A bi-monthly, internationally circulated e-newsletter of the CUTS-Centre for International Trade, Economics & Environment (CUTS-CITEE), which has been designed to disseminate information about the “7 UP Project”, in addition to reporting interesting newsitems, which have been reported across the globe on competition and other related issues.
The 7-Up Project is a 2 year research and advocacy programme being conducted by the Centre with the support of DFID, UK for a comparative study of competition regimes of seven developing countries of the Commonwealth.
The 7-Up project has crossed the half-way of its second phase now. The reports that came out of first phase activities are now almost complete and are going to be published very soon. In the meanwhile the country researchers were busy preparing the case studies for the second phase. Some of them have already prepared the first draft of the first case study.
The intervening period witnessed intense discussion on the issue of whistleblower not only in the context of competition law enforcement but also its importance in bringing fairness in every area of governance, public or private. The issue also came up at a symposium on competition policy, organized by CUTS at Geneva in October 2001 and was discussed in depth. In competition law enforcement of course the role of the protection of whistleblower in breaking cartels has been long recognised especially in the US. The EU has also approved new rules to reward whistleblowers. In India, the government is in the process of adopting a new competition law and is considering similar leniency programme, where it is popularly known as ‘amnesty clause’.
However, there is a significant difference between the US approach to leniency programme and that of the EU. Whereas in the US the executives responsible for price-fixing conspiracies are handed out prison terms, the EU relies only on fines as punishment. Neither India is considering criminal punishment in such cases. This means a deviation from the ‘carrot and stick’ approach, and relying only on carrot. This is even more important from the developing countries’ viewpoint. It has been a learning from the 7-Up project that the chief executives of developing country subsidiaries of many MNCs, who very often are expatriates, are undeterred by fines. But the fear of landing up in a developing country jail can actually work.
There has always been a tendency to view corporate crimes or economic offences differently from other crimes. But now there is a need for a paradigm shift. To function effectively as well as remain acceptable socially the system of economic governance should be as clean as possible. Growing incidence of corporate crimes over the recent years is an ample proof that we have not done enough in this area to clean up the system. The imposition of severe punishment for corporate crimes can work both as a preventive as well as a curative measure.
A brief report of the proceedings of the Geneva Symposium is available at www.cuts-international.org/comp-event-geneva.htm
I. PROJECT PROGRESS
The months of January and February 2002 proved to be very decisive in terms of planning for various activities of the second phase of the “7-Up Project” as it is popularly known. The project entitled “Comparative Study of Competition Regimes in Select Developing Countries of the Commonwealth” is being implemented by CUTS, Jaipur with the support of DFID, UK. The countries selected for the study are India, Kenya, Pakistan, South Africa, Sri Lanka, Tanzania and Zambia.
During these two months the project stepped fully into the research activities of its Phase-II. The work of collecting and compiling information on the case studies was started. The following is a brief report of the progress made by the Project during the months of January and February 2002.
Phase-I Country Report
It was envisaged in the Project plan that the phase-I country reports would be published individually for all the seven countries as separate documents along with a synopsis of the Phase-I synthesis report. These would be widely distributed in the project countries to enhance awareness on competition issues in these countries.
The partners have started working on this and the reports are being edited before they can go for printing. A common format for the reports has been finalised to make them more comprehensive and reader friendly.
A compilation of these seven country reports has also been prepared by the core researcher of the project. This compilation, called as the Phase-I Synthesis Report, is a comparative analysis of various issues included in the country reports in respect of the seven countries.
Field Survey on Awareness
As mentioned in the previous edition, a field survey was conducted to find out the level of general awareness in these countries on competition issues. The field survey was based on a short questionnaire.
During the period under review, a brief analysis of these questionnaires was made in some of the project countries and the others are in the process of doing the same. A comparative analysis of these questionnaires would also be made by the core researcher of the Project.
Phase-II Case Studies
The research part of Phase-II of the Project involves taking up of three case studies having cross border implications. The idea is to take up, as far as possible, common cases in all these countries so that a comparison could be made as to how have similar cases been dealt with differently in different countries. This would enable the developing countries to learn from each other’s experience.
