The Cartels and Leniency Review: Russia
Enforcement policies and guidance
Federal Law No. 135-FZ on Protection of Competition (the Competition Law), dated 26 July 2006, has undergone a series of amendments and is the main statute containing basic prohibitions applicable to cartels (largely similar to those that exist in many other jurisdictions). The Russian competition authority, the Federal Antimonopoly Service (FAS), and its regional offices are responsible for their enforcement. Specifically, the Competition Law provisions in this area cover anticompetitive agreements (cartels as such), concerted actions and coordination of business activities. Liabilities for violations of the relevant prohibitions are provided for in the Code on Administrative Offences and the Criminal Code.
The entry into force of the Fourth Antimonopoly Package and the results of its implementation were among the key developments in recent years in terms of a strategic and practical impact on market players. The amendments have affected virtually all areas of antitrust regulation and have resulted in changes to the rules on cartel arrangements and leniency. Notably, the definition of cartels has been amended to cover not only arrangements between undertakings selling in the same market but also buyers' cartels (between undertakings purchasing in the same market).
The FAS has also issued guidelines summarising its outlook and practice on such matters as calculation of damages resulting from antitrust violations, proof of prohibited agreements (cartels) and concerted actions, FAS inspections, as well as application of intra-group exemptions.
The following arrangements are expressly prohibited by the Competition Law as agreements and concerted actions between competing market players (or consequences of prohibited coordination):
- fixing or maintaining prices and tariffs, discounts, bonus payments or surcharges;
- increasing, reducing or maintaining prices during tenders (bid rigging);
- market sharing by territory, volume of sales or purchases, assortment of goods, works or services sold, or composition of sellers or purchasers (customers);
- reducing or terminating the production of goods, works or services; and
- refusing to enter into contracts with certain sellers or purchasers.
These provisions are considered to be hardcore restrictions that are anticompetitive; that is to say, the mere fact of implementing these arrangements is sufficient to establish the infringement (the FAS does not need to prove their negative effects).
As in past years, cartel enforcement is one of the major priorities for the FAS: 424 cases were initiated in 2019. As suggested by the 2019 annual report prepared by the FAS, bid rigging remains the most common cartel offence, accounting for more than 87 per cent of cases (320 cases). The following industries, according to the FAS, are particularly prone to cartels (bid rigging): construction, accounting for 37 per cent of the overall number of cases (in particular, road construction); life sciences (public procurement of medicines and medical devices: 11 per cent of the bid rigging cases); food supply (10 per cent); transportation services (8 per cent); and real estate (6 per cent). FAS officials believe that foreign companies are now more actively engaged in cartels. Also, cartel participants tend to resort to more advanced (digital) technologies to implement their arrangements.
For completeness, competitors need to obtain prior approval from the FAS for the conclusion of joint venture agreements (agreements on joint activities) if the following thresholds are exceeded by them (and their groups): (1) the aggregate worldwide value of assets of the groups involved exceeds 7 billion roubles; or (2) the aggregate worldwide revenue of such groups for the past year exceeds 10 billion roubles. The term 'agreement on joint activities' is rather broad so it may catch joint ventures and be extended to other commercial arrangements aimed at establishing cooperation. The prohibitions of the Competition Law therefore do not apply to joint venture agreements between competitors entered into with prior approval of the FAS (the same rules apply as with merger clearance). However, as supported by the FAS guidelines, any clauses that lead to cartels (see above) are inadmissible and will not be cleared by the FAS.
Cooperation with other jurisdictions
As suggested in its annual report for 2019, the FAS recognises the importance of international cooperation in cartel cases and tends to emulate the best global practices. It cooperates with other jurisdictions, including the European Union and its Member States, based on bilateral and multilateral agreements. The FAS has signed more than 50 bilateral agreements and other documents with competition authorities of various countries. Although bilateral agreements entered into by the FAS in the past provide for more extended cooperation (consultations, information requests, consideration of mutual interests in the course of investigations), these are interagency agreements that are declarative rather than binding on a state level.
The FAS is a member of the International Competition Network and is expanding its cooperation with competition authorities in Brazil, Russia, India, China and South Africa, the Organisation of Economic Co-operation and Development (OECD) and the United Nations Conference on Trade and Development. The nature of such interactions is mainly related to general policy matters, consultations, exchange of experience and practice. OECD recommendations in particular had a significant influence on competition policy and enforcement practice in Russia. FAS employees regularly take part in training and workshops organised by foreign competition authorities and international organisations.
