PvtIntl Cartels

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Private International Cartels

John M. Connor

Purdue UniversityWest Lafayette, Indiana

[email protected]

April 2003
mailto:[email protected]:[email protected]


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OBJECTIVES Analyze economic dimensions of recently discovered

private international cartels Types and structures Durability

Affected commerce Economic harm caused

Evaluate the deterrence power of public and privatesanctions on cartels

Fines in U.S., Canada, and EU Treble damages Optimal deterrence


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DATA SET 100 private cartels with participants (corporate or

individual) from at least two countries Discovered since 1990: investigation is public,

indictments handed down, or fines imposed. (1990 is thefirst year that present Sherman Act sanctions operated).

As of March 2003, 78 were fully or partially prosecuted;investigations public on 22 others.

Approximately 35 secret investigations of internationalcartels ongoing in the United States.


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Product Characteristics 50% organic chemicals 42% food, feed, or agricultural uses 33% other manufacturers (Mostly Metal and metallic, plastics,

graphite products) 17% construction, transport, finance, other services

Food-and-agricultural accounted for 80%+ of sales of cartels

discovered before 2000 Since 1999, large majority discovered in nonfood industries

} high overlap


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Geographic Characteristics 43% global operated in two or more continents, most of

them in North America, Europe, and Asia (51% of affected sales)

33% intra-European Union, multiple Member States(44% of sales)

23% other regions or single countries: U.S., Canada, UK(5% of sales)


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Structural Characteristics In cartelized markets, top 4 or 5 producers supplied

more than 80% Cartels typically controlled more than 90% of supply, but

broke down when control dropped below 65% On average 5.6 corporate participants per cartel

56% had 4 or less 22% had 7 or more

Homogeneous products virtually universal


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Average Durability (months)

Organic chemicals

Other manufacturersServices

GlobalRegional EuOther regional

All types

Discovered

1990-1995 1996-1999 2000-2003

82 85 65

61 76 77- - 61 73

- - 85 7059 71 7364 73 32

60 79 65


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Affected Sales Sales by type:

Sales unavailable for 43 cartels Average cartel affects $3.7 billion in commerce, global the

largest, other regional the smallest Approximately 30% in North America, 35% in EU, 35% rest of

world

Million dollars

Organic chemicals (36) 101,736Other manufacturers (16) 115,570Services (6) 8,250

Global (30) 109,410Regional EU (13) 86,814Other Regional (14) _13,846

All types (57) 210,045


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Average Percentage Overcharges

By type:Organic chemicals 25%Other industries 35%All industries 28%*

Available for 31 cartels, from a variety of sources: publishedeconomic analyses, statements of public prosecution, andcourt or EC decisions.

Even allowing for some upward bias, these overcharges arewell above the 10% assumed for U.S. SentencingGuidelines and 10%-of-sales maximum EU fine.

Excludes the 1900-3000% overcharge in Mylar Laboratories


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U.S. Prosecution of InternationalCartels, 1990-2003

33 cases from Aluminum Phosphide (1993) to MagneticIron Oxide (2003)

97 companies fined, 42 more indicted (65% non-U.S.)

61 executives fined in 64% of cases, 39 fugitives indicted Of the 61 fined, 30 given prison sentences in 36% of cases averaging 11.1 months

Contrary to DOJ statements, there is no upward trend in

length of prison sentences Total individual fines $24.4 million, but median only$50,000. Four fines above $350,000, one litigated(Taubman)


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Canadian Prosecutions of International Cartels

15 cases prosecuted 1991-2003, 11 followingU.S. actions

62 corporations fined U.S. $125 million total 4 individuals fined U.S. $600,000 total First Canadian prosecutions lag U.S. convictions

by an average of 8 months Corporate fines about 6% level of U.S. fines


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EU Prosecutions of InternationalCartels, 1990-2003

Prosecuted 34 cases, of which 14 were global cartels 396 corporations were fined (or given amnesty)* 19% of sanctioned corporations from outside EU (30%

excluding Euro-Zone Banks) EU decisions lag U.S. prosecutions by 30 months Decisions take average 28 months after raids EU fines about 85% size of comparable U.S. fines

* Includes 149 banks in the Euro-Zone case


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Many Repeat Offenders in 100Cartels

Top 10 # of Intl. Cartels*

Hoffman-LaRoche 13BASF 12

Aventis/Hoechst/Rhone-Poulenc 10Akzo Nobel 8Mitsubishi 7Elf Atofina 6Archer Daniels Midland 5

Bayer 5Takeda Chemical 5Degussa-Huels 5

*Includes targets of announced ongoing investigations


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Deterrence of Global Cartels Optimal deterrence occurs if at point of cartel formation: Affected by probability of discovery (10% to 33%) Affected by probability of conviction (50% to 90%) Considering U.S. fine discount policy, U.S. fines are expected to be

127. to 64% of us EU fines are in range 20% to 70% of eu Rest-of-World fines are virtually 0% of other Total effective cartel are 25% from U.S., 30% EU, 45% elsewhere Treble-damage suits (U.S. and Canada) add 60% to 200% of us To be conservative, ignore Net Present Value and Statute of

Limitations Bottom Line: optimal deterrence is from 5 x to 55 x No international price fixer has paid 5 x ex post


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The Cost of Collusion: The LysineCase

$Million1990-1991 Price War due to ADM entry* 9.21993 Price War, ADM disciplinary move 5.51992-95 Direct management costs 1.0

