At face value, it should be very simple for companies to spot that they are infringing competition law if they are working with their competitors to set prices, or if they are dictating draconian sales terms to customers to corner a market they already predominantly control. A laughably low corporate tax rate of 0.005 percent should also be a good indicator that the company is effectively receiving state aid.
But time and again, the European commissioner in charge of competition policy is surprised to find that some of the world’s biggest and most respected companies are either unaware of how their actions violate even the most basic concepts of competition law or think that they may get away with breaking the rules.
Margrethe Vestager admits that “some of the competition infringements that companies are found guilty of take some believing,” as the violations appear to be obvious when written on paper. For example, at the end of April the Commission fined Dutch telecom company Altice €124.5 million (U.S. $147.8 million) for the basic error of jumping the gun and going ahead with its acquisition of Portuguese telecom operator PT Portugal—before the Commission had even approved the deal on competition grounds.
And in 2016 five of Europe’s largest truck makers—Iveco, DAF, Volvo/Renault, and Daimler—were handed the biggest cartel fine in EU history after admitting their part in a 14-year price-fixing scheme for their vehicles. Fined €2.93 billion (U.S. $3.48 billion) between them, the penalty was more than double the previous record fine.
The case contains so many red flags that it is bizarre to think the activity eluded executives for so long. According to the Commission, the collusion began at a meeting at a hotel in Brussels in January 1997 and came to an end in 2011, when the Commission carried out surprise inspections of the firms. At first, senior managers colluded at meetings on the fringes of trade fairs and other events and also discussed price-fixing by phone. From 2004, lower-level managers ran the cartel through the companies’ German subsidiaries, and information was exchanged largely by e-mail. Phone records and company e-mail accounts should have meant that the companies had an audit trail to uncover such wrongdoing. They either did not act, however, or were unable to find evidence somehow.
“It surprises me that these companies with such good reputations were acting the way they were for so long,” says Vestager. She blames failings in management oversight and poor corporate governance for such incidences, and she believes compliance functions “need to speak up more readily, as well as set a clear tone about how the organisation should behave” if companies are to avoid falling foul of the rules.
But she adds that such notorious cases as the truck maker example “just go to show that you can’t trust anyone in a cartel, and that it pays to be the first company to inform on the activity.”
Whistleblower scheme has paid off
More than a decade ago, the Commission launched an initiative to encourage companies to come forward and disclose potential cartel activity after accepting that investigating suspected cases purely proactively on its own was proving difficult. Under its 2006 Leniency Notice, companies are granted full immunity from fines and prosecution if they are the first to inform of the existence of a cartel. Other companies that cooperate are given fine reductions, depending on how cooperative they are and how soon in the process they come forward.
And it’s worth cooperating: Fines for involvement in a cartel can be a maximum of 10 percent of a company’s total turnover. MAN, which had been part of the trucks cartel but blew the whistle on it, avoided a penalty that would have been €1.2 billion (U.S. $1.42 billion). Conversely, Swedish truck manufacturer Scania, which refused to admit liability and be a part of the settlement agreement, was fined €880 million (U.S. $1 billion) last September—more than double what the company had made provision for.
Indeed, the scheme has proved to be successful, and the Commission openly admits that most of its tip-offs leading to investigations on cartels and price-fixing come directly via the leniency notice route.
“The Commission has always made a priority of ensuring that there is a fair market for companies to operate within and that the rights of EU citizens must be protected, and it is simply a coincidence that some of these big fines have been handed out while I’ve been commissioner.”
Magrethe Vestager, European Commissioner for Competition
Vestager believes that leniency is a fantastic weapon to reward—and punish—corporate misbehaviour. “When cartels are profitable, the companies involved are happy to continue with the arrangement. But when the scheme starts to fail, some of those involved tend to think about abandoning the cartel, and the leniency notice is a powerful incentive for one of them to come forward first and make sure that it qualifies for full immunity.”
But the scheme has its flaws: The company that informs first not only escapes a fine, but it gets to keep its share of the spoils—even if it may have been the principal architect of the arrangement and even if consumers and suppliers have been ripped off for decades as a result.