The FAS is committed to investigating cartel cases with a foreign element but the extent of its cooperation with foreign competition authorities during investigations is rather insignificant (mostly in the form of consultations). In a cartel case relating to container liner shipping companies (see Section III), the FAS officials noted that similar investigations were being conducted by the European Commission and the South African competition authority. According to the FAS, however, in the absence of a legal framework, it is virtually impossible to establish a workable solution to the exchange of information between the authorities.
Taking into account the fact that the extent of such cooperation is not defined, the issues associated with the exchange of confidential information and ensuring its protection remain a major hurdle. The existing agreements do not directly deal with this matter or provide mechanisms for the exchange of confidential information. While the parties' waiver remains the most straightforward solution for the FAS to facilitate the exchange of confidential information in the area of merger control, this option is hardly applicable to cartel cases. Similarly, there are no established procedures for joint inspections, or inspections requested by a foreign authority, or enforcing fines imposed on foreign legal entities.
Special rules currently apply to cooperation within the Eurasian Economic Union, which includes Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. Under the Treaty on the Eurasian Economic Union, the Eurasian Economic Commission, a permanent regulator, controls compliance with the common competition rules on cross-border markets.
The Treaty provides for the procedure on cooperation between the competition authorities of the Member States and with the Eurasian Economic Commission. Specifically, such interactions may extend to the exchange of confidential information, instructions to conduct certain procedural actions, and law enforcement at the request of a relevant competition authority. The obvious reasoning behind these provisions is to facilitate investigations in both cross-border and national markets. The practical implications of the above cooperation and its possible role in cartel investigations are yet to be assessed.
Criminal enforcement and extradition issues are mostly theoretical: such issues have never arisen in practice. The extradition of Russian nationals is not allowed in accordance with the Russian Constitution. In this light, it is highly unlikely that extradition requests will be made to pursue foreign citizens in cartel cases.
Jurisdictional limitations, affirmative defences and exemptions
Article 3(2) of the Competition Law has an extraterritorial application and applies to agreements (practices and conduct) reached outside Russia between Russian and foreign undertakings if they affect competition in Russia. Therefore, the choice of foreign law or arguments relating to the absence of a direct effect on the Russian market would not serve as a defence.
The FAS is entitled to hold a foreign (non-Russian) company liable for violation of the Competition Law and impose fines on such an undertaking (even if it does not have any representative offices or subsidiaries in Russia). There are obvious difficulties that reduce the practical realisation of fines.
The competition authority may seek to enforce the fines in Russia should a foreign person have any assets in Russia, but currently there is no extensive practice in this area. Although the FAS is trying to cooperate with foreign competition authorities in other countries to facilitate the enforcement of its decisions on penalties imposed on foreign companies in other jurisdictions (outside the Eurasian Economic Union), its powers remain very limited.
More importantly, the FAS has already initiated proceedings regarding the agreements and practices of foreign companies: the FAS's intention demonstrates that the number of cases is likely to increase in the future.
A highly publicised case concerning the alleged anticompetitive agreements (cartels) and concerted practices of major (foreign) container liner shipping companies can serve as an obvious example.
The infringements uncovered by the FAS consisted in concerted practices of certain market players that resulted in fixing surcharges to their freight rates. The information was published on the website of one market player and, thereafter, the same rates were fixed by its competitors. The aggregate market share of the parties involved exceeded 20 per cent, with the individual market share being more than 8 per cent (thresholds for the application of prohibitions on concerted actions; other concerted actions are exempted). The companies, which were eventually found to be in violation of the Competition Law, are foreign legal entities incorporated abroad.
Russian law does not use a concept of parental liability with regard to antitrust matters. Only a company that committed a cartel offence can incur liability; parent (foreign or Russian) companies cannot be held liable for the anticompetitive actions of their subsidiaries. This approach is supported by the practice of the FAS.
Cartels are viewed as hardcore violations subject to per se prohibitions: the fundamental principle is that cartel arrangements are inadmissible and are treated as very serious offences. Essentially, there are no affirmative defences. Similarly, no specific industries are exempt from cartel enforcement. Exemptions are available in a limited number of cases.
