Policing the firm.

• Author: Sokol, D. Daniel
• Position: Improving antitrust enforcement through changing internal firm compliance incentives - Abstract through I. The Cost of Cartels E. Culture of Corruption 3. Morality: Firm and Society-Based Stigma for Participation in Cartels, p. 785-816

ABSTRACT

Criminal price fixing cartels are a serious problem for consumers. Cartels are hard both to find and punish. Research into other kinds of corporate wrongdoing suggests that enforcers should pay increased attention to incentives within the firm to deter wrongdoing. Thus far, antitrust scholarship and policy have ignored this insight in the cartel context. This Article suggests how to improve antitrust enforcement by focusing enforcement efforts on changing the incentives of internal firm compliance.

INTRODUCTION

In 2006, details began to emerge about a massive, decade-long, worldwide price fixing conspiracy involving air cargo. Seasoned international travelers will recognize members of the conspiracy, which included some of the best-known airlines in the world--Air France-KLM, Alitalia, American Airlines, British Airways, Cathay Pacific Airways, Delta (via its acquisition of Northwest Airlines), Lufthansa, LAN, El Al, Emirates Airlines, Singapore Airlines, Air India, All Nippon Airways, South African Airways, and Thai Airlines. (1) The extraordinary dollar amount of this worldwide price fixing cartel (over $4 billion recovered so far) (2) has made the air cargo cartel the largest cartel in terms of damages collected.

The number and sophistication of the companies and individuals involved in this collusive criminal activity (3) and lack of detection by internal gatekeepers such as in-house counsel and compliance officers illustrate inadequate corporate governance on a massive scale. Employees of a given airline would send emails and phone their counterparts across airlines to ensure that price changes, based on an agreed upon fuel surcharge index, would be followed by all of the cartel members. These employees would report up to their superiors that all the cartel members would increase the surcharge. Put differently, there were price conversations between competitors and some bonding and monitoring mechanisms thereafter to enforce the cartel. (4)

With all of the compliance enforcement methods used by antitrust agencies (imprisonment, individual and corporate fines, and leniency), the number of antitrust agencies around the world spending resources to uncover cartels, and layers of compliance programs within a given company, it may be surprising that so many large and sophisticated companies avoided detection for ten years. The cartel's duration and composition is even more shocking given significant corporate governance focus on improving compliance.

Corporate scandals of the past decade have inspired burgeoning academic literature on corporate governance and wrongdoing. However, the explosion of scholarship on corporate governance and compliance, (5) as well as a similar increase in scholarship on white collar crime and corporate criminality, (6) has for the most part neglected antitrust.

Cartels are a sophisticated form of corporate crime because they, like other conspiracies, inherently require coordination across multiple firms, as the air cargo cartel example illustrates. (7) That the air cargo cartel was not detected (8) across its participant firms either internally or through third parties (customers and outside gatekeepers such as law and accounting firms) suggests current antitrust criminal and civil penalties are not sufficient to deter wrongdoing, nor is the probability of detection sufficiently high.

Two major trends suggest that antitrust cartel enforcement is different relative to other areas of corporate crime. First, in white collar crime overall, there has been a shift toward more significant structural penalties. Brandon Garrett named this phenomenon "structural reform prosecution," a process in which prosecutors secure the cooperation of a business to adopt internal reforms. (9) Similarly, Vik Khanna and Timothy Dickinson have focused on the use of corporate monitors (embedded outside oversight personnel) to increase firm compliance. (10) However, the systematic use of structural reform prosecution and monitors has been underutilized in the antitrust criminal context, even when a corporate monitor has been imposed on a firm that has committed other crimes, for example in the Foreign Corrupt Practices Act (FCPA) context, as well as antitrust violations.

The lack of systematic structural reform through monitors for antitrust criminal price fixing seems surprising. One might suspect that the type of penalties imposed upon a firm would be more severe for criminal antitrust than civil antitrust. Indeed, in 2004 the Supreme Court called cartels "the supreme evil of antitrust." (11) Yet, it is generally civil rather than criminal antitrust that imposes corporate monitors and compliance officers.

