06 October 2015

Cartel Whistleblowing – Draft Hong Kong Competition Leniency Policy Published

This article was written by Edmund Wan, Martyn Huckerby, Neil Carabine, Philipp Girardet and James Wilkinson.

The Hong Kong Competition Commission has released a draft leniency policy for comment that is designed to encourage companies that may have engaged in cartel conduct to report it to the Commission in exchange for leniency. If experience in other jurisdictions is repeated in Hong Kong, once the policy is finalised it is likely to be an effective tool for the Commission to identify, investigate and prosecute illegal cartel behaviour. Companies should take the draft policy into account in their planning for compliance with the Competition Ordinance, which takes full effect on 14 December 2015, and consider whether to provide comments on the draft.

What is the draft leniency policy?

The Commission has sought comments on the draft leniency policy by 23 October 2015 and a copy of the policy can be obtained here.

Under the policy, the Commission will agree not to bring proceedings for pecuniary penalty against the first member of a cartel that comes forward and agrees to co-operate with the Commission. Leniency extends to current directors, employees and officers of a successful leniency applicant.

Leniency policy only applies to cartels

The policy only applies to cartels, which are arrangements between competitors to fix prices, restrict output, share markets and rig bids. Cartel arrangements are considered to be serious anti-competitive conduct. The Commission has signaled that cartels will be a key focus of its enforcement efforts.

The policy does not apply to conduct other than cartel conduct, such as abuse of market power and vertical price fixing. The Commission will consider case by case whether to grant leniency in relation to non-cartel conduct that contravenes competition law.

Leniency will only be offered to “first-in” cartel member

The Commission will only offer leniency to the first cartel member that reports its involvement in the cartel and meets the requirements for obtaining leniency.

The Commission will operate a “marker” system to establish a queue in order of the date and time that companies apply for leniency. Cartel members must call a “leniency hotline” to obtain a place in the marker queue. If the first marker fails or is terminated, the second marker may be offered leniency.

Requirements for obtaining leniency

In order to obtain leniency, a cartel member must report the cartel to the Commission and terminate its participation in the cartel conduct. The applicant must provide complete, truthful and continuous cooperation throughout the Commission’s investigation and any ensuing proceedings against other cartel members. This includes:

  • providing a detailed description of the cartel, the entities involved, the role of applicant, and the evidence the applicant can provide;
  • signing a statement of agreed facts admitting the leniency applicant’s participation in the cartel;
  • attending interviews with the Commission and answering questions;
  • providing evidence in any proceedings in the Competition Tribunal, including appearing as a witness at hearings; and
  • signing leniency and non-disclosure agreements.

The Commission may terminate the leniency agreement if the company breaches the agreement. If the agreement is terminated, the company will lose its immunity.

Favourable treatment for other cartel members that co-operate

The Commission may agree to provide favourable treatment to other cartel members that terminate their involvement in the cartel and co-operate with the Commission’s investigation. This may benefit cartel members that are not eligible for leniency because they were not the first member to come forward.

Favourable treatment may include making joint submissions with the co-operating company to the Competition Tribunal on the pecuniary penalty that should be imposed. This may result in the Tribunal imposing a lower pecuniary penalty on the company.

Even where favourable treatment is granted, the Tribunal retains discretion as to the amount of pecuniary penalty that will be imposed. The approach taken by the European Commission in the EU may provide some guidance as to how the Tribunal may apply its discretion. Under the EU leniency regime, the first company to qualify for “favourable treatment” is granted a 30 to 50% reduction in the amount of pecuniary penalty, the second 20 to 30% and subsequent companies up to 20%.

No immunity from follow-on actions or other orders

A leniency agreement does not provide immunity from follow-on actions by persons who have suffered loss or damage as a result of the cartel. A successful leniency application may, in fact, expose the applicant to follow-on actions. This is because the applicant must sign a statement admitting its involvement in the cartel, which may lead to the Tribunal making an order declaring that the applicant has contravened the Competition Ordinance. A follow-on action may only be brought against a company that has contravened a competition rule.

In addition, a leniency agreement does not provide immunity from other orders that may be imposed on companies that contravene a competition rule. The Tribunal has broad powers to make other orders, including:

  • prohibiting a person from making or giving effect to an agreement;
  • requiring the parties to an agreement to modify or terminate the agreement; and
  • disqualifying a person from being a director of a company.

Compliance tips for companies doing business in Hong Kong

Companies doing business in Hong Kong should take steps now to ensure they are compliant with Hong Kong’s competition regime. Those steps should include an audit of agreements and arrangements with competitors to identify any competition law concerns.

The final version of the leniency policy is expected to be published by mid-December in advance of the Ordinance taking full-effect. Companies should consider whether to apply for leniency when the final version of the policy is published. The key benefit of leniency is immunity from pecuniary penalty in relation to involvement in a cartel. Pecuniary penalties under the Competition Ordinance can be as high as 10% of a company’s annual turnover in Hong Kong for each year in which the contravention occurred (up to a maximum of 3 years).

However, the decision to apply for leniency should not be taken lightly and companies should also be aware of the consequences of applying for leniency. These include:

  • strict obligations to co-operate with the Commission in actions against other cartel members;
  • an obligation to publicly admit involvement in the cartel; and
  • exposure (together with other cartelists) to potential follow-on actions by persons who can prove they have suffered loss or damage as a result of the cartel.

Where a cartel operates in multiple jurisdictions, companies should consider simultaneously applying for leniency in each relevant jurisdiction.

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