18 December 2015

Hong Kong Competition Commission’s enforcement and leniency policies

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

The Hong Kong Competition Commission has published two key policies setting how it intends to exercise its enforcement powers under the Competition Ordinance.  In this article, we provide insight into the Commission’s Enforcement Policy and Leniency Policy for Undertakings Engaged in Cartel Conduct.

Enforcement Policy

The Competition Commission's Enforcement Policy outlines the Commission's enforcement priorities and the factors it will take into account when deciding what enforcement action to take.

The Commission will not conduct a detailed investigation into every competition issue it becomes aware of. Rather, it will focus its resources on conduct that it considers causes the greatest overall harm to competition and consumers in Hong Kong.

Enforcement priorities

Cartel conduct

The Commission will target cartel conduct and other agreements that cause significant harm to competition. Cartel conduct refers to agreements between competitors to fix prices, share markets, restrict output or rig bids.

Where cartel conduct is suspected, the Commission may prioritise action against both the company and any individuals involved, including company directors.

Exclusionary behaviour

The Commission will also focus on companies that breach the Second Conduct Rule by engaging in exclusionary behaviour. This is conduct by companies with a substantial degree of market power that has the object or effect of preventing or limiting the ability of competitors to compete. Examples include exclusive dealing, predatory pricing, refusals to deal, and tying and bundling.

Target sectors

The Commission has not identified specific target sectors. Based on overseas experience, potential targets include the construction, energy, financial services, real estate and retail sectors.

The areas targeted by the Commission will partly depend on what complaints are received from the public. In 2015, the Commission commenced a market study into the building management sector following complaints by homeowners. In the 8 months to 31 March 2015, the Commission received 96 contacts from businesses and consumers raising questions or concerns about competition issues. The majority of the contacts related to cartel conduct and resale price maintenance. The chart below shows the industries concerned in the contacts.

Industries concerned in contacts - bilingual

Factors in deciding what enforcement action to take

In determining what enforcement action to take in relation to breaches of the Ordinance, the Commission will take into account factors including:

  • whether the conduct demonstrates a blatant disregard for the law;
  • he deliberateness of conduct, including the taking of steps to avoid detection;
  • the involvement of senior management in the breach;
  • previous warnings or breaches of the Ordinance;
  • efforts of persons under investigation to comply with the Ordinance; and
  • a person's co-operation with the Commission in its investigation.

The Commission will favour remedies that will stop the unlawful conduct, undo harm caused by the conduct, and impose sufficient economic sanction to encourage compliance with the Ordinance.

Leniency Policy

The Commission has published a Leniency Policy that is designed to encourage companies that may have engaged in cartel conduct to report it to the Commission in exchange for leniency. The policy is likely to be an effective tool for the Commission to identify, investigate and prosecute illegal cartel behaviour. Companies should take the policy into account in their planning for compliance with the Competition Ordinance.

What is the leniency policy?

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

The policy only applies to cartels, which are arrangements between competitors to fix prices, restrict output, share markets and rig bids.

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 exercise its enforcement discretion 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. There is therefore a strong incentive for a cartel member to be the first to apply for 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 co-operation 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 applicant must also be prepared to continue with, or adopt and implement, an effective corporate compliance programme.

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

No immunity from follow-on actions

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 may be required to 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.

Treatment of cartel members that co-operate but do not qualify for leniency

Cartel members that do not qualify for full immunity (in particular those that are not the first member to come forward) may still benefit from co-operating with the Commission. In determining how to treat such cartel members, the Commission will assess the extent and value of the co-operation provided, including whether the member provided significant evidence regarding the cartel conduct.

In exchange for the cartel member’s co-operation, the Commission may consider providing:

  • a lower level of enforcement action, including recommending to the Tribunal a reduced pecuniary penalty; and
  • making joint submissions to the Tribunal on the pecuniary penalty that might be imposed and/or the terms of a particular order that the Tribunal may make.

However, 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 “second-in” company is granted a 30 to 50% reduction in the amount of pecuniary penalty, the “third-in” company 20 to 30%, and subsequent companies up to 20%.

Hong Kong Competition Law Guide

For more information on Hong Kong’s competition rules, see our Hong Kong Competition Law Guide.

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