Chilean society has had a rough couple of years when it comes to white-collar crimes. Cartels in sensitive markets, like pharmacies and poultry producers; illegal financing of politicians; the frequent use of privileged information in our stock exchange market; grave environmental damages; company frauds affecting mostly our underprivileged population Indeed, our tolerance for these kinds of conducts, which increase Chile's profound social inequalities, has diminished considerably to the point of being currently non-existent.
This political and social scenario has launched the Chilean government to propose to Congress a series of profound reforms: a tax reform, a labor reform, a pension funds reform, an energy law reform, even the drafting of a new Constitution is being discussed Among other matters, the Chilean government has also introduced a bill to Congress aimed at modernizing the Chilean Competition Act ("ChCA").
The ChCA is contained in Decree Law No. 211 and its enactment dates back to 1973. The ChCA was introduced by the Chilean government as a mechanism to foster and protect the newly installed free market economy from anticompetitive conducts which could hinder the development of the Chilean economy which, at that time, was extremely weak. In simple terms, the ChCA was the first serious regulatory effort in order to protect competition in the markets. It was not intended, and could not possibly have been intended, to provide a comprehensive competition regulation.
The ChCA was and is a rather simple and to-the-point regulation. It lacks depth, something which could also be said of the Shearman Act, for example. However and just as it happened with the Sherman Act in the U.S., what the ChCA lacked in depth was compensated by its simplicity and the broadness of its terms which for almost 40 years have allowed for a wide range of interpretations which were provided by the authorities, the courts, law schools and competition practitioners nationwide.
The Chilean competition system was modified and updated a few times before in its lifetime, more precisely in 2003 and 2009.
In a nutshell and from an organic perspective, the Chilean competition system consists of an independent Competition Tribunal composed of three lawyers and two economist and of an independent Economic Prosecutor's Office, with quite large investigate prerogatives aimed at bringing claims before the Competition Tribunal and/or reaching out-of-court settlements approved by the Competition Tribunal. The rulings of the Competition Tribunal may be challenged before the Chilean Supreme Court, our maximum court which is of course not specialized in antitrust matters but it is a tribunal of general jurisdiction.
Procedural wise, the ChCA does not provide for a mandatory but rather a voluntary merger control system and, as of 2009, it establishes leniency programs aimed at detecting and deterring cartels, the fining of which is in any event limited to a maximum amount of approximately US$30 million.
The Proposed Competition Law Reform
In principle, we are of the opinion that a reform to the ChCA is necessary and that the Chilean government has correctly identified the key issues that need either clarity or modernizing as many are stagnant when compared to competition regulation worldwide, particularly when paralleled to the competition regimes of other OECD countries.
Indeed with the main amendments proposed, the new ChCA will provide for (1) a mandatory merger control system; (2) a substantial flexibilization and increase in the applicable fines not only to cartels but to all other anticompetitive conducts; and (3) the criminalization of cartel activities with penalties between five to ten years of effective prison time.
The purpose of this brief is to analyze the convenience of both the flexibilization and increase of the fines, in particular for cartels, on the one side and of the criminalization of cartel activities on the other.
When examining these matters, our starting point is that cartels constitute the most lethal anticompetitive conduct possible. It is the cancer of competition. Cartels do not only affect the relevant market involved but also the abstract notion of competition as a pillar of any free market economy. More importantly: the general public is directly and considerably harmed, especially in cartel cases concerning the price of basic products such as medication or food. Thus, cartel cases must be met with exemplary measures. Companies participating and benefiting from cartel activities must be fined in accordance with the benefit they unlawfully obtain.
Also, our starting point is that the service of effective prison time for those executives participating in cartels is a common tool for deterrence of said activities in several jurisdictions. We also assume that the criminalization of cartels, while possibly convenient, is debatable since in many countries, particularly those with Continental Law traditions, it may not be the best alternative since it may substantially hinder the effectiveness of the competition system itself. Chilean competition law did in fact punish executives who participated in cartel cases with prison time, but such punishment was removed from our legislation almost a decade ago. While it was in force, its track record was hardly memorable. Not a single conviction existed. Not once was criminal liability ever sought.
When the proposed bill is enacted, which is expected to happen in 2016, we will have a brand new ChCA. As it stands we must ask ourselves if adopting measures that exist in other more developed countries than ours assure us that in the end we will have a better, more effective competition system in Chile? These new amendments, which are certainly well-intended, will indeed foster competition in the Chilean markets?