During the month of January, the partners were able to finalise the three case studies which they would do. A brief structural outline was prepared by CUTS for the reports of these case studies to ensure uniformity and to facilitate the work of comparative analysis of the cases.
Researchers have started collecting and compiling information on the first case study. This information would be put in the form of a report and would then be compared by the core researcher.
II. MAJOR NEWS
BRUSSELS MOVES TO REWARD CARTEL ‘WHISTLEBLOWERS’
Top secret price-fixing meetings among executives of rival companies could become even more tense when the European Commission approves new rules this week to reward whistle blowers.
Under new “leniency” rules, the first company to blow the whistle on a cartel will be spared a fine if the information it provides is enough for a commission to launch a “dawn raid” on members of the conspiracy.
The move is part of a renewed effort by Mario Monti, competition commissioner, to increase the commission’s powers to fight illegal price-fixing conspiracies. Those who follow the first whistleblower through the commission’s door will be entitled to a reduction on their fine based on the timing of their confession and the quality of their information.
Unlike the present system, companies will receive a legally-binding assurance from the commission of either immunity or the level of reduction in the fines.
The current leniency regime states that only companies providing “decisive information” to the commission can get full immunity.
However, the commission thinks the current rules do not provide enough incentives for whistleblowers as only two companies have been granted full exemption from fines since it was introduced in 1996.
The commission has the power to fine companies involved in a cartel upto 10 percent of their annual sales. Last year, Brussels levied record fines of $1.6bn on companies involved in more than 50 cartels, including a euro 855mn fine on eight companies for conspiracy to fix vitamin prices.
Some competition experts expect tomorrow’s approval of the new whistle-blowing rules to spark a wave of confessions from price-fixers because only the first company to admit participation in a cartel can be sure of total immunity. But others think the new leniency regulations will still be undermined by the continued reliance on fines, rather than the prison sentences handed out to executives in the US.
Julian Joshua, a partner at the law firm Morgan Lewis and former deputy head of the commission’s cartel unit said: “It will not be a magic bullet in Europe. In the US, they have a big stick and a big carrot. The rules will never be as central in Europe because people don’t go to jail.”
(Francesco Guerrera, Financial Times, 12.02.02)
BREAK UP THE FINANCIAL GIANTS TO AVOID ENRON-LIKE COLLAPSES
Why is the world of finance purporting to be surprised and shocked by the Enron affair? The potential for such events has long been obvious. Enron is just one result of a decade of slowly spreading cancer throughout the financial services business. The only solution is the breakup of the industry into its component parts; separating banking from investment banking, from stock brokerage, from pension fund management, from derivatives trading, from insurance — and consultancy from auditing.
This is not just a story of one rogue company and a complacent auditor. It may be the biggest scandal so far but fits a pattern which has grown out of the way the financial services industry has evolved in recent years.
Horizontal integration, amalgamations into ever bigger units, has reduced competition and created hard-to-manage behemoths. Vertical integration has brought about so many conflicts of interest within firms that some clients can only be served at the expense of others, or by deceit.
The last symbolic barrier to such conflicts of interest, the Glass-Steagall Act which followed the scandals of the 1920s, was abolished in 1999 just as the stock market was being pumped up to more ridiculous levels than in 1929. Not surprisingly, the removal of restraints occurred when the U.S. Treasury was in the hands of an investment banker, Robert Rubin, previously with Goldman Sachs and recently pleading Enron’s cause on behalf of Citigroup.
The abolition of constraints occurred despite the increase in new financial products such as derivatives which increased risk levels, reduced transparency and took an increasing proportion of the financial sector outside the purview of banking or securities supervision. It coincided with an explosion in non bank credit to the U.S. private sector. It was supported by claims that bigness meant efficiency and increased capital adequacy or was a natural consequence of globalization.
In practice it meant more conflicts of interest. Risk assets grew far faster than capital bases, and off-balance-sheet activity boomed.