First, the prohibitions of the Competition Law do not apply to certain intra-group arrangements between the entities in 'control' relations (except for situations in which certain types of activities cannot be conducted by one entity). Thus, agreements entered into by and between entities that are part of the same group, where one party controls the counterparty by holding more than 50 per cent of shares or both parties are controlled (directly or indirectly) by the same company by virtue of the shareholding exceeding 50 per cent, are viewed as agreements within the same undertaking having a single 'commercial will'.
Further, agreements on granting or transferring intellectual property (IP) rights or equivalent means of individualisation of a company, products, works or services are supposed to be exempted from the application of the Competition Law. The FAS advocates the removal of these exemptions and seeks to exert control over contractual arrangements in the area of IP and look into the existing practices in terms of their compliance with the Competition Law. Most notably, a set of amendments to the Competition Law prepared by the FAS provides for the removal of this IP immunity.
The leniency programme is provided for in administrative (for both legal entities (or a group) and individuals) and criminal (for individuals only) laws. Formally, these are two separate procedures. Leniency programmes do not preclude private enforcement.
Further to Article 14.32 of the Code on Administrative Offences, administrative leniency is available under the following conditions:
- at the time of submission of the leniency application the competition authority did not have information concerning the violation;
- the applicant stopped its involvement in the cartel arrangement; and
- information and documents provided are sufficient to establish violation of the Competition Law.
Collective applications filed simultaneously by several cartel participants are not accepted. Full immunity is available only to the first applicant. Leniency is available only if the application is submitted to the FAS before the announcement of a decision in the antitrust case.
It is possible for the FAS to set a minimum amount for administrative fines against those who were the second or third to report a cartel arrangement voluntarily to the competition authority. The necessary prerequisites are essentially the same as in the case of the first applicant. The organiser of a cartel cannot benefit from this option to reduce fines.
Russian law does not expressly establish a procedure for obtaining markers. The basic recommendation is to submit a complete application in line with the FAS requirements. Alongside an application in writing, applicants provide all available evidence and plead guilty. The competition authority states that its focus continues to be the stimulation of voluntary reporting through the leniency programme. Still, in most instances, market players tend to resort to leniency in exceptional circumstances.
The criminal leniency programme is granted to individuals under Article 178 of the Criminal Code provided that: (1) the offender was the first one to report; (2) the offender assisted with the investigation; (3) the offender compensated the damage; and (4) the offender's actions do not constitute any other criminal offence (e.g., those relating to corruption). Applications for criminal leniency are handled by the law enforcement agencies and, ultimately, the courts. Owing to the fact that the number of criminal cases remains very insignificant, the criminal leniency programme is of limited practical application.
Violations of the Competition Law provisions relating to cartels may result in administrative (for individuals and legal entities) and criminal liability (for individuals only). For a discussion on civil liability issues, see Section VII.
The most common penalty imposed on legal entities being cartel participants is an administrative fine of up to 15 per cent of the company's turnover in the market concerned for the preceding year. In any case, the amount of the fine cannot exceed 4 per cent of the total turnover of the offender for the preceding year and cannot be less than 100,000 roubles. Company officials may also be held liable and be fined up to 50,000 roubles or disqualified for up to three years. The FAS is entitled to impose administrative fines on offenders; disqualification (prohibition from holding certain posts or carrying out certain activities) can be applied only by the court.
The Code on Administrative Offences has been amended to introduce differentiated fines for conclusion of anticompetitive agreements or concerted actions depending on their nature: for example, in the case of agreements that lead to or may lead to an increase or decrease in price or price-fixing at tenders, a fine of up to 50 per cent of the starting price of the subject of the tender; in the case of concerted actions, a fine of up to 3 per cent of the company's turnover in the market concerned for the preceding year.
Both mitigating (e.g., the offender did not initiate a cartel or was required to follow the binding instructions, did not actually implement the arrangement, stopped the violation, contributed to the investigation, or took certain steps to remedy the violation) and aggravating (e.g., the offender initiated a cartel, forced other undertakings to participate, refused to stop the violation, or repeated the violation) circumstances stipulated in the Code on Administrative Offences are taken into account for the purposes of calculating fines and any possible reductions.
