Detecting Cartels: What Can We Do? Joo-yong Lee Deputy Director, Cartel Policy Team, Cartel Bureau Korea Fair Trade Commission 7 April 2006, Seoul, Korea Regional Cartel Workshop, OECD-Korea Regional Centre for Competition

2 Contents 1.Definition of Cartel 2.Types of Cartel 3.Detecting Cartels: General Perception 4.What KFTC has done to improve detection 5.Fear of Heavier Sanction Also Helps

3 1. Definition of Cartel (1) OECD Council Recommendation (1998) - “A "hard core cartel" is an anti-competitive agreement, anti- competitive concerted practice, or anti-competitive arrangement by competitors to fix prices, make rigged bids, establish output restrictions or quotas, or share or divide markets by allocating customers, suppliers, territories, or lines of commerce. ” ICN (2004) - “A "cartel" is an agreement between businesses not to compete with each other. ”

4 1. Definition of Cartel (2) MRFTA (Korean Competition Law) Article 19 - “No business shall agree with other business by contract, agreement, resolution, or any other means to jointly engage in an act, or let others do this kind of activities, falling under any of the following sub-paragraphs, that unfairly restricts competition. ” 3 Elements of Cartel 1.Agreement 2.Between Competitors 3.To Restrict Competition

5 2. Types of Cartels (1) OECD Council Recommendation (1998) - “A "hard core cartel" is an anti-competitive agreement, anti- competitive concerted practice, or anti-competitive arrangement by competitors to fix prices, make rigged bids, establish output restrictions or quotas, or share or divide markets by allocating customers, suppliers, territories, or lines of commerce. ” ICN (2004) - Price Fixing - Output Restrictions - Market Allocation - Bid Rigging

6 2. Types of Cartels (2) MRFTA (Korean Competition Law) Article 19 1.Fixing, maintaining, changing price 2.Determining terms and conditions of transaction 3.Restricting production, delivery, transportation 4.Regional or Customer allocation 5.Restricting establishment of facility or equipment 6.Restricting types or specifications of goods or services 7.Joint management, joint establishment of company, etc. 8.Any other practice that substantially lessens competition

7 2. Types of Cartels (3) Hard Core Cartel Cartel (Soft) Price Fixing (including bid rigging) Output Restrictions Market Allocation Determining Terms of Trade Other types: - such as jointly establishing company Usually per se illegal Usually rule of reason approach

8 2. Elements of Good Cartel Regulation In regulating cartels, detection and sanction are keys to success Improved Detection: Increases chance of getting caught Optimal Sanction: Sanction greater than cartel profit and chance of getting caught deters Cartels Strong law and regulation giving sufficient investigative powers Dedicated unit & Sufficient resources (eg. manpower) Policy tools such as leniency programme Financial sanction Incarceration

9 3. Detecting Cartels (1) Where can we find cartels? - Answer : EVERYWHERE! However, more likely in following conditions 1.High market concentration: oligopolistic 2.High barriers to entry 3.Homogeneous product 4.Little residual production 5.Low market demand elasticity 6.Previous history of cartel activity To Hunt Cartels We have to Find Their Hideout

10 3. Detecting Cartels (2) Ways to improve detection Investigative powers given by law - Power to enter premise, search, obtain evidence Improve manpower because cartel investigation requires special skills different from other antitrust violations - Sufficient investigators to conduct dawn raids - Train them with search, interrogation, IT forensic skills Detection tools - Leniency programme - Informant reward programme - Others (eg. BRIAS, Bid Rigging Indicator Analysis System) - Forensic Tools, Voice Recorders, Digital Cameras

11 4. KFTC’s Improvement of Cartel Detection (1) (1) Enhancing Detection - Improvement of Leniency Programme Leniency is granted to: A cartel member who is first or second to provide information necessary to prove cartel before KFTC obtains it 100% amnesty to first comer (30% leniency to 2 nd comer) Amnesty Plus Marker System Improved protection of confidentiality of informer A hike in number of leniency applications Why? : Fear of Detection, Higher Sanction, Transparency

12 4. KFTC’s Improvement of Cartel Detection (2) (2) Enhancing Detection - Enhanced Informant Reward Programme A strong complement to leniency programme which: - Gives reward up to 1 m USD to informant who provides evidence needed to prove cartel *Gravity of violation (amount of surcharge) and quality of evidence determines the amount of reward First introduced in Improved protection of confidentiality of informer, increased the amount of reward by 10 fold More frequent use after improvement

13 4. KFTC’s Improvement of Cartel Detection (3) (3) Enhancing Detection – Bid Rigging Indicator Analysis System Suspicious Electronic Bids to Procurement Agencies Automatically Detected and Reported to the KFTC Procurement AgencyKFTCBid Rigger Applied to Construction Projects Over 5 B Won, Goods and Services Over 2.5 B Won Scores are Calculated by Analyzing 6 Factors and If Score Adds Up to be Over 80, the Bid is Reported to the KFTC On-Line

14 4. KFTC’s Improvement of Cartel Detection (4) (4) Enhancing Detection – Staff Training KFTC Investigators Improve Their Skills by : Exchange Enforcement Experience in Cartel Study Group Study Investigation & Interrogation Techniques of Other Enforcement Agencies (Police, Prosecutors, etc.) Participate in ICN and OECD Meetings on Cartels It is also important to “arm” investigators with strong will to detect cartels

15 4. KFTC’s Improvement of Cartel Detection (5) (5) Enhancing Detection – Reinforcement of Manpower Cartel Division (11 Persons) 19 December 2005 Cartel Investigation Bureau (Director General Level) Cartel Policy Team (12 Persons) Manufacturing Cartel Team (10 Persons) Service Cartel Team (10 Persons) Note : All Staffs in the Bureau are Strongly Motivated

16 5. Fear of Heavy Sanction Heavier Sanction increases fear of detection 5% of Related Sales 10% of Related Sales * Higher sanction means that cartel members risk heavy sanction Deters Cartels and induces leniency application OECD sees cartel damage to be 15%-20% of sales - Korea needs to further raise the penalty in future Such fear increases incentive for coming forward with leniency application

17 Conclusion 1.To improve detection, both hardware and software upgrades are needed 2. Both institutional and mental upgrades are needed 3. Detection is facilitated even more by heavier sanction

18 Thank You For more information, contact : Tel: Fax: