Leniency Plus: Excessive Generosity Or A Shiny Armor In The Indian Leniency Regime?

With cartels being notoriously difficult to uncover and prosecute and an apparent decrease in the number of leniency applications globally, the leniency plus tool seems just the right approach. Even the Competition Law Review Committee, formed to overhaul the Indian competition regime, described leniency plus in its July 2019 report[2] as a “proactive antitrust enforcement strategy”.

Leniency plus tool is useful in multimarket settings. A multimarket enterprise involved in an anticompetitive cartel is more likely to replicate similar collusive behavior in other markets.[3] Leniency plus incentivizes such implicated parties, who might have missed the boat in disclosing one cartel, to be the first in disclosing another cartel in a different product or geographic market. Like the leniency regime, the fear that fellow cartelists may blow the whistle first to get immunity from fines and implicate others can lead to a series of cartels crashing down like a house of cards. Such a domino effect has been seen in the past in some markets, such as the global auto parts and financial sectors, the construction sector in Brazil, and the replica football kits market in the UK.

Here it is clarified that the Amendment does not require a ‘different product or geographic market’ and multiple cartels may very well exist in the same market. It should not however be difficult for the authority to uncover other cartels when investigating one in the same market. As such, the focus of the plus mechanism is on different products or geographic markets.

Leniency plus tool is thus rightly intended, but will it deliver? The experiences from some foreign jurisdictions suggest it depends.

Global response to the plus tool - foreign experience

Several foreign jurisdictions, both mature and young, such as Australia, Brazil, France, Hong Kong, Poland, Singapore, South Korea, the UK, and the US (known as amnesty plus there) have adopted leniency plus. Yet the International Competition Network calls it a “less frequently occurring element” of leniency programs.[4]

Leniency plus has been a proud success story in the US since 1999 – the place of its origin. The Department of Justice (“DoJ”) of the US has investigated many undisclosed conspiracies from evidence gathered during a separate conspiracy. [5] That success should however be seen in its full context. The US regime is unique to include ‘penalty plus’ as a stick side to the leniency plus carrot side. Penalty plus provides that if a leniency applicant is involved in another cartel and did not report it voluntarily while being investigated for the original cartel, the applicant can receive a substantially higher penalty than what the infringement would otherwise merit.[6] Penalty plus, a necessary companion to an effective leniency plus mechanism, is not included in the Amendment.

The US DoJ also poses an ‘omnibus question’ – an essential investigatory element of its leniency plus tool. Following a witness interview or examination, the investigator asks the cartelists if they are aware of other prohibited practices, which requires the cartelists to disclose all other contravening conduct to the agency in its testimony on oath.[7] Failure to disclose such information can lead to a penalty for perjury accompanied by a fine and/or prison sentence.[8]

Again, in India, cartelists are not obliged to disclose illegal conduct not known to the CCI. The uncertainty on penalty plus and omnibus questioning weaken the incentives of firms to self-report. The cartelists will not lose if they do not cooperate. Nor are the individuals liable for criminal sanctions in India. The lack of explicit penalty plus can however be amended if the CCI views repeated offenses and withholding information on another cartel as a ‘grave’ aggravating factor in line with the penalty plus approach.

Aside from this, firms that do not secure the first spot get comparatively lenient treatment in India as compared to jurisdictions such as the USA. If incentives to second and subsequent applicants are as enticing as the ones to the first applicant, the rush to report is slowed down. An equally important factor is that multimarket cartelists should have a significant threat of detection in other markets when caught colluding in one market. Absent the threat, leniency plus loses its effectiveness. And that is where the ‘cartel profiling’ strategy[9] of the US is recommended, which targets a focused approach toward markets and companies more susceptible to collusion.

For these and other reasons, such as the absence of criminal sanctions and individual responsibility, the European Commission does not see leniency plus as an advantageous tool. It is not convinced that the plus tool will bring more cases and relies on the traditional leniency regime which too has seen a domino effect in uncovering multiple cartels. Leniency plus in other jurisdictions, barring a few exceptions, has received a tepid response so far, which questions if adopting the plus tool will be excessive generosity to cartelists or a shiny armor in the Indian leniency system.

