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Comply Or Suffer: Competition Compliance Manual

Published on Mon, Aug 24,2015 | 21:40, Updated at Mon, Aug 24 at 21:56Source : 

    By: Pratibha Jain, Partner, Nishith Desai Associates

Executive Summary
In Re: Kannada Grahakara Koota v. Shri Karnataka Film Chamber of Commerce, Competition Commission of India (“Commission / CCI”) has examined the significance and importance of competition compliance programs. While the Commission has been quite active in advocacy initiatives, there has not been much development with respect to compliance programs, despite an international trend to the contrary. CCI itself has not laid much emphasis on compliance programs in its orders in the past. This ruling makes a welcome departure and this paper analyses the significance of compliance program and argues in favour of companies designing a compliance program for competition law. The article makes a comparison with jurisprudence from United States of America (“US”) and examines the advocacy initiative of CCI as well. The US Sentencing Guidelines (“USSG”) provides for reduced penalties in case of adherence to compliance manual by business entities in U. Though India still doesn’t have such a mechanism in place, this judgment seems like a step in the right direction and companies should consider adopting a corporate policy including compliance manuals within it

Without guidelines companies may fail to realize the steps required to be taken to ensure compliance and ignore the need to adhere to best practices. Having an effective and efficient competition compliance manual in place helps enterprises and corporations avoid heavy penalties and strengthen their internal functioning and adoption of best practices. Absence of such procedures and compliance could lead to possible loss of contracts, business loss and non-compliances which could have been easily avoided / detected. The solution is to have a compliance procedure implement the requirements and steps to be taken and safeguard against engaging in illegal and unauthorized activities. Training companys’ employees would play a critical role in creating awareness among enterprises.  

Given the Act’s inspiration and heavy reliance on US jurisprudence, an analysis of American compliance mechanisms provides useful insight as to how Indian businesses could approach compliance and implement a successful compliance program to protect the company and key officers from infringement penalties.

The competition compliance programs in India suffer in three appreciable ways when compared to those in other developed jurisdictions: (1) there exists no statutory mechanism to implement a compliance program, and (2) there is unclear direction as to what constitutes an “effective” one and (3) loss of business opportunities which can be easily avoided. These three shortcomings put Indian businesses at an unnecessary risk of penalty while also sacrificing the effectiveness of the Act in preserving competition within India. The need of the hour is for CCI to improve levels of compliance and understanding and knowledge of compliance strategy and activities.

1.    Introduction
The Act significantly altered the paradigm of business practices in India and the implications of anti-competitive behaviour have become increasingly threatening for Indian businesses. In order to avoid the steep penalties for non-compliance, which include heavy fines and lost business reputation, it is critical that Indian organizations, corporations as well as small and medium enterprises adopt effective compliance strategies and take steps in the right direction. All businesses, regardless of their size, nature or sector require adhering with some amount of compliances to successfully conduct their businesses.

In this paper, we look at the existing compliance structure in US and the need for proper guidelines in India to implement them. It starts by explaining anti-trust regulations in the US: the law, incentives and guidelines for an “effective compliance” scheme. It then goes through the same exposition for India’s competition law, drawing upon similarities and differences in the two countries’ schemes. The paper concludes by addressing the caveats of applying USA compliance methods to antitrust enforcement in India, highlighting the fact that Indian competition law differs in ways that require additional compliance measures.

Anti-trust law in the US includes most notably the Sherman Act , Clayton Act, the Robinson-Patman Act  and the Federal Trade Commission Act , which together (1) restrict the formation of cartels and other collusive practices regarded as being in restraint of trade, (2) restrict the mergers and acquisitions of organizations which could substantially lessen competition and (3) restrict the creation of a monopoly and the abuse of monopoly power. In order to avoid violating anti-trust regulations, most major corporations in the United States have antitrust compliance programs. In addition to benefitting from the near century-worth of doctrine and research on the subject, US businesses form compliance strategies based on guidance from two sources: the US Sentencing Guidelines (“USSG”) and the Organization for Economic Co-operation and Development (“OECD”) academic research is also cited in paras below.

In line with these guidelines, American corporate antitrust compliance programs typically entail a variety of methods to avoid violations, namely: an outline of the applicable anti-trust law, suggestions how to avoid violations, a clear statement of company policy on compliance, company-wide disbursement of a hard copy of the antitrust program-often referred to as a compliance manual, employee educational programs, and mechanisms for an employee to report antitrust violations within the company.

