Cartel Regulation and the Leniency Programme in Russia

General overview

The fight against cartels continues to be the main strategic activity of the Federal Antimonopoly Service of Russia (the FAS) in recent years. The legislative base has developed significantly; a lot of modern legal instruments of public enforcement of the anti-cartel legislation have been implemented.

At the start of January 2012, significant amendments to the Russian competition legislation (Federal law No. 401-FZ of 6 December 2011) took effect. It was dubbed the ‘Third Antimonopoly Package’ among the lawyers practising in competition law and affected the essential sources of the Russian legislation concerning cartel prohibition:

• the core federal law ‘On Protection of Competition’ No. 135-FZ, dated 26 July 2006 (the Competition Law);
• the Code on Administrative Offences of the Russian Federation, dated 30 December 2001, No. 195-FZ (the Administrative Code); and
• the Criminal Code of the Russian Federation, dated 13 June 1996, No. 63-FZ (the Criminal Code).

One of the important achievements of this reform is introducing the definition of a cartel that is now, in accordance with article 11(1) of the Competition Law, a horizontal agreement between the competitors that leads or may lead to:

• the fixing or maintaining of prices, discounts, bonus payments or surcharges;
• division of market by territory, volume of sales and purchases, assortment of goods and services, or range of sellers or purchasers;
• the reduction or termination of production of goods;
• refusal to enter into a contract with a particular customer or seller; or
• the increasing, reducing or maintaining of prices on tenders.

The list of per se restrictions was limited. Any other agreements are prohibited only if it is discovered that they lead or may lead to the restriction of competition.

Cartels prohibition is based on articles 8 and 34 of the Constitution of the Russian Federation, guaranteeing shared economic space, free transfer of goods, services and financial recourses, competition support and freedom of economic activity, and prohibiting economic activities aimed at monopolisation and unfair competition. The Competition Law is commonly applicable to all sectors of the economy, and there are no sector-specific offences or exemptions with respect to cartels.

It must be specifically noted that the Competition Law is extraterritorial in nature. The relevant rules were slightly amended, and now the Law applies to agreements made outside the Russian territory between Russian and foreign entities or organisations, and actions made by them to the extent that such agreements have an impact on competition in the territory of Russia. The character and extent of such an impact shall be assessed by the FAS in each case. Thus, foreign companies may be fined under the Administrative Code and foreign officials are also subject to criminal prosecution under the Criminal Code. Still, we are not aware of any cartel case involving foreign undertakings.

The cartel prohibition has both an administrative and criminal nature. The criminal liability for individuals is provided for by article 178 of the Criminal Code and arises when a cartel causes at least a loss to individuals, legal entities or the state exceeding 1 million roubles, or derives illegal revenue exceeding 5 million roubles. It is worth mentioning that as of the latest amendments, any other prohibitive horizontal or vertical agreement is now decriminalised.

The FAS is very attentive to the competition in the markets for chemicals, pharmaceuticals, funeral services, energy products, food products, air carriages and financial services, including the insurance market.

One of the much publicised cartel cases is the typical price cartel case with respect to sodium hydrate (FAS Russia case No. 1 11/139-11). The fine for the initiator of this cartel exceeded 912 million roubles, which is the highest pecuniary penalty ever imposed on a cartelist in Russia. Now the FAS decision is being challenged in commercial court.

Inspections

On 25 May 2012, new procedural rules for inspections of compliance with the competition legislation conducted by the FAS have been revealed. It is expected to come info force very soon (the relevant decree has not been officially published yet). The new regulations have been negotiated with business groups and some important business-oriented amendments have been made.

The basis of the rules for conducting inspections is provided for by articles 24 to 26 of the Competition Law and elaborated in the new FAS Decree No. 340 of 25 May 2012 (the Rules).

In extraordinary cases, investigations carried out by the FAS may be accompanied by prosecution agencies. The FAS is also entitled to conduct joint inspections among its territorial administrations.

There are two types of inspections: scheduled and unscheduled. Each of them may be conducted with a camera (documentary) or with an on-site form.