These are the questions that we believe ought to be asked and fairly responded prior to proposing and enacting amendments to the ChCA which, regardless of its generality, has thus far and particularly in the last couple of years worked quite well, a fact that has been internationally recognized.
The Flexibilization and Increase of the Fines For Anticompetitive Conducts
The current ChCA fines any anticompetitive conduct with a maximum of approximately US$ 20 million and, in cartel cases, the fine may be increased to a maximum of approximately US$ 30 million.
The proposed bill currently being discussed in Congress provides, without distinguishing the anticompetitive conduct involved, for maximum fines applicable by the Competition Tribunal amounting to "(…) (the) double (of the) the economic benefit obtained as a result of the conduct or up to 30% of the sales corresponding to the product line and/or service associated with the conduct for the time during which it lasted". Only when neither of these two parameters can be determined, the Competition Tribunal may impose fines up to a maximum amount of US$ 30 million.
As of this date, the Economic Prosecutor's Office has seldom sought the maximum fine for cartel cases and, even when sought, the Chilean Competition Court has rarely ever imposed it. The two cases in which the maximum fines were sought and applied were those involving cartels in the pharmacies and poultry markets.
However, we agree that the existing cap for fines, even if hardly ever used, may pale in comparison to the benefits obtained by the cartelized companies. This much we may perfectly concede. Indeed, US$ 30 million per company involved may be a small sum when the profits accumulated by the companies involved in a cartel were extensive, it may even be a small sum in comparison to the harm caused to other competitors or to the consumers in general. When faced with a cartel case in which a maximum fine of US$ 30 million becomes rather innocuous to the companies involved, one can imagine the public outcry and the feeling of helplessness of consumers.
Now and even whilst all of this may be true, we do not share the popular conspiracy theories involving CEOs and Boards of Directors secretly gathering, calculators in hand, playing the whole thing out, calculating the cartel profits on the one hand and on the other hand estimating the fines and damages to be paid…if caught, or rather if caught and convicted…on the other. Such depictions belong in a John Grisham novel…and its big screen adaption. They do not belong in Congress.
Our competition regulation must be based on objective data, international experience, national idiosyncrasy, recognized economic principles and, above all, the rule of law.
We do not dismiss the possibility of cartels or anticompetitive conducts being intentionally executed. Of course they exist, though it is more likely that they are the result of intricate and sophisticated commercial practices carried out by executives for decades, without any real questioning on their legitimacy, who are also oblivious of competition regulation or to the very least cartel cases will seldom be overt cartel cases anymore but rather the result of complex economic inferences and deductions. Regardless of the more or less sinister origins of current cartel cases or anticompetitive infringements, legislation must be grounded on unbiased objective premises, devoid of prejudice and discrimination. As Aristotle once said "law is reason, free from passion". If the lump sum standard has become obsolete, so be it. Let us replace it. Not because of the ignominious calculator of a fictional executive has one too many zeros on one hand and not on the other, but because we have found better ways in which to measure economic benefits arising from cartels and anticompetitive infringements and the damages inflicted to society.
A revision of the current fine caps provided by the ChCA in order to eliminate the lump sum standard and to introduce a variable ceiling standard is both healthy for the competition system as a whole and a much more pragmatic and proportional way in which to punish infringements to competition law. It is also a common international practice for developed countries to whom we look-up-to in regulatory matters.
That being said, the modification proposed by the Chilean government to the CHCA in relation to the fines is yet to be considered anything more than a diamond in the rough. Some of the problems we have found arising from the current phrasing of the reform are:
i. Neither the economic benefit nor the 30% of the sales, as parameters for the determination of the fine, are limited to the Chilean territory or to a specific timeframe. The first omission may easily lead, and will probably lead, to the imposition of fines for multinational companies convicted for participating in cartels calculated on a worldwide turnover basis. Our understanding is that the Chilean government wishes to emulate E.U. competition law in this matter. If that is the case, just as E.U. competition law does, the reform to the ChCA should introduce a national or a worldwide limit to the fine. We believe this omission may lead to disproportional judicial decisions. The second omission may allow the Competition Tribunal, as per request of the Economic Prosecutor's Office and/or any private party, to impose a fine calculated not on the basis of what could legally be prosecuted in accordance with the statute of limitations under the ChCA, but on the basis of the period of time the cartel or the competition infringement may have lasted regardless of the statute of limitations for prosecuting cases under the ChCA. In Chile, for instance, a cartel that lasted ten years may be prosecuted, under the statute of limitations of the ChCA, up to five years after the cartel has ceased to produce any anticompetitive effects. The reform to the ChCA could possibly allow our competition authorities to prosecute an eventually impose fines to the cartelized companies considering, for the imposition of the penalties, the benefits obtained for the cartel for the whole ten years the cartel lasted. Our opinion is that this omission goes against the legal principle of judicial certainty which is recognized through the statute of limitations. If under due process of law an authority cannot prosecute nor convict crimes or offenses beyond a certain period of time, then said authority should not have any legal grounds to impose fines calculated on time that has been excluded from its own prosecution and judicial powers.