Like the US, India seeks to promote competition through its Act which prohibits or regulates anti-competitive agreements, abuse of dominant position and combinations. Similar to the USSG and the OECD, CCI has encouraged businesses to create compliance programs that will minimize the likelihood of violations. In its Competition Compliance Programme for Enterprises, CCI suggested measures that are similar to what the USSG and OECD have outlined: stating the company’s commitment to compliance, training and educating employees, creating compliance manual, and providing an opportunity for employees to seek compliance-related advice from counsel.

Compliance Manual is quite common amongst the entities doing business in developed jurisdictions like the EU and the US. Notably, various jurisdictions including Singapore, South Korea, Australia and Canada reward compliance efforts through fine reductions in certain circumstances. Given the nascence of both the Act and CCI’s articulation of compliance standards, compliance procedures in India are far less clear and developed than those in other developed jurisdictions. As a result, Indian businesses are left with ambiguous direction and inadequate incentives for enacting an effective compliance strategy.

2.    USA - Antitrust Law
The body of anti-trust law in the United States is mainly comprised of the Sherman Act of 1890,  the Clayton Act,  the Robinson-Patman Act,  and the Fair Trade Commission Act.  These anti-trust laws are enforced by multiple entities depending on the nature of the violation: the Federal Trade Commission (FTC), the Department of Justice (DOJ), and private parties who file suit. Before opening a claim, the agencies consult with one another to avoid duplicating any investigation efforts.  The FTC and DOJ have developed expertise in particular industries and typically handle claims within those markets. In contrast, only the DOJ can obtain criminal sanctions and the DOJ also has sole anti-trust jurisdiction in industries such as telecommunications, banks, railroads, and airlines.  Most anti-trust suits, however, are brought by private parties-individuals or businesses-seeking damages for violations of the Sherman or Clayton Act.

Incentives for Compliance

Incentives play an important role in prompting businesses to adopt comprehensive compliance programs to deter anti-competitive conduct. In the US, the strongest incentives to implement a compliance program stem from four things:

.    the risk of severe penalties for violation,

.    the chance that a good-faith compliance program might persuade anti-trust enforcers to exercise leniency,

.    the possibility that the existence of a compliance program will negate the intent necessary for criminal charges, and

.    the opportunity to have a reduced sentence under the statutory sentencing guidelines.    

The penalties for violations under US anti-trust laws can be especially severe, in part because businesses charged with an antitrust violation may be found liable for both civil and criminal violations. In addition, individuals of a company who participate in illegal, anti-competitive acts may face personal liability and separate criminal charges. Under the Sherman Act, for example, criminal penalties of up to $100 million for a corporation and $1 million for an individual may be imposed, along with up to 10 years in prison.  Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.

US businesses that adopt compliance programs do so with hopes that an antitrust enforcer will be more lenient in its pursuit of antitrust claims against the company.  Firms charged with price fixing may invoke their compliance programs in an attempt to persuade antitrust officials not to prosecute or to exercise leniency.  However, the Antitrust Division of the DOJ has discounted the notion that a compliance program will persuade officials not to prosecute offenders. Nonetheless, the subjectivity inherent in how the DOJ picks and chooses which antitrust cases to pursue cannot be ignored. Moreover, the FTC, which operates similarly to the DOJ in selecting which cases to move forward, may still treat businesses with compliance programs in place with leniency. Another incentive for compliance comes from the USSG that allows a non-compliant company’s penalty to be reduced in some cases. In sum, an organization with a compliance program that fits the USSG’s criteria may face less threatening consequences for undetected violations than would a company without such a program.

Guidelines for Compliance

US businesses that are incentivized to implement a compliance program within their organization are served by three sources of standards for what makes one “effective”: the USSG, the OECD, and academic research. Although the guidelines provided by each are largely similar in their basic instructions, each source has its own distinct characteristics that should be considered in order to create a truly exhaustive compliance program.

