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The
7-Up project has crossed
the half-way of its second phase now. The reports that came out of
first phase activities are now almost complete and are going to be
published very soon. In the meanwhile the country researchers were
busy preparing the case studies for the second phase. Some of them
have already prepared the first draft of the first case study.
The
intervening period witnessed intense discussion on the issue of
whistleblower not only in the context of competition law enforcement
but also its importance in bringing fairness in every area of
governance, public or private. The issue also came up at a symposium
on competition policy, organized by CUTS at Geneva in October 2001 and
was discussed in depth. In competition law enforcement of course the
role of the protection of whistleblower in breaking cartels has been
long recognised especially in the US. The EU has also approved new
rules to reward whistleblowers. In India, the government is in the
process of adopting a new competition law and is considering similar
leniency programme, where it is popularly known as ‘amnesty
clause’.
However,
there is a significant difference between the US approach to leniency
programme and that of the EU. Whereas in the US the executives
responsible for price-fixing conspiracies are handed out prison terms,
the EU relies only on fines as punishment. Neither India is
considering criminal punishment in such cases. This means a deviation
from the ‘carrot and stick’ approach, and relying only on carrot.
This is even more important from the developing countries’
viewpoint. It has been a learning from the 7-Up project that the chief
executives of developing country subsidiaries of many MNCs, who very
often are expatriates, are undeterred by fines. But the fear of
landing up in a developing country jail can actually work.
There
has always been a tendency to view corporate crimes or economic
offences differently from other crimes. But now there is a need for a
paradigm shift. To function effectively as well as remain acceptable
socially the system of economic governance should be as clean as
possible. Growing incidence of corporate crimes over the recent years
is an ample proof that we have not done enough in this area to clean
up the system. The imposition of severe punishment for corporate
crimes can work both as a preventive as well as a curative measure.
A brief report of the proceedings of the Geneva Symposium
is available at www.cuts-international.org/comp-event-geneva.htm
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The months of January and
February 2002 proved to be very decisive in terms of planning for
various activities of the second phase of the “7-Up Project” as it
is popularly known. The project entitled “Comparative Study of
Competition Regimes in Select Developing Countries of the
Commonwealth” is being implemented by CUTS, Jaipur with the support
of DFID, UK. The countries selected for the study are India, Kenya,
Pakistan, South Africa, Sri Lanka, Tanzania and Zambia.
During these two months the
project stepped fully into the research activities of its Phase-II.
The work of collecting and compiling information on the case studies
was started. The following is a brief report of the progress made by
the Project during the months of January and February 2002.
Phase-I
Country Report
It was envisaged in the
Project plan that the phase-I country reports would be published
individually for all the seven countries as separate documents along
with a synopsis of the Phase-I synthesis report. These would be widely
distributed in the project countries to enhance awareness on
competition issues in these countries.
The partners have started
working on this and the reports are being edited before they can go
for printing. A common format for the reports has been finalised to
make them more comprehensive and reader friendly.
A compilation of these
seven country reports has also been prepared by the core researcher of
the project. This compilation, called as the Phase-I Synthesis Report,
is a comparative analysis of various issues included in the country
reports in respect of the seven countries.
Field Survey on Awareness
As mentioned in the
previous edition, a field survey was conducted to find out the level
of general awareness in these countries on competition issues. The
field survey was based on a short questionnaire.
During the period under
review, a brief analysis of these questionnaires was made in some of
the project countries and the others are in the process of doing the
same. A comparative analysis of these questionnaires would also be
made by the core researcher of the Project.
Phase-II Case Studies
The research part of
Phase-II of the Project involves taking up of three case studies
having cross border implications. The idea is to take up, as far as
possible, common cases in all these countries so that a comparison
could be made as to how have similar cases been dealt with differently
in different countries. This would enable the developing countries to
learn from each other’s experience.
During the month of
January, the partners were able to finalise the three case studies
which they would do. A brief structural outline was prepared by CUTS
for the reports of these case studies to ensure uniformity and to
facilitate the work of comparative analysis of the cases.
