Editorial: Why corporate cheats need threat of jail

Commerce Minister Simon Power said that anti-competitive behaviour causes 'significant harm by reducing economic output.' Photo / Mark Mitchell

Opinion

Corporate criminal liability is becoming increasingly common as society demands executives bear personal responsibility for transgressions. Offences such as insider trading that formerly attracted financial penalties can now lead to prison sentences. Soon to join that list should be cartels involved in activities like price-fixing, bid rigging and customer allocation. A new Ministry of Economic Development discussion paper recommends the criminalisation of such anti-competitive behaviour, with jail sentences of up to seven years.

The motive for this upping of the ante is market efficiency. As Commerce Minister Simon Power noted, "such activities cause significant harm by reducing economic output, undermining trust in markets, slowing productivity growth, and distorting investment signals by making cartels appear more profitable than they would be in an undistorted market". At the moment, the maximum civil sanction for individuals for such activity is $500,000. The maximum penalties for businesses is $10 million, or three times the value of any commercial gain resulting from their breach. For many large-scale cartels, that may constitute a risk worth taking, particularly given the difficulty of detecting what may be informal arrangements.

The possibility of imprisonment would introduce a significant deterrent. American anti-trust law has recognised this for a long time. Criminalisation has been promoted by the Organisation for Economic Co-operation and Development since 1998 for the same reason. Many countries comparable to New Zealand have responded. Last year, Australia acted, six years after the step was first recommended by the Dawson Committee report to Canberra and two years after record penalties were imposed on Richard Pratt's Visy for price-fixing.

The delay in Australia is indicative not only of corporate opposition but of the downsides of criminalisation. Criminal prosecutions require a higher standard of proof. Establishing proof beyond reasonable doubt - not simply establishing something to be proven on the balance of probabilities, as in civil cases - may make obtaining a conviction more difficult. It also demands a more costly investigation. Equally, most cartel prosecutions are extremely complex. Some juries will, inevitably, find themselves out of their depth.

Such arguments, however, are not strong enough to deprive the Commerce Commission of a new weapon to fight cartels. Given that most New Zealand corporates have transtasman operations, it would make sense, in terms of reducing costs, to harmonise the criminalisation law with that of Australia. Its legislation provides for a maximum 10 years in prison. The ministry paper suggests a lesser term, based on the New Zealand punishment for other corporate misdeeds. But that points only to the relative leniency of local penalties. This should not be an obstacle to harmonisation.

New Zealand last toughened its penalties for cartel conduct in 2001. The Commerce Commission has taken successful action, notably against companies involved in wood preservative chemicals. But the ministry discussion paper notes that Australia's competition watchdog has reported an increase in leniency applications since cartel conduct was criminalised. "As Australia's cartel penalties were similar to ours prior to criminalisation, this tends to suggest our penalties may not be optimal." That, in turn, suggests consumers are paying inflated prices. The threat of imprisonment just might make executives think twice about trying to cheat.