The first ever convictions in the UK for a cartel offence were handed down yesterday to three UK executives in the oil services sector. The three received terms of between two and a half to three years and were also disqualified from acting as company directors for periods of between five and seven years.
All three pleaded guilty to dishonestly participating in a cartel to allocate markets and customers, restrict supplies, fix prices and rig bids for the supply of marine hose and ancillary equipment in the UK. Marine hose is used by the oil and defence industries for transporting oil between tankers and storage facilities. The cartel was global in its scope and involved all the major manufacturers of marine hose worldwide - it was alleged to have affected contracts worth at least £122 million between 1999 and 2007. Bryan Allison and David Brammar were the Managing Director and Sales Director of Dunlop Oil and Marine Limited, a manufacturer of marine hose based in Grimsby. Peter Whittle traded as an independent consultant but in practice was employed full-time by the parties to the cartel to co-ordinate their activities around the world.
The story began in May 2007 when officers of the OFT executed search warrants at Dunlop's offices and Whittle's home and seized “extensive and compelling evidence” of the cartel arrangements. At the same time, the three men were arrested in Houston, Texas, where they were attending the OTC trade fair - they had used the opportunity to hold a cartel meeting which had been covertly recorded by the US authorities. In all, a total of 8 people from the UK, France, Italy and Japan were arrested over two days of raids across the USA and Europe, following a combined investigation by the UK’s Office of Fair Trading (OFT), the European Commission and the US Department of Justice (DOJ).
Within months of their arrest the “OTC Three” had been charged and pleaded guilty under a plea bargain arrangement - they were each sentenced to between 20 and 30 months. Under the terms of the plea bargain Whittle, Brammar and Allison were allowed to return to the UK in December 2007 where they were promptly arrested at Heathrow Airport by the Metropolitan Police. They were then charged under the UK’s cartel offence - used for the first time since its introduction in the Enterprise Act 2002. Under their US plea bargain, time spent in a British prison will count towards their US sentences though if they do not serve the full term of their US sentences in the UK they will have to serve any remainder in the US.
This is unlikely to be the end of this particular story, nor is it likely to be the end of cartel investigations in the oil sector. Like the construction sector, where the OFT has recently announced a major anti-cartel investigation, the oil industry supply chain is quite concentrated in some areas and supplies some high value but relatively standardised items where prices are fairly transparent - just the kind of conditions where economists tell us that cartel activity can flourish.
In addition to the reputational damage, Dunlop Oil and Marine and any other companies involved now face significant fines (up to 10% of worldwide turnover under EU law) for their actions and very probably also third party action for damages. While damages actions are still relatively infrequent in the UK, this cartel operated in the US where there is a long history of such actions and it seems likely that affected oil companies and possibly also the US Navy may sue. As for Europe, damages actions are already on the increase as a trickle of cases such as those involving replica football strips and airline tickets proves that recovery is possible. In addition, the EU has recently published a paper proposing changes to make such actions easier, although the Commission is currently not supporting a move towards the treble damages available in some US cases.
Cartel investigations are usually prompted by disclosures made by a whistleblower from among the cartel members keen to benefit from the so-called “leniency policies” which many competition authorities operate to encourage whistleblowing. If they are first through the door of the authorities, companies can gain immunity from fines for themselves and immunity from prosecution for the executives involved, although not from other consequences such as the unenforceability of anti-competitive agreements and third party damages actions. This creates a strong incentive to be the first to blow the whistle, as those who then hold their hands up will likely receive only limited immunity. In addition, the OFT has recently added to its armoury a scheme to award informants who are not themselves part of the cartel with up to £100,000 for information.
In the face of these risks all businesses should:
- Make sure their competition compliance policy and procedures are up to date;
- Even more importantly, to reduce the risk of rogue employees choosing to ignore the policy (as happened last year with British Airways and its attempt to fix fuel surcharges) give regular training to ensure that staff take the message fully on board;
- Ensure their staff know what to do if the authorities arrive to carry out a dawn raid - EON was recently fined 38 million euros for breaching an official Commission seal fixed during a dawn raid in May 2006 to secure documents.