Policing the firm.

Author:Sokol, D. Daniel
Position:Improving antitrust enforcement through changing internal firm compliance incentives - I. The Cost of Cartels E. Culture of Corruption 4. Industry-Level Factors through Conclusion, with footnotes, p. 816-848
  1. Industry-Level Factors

    The industry in which a firm operates may affect outcomes. There are factors exogenous to a particular firm that also may affect its predisposition to criminal behavior. Industry structure and poor industry performance may indicate criminality. (165) Similarly, firms in some industries are more prone to criminality than others based on industry culture. (166)

    Specific to antitrust compliance, antitrust scholarship provides a sense of the types of industry factors on which cartel stability seems to depend for its operation. (167) For example, industry or product cycle, competition within the sector, and cultural factors as to the nature and stability of the cartel influence the effectiveness of leniency. (168) Industry features such as high concentration, entry barriers, relatively inelastic demand, homogeneous products, and greater demand shocks affect the decisions of firms within an industry to participate in a cartel. These industry factors are important for enforcement because cartel stability mitigates the effectiveness of leniency. (169)

    Industry growth impacts internal compliance. Where there is rapid growth in an industry, it may be that internal controls may not yet be strong enough to prevent wrongdoing. (170) Accordingly, such industries may be more prone to cartel behavior because formal and informal monitoring mechanisms are not in place. (171) The monitoring mechanisms within the firm also impact the ability of a firm to create a distinct culture relative to that of other firms in the same industry. (172)


    1. Compliance Programs and the Creation of Super Leniency

      To encourage cartel detection, DOJ Antitrust provides leniency for corporations and individuals. (173) The leniency program allows for firms to self-report their cartel activity in return for zero government penalties. In the United States, leniency creates a prisoner's dilemma to encourage defection--the firm that is the leniency applicant receives amnesty from criminal prosecution and a reduction from treble to single damages if it fully cooperates. Other firms involved in the cartel may receive lower financial penalties if they provide additional information to DOJ Antitrust that results in detection of other cartels, under a program known as Amnesty Plus. The possibility that firms might defect from a cartel and inform on its cartel members destabilizes many existing cartels and deters other cartels from being formed. (174) DOJ Antitrust now detects most cartels as a result of the leniency program. (175)

      Yet, the leniency program has certain limits. In particular, the leniency program does not reward the adoption of a rigorous compliance program (other than being the first to self-report). (176) Indeed, the leniency program utilizes a strict liability regime for wrongdoing. This is a departure from other areas of corporate crime where a compliance program allows for a penalty reduction under the Federal Sentencing Guidelines and programs are taken into account in enforcers' decisions on how to proceed against the company. (177) The motivation behind penalty mitigation and taking programs into account is to encourage companies to proactively set up compliance programs to minimize wrongdoing and build an infrastructure of good governance.

      Informally and at various practitioner conferences (such as those organized by the American Bar Association Section of Antitrust Law), DOJ Antitrust officials have stated that the proper application of the Guidelines almost always results in no credit being given for a compliance program in the sentencing calculations in an antitrust case because these violations are almost always participated in, condoned by, or occur with the willful ignorance of, high-level or substantial authority personnel. Under the Sentencing Guidelines, the three point credit for compliance programs simply does not apply (or, in the case of substantial authority personnel, there is a rebuttable presumption against credit) in such cases. Hypothetically, where the offense occurs without high-level involvement, DOJ Antitrust might give credit for a compliance program. (178) However, in its public discourse, some DOJ Antitrust officials have mentioned an antitrust carve out from Sentencing Guideline Section 8C2.5(f) regarding compliance mitigation. (179)

      The law on the books provides no such carve-out. (180) DOJ Antitrust has tended to conflate the Guidelines penalty analysis with the Department of Justice's approach to prosecutorial discretion, although the two are distinct. The Department, in all cases except antitrust, does take programs into account with no automatic carve-outs that are based on the fact that individual employees committing a violation may have had authority and discretion. (181) The rest of the Department of Justice will consider compliance programs in the various stages of dealing with corporations; DOJ Antitrust appears to avoid programs at all stages of the process.