Warnings were aplenty. The Asian boom and bust from 1995 to 1998, to which investment banks were major contributors, was one. Even since then Asia has produced more examples — such as Asian Pulp and Paper ($12 billion in default) — of investment banks earnings tens of millions in fees by telling fairy-tales. Barings and Long Term Credit Management were other warnings.
A former Securities and Exchange Commission chairman, Arthuir Levitt, was eloquent on some of the conflicts — between the investment banking and brokerage units of the giant firms, and between auditors and their consulting businesses. But Mr. Levitt was thwarted by a cabal of “professional” interests.
It is now almost two years since the Nasdaq crash revealed the reality behind the banker-broker hype that inflated the bubble. But the public, which lost so heavily, still sees no attempt to reform the industry or bring criminal charges for breaches of trust toward investors. The big houses continue to publish “research” often tailored not to the interests of investors but in the interest of their corporate finance business, which is far more profitable than stock brokerage.
Auditors have long been mostly captives of the boards which appoint them. What is new is the cartelization into a handful of huge players, and the emergence of conflicts of interest over consultancy. The whistle-blowers became the designers of camouflage.
Investigative financial journalism is back in vogue after Enron, but very belatedly and overly excited about the Bush administration connection.
The media joined in the hype making heroes out of investment bankers and brokerage analysts. The wire services remain a source of worry for those wanting dispassionate financial news. Their main clients are not the public media but the financial sector which needs scrutiny. They overexpose the self-interested views of these clients.
Enron is symptom not disease. (Philip Bowring; International Herald Tribune, 22.01.02)
IV. PAST EVENTS
National Seminar on “Competition, Investment & Regulation: Role in Economic Growth”, 11/12 January 2002, Jaipur, India
CUTS Centre for International Trade, Economics & Environment (CUTS-CITEE), Jaipur, India, organised the seminar in collaboration with National Council of Applied Economic Research (NCAER), New Delhi, India, on 11-12th January 2002 in Jaipur, India.
A brief report of the proceedings is available at www.cuts-international.org/citee-event-cominvstjan02.htm
V. FORTHCOMING EVENTS
a) International Meet on “Competition Law and Policy in a Global Context” 18 March 2002, Cape Town, South Africa
International Bar Association (IBA) in collaboration with South African Competition Authorities is organising this programme. It is part of the IBA Global Forum on Competition Policy’s initiatives.
Competition experts from all over the world will participate in the event. The programme will focus on comparative merger control analysis, competition policy in developing countries and competition compliance issues. It will also have a special session on competition law enforcement in South Africa.
IBA also intends to utilise this opportunity to begin to disseminate the message of the International Competition Network and to attract stakeholders’ interest in its work.
b) 2nd National Seminar on “Competition, Regulation & Investment: Role in Economic Growth”, 8/9 June 2002, Chennai, India
CUTS Centre for International Trade, Economics & Environment (CUTS-CITEE), Jaipur, India, will be organising the seminar in collaboration with National Council of Applied Economic Research (NCAER), New Delhi. It is the second event, in continuation to the National Seminar organised on 11-12th January, 2002, in Jaipur which aimed at generating and enhancing understanding on competition and regulatory issues and their interface with investment.
c) 7-Up Project: Phase-II Culmination Meeting, 5/6 July 2002, Geneva
The Phase-II Culmination Meeting of the 7-Up Project would be organised on 5-6th July 2002 in Geneva. The meeting would deliberate on the Phase-II research results of the project and the Phase-II synthesis report would also be discussed. The meeting would chalk out the action plan for the remaining period of project duration.
VI NEW PUBLICATIONS
Challenges in Implementing a Competition Policy and Law: An Agenda for Action
This report is an outcome of the symposium held in Geneva on “Competition Policy and Consumer Interest in the Global Economy” on 12-13 October 2001. The one-and-a-half-day event was organized by CUTS and supported by the International Development Research Centre (IDRC), Canada. The symposium was addressed by international experts and practitioners representing different stakeholder groups viz. consumer organisations, NGOs, media, academia, etc. and the audience comprised of participants from all over the world, including representatives of Geneva trade missions, UNCTAD, WTO, EC, etc. This publication will assist people in understanding the domestic as well as international challenges in respect of competition law and policy.
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