The Criminal Code establishes liability for individuals if a cartel agreement resulted either in significant damage (over 10 million roubles) to individuals, organisations or the government, or significant revenue for the parties to the agreement (over 50 million roubles). Legal entities cannot incur criminal liability under Russian law. Criminal proceedings against individuals involved may be initiated; the investigation is conducted by the law enforcement agencies. In the most extreme cases (where there are aggravating circumstances), the sanctions imposed by the court may include imprisonment for a term of up to seven years. These penalties are very rare in practice.
On a separate note, under the Competition Law, the FAS is authorised to issue orders aimed at putting an end to a violation. This is a binding instruction, further to which the undertaking may be obliged to terminate anticompetitive agreements (or modify their terms and conditions) or take other measures to restore competition. In the most extreme cases, the FAS has a right to invalidate agreements (or certain clauses thereof) through court proceedings.
The FAS is entitled to issue an order requiring the offenders to transfer to the state budget all revenue received as a result of an antitrust violation. It is expressly prohibited to resort to administrative liability if the offender complied with such an order and transferred the prescribed amount to the budget.
Settlement procedures are not available at the FAS review stage of the case. An amicable settlement agreement can be entered into with the FAS when a decision it has made is appealed in court. A settlement agreement must be approved by the court and is binding on the parties (the offender and the competition authority). As part of the settlement procedure, the offender is required to acknowledge the violation while the competition authority agrees to reduce the fine. Additional behavioural commitments may be imposed on the offender. From a practical perspective, such settlement agreements are often entered into in high-profile cases relating to the abuse of dominance but are also available for cartel offences (e.g., as in the case of foreign container liner shipping companies).
'day one' response
Generally, there are two types of FAS inspection: scheduled and unscheduled (dawn raids). Both may be conducted either on-site (field checks) or in the form of documentary reviews. It is during dawn raids that the competition authority attempts to uncover cartel arrangements and gather valuable evidence suggesting anticompetitive practices. Although most businesses are becoming increasingly aware of FAS dawn raids (e.g., through training or guidelines), in many instances it is challenging to take a well-structured and well-documented approach during these audits.
First, the officials must present FAS identification and a decree authorising an inspection. All information included in the decree (inspection dates, legal grounds and subject matter) is to be checked very carefully. The term of inspections cannot exceed one month from the date specified in the decree, but may be extended by two months.
The company representatives are allowed to be present during the inspection and provide clarification (as required) to the FAS. The competition authority is not under a legal obligation to wait for legal advisers to arrive. The FAS officials are entitled to interview all employees and ask questions relating to the subject matter of the dawn raid. The employees of an inspected company should address only the questions asked and, as far as possible, make notes of all questions and the answers given.
The inspection can extend to all business premises, cupboards, desks, safes, IT systems or persons: the FAS officials are allowed to access and inspect a legal entity's premises, offices and documents. However, the FAS officials may not access, inspect or search persons, vehicles, private belongings or residential premises. Two independent witnesses should be present during the inspection. The FAS is authorised to engage experts and specialists to provide assistance in the course of dawn raids. Obstruction of the inspection, failure to provide documents and refusal to grant access to the FAS officials constitute an administrative offence. To this end, reasonable cooperation is expected from an inspected company.
Further, the officials have a right to request any documents and information; they may review original copies of all documents but can only retain duly certified copies. All documents provided should be listed on the transfer and acceptance deed. It is recommended to make a copy of all documents to be transferred to the competition authority. The FAS officials may copy documents and other materials, take photos and make video recordings during the inspection.
Documents must be provided to the officials even if they contain confidential information, or business or other secrets protected by law. If the officials want to inspect the privileged documents, it is advisable to mark documents appropriately (as trade secret, confidential, etc.) to ensure the proper handling of this information by the competition authority, to prevent further distribution and to be able to impose liability in the case of unauthorised dissemination of the information.
The officials are entitled to make electronic copies of information contained on company-owned computers, hard drives and servers, including internal and external email correspondence. Servers, computers and hard drives are to be left at the company. Again, to avoid any further controversy, an electronic copy should be made of all information that the officials have received.
In light of the above, while the competition authority has extensive powers to conduct inspections (dawn raids), the FAS officials cannot perform certain actions. By way of illustration, they cannot retain original copies or electronic equipment, raid private addresses or conduct surveillance. Only law enforcement agencies brought in by the FAS for such purposes are endowed with such powers (usually subject to a court order).