Total costs $15.7

As a % of monopoly profits a trivial 4-5%

* Somewhat doubtful


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International Cartel Fines Collected by the U.S.Department of Justice, 1996-1999 Calendar Years

35.453.5

203.2

92.5 118.7

1134.7

236.2

0

200

400

600

800

1000

1200

1996 1997a 1998 1999 2000 2001 2002

m i l l i o n s o f

d o l l a r s

Lysine

CitricAcid

Vitamins

Other Cartels

V i t a m i n s


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Proportion of Corporate defendants in U.S.Criminal Cartel Cases that were Foreign, 1987-1999

0

10

20

30

40

50

60

70

80

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

P e r c e n t F

o r e i g n


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Five Global Cartels with Corporate Fines Imposedby U.S., EC, and Canada, 1996-2002

Cartel U.S. EC Canada

Lysine 92.5 97.9 11.5

Citric Acid 110.4 120.4 7.9Vitamins 906.5 756.9 64.0Sodium gluconate 32.5 51.2 1.6Graphite electrodes 436.0 172.0 15.5

Total 1,577.9 1,213.3 100.5

Million U.S. dollars

Sources: Posner (2001), Shepherd (1985), Connor (2001), DOJ (2002). Note: These are the only five global cases for which all three jurisdictions had taken actions by mid-2002. The list of overlapping cases ought to double or triple by 2004 .


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Potential and Actual U.S. Sanctions Applied to theLysine Conspirators 1996

20%SalesRule

Twicethe

HarmActual Max. Actual Max. Actual Max. Actual

ADM 54-108 156 70 8 3 288 78 2,800 700

Ajinomoto 80-160 231 10c 14 2 504 0 4,900 75

Kyowa 45-90 129 10c 5 1 180 0 1,750 75

Sewon 32-65 94 1.25 c 7 1 252 0 2,450 50Chcil 15-30 43 1.25 6 0 216 0 2,100 0

Total 225-448 559 92.5 40 7 1,440 78 14,000 900

Company Name

Million dollars

Individual Sanctions

Number b Prison Time

Months Thousand dollars

Corporate Fines

Maximum under Guidelines a

Fines


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6%8%

86%

6%

8%

86%

Vitamins

Proportion of Global Treble DamagesRecovered by Plaintiffs or GovernmentFines

$20.1 billion


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Proportion of U.S. Treble DamagesRecovered by Plaintiffs or U.S. Fines

28%

17%27%

28%

28%17%

27%

28%

Vitamins

$3.5 billion


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Does Crime pay? ADM and the Lysine Cartel,1992-1995

ActualLiability

MaximumLegal Liability

United States:Revenues (Monopoly Profits) 80 80Costs:

U.S. Government criminal fines 70 160Federal civil settelments 45 240

Suits by attorneys general 0 120State-level indirect buyers units a 15 30Legal Services 20 20

Total U.S. financial costs 150 530

Net U.S. revenues from price fixing -70 -490

Rest of the World:

Revenues b 100 100Costs:

European Union fines 45 1,200Canadian government fines 8 10Canadian Civil suits 10E 25EOther national agencies 10E 25E

Total non-U.S. financial costs 73 1,260

Net non-U.S. revenues from price fixing 27 -1,120

Global net revenues -43 -1,610

Income Statement

Million dollars c


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Costs of Collusion: 3 Examples of Overcharges

All three cartels caused substantial economic injury to buyers. Thedirect global overcharges due to collusion were:

Lysine $330 million (20% sales)Citric Acid $690 million (17% sales)12 Bulk Vitamins $6,710 million (25% sales)

(Vitamins range was 4% to 33%)

I believe there are exceptionally precise estimates.

North American Buyers bore about one-third of the global amounts,Europe one-third, Asia one-third


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Two Examples of the U.S. Department of JusticesLeniency Program for Corporate Price Fixers

Amount

Proportionof

AffectedSales

AmountProportionof Affected

Sales

Discountfrom

Guidelines

Vitamins a : Percent $ millionFirst to plea (Rhne-Poulenc) 120-240E 120-240E 0 0 0 100Second to plea (Roche) 1312-2624 360-900 10-25 500 14 62-81

Second to plea (BASF) 409-818 160-420 10-25 225 14 45-72Third to plea (Daiichi) 80-180E 25-40 25-35 25 24 69-86Fourth to plea (Eisai) 150-320E 55+ 30+ 40 22 73-88

Graphite Electrodes b:First to plea (Carbide/Graphite) 90-250E 0 0 0 0 100Second to plea (Showa Denko) 65-135 32-82 10-25 325 10 50-76Third to plea (UCAR Intl.) 125-275E 175-250 25-35 110 15-18 12-60Last to plea (SGL Carbon) 100-240E 150+ 30+ 135 24-28 0-44

Million Dollars Percent

Actual Fines Paid

CASE: Company

U.S.Sentencing

GuidelinessFine Range

Normal Leniency


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LinkagesRoche & BASF:Vitamins A&E Roche & BASF

executives

Andreas HauriKuno Sommer

Terry WilsonBarrie Cox

Roche, ADM, Bayer,Jungbunzlauer: Citric Acid

Terry WilsonMark Whitacre

ADM,

Ajinomoto,Kyowa Hakko:Lysine

Ajinomoto &Kyowa Managers

Sewon and CheilJoin: Lysine

Rhne-Poulenc, Eisai,Takeda, Daiichi, etc:Vitamins B1, B2, B5, B6, Cetc.

January 1990

Mid 1990

March 1991

January 1991

Summer 1991

April 1992

June 1992

July 1992

Late 1992

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