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Economic Crime: Antitrust Offenses - The Role Of Criminal Sanction

enforcement cartel policy leniency

When considering the proper role for criminal enforcement of antitrust policy, it matters that the antitrust field generally has been riven by normative controversy. Litigants have brought cases about business practices faster than economists have developed theories to comprehend the true nature of those practices. Some practices that initially seemed suspiciously anticompetitive have turned out in reality to have neutral or pro-consumer effects. Violating the antitrust laws, then, is not like robbing a bank. Everyone agrees that bank robbery is morally wrong and socially harmful. Over time, however, antitrust law has learned not to be nearly so sure of itself. Facing this complex and evolving understanding, one fairly can question exactly what role—if any—the mighty force of criminal law should play.

Criminal enforcement of antitrust law has been controversial on grounds of both efficiency and fairness. Beginning with the efficiency perspective, there was past concern that excessive enforcement would deter efficient business conduct, but the government's prosecutorial restraint towards the end of the 20th century largely has removed this debate from the criminal sphere. A different issue addresses the proper relationship of criminal to civil enforcement. Some utilitarians favor prison over civil liability as a superior deterrent (Baker and Reeves; Werden and Simon; Blair; Dau-Schmidt). Other utilitarians, however, recommend using civil sanctions to the maximum possible extent before turning to criminal penalties. Posner (1980), Polinsky and Shavell, Shavell (1985, 1987), and Kaplow and Shavell (1994, 1999) develop this literature, which originates in the eighteenth-century work of Jeremy Bentham. The core idea is that the civil process and civil fines are both cheaper than, and thus preferable to, criminal litigation and incarceration—so long as the civil process adequately deters the proscribed conduct. These influential utilitarians then emphasize the muscular power of the treble damage deterrent as well as the calculating character and financial motivation of business conduct, and wonder why there is any need for criminal antitrust enforcement at all.

Yet a central problem for competition policy is to discover and to gather evidence against cartelists at work. This task is hard because this evidence is so elusive. Cartelists have perhaps more management training and corporate resources than any other sort of villain. Before the 1990s, it appears many cartels escaped detection. During that decade, however, some proved newly vulnerable to credible governmental threats of prison, to the promise of leniency for the first to cooperate with the government, and to special powers that criminal investigators wield. This policy combination created incentives for cartel defection that led to impressive government successes.

One important incentive dates from August 1993, when the Antitrust Division changed its corporate leniency program to marked effect. The old policy was that leniency was always discretionary and never automatic, and was never available once an investigation was underway. The new policy made amnesty automatic if there was no existing investigation, and made amnesty possible even after an investigation had been started. The new policy also promised amnesty from criminal prosecution to all corporate officials who cooperated with the government. Division officials reported striking results. During 1999, they received about two leniency applications per month—more than a twenty-fold increase over the old application rate. (Spratling 1999).

As Figure 1 illustrates, in the late 1990s the government reported a spectacular increase in criminal fines from corporations convicted of criminal antitrust charges. Time will tell whether this increase will prove an isolated spike or will achieve a new and stable future plateau. One source stated that, "[a]necdotally, U.S. antitrust authorities report [in 1999] that those cartels prosecuted over the past several years represent just the tip of the iceberg" (ICPAC, p. 168). Government Figure 1 SOURCE: U.S. Department of Justice, Antitrust Division, Workload Statistics. enforcers say their leniency policy has been important to the detection and prosecution of conspiracies that otherwise would have remained hidden (ICPAC, pp. 172–174, 177–180; Klein (1997, 1999); Spratling (1998, 2000)).

Three aspects of these cartel prosecutions in the 1990s are notable. First, not all of the successful cartel prosecutions of the late 1990s originated with this corporate leniency policy change. A highly-publicized prosecution of a cartel in the lysine industry began with information that predated this policy change, as Eichenwald (pp. 48–53, 536–538) and the Andreas decision (p. 655) report. It was a bizarre and lucky break and not a change in enforcement policy that triggered at least one major Antitrust Division success in the late 1990s.

Second, the cartel investigations of the 1990s improved our understanding of the world. These investigations painted a new and remarkable picture of illegal activity that previously had been extremely difficult even to detect, let alone to study. The picture included, for instance, undercover recordings of secret cartel meetings at which the cartelists joked about being watched by the F.B.I., while the F.B.I. in fact was watching—and videotaping (Eichenwald pp. 265–266; see also Barboza, Connor (1997, 2001a, 2001b); Griffin; ICPAC, pp. 171–176; Lieber; White). This new information revealed that, according to cartelists' own words and actions, the cartel threat is a very serious one, arising in large and diverse international markets. Economists long have debated the seriousness of the cartel threat. Centuries ago Adam Smith in his Wealth of Nations (p. 135–136) wrote that "[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Later and more skeptical economists tempered Smith's view, however, by noting that cartels face a persistent cheating incentive that can make large and effective cartels difficult to organize and maintain. Another source of skepticism was that expressed by respected authority William Baxter in 1995: "The larger companies are well-counseled and don't get into the kind of trouble that the antitrust division is looking for." (Labaton 1995). The prosecutions of the late 1990s showed that Figure 2 SOURCE: U.S. Department of Justice Antitrust Division, Workload Statistics. cartel attempts were more common and more dangerous than skeptics had suspected. Civil enforcement alone had failed to detect the magnitude of the cartel threat from larger companies. We still remain unsure, however, of whether more cartels or an improved detection rate propelled the fine increase of the 1990s.

Third, using a criminal leniency policy to create the incentive for cartelists to break ranks seems appealingly efficient and comparatively cheap. The total number of cases and the average sentences are relatively small. Given that some cartels targeted worldwide markets for important commodities, it apparently required only rather small expenditures on criminal remedies to create a sentencing threat of superior effectiveness.

Figure 2, which shows average sentences and the number of people incarcerated, is consistent with this picture. For decades, the average number of convicts and their average sentences have remained noticeably modest: annually, for the entire country U.S. courts sentence only about 20 antitrust violators to an average sentence of less than a year each. Average sentence duration has steadily increased since 1970 but has remained relatively short, while the average number of defendants incarcerated annually has remained generally constant (with pronounced variance around the mean). Strictly in terms of efficiency, then, this cost of criminal antitrust enforcement seems relatively slight compared, for instance, to the resources we devote to incarcerating other types of federal criminals. Comparing Figures 1 and 2 also suggests that enforcement changes in the late 1990s were generally consistent with the utilitarian prescription of emphasizing fines more than incarceration. If one accepts that cartelists pose a significant threat to consumers, at an impressionistic level this enforcement deal for the public seems a very good one.

Moving from the perspective of efficiency to that of fairness, retributivists have shared doubts about criminal antitrust enforcement. Those who believe in reserving the singular stain of the criminal law to morally blameworthy conduct worry about overcriminalizing mere economic regulation (e.g., Hart, pp. 422–425). One crucial concern is the injustice of imprisoning morally blameless people under laws that are exceedingly complex and uncertain. Every retributivist should be satisfied, however, if prosecutors prove that defendants acted with the blameworthy awareness that their conduct was wrongful or illegal (Hart, pp. 415, 418; Green, pp. 1577–1578).

In sum, criminal antitrust enforcement can be efficient as well as fair. It can be efficient if the threat of criminal prosecution powers an effective leniency program that induces cartel defection, discovery, and prosecution. It can be fair if the law requires proof of blameworthy awareness of wrongdoing or illegality as an element of the criminal offense.

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