By Prickett, Ruth
Financial Management (UK)
While many people get irate about the cost of new cars, CDs and supermarket food, fewer sympathise with a collector or dealer who whinges about the commission for selling the odd Picasso or Monet. But the exposure of a cartel operating between the auction houses Sotheby's and Christie's should have sent a shiver down every finance director's spine. Not only have the penalties--personal and financial--been enormous, but governments across the world are clamping down on competition abuses, so such cases are likely to increase.
Under existing laws, price fixing in the UK and EU is a civil offence. Firms can be fined, but their directors will not go to prison. This is not true in the US and, if the enterprise bill becomes law, it will no longer be true in the UK. This is why Alfred Taubman, former chairman of Sotheby's, has been jailed, while Anthony Tennant, former chairman of Christie's, can neither be imprisoned in the UK nor extradited to stand trial in the States.
US law also allows the victims of cartels, individual or corporate, to claim up to three times their losses in damages. In addition to the jail sentence, Taubman has been fined $7.5 million and the two auction houses have agreed to pay $512 million in damages to those customers who had to pay more, while the commission charges were fixed for US auctions. These costs do not take into account the damage to the firms' reputations.
"Price fixing is theft from consumers and from competitors. It makes the firms involved lazy, stunts innovation and causes honest companies and new entrants to the market to suffer," says Alan Asher, director of policy and campaigns at the Consumers' Association. He welcomes the proposals that would make the practice a criminal offence in the UK.
But Rod Armitage, head of company affairs at the CBI, is concerned about whether it would work. "All this proposal does is to criminalise something that has been illegal for some time. The Competition Act 1998 already allows courts to fine a company up to 30 per cent of its turnover for serious cartel offences," he points out. "It will slow things down because civil cases will come to a halt while the criminal case is investigated, and the definition of a criminal case can be complicated."
Armitage is also concerned about how much an investigation can cost a company even where it is acquitted. "The cost in terms of things like management time is huge--at least 500,000 [pounds sterling] and often more than 1 million [pounds sterling]." And there's no guarantee that a sector will be scrutinised only once--the CD industry has been investigated five times, for instance.
The enterprise bill widens the remit for investigations and Armitage argues that there should be specific guidelines about which criteria should be satisfied to justify an investigation. "If no action is taken, companies should be able to reclaim some of the costs," he says.
Asher believes this is impractical. "The idea of firms clawing back the costs of investigations is ridiculous," he says. "It is a public duty to comply with legal investigations and this wouldn't work in any other area, such as tax compliance. It could simply increase pressure on the Office of Fair Trading (OFT) to launch an action to avoid costs."
Yet, as global competition increases and markets become squeezed, few experts are in any doubt that the number of cartels is rising. The rewards are too great and collusion is too easy. Senior managers at Sotheby's and Christie's started to discuss prices after the collapse of the Japanese economy in the early 1990s. The art market was faltering, but customers expected the same lavish treatment and favourable deals as before. Fixing standard fees was the obvious, if illegal, solution--and, after all, how would anyone find out?
"The world is becoming a far more competitive place and firms are finding it harder to make profits," Asher explains. …