ii. It may very well be argued that very few companies, if any, do currently exist in Chile which may be able, if convicted, to survive the 30% of sales cap if the maximum fine is imposed. Even our largest firms could face bankruptcy if only 30% of the sales of a single year were to be imposed as a fine, let alone those of a period of time substantially larger than that. It is therefore of outmost importance that the justification for the 30% of sales of a company, as a parameter for the amount of the fine to be imposed, is thoroughly analyzed by Chilean Congress and by no means should it be left standing if it is the mere reproduction of an international numerical standard that does not reflect Chilean economic reality. Infringements to competition law, such as cartels, must be punished. Of course. However, one must give some thought to the possibility that the nominal punishment introduced becomes a death sentence. Competition must be protected. Justice must be made. But in our zeal for competition law, let us be weary, as the old saying: "Fiat justitia, et pereat mundus".
iii. Finally, the bill aimed at amending the ChCA, with the explicit purpose of deterring cartels, does however contemplate just one "fine system" regardless of the anticompetitive conduct detected, prosecuted and punished. Is it justified that cartels may possibly be fined, or at least subject to the same set of fines, as other, clearly less grave anticompetitive conducts such as abuse of a dominant position, unfair competition and/or mere formal infringements of the ChCA, like failure or delay in filing a merger transactions? We all know that, at times, competition law can be quite "obscure", i.e., that in several occasions it is extremely difficult to determine, even for experts, whether a conduct may or not be anticompetitive in itself or at least have anticompetitive effects. Thus, should the law not be reasonable in and by itself rather than rely on the more or less reasonable application given to it by the competition authorities? Can a strict law hinder competition by deterring new, legitimate economic/commercial activities in the markets due to the fear of punishment?
The Criminalization of Cartel Activities
Criminal penalties for cartel cases are being introduced in our competition system once again. Almost a decade ago, prison time as punishment for cartel cases existed in our country and it was probably the one tool our competition authorities never used.
Philosophically, the only reason why the rule of law should determine that a citizen be punished with the deprivation of his/her freedom is because society as a whole believes the value or principle that has been wronged through the conduct of the person is of such quality as to render the trespasser unfit to continue to live in society, and to the extent that the punishment thus established prevents or deters other citizens from executing the same prohibited conduct.
However and as Beccaria once said, punishment must be proportionate to the crime and should not be retributive in nature. Of course, current politics hardly analyzes such philosophical requirements when public outcry is knocking at the door and yet, as lawyers, it is or should at least be our duty not to be serfdom to the views and opinions which may be popular at any given time, because part of our duty is to uphold the law and what the law stands for.
