Refining China's cartel leniency policy

The NDRC has waived or reduced penalties for companies that have voluntarily disclosed monopoly agreements, provided “important evidence,” or cooperated with investigators in high-profile cases involving cartels in the auto parts, ocean freight, insurance and sea-sand cases. Nevertheless, enforcement behavior and implementing rules adopted by the NDRC and SAIC have left many critical questions unresolved. The draft Guidelines provide a much-needed roadmap for prospective leniency applicants in China.

Cartels only

Although most jurisdictions confine formal antitrust leniency programs to hardcore cartels among competitors, Article 46 of the AML literally applies to all “monopoly agreements,” including vertical restraints and other collaborations (such as research joint ventures). In its 2013 investigations of infant formula suppliers for resale price maintenance, the NDRC exempted three companies from punishment on grounds that they “cooperated with the investigation, took initiatives to report the price-fixing agreements, provided important evidence and carried out active self-rectification.” The Guidelines, in contrast, explicitly limit leniency procedures to “horizontal monopoly agreements” – in other words, cartels.

Rewards of leniency

Successful cartel leniency programs guarantee significant penalty reductions for the first qualified leniency applicants. However, Article 46 of the AML leaves leniency to the discretion of the enforcement authorities. Current NDRC rules provide that penalties “may” be reduced by up to 100% for the first leniency application, at least 50% for the second and no more than 50% for subsequent applicants, while SAIC rules only provide that penalties “may” be reduced or waived based on factors such as the sequence of voluntary reporting, the significance of the evidence provided, the circumstances of the misconduct and cooperation with the investigation.

The draft Guidelines explicitly provide that the first leniency applicant to report a cartel before the initiation of an investigation “will” receive a full remission of penalties. This concrete assurance of amnesty aims to expose previously undetected cartels. Otherwise, the authorities retain discretion in determining whether to grant leniency. If an investigation has already commenced, then the fine for the first successful applicant “may” be reduced by “not less than 80%” or fully remitted. Fines for the second successful leniency applicant “may” be reduced by up to 50%, and those for subsequent applicants “may” be reduced by up to 30%. In addition, authorities may apply the same principles to reduce the amount of any illegal gains to be confiscated as a result of the investigation.

Qualifications for leniency

To qualify for leniency, an applicant must submit an application that:

• explicitly acknowledges its participation in a cartel in violation of the AML;
• details the formation, affected products and territories, participants, operations, and duration of the cartel; and
• provides new “important evidence” sufficient to initiate the probe of a previously unknown cartel or substantially contribute to an existing investigation.

Afterwards, the applicant must promptly cease the cartel behavior, cooperate fully with the investigation, preserve and produce relevant evidence and must not disclose the application to any third parties or otherwise impede the investigation. Significantly, companies that organize cartels or coerce other companies to join or continue cartel activities are generally ineligible for leniency. This prevents ringleaders from instigating a cartel among their rivals and then securing amnesty while burdening competitors with fines.

Marker system

Leniency applicants are encouraged to contact the authorities as early as possible. Initial inquiries may be anonymous (thus providing a channel for confirming whether leniency is still available for a specific cartel). They may then proceed with an oral or written “preliminary report” providing basic information about the formation, duration, product scope and participants of the cartel. Such preliminary reports serve as markers for determining the priority of successive leniency applications from different members of the same cartel. After receiving and reviewing the preliminary report, the authority will direct the applicant to provide additional information and documents necessary to complete the leniency application within 30 days (or 60 days in some cases). Failure to “perfect the marker” by timely providing the necessary information will invalidate the leniency application.

If leniency is not granted, the materials submitted in support of a rejected application may not be used as evidence in a subsequent cartel investigation – a remarkable procedural restraint for a Chinese regulator.

Leniency applicants are to be notified of the authority's decision on whether to grant leniency and the extent of any reduction in penalties through a written administrative penalty notice, and final decisions granting leniency are to be published.

Enforcement coordination

The NDRC has authority over pricing-related AML violations, while the SAIC governs non-price related infractions. If a single cartel scheme involves both price and non-price elements, different cartel members might seek leniency from different authorities for the same conduct. The draft Guidelines simply suggest that the agencies would “discuss and coordinate among themselves” in this scenario “if all applications are accepted.” Simultaneously applying to both authorities may be prudent, but questions about the ranking and disposition of applications by both agencies remain unanswered.

Although the Guidelines have not been finalized, the current draft would strengthen China's cartel leniency program by providing greater predictability and transparency for prospective applicants.

Nate Bush and Lining Shan
[email protected] and [email protected]

On February 2 2016, the National Development and Reform Commission (NDRC) released for public comment the draft Guidelines on the Application of the Leniency Program for Horizontal Monopolistic Agreement Cases (横向垄断协议案件宽大制度适用指南) (Guidelines). The final measures are intended to be issued by the Anti-monopoly Commission of the State Council, and apply to cartel investigations by the NDRC, the State Administration of Industry and Commerce (SAIC) and their local counterparts. The Guidelines adopt many common features of foreign cartel leniency programs, and reflect an increasingly sophisticated approach to managing the incentives for voluntary disclosure of cartels.

Disrupting cartels through leniency

For many competition regulators worldwide, leniency is the weapon of choice for combatting cartels. Schemes among competitors to fix prices, restrict supply, allocate customers and markets or rig bids are almost always harmful to consumers, therefore illegal or illegal per se in most jurisdictions. They are also generally secretive, making them difficult for customers or regulators to detect (or prove).