In order to help companies avoid such harsh penalties and incentivize compliance, the USSG reduces organizational liability for enterprises that demonstrate the existence of “effective” internal compliance structures.  A company’s fine can be reduced by up to 60 percent  if the company can discharge the burden of proving that the compliance program was “effective” notwithstanding a violation.  In addition to the USSG’s direction as to what constitutes an effective compliance program, the OECD issued the "Good Practice Guidance on Internal Controls, Ethics and Compliance" in 2010, which sets similar standards for effective compliance programs.  If a company makes a concerted effort to properly document the critical aspects of its business transactions, the documentation may help substantiate commercial justification for the transaction and this could help negate anti-trust claims made against it.  

US academia recognizes whistleblowing elements as another critical component of effective compliance programs. Such provisions protecting whistle-blowers promote transparency in corporate actions and remove the barriers to reporting violations.  Such barriers include “lacking trust in the company to combat corruption, feeling guilty for the effect of disclosures on employees and shareholders, fearing retaliatory effects from disclosure, and cultural constraints that indicate a negative perception of whistle-blowers.”  Without a whistle-blowing mechanism that “provides legal remedies for retaliatory actions, rewards whistle-blowers, and provides processes that encourage disclosure of suspected illegal actions,” employees are less likely to report identified anti-competitive acts within the company.  In contrast, by protecting whistle-blowers and promoting employee diligence in reporting violations, a company improves its ability to assess, identify and address any anti-trust risks it might have, thus avoiding the cost of antitrust litigation and penalties.

Legislation providing statutory protection for whistle-blowers adds to the effectiveness of whistle-blower components in corporate compliance schemes. Individuals that disclose information regarding these questionable practices have some protections under the law.  The Sarbanes Oxley Act and the Dodd Frank Act regulate internal disclosure mechanisms in the financial sector, introduced financial incentives for whistleblowing, and strengthened anti-retaliatory protections to encourage individuals to address potentially illegal corporate activity.  Compliance programs are generally considered effective if it “promotes an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”  

3.    India- Competition Laws
The first competition legislation in India was the MRTP Act. The aim of the MRTP Act was to "provide that the operation of the economic system did not result in the concentration of economic power to the common detriment, for the control of monopolies, for the control of monopolistic and restrictive trade practices and for matter connected therewith or incidental thereto." In order to keep competition policies in line with international economic developments and India's growing role as a global economic player, India proposed a new framework of competition law.  

Drawing on the wisdom of competition law in mature jurisdictions and the perceived change in the country’s economic landscape following a number of economic reforms, India passed the Competition Act in December 2002.  While the MRTP Act sought to prevent economic concentration and restrictive trade practices, the Act was more focused on promoting competition. The Act was not enforced, however, until six years later: after a number of constitutional challenges and amendments, the Act became enforceable in May 2009.  The sections dealing with merger review were not brought until force until even later: June 2011.  

Proper enforcement of the Act called for the creation of a new regulatory body: the Act created and empowered the CCI with an enlarged role and extensive punitive powers as compared with the Monopolies and Restrictive Trade Practices Commission. The CCI operates “to eliminate practices that have an adverse effect on competition, promote and sustain competition, protect the interest of consumers and ensure freedom of trade carried on by other participants, in markets in India."  In addition, it has the power to start inquiries into any alleged contravention of the Act.  As a quasi-judicial body, the CCI is bound by principles of rule of law in giving decisions and the doctrine of precedents. As per the Act, CCI is duly empowered to receive documents and testimonial by way of evidence and therefore is well suited to adjudicate disputes before it on the basis of material adduced by parties and by application of the principles of evidentiary proof under the Evidence Act.

The CCI regulates anti-competitive practices mainly through three provisions within the Act: Sections 3-6. Section 3 of the Act states that agreements entered into by an enterprise or association of enterprises or person or association of persons, in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition (“AAEC”) within India are void.  Section 4 prohibits the abuse of a dominant position by an enterprise.  Sections 5-6 allow the CCI to regulate mergers, acquisitions and combinations. Through these four sections and in addition to regulating combinations, the Act combats three categories of anti-competitive behaviour: cartels, other horizontal agreements and vertical agreements. The Act states explicitly that horizontal agreements—i.e., price-fixing, output restrictions, market-sharing, bid-rigging—are presumed to give rise to an AAEC. Other categories of horizontal and vertical agreements are analysed under a “rule of reason”, balancing the benefits arising from the agreements against the restrictions on competition.

