To break a cartel: Change the whistleblower incentive

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Canada's competition watchdog could bolster its weak track record on prosecuting cartels by offering greater incentives to be the first participant to blow the whistle on the others in the group, a new report recommends.

The C.D. Howe Institute Competition Policy Council – a committee of competition lawyers and policy experts – says the federal Competition Bureau has had high-profile success with cases involving international cartels that come to light following prosecution efforts abroad, including the recent high-profile Libor case. But the bureau has had far less success uncovering evidence on domestic cartel cases.

The difference, the committee concludes in a report released Tuesday, lies in Canada's incentive system.

Cartels are notoriously difficult to detect and prosecute because participants normally have little incentive to expose their existence, and regulators have difficulty proving there is an explicit agreement among the parties to collude on pricing, market access, production levels or other factors.

The C.D. Howe report, however, says regulators should do more to exploit the biggest weakness in any cartel: instability. Cartels often break down as members grow unhappy with the arrangements and want to find ways to undercut rivals or gain market share. That instability is aggravated when cartel members grow worried about the possibility of detection and prosecution, concluding the risk-benefit calculation is increasingly unappealing.

Under current rules in Canada, the Competition Bureau will grant immunity to the first company that comes forward to the bureau with information about a cartel. The bureau says the program has been the "single most powerful means of detecting criminal activity."

The problem, however, is that there are also further stages of leniency – although not outright immunity – for the second, third and subsequent companies that admit to participation. The second participant to come forward, for example, is eligible for a 50-per-cent reduction in penalties, while the third can have a 30-per-cent reduction, and so on. With jail terms up to 14 years and maximum fines of $25-million available under the Competition Act, the benefits of self-reporting could be significant.

The C.D. Howe committee says the leniency program makes it much less attractive to be the first one to report, however, because firms know that if the cartel ever comes to light, they can jump in quickly and win significant reductions in fines anyway. The result is that many firms calculate they might as well take their chances that nothing will ever come to light, and then go second if it becomes necessary. In other words, the leniency program "may be blunting" the immunity program.

"Each cartel member might sensibly wait until others report, which, if all reason similarly, may create a situation where no member comes forward," the report says.

The committee also recommends that the Competition Bureau devote more resources to domestic cartel investigations so companies have a greater fear of possible detection.

"The greater the probability that the bureau will uncover the existence of a cartel without it being reported by a conspirator, the more attractive will be the carrot, reduced punishment, to a cartel member contemplating self-reporting."

The report makes no recommendations on one of the biggest disincentives to self-reporting, however, which is the emergence of class-action lawsuits against firms accused of collusion. The potential damages from legal action could be far greater than fines paid to the Competition Bureau, but the committee said it has reached "no consensus on the appropriate path forward on this emerging issue."