The OFT’s Revised Leniency Guidance Advises Companies How To Conduct Internal Investigations Into Cartels

Article by Michael O'Kane. Partner in the Fraud and Regulatory Department, Peters & Peters Solicitors.

On 11 December 2008, the Office of Fair Trading (OFT) published its revised guidance on leniency and no-action (OFT 803) ('The Guidance'), in relation to cases where companies or individuals come forward with information of their involvement in a cartel. It supplements and elaborates on the procedures set out in the OFT's Penalty Guidance (OFT 423), and No-action Guidance (OFT 513)¹. The OFT's leniency programme offers members of cartels, who provide evidence of involvement, reduced fines and potential immunity from criminal prosecutions.

The Guidance is consistent with the European Commission's most recent guidelines on immunity from fines and the reduction of fines in cartel cases, which was designed to increase the degree of convergence between leniency systems within the EU². This should mean that normally where a company qualifies for leniency under the Commission's leniency notice, it should also be able to obtain civil and criminal immunity for its employees and directors under the OFT's leniency policy.

In the Guidance, the OFT have sought to offer a more detailed explanation of what is required from the leniency applicant in order to benefit from the programme. The OFT has introduced the need for a 'genuine intention to confess' and 'continuous and complete cooperation'. The Guidance also, for the first time, specifies how companies should conduct their internal investigations, both prior to and after approaching the OFT. The provision of such advice is very unusual from a UK regulator and may derive from concerns that the OFT has about the nature and conduct of internal investigations to date. It is also noteworthy that the OFT suggests that companies seek specialist criminal legal advice before conducting their internal investigation, even where criminal proceedings are not a likely outcome. As well as commenting on internal investigations, the OFT has also taken the opportunity in the Guidance to stress the importance of two key factors in any immunity application.

The basis of any leniency application is subject to the company demonstrating that there is a concrete basis for a suspicion of cartel activity and a "genuine intention to confess"³. This means that the company must accept that, as a matter of fact and law, the information available suggests that it has been engaged in cartel conduct in breach of EC and/or UK law⁴. The OFT recognises that in certain circumstances it may not be possible for the company to be certain as to whether it has engaged in cartel conduct; therefore, the acceptance that they have been involved in a cartel may have to be qualified. However, where the basic facts are available, a marking will not be granted unless the company expresses a genuine intention to confess to the cartel conduct.

The requirement to maintain continuous and complete co-operation implies that the overall approach of the applicant to the leniency process must be constructive, and is designed genuinely to assist the OFT in efficiently and effectively detecting and investigating cartel conduct, so that enforcement action can be taken. Failure of a director, current or former employer, to cooperate may result in the revocation of a company's leniency, unless the applicant shows that it used its best endeavours and, overall, it provided the OFT with sufficient evidence of the reported cartel activity⁵. If a company's application does fail, current or former employees who had co-operated will no longer be eligible for blanket immunity, but the information provided by them as part of the leniency process (under paragraph 3.7) will not be used in evidence against them⁶.

Tip offs about an intended or actual approach for leniency; or tampering with the evidence goes beyond non co-operation, and is referred to by the OFT as bad faith. Disclosures to lawyers with a view to obtaining legal advice about an intended or actual approach to the OFT are obviously acceptable⁷. Bad faith is viewed more seriously than simple failure to cooperate, and may result in the prosecution of one or more individuals under sections 43 and 44, Competition Act and section 201, Enterprise Act 2002.

Conducting internal investigations

The OFT stresses that internal investigations, even at the earliest stage, must be conducted with integrity and with an eye to future criminal proceedings. As such companies uncovering potential collusive conduct will need to consider obtaining specialist criminal legal advice⁸.

The company's legal adviser must be able to confirm he is instructed (on a conditional basis) to apply for Type A immunity if it is available⁹. If Type A immunity is available the legal adviser will disclose the identity of their client and provide the relevant information to secure a marker (details of the suspected infringement and the evidence uncovered so far). The OFT requires an initial proffer setting out a minimum level of information and providing the key documentary evidence uncovered so far. All information, documents and evidence in relation to the existence and activities of the cartel must be provided. The OFT explains that this is a wide requirement and includes evidence from current and former employees. While it will not expect all relevant information to be provided before any leniency agreement and no action letters can be signed, as a minimum, the OFT will expect to have received and analysed at least the substantial and most evidentially probative elements of the information. This emphasises the company's obligation to have already conducted an internal investigation of the cartel.

Where Type A is not available, as under the previous guidance, the OFT will advise whether Type B immunity is available in principle, without identifying the applicant. However the applicant can now seek to establish whether the information it could provide would be sufficient to warrant a marker by making an "informal proffer"¹⁰. The information must add significant value to perfect a marker.

The OFT does not demand that significant enquiries are undertaken before an approach for a marker is made, but state there must be a concrete basis for suspicion of cartel involvement and a genuine intention to confess. More extensive internal investigations may be required where multiple jurisdictions are involved¹¹. From experience, the OFT has realised that the way in which companies and their advisers conduct their internal investigations, both prior to and following an approach to the OFT for leniency, can have a substantial bearing on the success of the OFT's own subsequent investigations and enforcement action, particularly when criminal proceedings are contemplated¹². The OFT's prime consideration in deciding whether a case will be subject of criminal enforcement is the likelihood and extent of evidence that one or more individuals behaved dishonestly¹³. The OFT has, therefore, provided guidance on "tip offs", tampering and corruption avoidance, notes of internal investigations, witness interviews and preservation of notes.