Gaming the system – potential pro-collusive effects

Despite the incentives leniency plus brings, economists have often warned of adverse outcomes of leniency plus program.[10] Under the leniency plus program, cartelists can create a new cartel, which would not have otherwise existed since leniency plus makes it more convenient for a company in a cartel to join another to reap more profits while expecting lesser penalties.[11] Cartelists may create smaller cartels to benefit from additional penalty reductions for a substantially bigger cartel under leniency plus. It can be done by either creating new cartels or splitting a cartel into multiple contraventions to lower the penalty exposure in otherwise severe cartel arrangements. Thus, the plus system can be rigged by cartelists.[12]

More troublesome is certain economists’ opinion that leniency plus can potentially sustain cartels for a longer duration.[13] Since leniency plus induces firms to reveal two or more cartels, it may in fact reduce their incentives to reveal the first cartel itself under the fear that it will lead to the disclosure of the second cartel, especially if profits from the second cartel is substantially higher. For simultaneous reporting of two cartels as well, the firms will likely do so only when the benefit of leniency outweighs the profits from the cartels or the threat of disclosure from the authority or co-cartelists is imminent.

Do we need the plus tool? – judicial and moral issues

Leniency plus poses problematic moral issues as it lacks basis insofar as it grants a reduction for the first and unrelated cartel, for which no additional information is supplied.[14] Essentially, this leads to a situation where a cartelist – an infringer of the most harmful contravention of competition law – is rewarded twice for the same ‘service’ provided to the authority.

The result of leniency plus is also skewed in as much as the infringer can receive more than 100 percent leniency. From the perspective of justice, it seems controversial to award ‘more’ an enterprise for participating in ‘more’ illegal conduct. In other words, the more cartelists profit from multiple cartels, the lesser the expected fine will be.

Perhaps the more telling question is – do we need the plus tool? Cartelists can apply for multiple leniencies anyway. Their incentives to confess for an extra cartel would probably not change for a 10 to 20 percent reduction in penalty in an ongoing case. The incentive to confess mostly comes when there is a clear threat of detection of cartels by the authority. That fear is heightened when a firm is under an investigation and the authority has access to internal files and dealings to potentially uncover other cartels as well. If so, more than the reward of extra leniency, the fear of detection is what propels firms to disclose other cartels. Better put, the plus tool may be needed not as a standalone incentive but to complement the ‘fear of detection’ to give that ‘extra nudge’ to firms to confess multiple infringements.

However, it is perhaps the long-term effects of a plus tool that has been considered by jurisdictions that have adopted it. Leniency plus may potentially create a climate of distrust among cartelists and may also destabilize cartels by preventing their creation.[15] Firms may fear that their multi-cartel members will plead leniency plus and disrupt the operation of all cartels, including unrelated markets not under investigation.[16] Nevertheless, the economic issues surrounding the plus tool’s pro-collusive effects as highlighted above still overshadow such remote long-term possibilities.

The plus tool thus is not very popular. And unlike the US experience, it has not uncovered as many cartel cases globally either. However, if applied correctly, it potentially can raise the effectiveness of the overall Indian leniency regime.

Conditions and quantification for leniency plus benefits – a fine balance required

The Amendment does not mention the eligibility factors for granting leniency plus benefits nor is the percentage of the discount set. These are expected to be clarified by way of regulations. Nonetheless, the original conditions for granting leniency should equally apply to leniency plus, such as confession, cooperation, and cessation of illegal conduct.

The amount of penalty and legal certainty to receive it are key to the success of the plus tool. A firm decides to remain in a cartel because of its profitability. Before betraying fellow cartelists, it would do a cost-benefit analysis and would need certainty about what reward it can expect from the authority. On the other hand, public interest requires the compensation to be strictly necessary and proportionate. To carefully balance both the stick and carrot sides, the CCI should set the bar high enough for cartelists to secure the benefits. It should consider factors, such as the probability of detecting the second cartel by itself, strength and sufficiency of evidence, gravity and duration of the second cartel, economic size of the second cartel compared to the first cartel, geographic scope, number of participants, and cartelists being a ringleader or co-leader.

