phone or anonymous message. Although this tool was introduced in response to a recent decline in leniency applications and the EC’s desire to increase cartel detection, crucially, the programme does not offer any rewards for reporting anticompetitive behaviour.

Outside of Europe, in 2012 the Korean Fair Trade Commission (KFTC) increased its whistleblower reward levels to approximately €2.2m. The cartel informant reward programme, first introduced in South Korea in 2002, has seen a progressive increase in the size of rewards to further encourage more whistleblowing by internal officers and employee insiders and is often cited as the leading example of a successful antitrust reporting programme. In South Asia, on the other hand, the Competition Commission of Pakistan (CCP) introduced a ‘reward payment of informants scheme’ whereby whistleblowers can receive rewards ranging from approximately €1075 to €48,000. Although the CCP’s reward scheme combines financial incentives with added protections in the form of anonymity, studies suggest that the award amounts are insufficient to incentivise the majority of informants.

Coronavirus (COVID-19) and other developments

For some time, the US been offering substantial financial rewards to whistleblowers under a number of successful programmes, particularly in relation to securities, commodities and tax compliance. Collectively, these programmes have enabled the US government to recover billions of dollars to date and impose billions of dollars in fines to enforce their respective agencies’ missions. However, no equivalent reward programme exists for the reporting of antitrust violations, despite repeated calls for the introduction of such measures. For example, in February 2017, the American Antitrust Institute issued a report on American cartel enforcement, recommending that Congress introduce whistleblower rewards in cartel cases.

More recently, in May 2020 a group of scholars and private practice practitioners submitted a comprehensive proposal for an antitrust whistleblower reward programme as part of the Financial Times Global Legal Hackathon initiative to develop solutions for problems created by the COVID-19 pandemic. Although the draft is focused on COVID-related antitrust violations, an antitrust whistleblower reward programme in the US is long overdue and the initiative seeks to address existing reservations about passing such legislation, effectively rebutting the presumption that financial rewards for cartel whistleblowers would interfere with leniency programmes and increase expenditure of government resources.

The COVID-related timing of the Global Legal Hackathon proposal is not coincidental. COVID-19 has put a lot of businesses under strain (e.g., closed offices and factories, loss of customer demand, supply shortages, excess inventory, cash shortages, etc.). It has also created opportunities for the unscrupulous because of increased demand for certain essential products and fixed or diminished government oversight resources. As a result, there are both more incentives to engage in illegal activity and greater opportunities to do so. Whistleblower programmes need to be particularly robust during such times, especially because governments around the world are themselves struggling with the COVID-19 outbreak on multiple fronts. Many competition authorities have already expressly cautioned businesses against taking advantage of the current crisis and violating antitrust laws. Whistleblower programmes operate to assist governments, which are frequently strapped for resources, in detecting and deterring such practices.

Concluding remarks

An insider blowing the whistle on a cartel could help save the limited resources of competition authorities and, more importantly, help save millions of consumers’ money that would otherwise land in the pockets of cartelists. In light of the increasingly more sophisticated methods of concealing cartel practices, and the challenges posed by the current COVID-19 crisis, effective cartel detection and deterrence mechanisms are crucial. Governments should therefore explore and strengthen incentives for whistleblowers to come forward, thereby further empowering authorities in their efforts to go after practices harming consumers.

As shown by the experience of many countries, a well-designed individual antitrust whistleblower programme needs to ensure that rewards are set at a sufficiently attractive level in order to incentivise submissions. The personal and professional risks that whistleblowers may face in exposing antitrust violations have to be counterbalanced appropriately in order to incentivise individuals to assist in antitrust enforcement.

Mary Inman and Richard Pike are partners and Alicja Dijakiewicz-Kocon is an associate at Constantine Cannon LLP. Ms Inman can be contacted on +44 (0)20 3959 0622 or by email: minman@constantinecannon.co.uk. Mr Pike can be contacted on +44 (0)20 3959 0624 or by email: rpike@constantinecannon.co.uk. Ms Dijakiewicz-Kocon can be contacted on +44 (0)20 3959 0641 or by email: adijakiewicz@constantinecannon.co.uk.

© Financier Worldwide

BY

Mary Inman, Richard Pike and Alicja Dijakiewicz-Kocon

Constantine Cannon LLP

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