Vestager says, however, that none of the companies involved in a price-fixing cartel ever walk away completely scot-free. “Even if a company is granted 100 percent immunity under the Commission’s Leniency Notice, it still has to face customers, suppliers, competitors, consumers, and shareholders, who all now know what the company has been up to, and it can face litigation from any of these parties. Furthermore, the company also has to rebuild trust, and that process takes time and costs money,” she says.
While the Commission pursues cases through a mix of proactive investigations, complaints, and tip-offs, it is keen to encourage more tips; in March of last year, it set up an anonymous whistleblower scheme to encourage individuals—and not just companies—to come forward with information about secret cartels and other antitrust violations. Although the tool offers protection, it does not offer financial incentive—unlike the U.S. Securities and Exchange Commission’s whistleblower program, which has seen some massive awards paid out in return for tip-offs. Vestager says she does not favour cash rewards for information.
“Some very brave people have come forward with information through this scheme because they want to highlight wrongdoing at their companies,” she said. “It is not about the money. Also, offering payment to informers does not give them any more protection.”
In name only
Under Vestager’s tenure, both she and the Commission have gained fearsome reputations for being dogged regulators. After all, the Commission has the authority to block mergers (even if one of the companies is based outside of the European Union, as in U.S. parcel company UPS’s attempt to buy TNT of The Netherlands), hand out eye-watering fines, and compel EU governments to reclaim billions in tax—even if they don’t want to (as was the case with Ireland and Apple).
But she believes that the notoriety is “undeserved” and that it is “only a coincidence” that the Commission has been involved in several high-profile (and highly punitive) anti-trust investigations since she became competition commissioner in 2014. Indeed, several of these investigations began before Vestager took office.
For example, the Commission first requested information on Apple’s tax arrangements in Ireland in 2013, and the investigation into the trucks cartel started in 2011. Other cases, such as the €485 million (U.S. $575 million) fines handed out in 2016 to Cre´dit Agricole, HSBC, and JPMorgan Chase for manipulating the Euribor interest rate benchmark, were a hangover from a 2013 settlement that the three banks refused to be a part of.
“I don’t think the Commission is any more an active regulator on competition issues now than it was 10 years ago,” she says. “The Commission has always made a priority of ensuring that there is a fair market for companies to operate within and that the rights of EU citizens must be protected, and it is simply a coincidence that some of these big fines have been handed out while I’ve been commissioner.”
While Margrethe Vestager may have said at her confirmation hearing to become competition commissioner that she preferred settling cases early, her department has actually meted out some of the biggest fines in history.
In January 2015, Vestager ordered Cyprus Airways to pay back more than €65 million (U.S. $77 million) in illegal state aid received in 2012 and 2013 as part of a restructuring package.
And in August 2016, following a two-year EU investigation, Vestager ordered Apple to pay the Irish government €13 billion (U.S. $15.4 billion), plus interest, in unpaid taxes after the Commission found that the technology giant had benefitted from illegal state aid for more than a decade.
In July 2017, the Commission imposed a €2.42 billion (U.S. $2.87 billion) against Google for breaching antitrust rules, while in October that year Vestager ordered Amazon to pay €250 million (U.S. $415 million) of back taxes to Luxembourg after the Commission found that the company had been awarded a sweetheart deal that had allowed almost three-quarters of its profits to go untaxed.
—Source: Neil Hodge
“And the size of the penalties has nothing to do with me being supposedly tough,” she adds. “The Commission has an established method of calculating fines, and some of the biggest penalties that have been handed out recently are simply a reflection of the degree of harm that these companies caused to other companies and consumers.”
Has the Commission overreached?
Vestager also takes suggestions that the Commission is “politically charged” and that it is “aggressively targeting” non-EU companies “very seriously.”
“As a European regulator, the overwhelming majority of companies that we investigate for competition issues are European companies, so to infer that we somehow target U.S. companies or others outside of Europe is inaccurate,” says Vestager.
“Our role is to protect EU consumers and to ensure that the single market remains fair, irrespective of where in the world a company or service provider is located, so non-EU companies that have EU citizens as customers also fall under our scrutiny.”
Vestager also rejects any notion that the Commission’s various investigations into Google, Apple, or Amazon over their tax affairs, company structures, operating models, and so on are unfair, or that the Commission is singling out large technology companies for special treatment.
