’Dawn raids’ or surprise search and seizure visits by competition and other regulatory authorities increasingly are becoming a regular global phenomenon. These unannounced inspections occur without warning and are usually conducted at times when least expected, often at the crack of dawn and at weekends.
Yet, in a business climate where high profile investigations into cartel behaviour, price-fixing and abuse of dominant market position have become commonplace, relatively few companies appear to have procedures in place to deal with a regulatory investigation.
Regulators are given wide powers of investigation in terms of legislation. The Competition Act, for example, gives enforcement authorities the right to carry out unannounced searches at a company’s premises for documents that might provide evidence of anti-competitive behaviour. The raids are conducted in a covert manner to prevent the firms under investigation from being given the opportunity to destroy evidence.
Mondo Ntlha, head of the competition and regulatory practice group at corporate law firm Cliffe Dekker, says that a comprehensive crisis management plan is necessary to deal with the potential areas of risk corporations face from regulatory investigations.
“Refusing entry to regulators or obstructing their search during a raid could be an offence. Imprisonment and heavy fines can be imposed for obstructing an investigation by way of hiding or destroying documents,” Ntlha says.
She adds that while cooperation with the competition and other regulatory authorities is generally to be recommended, firms that are the subject of raids have certain rights enshrined in the Competition Act and other Acts, and the Constitution.
“Managing the risk of investigation requires specialist advice at every stage of the regulatory cycle. Firms need to make sure their house is in order. They need to address all potential areas of risk in order to manage that risk as effectively as possible. Systems and controls should be put in place to manage the risk of a search and seizure raid. Every member of staff should be trained in what to do.”
Cliffe Dekker has recently introduced a Rapid Response hotline service to assist firms when faced with a regulatory crisis. Available 24 hours a day, every day of the year, the hotline gives clients instant access to specialists in regulatory investigations.
The Rapid Response team will give immediate advice on how to manage the situation anywhere in South Africa, and anywhere around the world.
“We operate the Rapid Response hotline in association with DLA Piper, the second largest legal services organisation in the world. They have global offices in every major business centre. Clients call a free telephone number in South Africa. The call gets routed through to a call centre in the UK from where the client is connected to a regulatory lawyer in the client’s particular country or anywhere in the world the service is needed,” Ntlha says.
Company executives are warned not to think that an investigation is unlikely to happen to them. “The risk is high and real,” she says.
In the past 18 months, the focus by the South African Competition Commission has shifted from merger regulation to enforcement cases, particularly cartel behaviour.
Cartel conduct is fertile ground for dawn raids. Because obtaining information on price fixing and other concerted practices between competitors is so difficult for regulators, Ntlha feels there can be little doubt that dawn raids will become a feature of enforcement activity in the future.
The Commission conducted a number of high profile search and seizure operations in 2007. The biggest involved a simultaneous raid on the Durban, Port Elizabeth and Johannesburg premises of the Reclamation Group in July for alleged collusive tendering and price fixing in the recycling industry. In October 2007, three large freight forwarding companies were raided on suspicion of fixing certain charges. These raids were conducted simultaneously in the EU and US with the competition authorities in those jurisdictions.
Tough new legislation is being introduced to bring SA’s competition laws in line with international best practice. Enforcement cases referred by the Commission to the Tribunal have increased fourfold over the past year.
The findings of a survey of 250 leading European firms show that companies consider regulatory risk management important to their business strategy but are failing to manage the risk effectively.
The survey shows that a large number are failing to put adequate measures in place to protect themselves and their reputation. In the findings, 57% of the companies surveyed believe that their industry is likely to be investigated in the next year; and 75% of the respondents believe that company directors’ personal exposure to the punitive consequences of regulatory breaches is likely to grow over the next five years.
In South Africa, the Department of Trade and Industry has been involved in a review to strengthen competition laws. Currently, the maximum penalty that can be levied on a firm that has contravened the Act is 10% of that firm's annual turnover in the preceding financial year. In line with international best practice, the proposed amendments are likely to include personal liability for directors of companies engaging in cartel activities.
Ntlha says that search and seizure operations can be conducted at a director’s private dwelling or home. She adds that individuals might not realise that they are considered to be engaged in cartel activity or are at risk of being investigated. “Industry associations create a platform for competitor contacts which could inadvertently lead to price fixing. Discussions could also be happening at lower levels between companies, such as sales teams, which company executives may not always be aware of.
“Due diligence and compliance audit services help company directors assess their existing levels of risk, whether an existing business or potential acquisition. Such services are part and parcel of the Rapid Response hotline,” says Ntlha.
Other services include seminars on raid procedures, raid training to equip employees with the tools to handle a dawn raid and an alert system that informs clients about critical policy and legislative developments before they become a business threat.
The SA Competition Commission can conduct a raid in conjunction with a foreign counterpart if the conduct under investigation abroad is also believed to be occurring in South Africa. The example of the recent dawn raid in the freight forwarding industry conducted simultaneously with US and EU competition authorities underscores this fact.
In the case of multinational organisations, simultaneous raids can be coordinated to take place in several jurisdictions at the same time. In January this year, the European commission mounted surprise raids on a number of leading pharmaceutical companies across Europe as part of an investigation into possible anti-competitive behaviour. The investigations were coordinated with, among others, the British, French and German competition authorities, alongside the US federal trade commission, and the Swiss.
“Breaches of competition regulation are prevalent. Companies and their executives will increasingly need to consider their risk profile and look at comprehensive procedures to deal with those risks,” Ntlha says.