More fire power in fight to clean up cartels

Last week, Patricia Hewitt rode into town with a promise to get tough on price fixing. Heather Tomlinson reports on plans to put guilty directors behind bars

Our competitors are our friends. Our customers are the enemy," exclaims Terrance Wilson, a senior executive of agribusiness group ADM, to Kanji Mimoto, an executive at what was supposed to be a rival, the Japanese company Ajinomoto.

The exchange is part of a secretly taped conversation between leading manufacturers of lysine, a chemical used in animal feed. The companies were illegally fixing the price of their product – resulting in price rises of up to 70 per cent.

On the tape, the participants were blasé and joked about their activities. They didn't find it so funny in 1999 when Wilson and his vice-chairman were sent to a US prison for two years and a $70m fine was slapped on ADM after an FBI investigation.

While American prosecutors have the power to take harsh action on price-fixing and cartels, in the UK the authorities are relatively toothless. After the auction-house price-fixing scandal of the mid-1990s, Alfred Taubman of Sotheby's is currently doing time in the US; his co-conspirator, Sir Anthony Tennant of Christie's, is a free man in the UK.

This situation is about to change. In a private meeting with business leaders last week, the Secretary of State for Trade, Patricia Hewitt, promised that price fixers will soon face more than just a fine. The new Enterprise Bill, expected to become law early next year, will give the Office of Fair Trading the power to send dishonest directors to prison.

Under the Competition Act of 1998, a company can be fined up to 10 per cent of turnover if it takes part in a cartel. Transport operators Arriva and FirstGroup have felt the effects of this law: they were fined a total of £848,000 for carving up bus routes in Leeds and Wakefield to ensure that they weren't treading on each other's toes. Their fines were later substantially reduced because they co-operated with the investigation from an early stage.

The new powers of the Enterprise Bill, however, are making the directors of UK plc quake in their boots. "The introduction of the cartel offence will put compliance with competition law at the top of boards of directors' agendas," says Andrew Finfer, a commercial lawyer at Addleshaw Booth & Co. "People are taking the prospect of conviction seriously."

Supporters of the Bill say it is the risk of jail that will really deter wannabe cartel members from price-fixing. "The very clear lesson from the US is ... that it is the sanction on individual behaviour that will create a real incentive for companies to mend their corporate ways," said Ms Hewitt, speaking last week at a reception hosted by law firm SJ Berwin.

The OFT will have new powers to snoop on directors. In cases where cartels are suspected, the OFT will be allowed to make covert video- or audio-tapes of meetings, something regarded as crucial in getting directors prosecuted. "With white-collar crime, juries often see the people in the dock as 'respectable'," says Adrian Walker-Smith, the director in charge of cartel investigations at the OFT. "Where evidence of surveillance is available, it gives the clearest possible explanation of what is going on, and increases the likelihood of a guilty verdict. It is very rare not to get a guilty plea if you have video evidence."

Surveillance experts from the National Crime Squad and Customs and Excise will be drafted in for the job. "It won't be my people who don black masks and climb up buildings," says Mr Walker-Smith.

The OFT is champing at the bit to get started. "I would be happy if it could be within hours of the Bill passing, but that won't be the case," Mr Walker-Smith says. It will take some time, he explains, to bring prosecutions. "The Bill is not retrospective, so for any cartel operating today that finishes in the next two to three months, there won't be any individual liability."

It'll probably take more than a year after the Bill becomes law for criminal charges to be brought against directors involved in cartels. "It will cost a lot more, in time and legal fees, and the process will become longer, more tortuous and more drawn out," says Susan Bright, a partner at the law firm Lovells. "I don't think that the actual consequences of the way the law will be enforced have been thought through."

One issue that remains unresolved is whether it is in directors' best interests to confess to price-fixing. Although the Government wants to protect whistleblowers, whether it will actually be able to do so under the current proposals is unclear. "The task of the OFT will be made much more difficult, because I think people are going to find it hard to know how to play things," says Ms Bright.

Many of the cartels that have been busted in the US dealt with industries unfamiliar to the public, such as graphite electrodes and explosives. In the UK the sectors that particularly need to watch out are the ones selling to the man in the street. "Consumer-related items are being targeted because the OFT wishes to demonstrate the importance of competition to consumers," says Mr Finfer.

The OFT has recently made public several ongoing cartel investigations, although, under the current legislation, the directors involved do not face prison if convicted. Manchester United and the retailers JJB Sports and Debenhams are accused of fixing the price of replica football kits. The toy manufacturer Hasbro and the Littlewoods and Argos chains face similar accusations.

At any one time, there are about 15 investigations under way that the public doesn't know about, according to the OFT. No wonder directors are quaking in their boots.