Hence, we will provide a few basic arguments as to why we believe reinstatement of criminalization in our country, at least in its current drafting , may be considered a mistake:
i. As competition lawyers we are aware that in many jurisdictions worldwide people participating in cartels are in fact punished, at least in theory, with prison time. However, we are also aware that in such jurisdictions the maximum prison time established by law, as with any other crime, is usually only used to leverage some sort of agreement between the prosecutor and the criminal in exchange for his cooperation aimed at the ultimate success of the competition investigation and prosecution. Real, effective criminal penalties are hardly ever imposed. Rather, after their cooperation, a two to three year prison time convictions is usually agreed upon by all parties involved, then suspended and replaced for an alternative measure such as community service. Even in cases where actual prison time has existed, criminalization in these countries mostly obeys to a series of historical reasons together with a powerful statistic for deterrence of cartels which is largely assumed to be caused by the threat of prison time. However, in assessing the length and might of a punishment one cannot simply argue from the point of view that any given number of years is equal to a higher or lesser degree of deterrence. Indeed if we were to do so: why stop at ten years of real, effective prison time, as the bill aimed at amending the ChCA does? Perhaps a ten year sentence does not deter some executives from orchestrating and carrying out a cartel or, possibly, their secretive calculations have resulted in enough zeros to the right as to cover the costs of a ten year sentence. Why not then impose a thirty or a hundred year sentence? Why not a death sentence? Surely dying is, or at least should be, a great deterrence for anybody to do anything. The argument a fortiori is no more than a fallacy, of course, but it carries a truth with it: first, deterrence in and by itself is not exclusively explained through a particular set of years in prison and, secondly, deterrence alone is not the only argument in which we must base our analysis when determining if criminalization of cartels is appropriate for our country or not. One must also bear in mind that there is another type of punishment already included within the reform, which is a prohibition to occupy any managerial position in state-owned and public companies for a five year period. This means the executive involved in a cartel, for at least five years, will be severed from the market even if he is not in jail.It seems that before even proposing any number of years in prison, particularly when the penalty proposed for participating in a cartel is not at all equivalent compared to the penalties imposed to other grave crimes in Chile, we must first and foremost analyze if prison time is indeed a proportional and reasonable additional punishment to cartel cases. Chilean society has not made this assessment other than through the media and its biased and often populist comments, and by comparing our national competition regulation with that of other, more modern jurisdictions. It is rarely considered, when analyzing whether or not to criminalize cartels, that if participation in cartels is to be considered a crime (i) said crime is usually committed by a low or mid-level executive; (ii) that said executive has strong economic incentives to achieve yearly turnover goals which he does not control they are given to him by his superiors; (iii) that said executive faces unscrupulous competition both within his own company and outside of it;(iv) that said executive has likely inherited a given commercial practice with sophisticated tools, software and tactics; and (v) that said executive usually does not receive the benefits of the cartel. Given all of the above, does the executive deserves a five to ten year real, effective prison sentence? Perhaps we find that he deserves it. Perhaps not. Chile is just now asking itself these questions once again. We know for a fact that, for almost thirty years, prison time was available and was never sought. That fact must be taken into consideration. Indeed, does the imprisonment of the executives deter companies from participating in cartels in the future? Is the imprisonment of the executives proportional to the harmed caused to society? Or perhaps the low or mid-level executive is not the party we should be worrying about? Because in the end, who is the victim of cartels? Other companies who were not a part of the cartel or that were wronged by its existence? Consumers of the relevant market? Society at large? Other companies will usually be able to seek compensation, if there were damages, after the cartel has been proven to exist; consumers through private and public associations have also been given class actions in order to seek compensation from the cartelized companies; and in those cases were circumstances are such that mere monetary compensations are not enough, we must ask ourselves: are we trying to compensate the public through the prison time to be served by executives or are we trying to prevent cartels from happening? One must remember that in accordance with the basic principles of the rule of law, punishment is not a retributive measure and therefore if we are calculating the years the executives deserve to be imprisoned in order to pay for their crimes, we may veru likely be abusing the State's monopoly in the use of force rather than making sound public policy rather than .
ii. We believe that the introduction of criminal prosecution of cartel cases in Chile will not suffice and, in turn, may even be counterproductive in the effective combat of cartels in our markets. Like many jurisdictions worldwide, our legal system provides for a strict separation between the Economic Prosecutor and the Criminal Prosecutor; between the Competition Tribunal and the many criminal courts; between the "softer" competition standard of proof required for demonstrating the existence of a cartel and the criminal standard of proof required to demonstrate "beyond a reasonable doubt" that a person committed a crime. In order to introduce criminalization in Chile, we must first decide whether it will be the Economic Prosecutor or the Criminal Prosecutor the authority in charge of criminally prosecuting cartel cases. Who will have the final decision? On the one hand, the Economic Prosecutor is more likely to understand the core of the crime, the people, the dynamics, the mechanisms and the economic principles involved; but, on