Campaign warns small businesses of last chance to clean up before a law providing for seven year jail terms comes into force.
The Commerce Commission is urging small businesses to beware of inadvertently entering into cartel activity after a recent law change.
The phrase ‘cartel activity’ may conjure up images of oil barons and shady backroom deals, but it can just as often be small businesses unaware of the rules. “We’ve seen from our advocacy work that small businesses are more at risk of not being fully informed and therefore engaging in cartel activity,” says Anna Rawlings, chair of the Commerce Commission.
As a result, the commission is running an advertising campaign urging small businesses to study up on their obligations under the new law.
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Previously, cartel activity was only covered by civil penalties including fines for companies of up to $10 million, three times commercial gain, or 10 percent of turnover per year for each breach.
Under the new law, individuals can now also face up to seven years in prison.
Cartel activity may not necessarily be more common among small businesses, but there is often a lack of awareness on what the law prohibits. Rawlings says she has seen cases where businesses were engaging in cartel conduct inadvertently, often because they weren’t aware it was illegal.
“Ignorance is not going to get you off the hook,” she says.
Cartel activity occurs where two or more businesses agree not to compete with each other. This can include price-fixing, bid-rigging, dividing markets or customer bases, and restricting the output of goods and services.
These practices undermine competition and can result in higher prices and a reduction of choice and quality. They can also harm other small businesses who are trying to compete fairly, according to the commission.
Last year, a Nelson pharmacy was fined $344,000 after it was found they had arranged with competitors to fix the price of certain products. This resulted in consumers paying $6, instead of $5, for their prescription items. The companies director was also fined $50,000.
Rawlings says small businesses can often run afoul of the rules when times are tough. Rather than investing in market research, owners might be tempted to work together with their competitors to divide up the market by region.
This kind of regional division is just the kind of cartel behaviour that can seem innocuous, according to University of Auckland associate professor of business and economics Alex Sims.
Sims says market division can be appealing because it allows businesses to focus their resources more efficiently, but businesses should beware.
“This type of behaviour can seem logical on the surface, but it is cartel activity,” she says.
The key is not to agree to anything with your competitors that might disadvantage the consumer, according to Sims. A business can look around at its competitors to decide on a fair market rate to charge for a product, but agreeing to prices with those competitors may be cartel activity.
The law change also comes with updated search and surveillance powers giving the Commerce Commission the ability to wiretap offices and vehicles to gather evidence. The commission will need to apply to the courts for a warrant and be able to prove there is reasonable grounds to suspect a crime is being committed.
The commission usually runs at least one cartel investigation per year, ranging from large global deals to small domestic arrangements of just two or three companies. More than $90m in fines have been issued over the last decade, including major cases involving air freight, real estate and pharmacies.
Another major case last year found that two Hamilton real estate companies had committed price fixing by agreeing amongst themselves to pass on a TradeMe seller’s fee to their customers.
While passing on the fee was not necessarily a problem, the coordinated agreement to do so at a certain price was deemed to be cartel activity. That case wrapped up a years-long prosecution involving up to 13 estate agencies and resulting in more than $23 million in fines.
The law change brings New Zealand into line with other countries like Canada and the UK who already treat cartel activity as a criminal offence. Australia’s criminalisation of cartels in 2009 led to a boom of prosecutions including a 2018 conviction against Air New Zealand for its role in a global air cargo cartel. That case resulted in a $16.2 million fine for the national airline.
The Commerce Commission is advising businesses who are worried about the new rules to read up on the new law on their website.
There are some exemptions to the law, including vertical supply contracts and joint buying and promotion agreements. The Commerce Commission also has a leniency, immunity and cooperation policy where parties who come forward early and cooperate fully can avoid fines and jail time.
There is also an online whistle blowing tool that allows people to anonymously report cartel activity.