Researchers have started
collecting and compiling information on the first case study. This
information would be put in the form of a report and would then be
compared by the core researcher.
BRUSSELS
MOVES TO REWARD CARTEL ‘WHISTLEBLOWERS’
Top
secret price-fixing meetings among executives of rival companies could
become even more tense when the European Commission approves new rules
this week to reward whistle blowers.
Under
new “leniency” rules, the first company to blow the whistle on a
cartel will be spared a fine if the information it provides is enough
for a commission to launch a “dawn raid” on members of the
conspiracy.
The
move is part of a renewed effort by Mario Monti, competition
commissioner, to increase the commission’s powers to fight illegal
price-fixing conspiracies. Those who follow the first whistleblower
through the commission’s door will be entitled to a reduction on
their fine based on the timing of their confession and the quality of
their information.
Unlike
the present system, companies will receive a legally-binding assurance
from the commission of either immunity or the level of reduction in
the fines.
The
current leniency regime states that only companies providing
“decisive information” to the commission can get full immunity.
However,
the commission thinks the current rules do not provide enough
incentives for whistleblowers as only two companies have been granted
full exemption from fines since it was introduced in 1996.
The
commission has the power to fine companies involved in a cartel upto
10 percent of their annual sales. Last year, Brussels levied record
fines of $1.6bn on companies involved in more than 50 cartels,
including a euro 855mn fine on eight companies for conspiracy to fix
vitamin prices.
Some
competition experts expect tomorrow’s approval of the new
whistle-blowing rules to spark a wave of confessions from price-fixers
because only the first company to admit participation in a cartel can
be sure of total immunity. But others think the new leniency
regulations will still be undermined by the continued reliance on
fines, rather than the prison sentences handed out to executives in
the US.
Julian
Joshua, a partner at the law firm Morgan Lewis and former deputy head
of the commission’s cartel unit said: “It will not be a magic
bullet in Europe. In the US, they have a big stick and a big carrot.
The rules will never be as central in Europe because people don’t go
to jail.”
(Francesco
Guerrera, Financial Times, 12.02.02)
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BREAK UP THE FINANCIAL
GIANTS TO AVOID ENRON-LIKE COLLAPSES
Why is the world of finance
purporting to be surprised and shocked by the Enron affair? The
potential for such events has long been obvious.
Enron is just one result of a decade of slowly spreading cancer
throughout the financial services business.
The only solution is the breakup of the industry into its
component parts; separating banking from investment banking, from
stock brokerage, from pension fund management, from derivatives
trading, from insurance --- and consultancy from auditing.
This is not just a story of
one rogue company and a complacent auditor.
It may be the biggest scandal so far but fits a pattern which
has grown out of the way the financial services industry has evolved
in recent years.
Horizontal integration,
amalgamations into ever bigger units, has reduced competition and
created hard-to-manage behemoths. Vertical integration has brought
about so many conflicts of interest within firms that some clients can
only be served at the expense of others, or by deceit.
The last symbolic barrier
to such conflicts of interest, the Glass-Steagall Act which followed
the scandals of the 1920s, was abolished in 1999 just as the stock
market was being pumped up to more ridiculous levels than in 1929.
Not surprisingly, the removal of restraints occurred when the
U.S. Treasury was in the hands of an investment banker, Robert Rubin,
previously with Goldman Sachs and recently pleading Enron’s cause on
behalf of Citigroup.
The abolition of
constraints occurred despite the increase in new financial products
such as derivatives which increased risk levels, reduced transparency
and took an increasing proportion of the financial sector outside the
purview of banking or securities supervision.
It coincided with an explosion
in non bank credit to the U.S. private sector.
It was supported by claims that bigness meant efficiency and
increased capital adequacy or was a natural consequence of
globalization.
In practice it meant more
conflicts of interest. Risk
assets grew far faster than capital bases, and off-balance-sheet
activity boomed.
Warnings were aplenty.
The Asian boom and bust from 1995 to 1998, to which investment
banks were major contributors, was one.
Even since then Asia has produced more examples --- such as
Asian Pulp and Paper ($12 billion in default) --- of investment banks
earnings tens of millions in fees by telling fairy-tales.
