The concept of honor among thieves is integral to any form of organized crime. If just one member breaks the code, the entire enterprise is jeopardized. Of course, criminals being criminals, any ethical sine qua non is not exactly playing to a long suit.
In the corporate sphere, price-fixing is the apex of criminal collusion–an unambiguous, egregious offense, and one that requires all participants to keep mum. Because cartel behavior has the power to undermine the integrity of entire markets, the penalties are massive: fines that run into the billions and years in jail for executives.
Increasingly, authorities are leveraging fear of the harshest consequences to entice price-fixers to break ranks, toppling the scheme as they save themselves.
“Ninety percent of criminal fines imposed over the past decade or so were the result of investigations that started with an amnesty applicant,” says Kendall Millard, a partner in the antitrust practice at Barnes & Thornburg. “The DOJ’s strategy is to provide significant incentives so that cartel participants basically run to their door.”
That’s what’s happened in the ongoing global investigation of price-fixing in the air cargo industry, which has so far snared 18 airlines and tallied $1.6 billion in criminal fines. Eight executives have also been indicted, four of them sentenced to prison.
The industrywide sweep is a clear example of current antitrust enforcement tactics and demonstrates the effectiveness of a six-year-old law that gives prosecutors powerful tools to bring down cartels.
According to the Justice Department, in early 2000, various air carriers began colluding on the price of fuel surcharges. Over time, the conspiracy grew, both in the number of participants and the scope of the price fixing.
The first public intimation of the investigation came in February 2006, when the Justice Department and the European Commission, acting in concert, raided airline offices on both sides of the Atlantic. The joint effort is evidence of the strong collaboration among international law enforcement authorities on competition violations.
“In some cases, the European Union goes after these companies even more vigorously than the U.S.,” says Alan Greene, a partner at Hinshaw & Culbertson.
In September 2006, Lufthansa announced it was cooperating with investigators, and the dominoes began to fall. One by one, many of the world’s largest and best-known airlines agreed to plead guilty to fixing prices. British Airways, Korean Air Lines, Qantas, Japan Airlines, Martinair Holland, Cathay Pacific, SAS Cargo Group, Air France, KLM, EL AL, LAN Cargo, Aerolinhas Brasileiras, Cargolux, Nippon Cargo Airlines, Northwest and Asiana Airlines each copped to their role.
In September, the DOJ announced new plea agreements with Polar Air Cargo and China Airlines, bringing the total number of companies implicated to 18. Some industry experts believe that sum could as much as double.
The DOJ’s dramatic success in the continuing investigation owes largely to the Antitrust Criminal Penalty Enhancement and Reform Act (ACPERA), a 2004 law that provides amnesty from criminal prosecution of a company and its employees to the first company to turn itself in and tattle on the rest of the cartel. ACPERA has proved such an effective tool that President Obama signed an extension in June that keeps the law on the books through 2020. Dozens of other countries have followed suit as well, enacting similar laws that turn the table on cartels. The concept is remarkably simple.
“Let’s say you and I and six other people are in an industry,” Greene says. “You and I know that something is being done that shouldn’t be done. The first person who goes to the government can get amnesty. A company can say, ‘Look, we’ve been part of this program, we now realize it’s wrong and we’re gonna spill the beans on everyone else.’ If the government is satisfied that they’ve done so, the first company that comes in gets amnesty, but they’re the only one that gets amnesty.”
That’s a massive out, and not just in the criminal context. Antitrust laws carry joint and several liability, so each company can be held responsible for the entire cartel’s behavior.
“ACPERA lets you reduce your exposure on the civil side as well,” says Hollis Salzman, a partner at Labaton Sucharow and co-lead counsel in a related class action filed by air cargo customers.
Among other benefits, successful amnesty applicants pay only single damages in civil cases, not treble. The strategy has been so successful that the DOJ has added additional layers of immunity. Under the Amnesty Plus program, any company that can bring new information to the table gets amnesty for criminal liability directly related to that part of the scheme. Amnesty Plus applicants often receive reduced fines as well. All this effectively creates a race to the confessional, and it helps authorities expand the investigation–even into related industries.
“Somebody coming in the door is just the first step,” says Millard. “The DOJ still has a lot of work to do.”
All forms of antitrust criminal penalties have trended upward during the past decade. In 2000, the total amount of criminal fines assessed by the DOJ was $152 million. That figure topped $1 billion in 2009. Since 2006 the EC has issued EUR1 billion in cartel fines every year, with a spike of more than EUR3 billion in 2007.
Individual accountability has intensified as well. In the 1990s, an average of 37 percent of antitrust defendants were sentenced to jail. In 2009 that total was 80 percent. Prison terms are longer, too. Antitrust criminals in the U.S. were sentenced to an average of 8 months in the 1900s. During the past three years the average is almost 27 months.
Still, cartel behavior persists, in part because many executives don’t understand how easily a conversation over drinks at a trade show can spiral into a global price-fixing scheme.
“It’s surprising what people don’t know,” Kendall says. “If you’re not schooled in antitrust, and you’re in an industry where there’s a lot of familiarity among competitors, you may not realize the criminal consequences. I’m not saying that justifies anything, but there are people out there that still do not realize what the antitrust laws prohibit.”
The onus for that kind of training falls on the legal department.
“Companies need to make sure that each of their employees–especially those that deal in sales, those that have authority for prices or price increases–have a very thorough understanding of what they can and can’t do,” Kendall says. “Some of the restraints may not be logical in the traditional business mindset.”