Second, the corporate and white collar crime literature offers important governance lessons on the interaction of various internal firm stakeholders--corporate boards, shareholders, senior and midlevel management. (12) Yet, antitrust scholarship on cartels generally has not recognized these insights. (13) Instead, antitrust scholarship generally continues to see the firm as a "black box." (14)

The present Article uses insights from economics, finance, accounting, and management literatures to bridge gaps in antitrust legal scholarship and offers a novel two-part proposal designed to reduce cartel formation and increase detection of existing cartels. The proposal provides incentives for firms to increase their compliance.

The first proposal is to provide increased carrots for applicants under the "leniency program" (no penalties from the Department of Justice Antitrust Division (DOJ Antitrust)) (15) as a "super leniency" for the cartel member that exposes the cartel and cooperates with DOJ Antitrust (no penalties from DOJ Antitrust and no damages in private litigation). The second proposal involves increased sticks--the automatic imposition of corporate monitors for all cartel members other than the leniency applicant. To make the case for the combination of corporate monitors and antitrust's use of leniency for cartels, this Article explains: (a) what is currently done to punish cartels and why this is not as effective as it needs to be, (b) how monitors work in other contexts, and (c) how monitors and leniency would function to deter and detect cartel activity in a criminal antitrust setting.

Properly designed, such a proposal would shift detection of wrongdoing from government enforcers to firms and encourage firms to spend more of their internal resources through more responsive regulation. (16) This would increase incentives for firms to self-report illegal behavior. (17) In those cases where cartels do form, the proposal would help to reduce the corrupt culture both within each firm and within the entire industry that might otherwise give rise to future cartel violations.

The remainder of the Article proceeds as follows. Part I provides an overview of cartel policy and the limits of its current enforcement system. Part II discusses super leniency as an alternative to traditional leniency. It also explores the lack of corporate monitors in antitrust and asks why antitrust remedies do not resemble remedies in other areas of corporate crime, with the routine imposition of monitors, such as the FCPA.

Part III discusses the current use of monitors in civil antitrust enforcement and how monitors might be used in criminal antitrust enforcement. This Part argues that super leniency and monitors would improve deterrence and increase the incentive to defect from existing cartels.

Given the use of monitors to change behavior in other antitrust settings to protect consumers and promote compliance, this Article argues that the most likely reason that criminal antitrust has not embraced the use of monitors is the fear by DOJ Antitrust that somehow tinkering with the leniency program will weaken the program. The path dependency of the current DOJ Antitrust approach leads to the use of ossified enforcement tools and techniques out of touch with mechanisms elsewhere in white collar practice that make enforcement more effective. The Article concludes that super leniency and monitors would move antitrust closer to optimal cartel enforcement as compliance will become a strategic variable for firms.

1. THE COST OF CARTELS

Cartel activity is a significant and unambiguous loss to society, which is why it receives per se illegal treatment (or something similar) in most of the world. From 2000 to 2010, the fines imposed against cartels by government actions totaled $31 billion in the European Union and $12 billion in the United States. (18) Private actions against cartels during this period (mostly in the United States) amounted to an additional $41 billion. (19)

These figures do not offer context of how high the overcharge (the amount charged above the competitive price) was for cartel victims. For U.S. cartels, overcharges averaged between 18% and 37%. (20) For European cartels, the range was between 28% and 54%. (21) This overcharge rate is under-inclusive globally as cartel members have the ability to continue to reap supra-competitive profits in third-world country markets that lack effective cartel enforcement. In these other countries, many of which are in the developing world, cartel members often offset their fines from jurisdictions that impose them via higher overcharges to their victims. (22)

Even with large fines for illegal activity, there is a significant problem of cartel detection, which suggests under-deterrence. Scholars have estimated the U.S. cartel...