Incentives for Compliance

Awareness and education are the tools in the enforcement of competition law worldwide. Good corporate governance practices are equally of significance for corporates and businesses to comply with competition law than legal reasons tagged with threat of penalties and sanctions. Notably, India has no criminal liability for anticompetitive conduct, and as a result, jail time may only be imposed if an entity fails to comply with the CCI’s order and compliance programs are not used to negate any requisite intent. In addition, there is no statutory scheme in place for how a penalty is imposed or may be reduced by Competition Appellate Tribunal (“COMPAT”). Incentives in India can be found in the sheer risk of financial penalty and the chance that a compliance program will warrant leniency from the CCI.

First, Indian companies are prompted to create compliance programs since the CCI may penalize an individual or business alleged to have engaged in anti-competitive behaviour. In the event of a finding of an anti-competitive agreement, the CCI may:-   

.    direct the parties to terminate the relevant agreement;

.   direct modification of the agreement; and/or

.   impose a penalty not exceeding 10% of its turnover for each year of the cartel agreement’s existence or three times its profit for each of such years.  

Unlike the United States, which imposes penalty based on statutory guidelines, CCI orders imposing a penalty generally do not have a discernible rationale which provides a legal or economic basis for imposition of a particular percentage of penalty.  As a result, the factors that CCI considers and how much weight each factor is attributed remains unclear in the absence of any guidelines.

The CCI has, however, indicated that it will consider any aggravating or mitigating factors when determining the appropriate level of monetary penalty for infringement of the Competition Act.  Further, in its Competition Compliance Programme for Enterprises, the CCI suggested that it may consider the existence of an effective compliance program as a relevant factor in determining the appropriate amount of fines.  Yet, India has no mechanism comparable to the USSG that statutorily establishes a test for how a compliance program is to be determined “effective” and how much that program will reduce a company’s penalty. As a result, companies cannot bank on a reduction in fines solely based on the presence of an “effective” compliance program: complete deterrence of anti-competitive behaviour is the only way to ensure a company is not harshly penalized. There is a significant compliance gap in relation to competition law due to less understanding on anti-competitive behaviour, penalties imposed and reporting of such activities.

It is noteworthy that although in some cases the CCI has given directions to the parties to amend their contracts, recently in one of its orders, CCI has attributed significance of having a compliance manual and advocated training and adoption of a competition compliance program.  This fact is inconsistent with the CCI’s advocacy for compliance programs in its Competition Compliance Programme for Enterprises and calls into question the true value that CCI places on such programs . However, irrespective of CCI implementing or taking steps towards enforcement of compliance manuals or reducing the penalty imposed, all companies should adopt a compliance manual to prevent any action by CCI and in complying with good corporate governance norms.

Guidelines for Compliance

Guidelines for Indian businesses on how to compose an effective compliance program are largely sourced from the CCI itself, namely, its publications and orders. For example, in 2008 the CCI issued the Competition Compliance Programme for Enterprises, which provides advice on how to compose an effective compliance program and deter anticompetitive behaviour. In it, the CCI outlines the “essential features” of a competition compliance program:

.    an explicit statement of commitment to the program from senior management;
.    availability of the compliance program;
.    training and education of employees;
.    creation of a compliance manual; and
.    program’s main principles set out in simple and plain language.  

The CCI goes on to list an additional set of elements that an enterprise “may consider…as essential”:-

.    An overarching commitment to comply with the Act and regulations, orders and directions issued by the CCI;

.   Duty placed on all employees and directors to conduct their business dealings within this overarching policy and seeking a written undertaking to this effect; and

.  Commitment to take disciplinary action against employees, CEOs, directors, proprietors, and partners for intentionally or negligently involving the company in an infringement of the Act.

Many of these elements are similar to those outlined in the USSG and OECD. However, unlike in the US, a business in India with a compliance program that contains these elements is not guaranteed to be granted any sort of leniency or reduced penalty but need to put in place a mechanism considering the pro-active approach adopted by CCI and in furtherance of corporate governance. In addition, the difference between the essential elements and those that may be essential remains to be seen and raises important questions. How many of these factors must be present for the CCI to consider acting with leniency toward an accused business? How does the CCI determine when those elements that may be essential are actually essential to a business’s compliance program? Moreover, CCI sets forth a separate checklist at the end of the document that provides more uncertainty: it is unclear whether this checklist is also considered essential for a non-compliant business to receive a softer blow from CCI.  Without a clear set of statutory guidelines and a proscribed method for evaluating compliance programs, businesses are left with unclear direction despite CCI’s attempts to create instructions for how to create one.

