Compliance Programs - Prevention is better than cure

Massive fines imposed on firms for violating competition law, amounting to over R350 million during the last year alone, have highlighted the need for firms to implement properly structured competition law compliance programs.

With the current turbulence of the economy and the proposed increase in the thresholds for merger notifications the competition authorities have shifted their focus from merger regulation to prohibited practices.

Guilty firms (and in due course potentially their directors and managers) face many far reaching consequences ranging from high fines, unenforceable contracts, restrictions on conduct, reputational damage, substantial legal fees, the loss of valuable executive time and private damages suits. An investigation may also trigger a national competition law investigation into an industry resulting in widespread scrutiny from competition authorities.

More and more firms are thus adopting much needed competition law compliance programs. An effective competition compliance program needs to be tailored to the individual needs of each firm.

In broad terms it should involve at least four elements:

• a compliance audit to determine the level of competition law compliance and existence of competition-related temptations;
• a compliance manual to inform employees and management of the basic principles of competition law, the competition authorities’ enforcement powers, and a practical guideline how to abide by competition law;
• training seminars designed to provide practical guidance and an opportunity for employees to ask questions and discuss any concerns; and
• regular monitoring of the program.

A compliance program should also educate employees how to deal with a “dawn raid”. The Competition Commission has the statutory right to conduct unannounced raids during which they are allowed to enter and search a firm’s premises and confiscate communiqués and documents, including electronic versions. In the last year the Competition Commission conducted several searches on companies like Dunlop Tyres International, Bridgestone South Africa, Cape Town Iron and Steel Works and Highveld Steel & Vanadium Corporation, and on industry associations like the South African Iron and Steel Institute and the SA Tyre Manufacturers Conference. A compliance program should educate staff on how to deal with such raids and ensure that a raid is lawfully carried out. The procedures will also require proper record keeping, in order to put the firm’s legal representatives in the best position to protect the firm should litigation follow.

If a compliance program is properly structured, thoroughly implemented and supported by management it will serve a dual purpose. It will actively assist a firm to comply with the competition laws, and to be fully prepared to deal with a situation where they have already transgressed the law.

In addition, the existence of such a program is often considered as a mitigating factor by the competition authorities when determining penalties, if it can be shown that the program has been implemented in a serious manner and that the infringement was not encouraged or condoned by directors or senior management.

Although not bullet-proof, the chance of a firm being guilty of a violation of competition law when a comprehensive compliance program is in place and properly enforced is significantly reduced. A compliance audit should also put management and directors in a position to understand what is going on within the firm at an early stage, allowing them the benefit of a leniency application. A leniency application can be made where the audit unveils that there have been violations without their knowledge before competitors apply for leniency or the competition authorities find out of the conduct for themselves.

Businesses tend to resist setting up compliance programs because they are thought to be time-consuming and expensive. Compared to what could happen to a business without proper compliance, the cost in time and money is cheap. It is not a cliché, it is a truism: Prevention is better than cure.