The ground for initiation of a scheduled inspection expires three years from the date of either incorporation of a legal entity or completion of the latter inspection.

The grounds for the initiation of an unscheduled inspection include:

• the receipt of materials from the state and municipal authorities or public associations indicating characteristics of antimonopoly law infringements;
• the receipt of reports and claims from persons and the mass media indicating characteristics of antimonopoly law infringements;
• the passing of the deadline by which to perform the binding prescription issued by the FAS (in this case, only the performance of such prescription is being inspected);
• mandates issued by the president of the Russian Federation or the government of the Russian Federation; or
• discovery by the FAS of characteristics of antimonopoly law infringements.

This last rule (as the previous one) was introduced by the Third Antimonopoly Package liberalising the competition legislation as a whole. However, it now grants the FAS carte blanche to conduct unscheduled inspections on its own initiative and actually expands the grounds for inspections.

An inspection is conducted in accordance with the relevant decree issued by the head of antimonopoly authority. Article 25.1(7) of the Competition Law sets up the requirements to such decree (it should specify full name, position of the each FAS official, authorised to conduct the inspection, terms and deadline for the inspection, the list of examining measures, legal grounds of the inspection, etc). Any valuable mistake in the decree may become the ground for appeal.

The inspectee should be notified not less than three days prior to a scheduled inspection. No prior notification is provided for inspections of compliance with article 11 of the Competition Law (cartels and prohibitive agreements).

The maximum term of any inspection is one month from the commencing date, indicated in the decree, until the date of sending the certificate of inspection. This term can be extended for up to two months by the head of antimonopoly authority (under Article 25.1(9) of the Competition Law). The inspectee should be notified about such extension not less than one day in advance by any means of communication.

On-site inspections may be conducted only and to the extent that it is not possible for the FAS during a documentary inspection to:

• be assured of the completeness and validity of information contained in the documents available to antimonopoly authority, or
• evaluate compliance of the inspectee’s activity with the competition legislation without conducting an on-site inspection.

During inspections, FAS officials have the following key rights:

• right of free access to the territory and premises of the inspectee (save for residential premises). The inspectee is not allowed to prevent such access;
• right to receive in due time (three business days) and in due form, under reasonable request, documents and information, including any confidential information and official electronic correspondence, written or oral explanations;
• right to free search of territory and premises (save for residential premises), things, documents and information saved on any storage. It is worth mentioning that searches of documents and information in electronic form should be incorporated into a separate report of the antimonopoly authority; and
• right to make picture and video recordings, and to take copies of documents during the search.

During the inspection, FAS officials are bound to:

• conduct the inspection based on the decree issued by the head of competent antimonopoly authority;
• conduct the inspection only in the course of their duty;
• prepare obligatory protocols and other statements;
• not disclose confidential information; and
• serve upon the certificate of inspection not later than the last day of the on-site inspection (or to send by registered mail).

During inspections, the inspectee is entitled to:

• demand presentation of service certificates, copy of the decree on inspection issued by the head of antimonopoly authority;
• demand complete, updated and true information on the procedural issues of conducting the inspection;
• prior to on-site inspection demand a review of the Rules;
• be present during the inspection (CEO or another manager or authorised representative) and provide explanations on the issues related to the subject matter of the inspection. The latter aspect is very important and antimonopoly authorities often describe the subject matter too broadly;
• demand provision of information and documents related to the subject matter of the inspection;
• with old documents and information that is not prescribed by the law (among other things during a documentary inspection not provide documents that are not related to subject matter of the inspection, as well as information and documents that can be obtained from other regulatory authorities);
• demand to sign a transfer and acceptance certificate with respect to the transferred documents and information;
• notify of the impossibility to provide documents and information to the extent specifying the reasons and new period of submission of such documents and information;
• demand to observe the period of inspection;
• refuse to provide explanations;
• demand to make an entry about the conducted inspection in the company’s inspections record book; and
• be acquainted with the results of inspection and specify in a certificate of inspection its disagreement with the results or certain actions of FAS officials as well as to refuse signing the certificate.

