Just a numbers game: OECD finds penalties too low

Published On 31/03/2018 | By Kendy Ding | Cartels, Enforcement, Litigation, Reform

The ACCC is set to re-think its approach to penalties following the findings of the OECD report “Pecuniary Penalties for Competition Law Infringements in Australia” (the “Report“) which revealed that average Australian penalties are substantially lower than those imposed in other comparable OECD jurisdictions (EU, the UK, Germany, Japan, Korea and the USA) for breaches of competition law.

Following the report, ACCC Chair Rod Sims has resolved to pursue higher penalties to address this disparity and in doing so, improve the deterrent value of sanctions imposed for breaches of Australia’s competition law.

Australian penalties too little, too late

The substantial disparity in penalties between Australia and the OECD jurisdictions used for comparative purposes was revealed by analysis of a sample of five major Australian cartel cases up to November 2017. By comparing the penalties imposed by the Court against the penalty that would have resulted from the fining regime in other jurisdictions, the Report found that the average pecuniary penalty in Australia was $25.4 million, while the average penalty in the comparator jurisdictions for this conduct would have been $320.4 million, a difference of over twelve-fold.

The Report observed that the significant shortfall in Australian penalties was in part attributable to the residual effects of a statutory regime in place before 2007 which had set a maximum penalty amount that did not take into account the size of the infringing companies’ conduct ($10M) which resulted in proportionally low penalties being imposed on large corporates. The Report found that even after the law was reformed to allow for larger penalties (including penalties of 10 % of turnover), this did not result in a sufficient uplift in the penalties imposed as subsequent judgments merely followed this pre-2007 precedent. Reflecting on this particular point, Mr Sims himself admitted that “[the ACCC] did not adequately reflect Parliament’s clear intent”.

A new starting point?

As deterrence is the foremost consideration for the imposition of civil penalties, the ACCC considers that the ability of current penalty levels in Australia to deter similar future conduct is compromised.

Mr Sims re-iterated the ACCC’s long-held view that penalties for breaches of Australia’s competition laws cannot simply be an acceptable cost of doing business in Australia, but must be set at a level “to grab the attention of boards, senior management and shareholders.

The ACCC considers that preserving proportionality between the quantum of the penalty and the size of the company is critical to maintaining the deterrent value of sanctions, especially for large corporates that would otherwise face low penalties relative to their turnover. Accordingly, the ACCC has resolved to reconsider how it takes into account the size and revenue of the contravening firm, both in determining the penalty amount it considers is appropriate in the circumstances, and in its submissions to the Court.

The Report made two key recommendations which the ACCC has accepted merit active consideration to.

1. Using a base fine

An assessment of penalty must commence with a base fine set by reference to a measure of turnover or value of commerce affected. Such an approach would avoiding instances where a proportionally low penalty is imposed on a large business. Mr Sims considered that the base line approach provides a “vital point for debate and discussion”.

2. Releasing public guidance

Australian stands out as an exception in lacking public guidance in the form of internal rules or guidelines with respect to the calculation of penalties compared to the other OECD jurisdictions. The Report considered that public guidance would be beneficial in strengthening the relationship between the predictability of sanctions and deterrence. Mr Sims stated that such guidance would have the added benefits of providing transparency to parties considering the potential cost of engaging in cartel conduct, as well as providing a structured approach that is likely to be welcomed by legal advisors to parties being investigated.

ACCC lifts its game

Mr Sims has warned that the ACCC will “have to be a little less likely to settle cases unless we get appropriate penalties” and restated that the ACCC would now begin pursuing penalties in the hundreds of millions in the case of the largest companies, closer to Australia’s maximum of 10% turnover.

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About The Author

is a solicitor based in the Sydney office of King & Wood Mallesons. On occasion, she engages in online shopping (to gain a deeper understanding of online markets, of course).

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