the other hand, the Criminal Prosecutor will understand the level of information required in order to prove the motive, intent, opportunity and execution of the crime. The bill introduced by the Chilean government to amend the ChCA is opting for the first alternative, but the Criminal Prosecutor is already publicly advocating for his right to have the monopoly in the filing of criminal complaints for cartels. How shall we prove cartel cases? On the one hand, we have the standard of proof used by the Competition Tribunal which accepts indirect factual and economic evidence as sufficient to demonstrate that a cartel was in place; on the other hand, we have the standard of proof of the criminal courts which require proof beyond a reasonable doubt to convict a person. If we normally had enough evidence in order to prove beyond a reasonable doubt that a cartel existed, we would not need leniency programs. That is why cartel cases are usually proven through indirect factual and economic evidence in the first place, because direct evidence does not exist. There are hardly any overt cartel cases anymore and concordantly covert cartel casis are mostly proven to exist by indirect economic evidence and plus factors. Consequently, which standard of proof shall we use? Can we even choose? Is it not a fundamental legal principle that criminal liability can only be attributed if and only if a crime has been proven beyond a reasonable doubt? After all, the life of a person is on the line. Does indirect factual and economic proof of a cartel justify prison time? What will happen if the Competition Tribunal finds that several companies did in fact participate in a cartel, the case then goes to a criminal court to pass judgment on the individual executives and the criminal court finds that they are innocent? What happens if the judgment of the criminal court absolving the executives is rendered even prior to the judgment of the Competition Tribunal? Evidence in one court may be sufficient to convict, but it may not be sufficient in the other court. Do we want that sort of judicial contradiction? Given all of the above, we ask ourselves does prison time for cartel cases do anything to prevent or deter cartels if the punishment established cannot reasonably be imposed or, at the very minimum, gives rise to potential contradictory judgments? Indeed, we believe that the deterrence for a crime does not lay on the severity of the punishment but in the inexorability of it.
iii. As it stands today without criminalization, companies participating in a cartel may engage in leniency programs and through them cooperate with the competition authorities, which also includes the collaboration of the very executives that participated in the cartel. A simple hommo economicus argument is sufficient to realize that introducing criminalization will affect the incentives of a company and, more importantly, the incentives of its executives to engage in leniency programs if they now face prison time. It is the prisoner's dilemma in action. However, in the prisoner's dilemma introduced by the reform there is an absolute exemption from prison time if one is the first to come forward and then no benefits at all will be granted for anybody else. So what this will do, basically, is that once there is a first whistleblower, cooperation will not be an option for all others involved, because they are facing five to ten years of prison no matter what they do. Thus, why cooperate with justice at all? For us, it is quite clear that even if Chilean society should decide to punish participation in cartels with prison time, the manner in which this punishment is being regulated will not help competition law neither to prevent cartel cases nor by improving cooperation to dismantle them. We understand both the need for modernization and the need for an appropriate punishment of anticompetitive infringements. However, when analyzing punishment and its appropriateness a society must first analyze the reasonableness and proportionality of the punishment in light of the crime. The appropriateness of punishment is not an average of the prison time established in jurisdictions worldwide; neither the solace of the masses when they feel wronged, that would be nothing short of public lynching. A society does not make public policy through time served in prison.
We are fully aware that all of our arguments are debatable. Nonetheless, we believe that this is just the point when passing a new act, especially a law as important as the one aimed at reshaping our competition system. We should all be given the chance to argue and to determine what is best for our country.
The following are some of our conclusion from the analysis of the subjects we have just made:
1. The ChCA is certainly due for an update and most of the subjects that need to be addressed are included in the reform which has been proposed by the Chilean government;
2. Even though we believe a review of the current lump sum cap for competition fines is appropriate, the current phrasing of the bill in relation to the maximum applicable fines will undoubtedly cause disproportionate judicial decisions, it may also contradict the very nature of the statute of limitations as a legal principle and it may cause the bankruptcy of some Chilean companies;
3. The reinstatement of criminal penalties for participating in cartel cases does not in itself ensure effective deterrence of said anticompetitive conduct. Quite to the contrary, it may even defeat the purpose of preventing the formation of cartels or detecting them and then punishing cartels as soon as possible. Furthermore, criminal penalty should be proportionate to the crime and a thorough analysis of the crime, the criminal and the victim is needed before establishing any range of time to serve in prison.
4. Does Chilean society regard cartel participation as a crime which must be prevented and punished through prison time, and if so if that time a real, effective five to ten years in prison? Do we understand the nature of cartel cases enough in order to make this decision? How will the competition and criminal institutions and their statutory frameworks co-exist? How do we balance the different standards of proof needed for one and the other?
We strongly believe that there is much room for improvement to the current text of the bill aimed at amending the Chilean competition system. For, as it stands, we foresee complications which may bring about unwanted consequences, not only for the ordinary development of commerce and industry nationwide but for the very enforceability of what is to be the future ChCA.