Cartels – what you need to know

While many people may think of cartels as operating overseas in illicit industries, the reality is that engaging in cartel activity is a very real risk for any New Zealand business, including SMEs. With consequences now including jail time, it’s essential that businesses understand what they can and cannot do, even if it’s just to avoid the prospect of a potentially stressful and damaging Commerce Commission investigation.

We talk to Commerce Commission Principal Investigator Cartels Barrie Sutton about cartels and what businesses need to know to avoid being caught up in cartel activity. 

What is a cartel?
A cartel is where two or more businesses agree not to compete with each other. This conduct can take many forms, including price fixing, sharing markets, customers rigging bids, or restricting output of goods and services.

People can be part of a cartel in a number of different ways, such as entering into an agreement, attempting to enter into an agreement, carrying out the agreed conduct, or facilitating and aiding the agreed conduct. The threshold of what constitutes an agreement is low and only needs to involve even very informal interactions.

Why is cartel conduct illegal?
Competition encourages businesses to innovate and to offer New Zealanders greater value and choice. Effective competition in markets can help to improve productivity and build economic resilience. Cartel conduct is anti-competitive and can result in higher prices and other harms, including a reduction of choice and quality for consumers. Businesses are also consumers of goods and services. 

Potential consequences 
Anyone who runs a business in New Zealand must comply with the Commerce Act. In 2021 the law changes introduced criminal prosecution for those engaging in cartel activity, with the first criminal cartel case now before the courts. 

Businesses and individuals can face large fines if they have been part of a cartel or attempted to be part of a cartel, and individuals can be banned from running a company and face jail time of up to seven years. The law was also changed around what can be legal competitor collaboration. 

“Most people engaged in cartel activity know it’s kind of wrong, but probably don’t realise the magnitude of trouble it can lead to," says Mr Sutton. "It’s very serious and harmful – and it’s considered to be a form of deception like fraud, which is why it is up to seven years in jail now. There are some exceptions that may be carefully applied. However, businesses should understand what a cartel is, what the risks are, and have systems in place to keep staff safe.” 

How does this apply to SMEs?
There can be a misconception that this law doesn’t really apply to SMEs, says Mr Sutton. “If businesses are interacting with competitors, they should be aware of the law and know what the rules are and ensure that their staff also have an understanding.

"For owner/operators, there is a very real risk. For example, we may see people doing million dollar plus contracts, but they won’t have an inhouse legal, HR, or compliance department. They also often don’t invest in any legal advice in this area, or at least not before it’s too late. It doesn’t matter how small you are – you don’t get an exemption just because you are an SME.

"There is also a greater risk for some of the smaller towns where there are less players in a market and they likely all know each other. Any sub-contracting to competitors is also an area of high risk.” 

For bigger organisations, the risk can be employees who engage in a rogue fashion. “The big companies have procedures and processes in place, but they might have an employee or employees who – often in their own interests – might act outside that and engage in activity that is not sanctioned by the company.

“It’s not just about avoiding criminal proceedings, it’s also about avoiding the stress of an investigation. Even being investigated – the legal costs, business interruption and reputational risk can be significant.” 

Top tips for businesses

• Make sure that you and your staff know what cartel conduct is and how to avoid anti-competitive behaviour.

• Read the Quick Guide: Is your business at risk of breaking competition law?

• Understand who your competitors are, and be very careful when discussing prices, tenders or bids, markets or output with them. Care is also needed in Trade Association environments.

• If you become aware of anti-competitive conduct, seek legal advice or contact the Commerce Commission immediately.