However, in the US, the DoJ only considers the above factors in deciding the reduction and does not quantify the level of discounts given under its leniency plus mechanism, which makes it difficult to implement the plus tool strategically or to promote certainty and confidence in the system. In practice, such leniency plus discounts in the US have ranged from 5 to 25 percent of a company’s cartel fine, depending on the value of the cartel disclosed by the company.[17] It has also been emphasized that the discloser will only be eligible for the upper discount levels if the second cartel is found to be significantly larger in its economic impact than the one which the DoJ is already aware of and is investigating.[18]

But at the same time, the authorities in Brazil and Poland have set ‘plus rewards’ at a significantly higher level – nearly 30 to 33 percent. Similarly, South Korea offers generous reductions between 20 to 100 percent relative to the size of the second cartel.

Typically, leniency plus proceedings should keep the level of penalty reduction far lesser than the original reduction granted under the leniency regime. Even in the UK, the leniency plus framework is not considered very generous, and while the level of reduction is not stipulated, it is not usually very high.

Further, leniency plus should not be allowed if the authority already has information about the conduct. The Amendment notes that the disclosure of another cartel, say cartel B, should enable the CCI to form a “prima facie opinion” on the existence of the cartel. Consequently, the plus benefit is available only to the first applicant and not the second and subsequent applicants.

The CCI may also choose to limit the maximum permissible reduction available to leniency plus disclosers, which should ideally be significantly below the percentage of reduction granted to the company and individual under the lesser penalty regulations for the first disclosure.

Implementing the plus tool - some practical issues

Aside from the above, leniency plus raises some practical questions.

First, if a firm is involved in cartels A and B under investigation by the CCI, and thereafter, it reveals cartel C, would it gain from plus discount only for cartel A or cartel B or both? Principally, if cartel B was disclosed immediately preceding to cartel C, it should get discount only for cartel B. If however, cartel A has bigger penalty than cartel B, the firm may seek reduction for cartel A instead of cartel B.

Secondly, if for any reason (such as non-cooperation or providing false information), the firm loses immunity in cartel C, would the discount for cartel B also be revoked. Principally again, it should. But if the proceedings in cartel B have been concluded while the investigation in cartel C is still ongoing, the authority may not be able to review or recall its final disclosure order in cartel B.

Thirdly, the CCI may receive unsubstantiated claims on infringements from firms in an undeserving effort to lower fines, which might eat up its valuable resources and time. The CCI should develop a framework to prevent or keep such unsubstantiated claims to the minimum, for example, by considering such frivolous claims as an aggravating factor in deciding fine.

Lastly, until what stage in the first cartel proceedings the firms must disclose the second cartel? Since the plus disclosure has ramifications on fine calculation in both cartels, the authority may not close the first cartel until it decides the second cartel on merits. The timing of disclosure of the second cartel is thus vital to not unduly hold up the closure of the first cartel.

Recommendations

The introduction of the plus tool appears to be a consequence of the CCI’s successful run in its lesser penalty program to unravel cartels. However, as expressed by its European counterpart, the CCI should be wary of cartelists gaming the plus system by breaking down their infringements into multiple parts and reporting such conduct in an incomplete manner at subsequent stages or creating new cartels, to benefit a discount disproportionate to the information disclosed and significance of the second cartel. To counter potential gaming efforts, the CCI should thoroughly peruse the evidence advanced by the discloser, including its role and duration of participation in the second cartel vis-à-vis the economic impact, scope and period of such cartel.

Indeed, apart from the aforementioned judicial, economic and moral considerations, there are valid threats of possible misapplication of the plus tool, which questions the enforcement tool’s design and appropriateness in the Indian context. The CCI would be therefore wise to (i) lay out clear conditions for rewarding a leniency plus disclosure, (ii) expressly provide for maximum permissible reduction and possible penalty plus, (iii) incorporate the ‘omnibus questioning’ approach, and (iv) build on cartel profiling strategies to cultivate a culture of greater threat of detection and distrust among cartel members. All things considered, the success of the plus tool will depend more on its implementation than its adoption which will only be tested with time.

Swati Bala is an antitrust / competition lawyer. She holds a master’s degree from the University of Cambridge in competition law. Satvik Mohanty is an antitrust / competition lawyer. He is an international and comparative law scholar (Michigan Grotius Fellow) at University of Michigan Law School.

The views expressed are personal.

[1] The Competition (Amendment) Act, 2023, Section 46, available at < https://prsindia.org/files/bills_acts/acts_parliament/2023/The Competition (Amendment) Act, 2023.pdf>