“These companies happen to be among the largest companies in the world, so their impact on EU citizens is also very significant,” she says. “Therefore, we need to take any complaints about the way they operate and how they interact with other companies and their customers very seriously, and the Commission does have legitimate concerns in these areas.”
But protecting the rights of EU citizens has proved to be controversial in some instances, and some lawyers have suggested that the Commission’s reach has become extraterritorial. For example, one of the largest fines meted out in 2016 (totalling €137.8 million, or U.S. $149.8 million) was issued against Mitsubishi Electric and Hitachi for their roles in a car parts cartel. The case is of interest because, although contacts associated with forming and running the cartel took place outside the European Economic Area (EEA), the Commission was keen to pursue those companies involved since the products were sold directly to car manufacturers in the EEA, thereby adversely affecting European consumers (in the Commission’s opinion).
More recent cases have also proved controversial. In January, the Commission hit Qualcomm, the world’s largest smartphone chip-maker, with a €997.4 million (U.S. $1.23 billion) fine for setting up a deal to be Apple’s sole supplier for five years. The penalty—the third largest imposed by the Commission for market abuse, after Google’s €2.42 billion (U.S. $2.99 billion) fine last year and Intel’s €1.06 billion (U.S. $1.31 billion) fine in 2009—equalled 4.9 percent of Qualcomm’s global revenues for 2017.
The Commission held that Qualcomm’s attempts to secure exclusive supply terms with the computer giant was an abuse of its dominant position, with the company illegally paying Apple billions of dollars through price reductions to exclusively use its chips (between 2011 and 2016, Qualcomm controlled 90 percent of the market for long-term evolution baseband chipsets).
Under the terms of the agreement, Qualcomm could cease these payments if Apple launched a device with a chipset supplied by a rival, as well as seek reimbursement for a large proportion of previous payments for most of the time the agreement was in place. In fact, Apple did try to get out of the contract, but held off until the agreement was nearly up because of the punitive costs involved.
Despite knowingly participating in the scheme, the Commission held that Apple did nothing wrong. Vestager says that “the case was all about Qualcomm’s behaviour” and that Apple became trapped in a contract that it could not get out of (though it was paid several billion dollars for the trouble). But several lawyers have questioned the fairness of the ruling, with some suggesting that it appears acceptable for a client to knowingly benefit from an abuse of dominance case, while the supplier is sanctioned.
Vestager, however, says the case is clear. “Qualcomm was the one that set up the deal. Qualcomm was the one that knew, or ought to have known, that this arrangement was an abuse of its dominant position and that it was anticompetitive. Qualcomm was the one that stood to gain more from the scheme. As a result, it is Qualcomm that was punished.”
Lessons for compliance
Given the abusive behaviours some companies have practiced that have led to investigations by the Commission, Vestager believes that compliance functions have a strong role in ensuring that their organisations conduct business fairly, and that compliance professionals retain independence.
“It is not always easy to be a compliance officer, especially in a company that is pursuing an aggressive acquisition strategy, or sales and marketing programme,” she says. “Compliance professionals are often the ones who have to directly challenge management and stop the business from following a course of action that is likely to be considered by a regulator as anti-competitive, or even illegal. That is tough, but the need for good compliance functions has never been greater.”
Vestager adds that it is important that compliance acts more strongly to stamp out poor corporate practice and that the function helps to foster a better way of working and of operating fairly.
“By being tough and being ready to stand up to management, the function helps build up a ‘culture of compliance’ throughout the organisation. It also helps to set a tone about the way the company should do business,” says Vestager.
“A strong compliance function can make it very clear what conduct is deemed to be unacceptable, such as competing unfairly, or asking for state aid. It is also important that compliance alerts employees about what the risks of non-compliance are to the business so that they are aware of what sanctions enforcement agencies may make, as well as what any infringement could cost the company,” she adds.
Vestager’s term as competition commissioner comes to an end in 2019. But her expectation is that the Commission will continue to protect the integrity and fairness of the European single market in much the same way. Companies, and compliance officers, should therefore ensure that they follow the rules—or face the consequences.