Tip off

The OFT will expect companies to approach internal investigations at their early stages with great care to limit the risk of others in the cartel being tipped off about its discovery.¹⁴ It advises against approaching former employees, directors of the leniency applicant or other 'high risk' individuals in the pre-marker period, where this might alert the other members of the cartel to the OFT's investigation¹⁵. One suggestion to avoid tip-off is that the company's advisers inform the individual that they are interviewing with a view to approaching the OFT, and given that a criminal investigation may ensue, any unauthorised disclosures may result in prosecution pursuant to section 201(4) Enterprise Act 2002 and a withdrawal of the option of immunity for either the company or the individual, which would otherwise have been available¹⁶. Covert internal investigations, such as examining relevant employee or director electronic material, may be sufficient to establish a concrete basis¹⁷. Therefore any approach taken by a company must be based on an assessment of the risks posed by the internal investigation to the OFT's future enquiries.

Tampering and corruption avoidance

The OFT will expect companies to take sensible and prudent measures to minimise the risk of evidence being interfered with, tampered with and corrupted. This includes ensuring that electronic material is collected in such a way as to ensure its integrity¹⁸. The OFT offers examples of how this risk can be reduced: the use of electronic imaging or the recovery of laptops and mobile telephones. In terms of maintaining the evidential integrity of the document, specialist advice is likely to be necessary.

Notes of steps taken in the internal investigation

The OFT will expect clear and comprehensive notes to be maintained throughout the course of an internal investigation to counter any suggestion that incorrect procedure was adopted¹⁹. A list should be kept of all current (and former) employees or directors, who are aware of the leniency application and who have access to potentially relevant information. The OFT advises that these individuals be asked to sign a declaration that they will observe strict confidentiality²⁰.

Witness interviews

The importance of the retention of witness interview notes is particularly emphasised. Interviews should be for the purpose of establishing the facts relating to the cartel involvement. It is considered vital that interviews are conducted in a balanced way, without pressure to give or confirm a particular version of events²¹. This is to ensure that testimony is unpolluted by the evidence of others or by documents that were not created by, or within the knowledge of, the individual being interviewed.

The legal adviser is bound by professional ethics; and due care must be taken when the individual being interviewed does not have legal representation. A balance must be struck between the adviser fulfilling the obligation to the client and ensuring the person being questioned is not at an unfair advantage.²² A company's legal adviser should explain their role to the individual clearly. The individual should be told that it may be necessary for the company to disclose the information provided.

Particular care must be taken when interviewing those who may have been involved in the illegal and/or criminal conduct. This is to ensure that any evidence obtained does not give rise to later challenge²³. Where evidence provides reasonable grounds of suspicion that the individual has committed a criminal offence, their right to legal representation, accompanied by an explanation of the consequences of any admissions should be set out prior to the interview. Failure to provide this information in these circumstances could render the evidence inadmissible in court proceedings.

Preservation of notes

Notes of the steps taken in the internal investigation and of witness interviews will normally be afforded the protection of legal professional privilege. However if the investigation leads to a criminal prosecution, such notes will be classified as third party unused material and if relevant to the case, may fall to be disclosed.²⁴ In these circumstances, the OFT will expect the company and the individual to waive privilege and so any notes taken by the company or its advisers must therefore be preserved.

Conclusion

The revised Guidance is clear: even where a criminal investigation is unlikely to result, potential applicants are advised to carefully consider the way internal investigations should be carried out²⁵ and should seek specialist criminal legal advice at an early stage.

Footnotes

1 OFT's guidance as to the appropriate amount of penalty (OFT 423, December 2004) and The Cartel offence – guidance on the issue of no action letters for individuals (OFT 513, August 2003).

2 Commission memorandum MEMO/06/256, 28 June 2006 (http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/06/256&format=HTML&aged=0&language=EN&guiLanguage=en ); Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No 1/2003 (http://ec.europa.eu/comm/competition/antitrust/legislation/fines.html )

3 Leniency and no action: the OFT's guidance note on the handling of applications, paragraph 3.1, 3.4 and 4.1

4 Ibid. paragraph 3.1

5 Ibid. paragraph 8.8

6 Ibid. paragraph 8.10

7 Ibid. paragraph 8.11-8.12

8 Ibid. paragraph 8.30

9 Ibid. paragraphs 3.3 and 3.4

10 Ibid. paragraph 4.4

11 Ibid. paragraph 8.19

12 Ibid. paragraph 8.20

13 Ibid. paragraph 7.1

14 Ibid. paragraph 8.22

15 Ibid. paragraph 8.21

16 Ibid. paragraph 8.22

17 Ibid. paragraph 8.23

18 Ibid. paragraph 8.24-25

19 Ibid. paragraph 8.26

20 Ibid. paragraph 8.16

21 Ibid. paragraph 8.27

22 Rule 10.01: Relations with Third Parties, Solicitors Code of Conduct 2007

23 Under sections 78 and 82(3) of the Police and Criminal Evidence Act 1984, a judge has a residual discretion to exclude evidence.

24 Criminal Procedure and Investigations Act 1996 and the Attorney General's Guidelines on Disclosure, paragraph s 51 and 52.

25 Leniency and no action: the OFT's guidance note on the handling of applications, paragraph 8.30

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.