      Leniency alone is not sufficient to deter all cartels given current detection rates. Those cartels that can adapt to leniency through better cartel management may avoid detection. (182) Leniency programs may have resulted in less inclusive cartels because having too many members increases the possibility of detection, at least among those cartels that have been detected. While a more inclusive cartel means higher cartel profits, each additional member is one more firm who could apply for leniency. (183) As a result of this higher cost of cartel participation, cartels have become more effective in the concealment of their activity. (184)

      What current antitrust cartel policy lacks are positive incentives to create robust and effective compliance programs to improve cartel detection. This Article proposes that the leniency applicant firm receive no government sanction and no private damages in return for full cooperation if the applicant can show that it had an effective compliance program in place (as determined via the creation of antitrust compliance guidelines) that detected the cartel conduct. The current system creates criminal immunity and removes treble damages for the leniency applicant. The proposed approach would destabilize cartels through an increased threat of defection because the leniency applicant could keep its illegal gains. Moreover, it would create incentives for firms to spend additional resources ex ante on antitrust compliance because the amount spent on additional effective compliance would be less than the cost of detection. This would create better incentives for detection.

      A robust compliance program could work with the existing leniency program. The better the compliance program, the greater the incentive for a firm to defect from the cartel through leniency (assuming that the legal regime creates sufficient rewards for good compliance).

      Early detection allows a firm to reap the benefits of an effective compliance program. (185) Motivating a penalty reduction is that one firm within the cartel will have better compliance results than the others. The penalty reduction encourages incentives for the weakest link to defect from a cartel. A better set of proactive incentives (assuming that a company meets the Sentencing Guidelines steps for effective compliance) will create enough encouragement for at least one firm within the cartel to invest in proactive compliance against potential wrongdoing.

      Under current practice, in following the Sentencing Guidelines, a company paradoxically increases its likelihood of sanctioning by the government. By ignoring the Guidelines and providing cosmetic compliance, a company increases the potential payoff from illegal activity (by keeping both its compliance costs and risk of detection low), while increasing the benefit from its illegal behavior. (186)

      With the proposal for super leniency, addressing what constitutes effective compliance becomes paramount. (187) It is difficult to determine what constitutes a "good" compliance program ex ante. Yet, what may make antitrust different from other areas of white collar crime may lie in the mechanics of price fixing. It may be easier for an outsider to monitor for criminal cartel-threatening activity than to monitor for, say, foreign corrupt practices. In many cases, criminal antitrust violations are relatively straightforward doctrinally and conceptually, and the criminal action is undertaken by relatively high level executives. One example is the price index and direct communications between the conspirators in the air cargo cartel. Another typical antitrust case is the well-known lysine cartel of the 1990s that resulted in a bestselling book and a movie starring Matt Damon in which executives from the lysine industry met in hotels to discuss price fixing. (188)

      This Article's policy proposal can be contrasted with other recent policy suggestions. Spagnolo and his co-authors have pushed for a lottery for the leniency applicant, in which the leniency applicant would be awarded all of the fines of the other cartel members. (189)

      In a real world setting, there are dangers to effective cartel policy from too much leniency, such as the cartel lottery. One danger is that the bounty awarded from the fines paid by other cartel members gives the firm receiving the bounty a competitive advantage such that other firms may exit the market, thereby creating potential antitrust problems of monopolization. In addition, it may be difficult to sell the bounty system to the public at large. In this case, a member of a criminal conspiracy that hurts consumers goes without significant punishment and in fact is rewarded with a bounty. This can give rise to backlash against any penalty reduction to cartel enforcement. (190)

      Antitrust authorities that promoted a competition culture to society might get pushback from a populace that wants to see firms receive punishment for wrongdoing rather...

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