Leniency programs disrupt cartels with an upfront offer of material reductions in penalties for the first cartel members that voluntarily disclose the arrangement to regulators, cease misconduct and assist in the investigation of other members. While many regulators and prosecutors have discretion to reward confessions and assistance with favorable charging and penalty decisions, the prospects of leniency remain uncertain at the point in time when companies are deciding whether to opt for voluntary disclosure. Cartel leniency programs, in contrast, encourage a race to confess by providing clear assurances that successful leniency applicants will achieve significant benefits, by limiting these benefits to the first successful applicants, and by levying substantial penalties on the remaining cartel members that fail to qualify for leniency. Many programs offer full exemptions from penalties for the first successful leniency applicant, with diminishing penalty discounts for subsequent applicants; others, such as the U.S. amnesty system, only guarantee leniency for the first successful candidate.

Article 46 of the PRC Anti-monopoly Law (AML) lays the foundation for a cartel leniency program, providing that “If the business operator reports to the anti-monopoly law enforcement authority of its own accord relevant information on the Monopoly Agreement that it reached and provides important evidence, the anti-monopoly law enforcement authority may, depending on the circumstances, reduce the penalties on the business operator or exempt it altogether from such penalties.”

The NDRC has waived or reduced penalties for companies that have voluntarily disclosed monopoly agreements, provided “important evidence,” or cooperated with investigators in high-profile cases involving cartels in the auto parts, ocean freight, insurance and sea-sand cases. Nevertheless, enforcement behavior and implementing rules adopted by the NDRC and SAIC have left many critical questions unresolved. The draft Guidelines provide a much-needed roadmap for prospective leniency applicants in China.

Cartels only

Although most jurisdictions confine formal antitrust leniency programs to hardcore cartels among competitors, Article 46 of the AML literally applies to all “monopoly agreements,” including vertical restraints and other collaborations (such as research joint ventures). In its 2013 investigations of infant formula suppliers for resale price maintenance, the NDRC exempted three companies from punishment on grounds that they “cooperated with the investigation, took initiatives to report the price-fixing agreements, provided important evidence and carried out active self-rectification.” The Guidelines, in contrast, explicitly limit leniency procedures to “horizontal monopoly agreements” – in other words, cartels.

Rewards of leniency

Successful cartel leniency programs guarantee significant penalty reductions for the first qualified leniency applicants. However, Article 46 of the AML leaves leniency to the discretion of the enforcement authorities. Current NDRC rules provide that penalties “may” be reduced by up to 100% for the first leniency application, at least 50% for the second and no more than 50% for subsequent applicants, while SAIC rules only provide that penalties “may” be reduced or waived based on factors such as the sequence of voluntary reporting, the significance of the evidence provided, the circumstances of the misconduct and cooperation with the investigation.

The draft Guidelines explicitly provide that the first leniency applicant to report a cartel before the initiation of an investigation “will” receive a full remission of penalties. This concrete assurance of amnesty aims to expose previously undetected cartels. Otherwise, the authorities retain discretion in determining whether to grant leniency. If an investigation has already commenced, then the fine for the first successful applicant “may” be reduced by “not less than 80%” or fully remitted. Fines for the second successful leniency applicant “may” be reduced by up to 50%, and those for subsequent applicants “may” be reduced by up to 30%. In addition, authorities may apply the same principles to reduce the amount of any illegal gains to be confiscated as a result of the investigation.

Qualifications for leniency

To qualify for leniency, an applicant must submit an application that:

• explicitly acknowledges its participation in a cartel in violation of the AML;
• details the formation, affected products and territories, participants, operations, and duration of the cartel; and
• provides new “important evidence” sufficient to initiate the probe of a previously unknown cartel or substantially contribute to an existing investigation.

Afterwards, the applicant must promptly cease the cartel behavior, cooperate fully with the investigation, preserve and produce relevant evidence and must not disclose the application to any third parties or otherwise impede the investigation. Significantly, companies that organize cartels or coerce other companies to join or continue cartel activities are generally ineligible for leniency. This prevents ringleaders from instigating a cartel among their rivals and then securing amnesty while burdening competitors with fines.

Marker system

Leniency applicants are encouraged to contact the authorities as early as possible. Initial inquiries may be anonymous (thus providing a channel for confirming whether leniency is still available for a specific cartel). They may then proceed with an oral or written “preliminary report” providing basic information about the formation, duration, product scope and participants of the cartel. Such preliminary reports serve as markers for determining the priority of successive leniency applications from different members of the same cartel. After receiving and reviewing the preliminary report, the authority will direct the applicant to provide additional information and documents necessary to complete the leniency application within 30 days (or 60 days in some cases). Failure to “perfect the marker” by timely providing the necessary information will invalidate the leniency application.

If leniency is not granted, the materials submitted in support of a rejected application may not be used as evidence in a subsequent cartel investigation – a remarkable procedural restraint for a Chinese regulator.

Leniency applicants are to be notified of the authority's decision on whether to grant leniency and the extent of any reduction in penalties through a written administrative penalty notice, and final decisions granting leniency are to be published.

Enforcement coordination

The NDRC has authority over pricing-related AML violations, while the SAIC governs non-price related infractions. If a single cartel scheme involves both price and non-price elements, different cartel members might seek leniency from different authorities for the same conduct. The draft Guidelines simply suggest that the agencies would “discuss and coordinate among themselves” in this scenario “if all applications are accepted.” Simultaneously applying to both authorities may be prudent, but questions about the ranking and disposition of applications by both agencies remain unanswered.

Although the Guidelines have not been finalized, the current draft would strengthen China's cartel leniency program by providing greater predictability and transparency for prospective applicants.