In addition to CCI’s Competition Compliance Programme for Enterprises, CCI’s orders provide direction on how a company should conduct its compliance program. From these orders, there is evidence of a need for Indian businesses to adopt better documentation mechanisms, like in the United States, as a part of a greater compliance scheme. For example, in the Google Case,  CCI imposed a penalty for delayed furnishing of information and/or failure to furnish information altogether.  Such an outcome may have been avoided had the companies adopted adequate documentation procedures that facilitated responding to anti-competitive claims made against them. In addition, better documentation procedures would help a company in defending its stand on regulatory compliance as the American company PPG did in its battle against numerous anti-trust claims.

CCI has also encouraged businesses to include whistle-blower provisions in corporate compliance programs in its 2011 publication, Public Procurement and Competition Law.  Specifically, the CCI suggests establishing “internal procedures that encourage or require officials to report suspicious statements or behaviour to the competition authorities in addition to the procurement agency’s internal audit group and comptroller, and consider[ing] setting up incentives to encourage officials to do so” in order to reduce the risk of anti-competitive bid rigging.  

Like in the United States, whistleblower provisions in India may be strengthened by a recently enacted statute. The recent Whistleblowers Protection Act, 2011 which was notified in May 2014, seeks to protect persons making a public interest disclosure related to an act of corruption, misuse of power, or criminal offence by a public servant.  “It brings within its mandate any public servant or any other person including a non-governmental organization who may make such a disclosure to the central or state vigilance commission.”  However, because the Whistleblowers Act was intended more for addressing government corruption than it was for ensuring competition, it remains to be seen whether the Whistleblowers Act will provide additional encouragement to employees who might report anti-competitive behavior.

4.    Conclusion

The lack of incentives to create an effective compliance program and vague direction as to what constitutes one not only exposes Indian businesses to an unnecessary risk of penalty, but it also compromises the effectiveness of the Act.

Business would comply with the norms to adhere with corporate governance norms or to avoid risk of fines. However, Indian businesses have fewer incentives to implement a comprehensive compliance structure than their counterparts in other jurisdictions. This can be attributed to the lack of criminal conviction for anti-competitive behaviour and the uncertainty of penalty reduction for implementing a compliance program. Second, companies in India lack clear direction on what constitutes an effective compliance program. Further, only large businesses tend to concentrate on competition law and engage legal professionals to deal with these issues having fair understanding of how the market operates and the approach of regulators. There is a myth among small enterprises that they can avoid compliance and can escape the scrutiny of CCI. Awareness increases with business size however with the recent ruling in media industry CCI has laid down the importance of having a compliance manual in place for companies as well as trade associations.

Despite the above ruling by CCI, in the absence of clarity of what constitutes an effective compliance program, companies still require more guidance to understand the functioning of competition law in India. If the CCI truly wishes to promote a culture of compliance and ensure that the Act is as effective as possible in preserving competition within India, it must re-evaluate the incentives it provides for businesses to comply and how those incentives are realized in practice. Comprehensive corporate compliance policies and procedures, senior management commitment and support, training and education, monitoring, auditing and reporting mechanisms have to be there for effective competition compliance. There is a need for CCI to explore the possibility of appointing a compliance education officer to assist firms in devising a competition compliance programme.

5.    Takeaways

.    Compliance program should contain a written ethics code or similar code of conduct.  Documentation is particularly important with respect to price determinations, meetings with competitors, and acquisitions and mergers.

.    Organisations/corporates to take steps to ensure that the code of conduct is communicated to stakeholders and employees through training programs or dissemination of the code.  

.    Compliance programs to contain monitoring and auditing systems that are reasonably designed to detect prohibited conduct within the company and it should form part of the company’s policy documents.  

.    Employing a reporting system for employees to report violations of the code of conduct.  

.    High-level personnel to be made responsible for ensuring that the compliance program is carried out.  

.    Necessary steps to be eligible for a decrease in sentence include using due care not to delegate authority to employees with a propensity to engage in illegal activities  taking all reasonable steps to respond appropriately to a detected offence and preventing similar offences  and consistently enforcing the code of conduct.


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