Following the inspection, the key recommendation is to review the protocol and inspection act and all information reflected therein, including a list of the documents copied and received by officials. An inspected company is entitled to make comments in the foregoing documents that reflect its agreement or disagreement with the inspection results. It is reasonable to sign the documents once they are accurate and confirm that a copy of the protocol and inspection act have been duly received.
A private right of action is available under Russian law. Further to Article 37(3) of the Competition Law, a private action may be initiated before the court by any person whose rights and interests have been violated by an antitrust infringement. Most notably, actual damages and lost profit can be claimed. General procedural rules apply to the review of private antitrust actions and their funding: legal costs (namely stamp duty and, within reasonable limits, legal fees) may be recovered from the defeated party.
While private proceedings are generally possible in all types of antitrust matters, court practice is primarily centred on abuse of dominance and unfair competition rather than cartels. Difficulties relating to the calculation of damages (in particular, lost profit) and associated high standards of proof adhered to by the Russian courts are two of the major problems preventing the development of private antitrust actions.
Currently, there is a clear preference for government enforcement by the FAS in cartel cases; market players are generally reluctant to opt for private enforcement. The competition authority is adamant about changing the existing situation. For example, its Presidium issued the Guidelines on Proof and Calculation of Damages Resulting from Antitrust Violations, which sheds some light on certain aspects of private litigation.
In line with court practice, the FAS emphasises that, to recover damages, the plaintiff is supposed to prove (1) a violation of the Competition Law, (2) the existence of damage (including the amount), and (3) the cause-and-effect relationship between the violation and the inflicted damage. The FAS decision establishing the violation is usually instrumental during the court proceedings but does not reduce the burden of proof imposed on the plaintiff (as to the amount of damage and the cause-and-effect relationship). The main effect of the FAS decision is that it serves as evidence and is not formally binding on the court. For this reason, the competition authority urges future plaintiffs to be more active in collecting and presenting evidence during the course of private antitrust proceedings.
The FAS has always been a proponent of class actions to deal with antitrust matters and has even drawn up several draft laws to this end. Traditionally, the concept of class action existing in common law legal systems has not been known to Russian law; however, recently, a general concept of collective (group) action (not specifically aimed at antimonopoly issues) has been modernised and a new procedure has been introduced into the Russian Code of Civil Procedure (the amendments came into force on 1 October 2019). In any case, private antitrust litigation remains a complex, somewhat expensive and, therefore, highly unpopular course of action.
The Competition Law and the enforcement agenda of the FAS are constantly evolving; the FAS puts a particular emphasis on the fight against cartels, as well as its digital and cross-border dimensions. The role of the Eurasian Economic Commission regarding the analysis of cross-border antitrust violations within the Eurasian Economic Union could increase in the near future.
The concept of antimonopoly compliance has finally been introduced to the Competition Law. Implementing an antimonopoly compliance system is not compulsory. However, if a company or group of companies decides to implement such a system, it must make sure that the internal documents it adopts to this end include the following: requirements for the assessment of antimonopoly risks within the company; measures aimed at reducing these risks; monitoring measures; the procedure for informing employees of the compliance system; and information about the company's antimonopoly compliance officer. Companies can apply to the FAS to get confirmation that their internal documents on antimonopoly compliance are in line with the legislation. The FAS believes that putting in place antimonopoly compliance will help prevent violations by companies, including cartels. At the same time, the new law is silent on whether liability can be mitigated or excluded for violations by companies that have implemented a compliance system cleared with the FAS.
Further amendments to the Competition Law are to be expected and may cover such topics as correlation between IP and antitrust regulations (elimination of IP immunity) and digital economics.
In addition, the FAS has drawn up several draft laws aimed at dealing with cartels. Obviously, battling bid rigging is a top priority for the competition authority. The FAS has prepared draft laws aimed at introducing further amendments to the Criminal Code and the Criminal Procedure Code (relating, among other things, to bid rigging), the Competition Law (giving the FAS additional rights during the course of cartel investigations) and public procurement legislation.
1 Maxim Boulba is a partner and Maria Ermolaeva is an associate at CMS Russia.