Barings and Long Term Credit Management were other warnings.
A former Securities and
Exchange Commission chairman, Arthuir Levitt, was eloquent on some of
the conflicts --- between the investment banking and brokerage units
of the giant firms, and between auditors and their consulting
businesses. But Mr. Levitt was thwarted by a cabal of “professional”
interests.
It is now almost two years
since the Nasdaq crash revealed the reality behind the banker-broker
hype that inflated the bubble. But
the public, which lost so heavily, still sees no attempt to reform the
industry or bring criminal charges for breaches of trust toward
investors. The big houses
continue to publish “research” often tailored not to the interests
of investors but in the interest of their corporate finance business,
which is far more profitable than stock brokerage.
Auditors have long been
mostly captives of the boards which appoint them.
What is new is the cartelization into a handful of huge
players, and the emergence of conflicts of interest over consultancy. The whistle-blowers became the designers of camouflage.
Investigative financial
journalism is back in vogue after Enron, but very belatedly and overly
excited about the Bush administration connection.
The media joined in the
hype making heroes out of investment bankers and brokerage analysts.
The wire services remain a source of worry for those wanting
dispassionate financial news. Their main clients are not the public media but the financial
sector which needs scrutiny. They
overexpose the self-interested views of these clients.
Enron is symptom not
disease. (Philip
Bowring; International Herald Tribune, 22.01.02)
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National
Seminar on “Competition, Investment & Regulation: Role in
Economic Growth”, 11/12
January 2002, Jaipur, India
CUTS
Centre for International Trade, Economics & Environment
(CUTS-CITEE), Jaipur, India, organised the seminar in collaboration
with National Council of Applied Economic Research (NCAER), New Delhi,
India, on 11-12th January 2002 in Jaipur, India.
A brief report of the proceedings
is available at www.cuts-international.org/citee-event-cominvstjan02.htm
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a) International
Meet on “Competition Law and Policy in a Global Context” 18 March
2002, Cape Town, South Africa
International
Bar Association (IBA) in collaboration with South African Competition
Authorities is organising this programme. It is part of the IBA Global
Forum on Competition Policy’s initiatives.
Competition
experts from all over the world will participate in the event. The
programme will focus on comparative merger control analysis,
competition policy in developing countries and competition compliance
issues. It will also have a special session on competition law
enforcement in South Africa.
IBA
also intends to utilise this opportunity to begin to disseminate the
message of the International Competition Network and to attract
stakeholders’ interest in its work.
b)
2nd
National Seminar on “Competition, Regulation & Investment: Role
in Economic Growth”, 8/9 June 2002, Chennai, India
CUTS Centre
for International Trade, Economics & Environment (CUTS-CITEE),
Jaipur, India, will be organising the seminar in collaboration with
National Council of Applied Economic Research (NCAER), New Delhi. It is
the second event, in continuation to the National Seminar organised on
11-12th January, 2002, in Jaipur which aimed at generating
and enhancing understanding on competition and regulatory issues and
their interface with investment.
c)
7-Up Project: Phase-II Culmination Meeting, 5/6 July 2002, Geneva
The Phase-II Culmination Meeting of the 7-Up
Project would be organised on 5-6th July 2002 in Geneva.
The meeting would deliberate on the Phase-II research results of the
project and the Phase-II synthesis report would also be discussed. The
meeting would chalk out the action plan for the remaining period of
project duration.
This report is an outcome of the symposium held
in Geneva on “Competition Policy and Consumer Interest in the Global
Economy” on 12-13 October 2001. The one-and-a-half-day event was
organized by CUTS and supported by the International Development
Research Centre (IDRC), Canada. The
symposium was addressed by international experts and practitioners
representing different stakeholder groups viz. consumer organisations,
NGOs, media, academia, etc. and the audience comprised of participants
from all over the world, including representatives of Geneva trade
missions, UNCTAD, WTO, EC, etc. This publication will assist people in
understanding the domestic as well as international challenges in
respect of competition law and policy.
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