The FAS only has administrative investigatory powers and only the Ministry of Internal Affairs and its divisions (MIA) has criminal investigatory powers. Thus, the law provides for material limitations of the investigatory powers to safeguard the rights of defence of companies and individuals under investigation. The FAS is not entitled to carry out compulsory interviews with individuals, to carry out an unannounced search of residential premises, ‘image’ computer hard drives using forensic IT tools, retain original documents, secure premises overnight (eg, by seal) or any surveillance powers. All these powers are granted to the MIA. However, the major material limitation of the MIA’s investigatory powers under the Code of Criminal Procedure is the necessity to obtain a prior court authorisation to execute some powers.

Both the FAS and MIA are not bound by the law to wait for legal advisers to arrive before the inspection starts. Dawn raids become more popular in the FAS’s activity to investigate cartels. The FAS often invite the MIA to conduct dawn raids for procuring organisational issues basing on the joint Decree of MIA No. 878 and FAS No. 215 dated 30 December 2004.

Under the Administrative Code FAS is entitled to impose a fine in case of failure to obey the lawful prescription of the FAS’s officials issued, inter alia, during inspections, to submit information requested by antimonopoly authorities, submission of misleading information or untimely submission of information. The FAS often enforces these rules against offenders. The Criminal Code provides much more severe sanctions for the obstruction of the MIA’s or prosecutor’s investigations or the court’s activity including fines, compulsory community service, apprehension or imprisonment.

In order to carry out any search, the Competition Law stipulates that two witnesses must be in attendance during both scheduled and unscheduled inspections. Moreover, a search may be witnessed by representatives of a legal entity or a person. However, there is no indication that the conduct of a search in the absence of such an authorised representative composes a violation of the Rules.

Enforcement

The FAS and its territorial divisions enforce the cartel prohibition under the Competition Law and Administrative Code through hearing the cases on violations of the competition law and cases on administrative offences. Criminal offences are investigated by the MIA subject to the Criminal Code and the Code of Criminal Procedure No. 174-FZ dated 18 December 2001. Usually, once a violation of the Competition Law is discovered and a cartel case is closed by the FAS, the antimonopoly authority sends the case materials to the MIA for initiation of criminal proceedings. As for criminal investigations, the MIA only prosecutes cartel cases, which amount to serious or complex fraud. However, its cooperation with the FAS is not reflected in the law. MIA conducts criminal procedures under the Code of Criminal Procedure and the Federal Law ‘Law Enforcement Operations Act’, dated 28 August 1995, No. 144-FZ, as amended.

In April 2012, the FAS unveiled a draft of new procedural rules of initiation of and conduct of the proceedings on cases of the competition law infringements. It is being reviewed by the Ministry of Justice of the Russian Federation. The current rules in effect were adopted by FAS Decree No. 447 dated 25 December 2007.

The FAS opens an investigation within its powers and on its own initiative. The ground for the investigation is based on the information received from other state or municipal authorities, individuals and legal entities, mass media sources and on the results of the FAS’s own inspections or discovering evidences of a cartel. The FAS considers whether it may initiate a case and open proceedings within one month of the day the respective information was submitted to FAS. This period may be extended for up to three months if additional information is required. In each initiated case, a special commission shall be established, which as a rule is composed of FAS officials and, if the investigation concerns the Competition Law violation in the bank sector or committed by financial institutions licensed by the Federal Service on Financial Markets of Russia (FSFM), representatives of the Central Bank of Russia or FSFM respectively. During the hearings held by the commission, undertakings and interested parties are entitled to submit written and oral explanations. The commission passes its final decision and binding prescription by simple majority of its members within 3 months of the assignment of the case, providing that this term may be extended for up to six months (without regard to procedural suspensions). The cartelists may appeal the commission’s acts either with the FAS or in arbitration court within three months.

In accordance with article 41.1 of the Competition Law the limitation period to initiate a case on competition law infringement constitutes three years from the date of breach or detection of breach (in the case of a continuing breach) of the Competition Law. The limitation period under the Criminal Code is a 10-year period from the date a crime was committed.

Sanctions

A pecuniary penalty for the Competition Law infringement has administrative nature being a measure of public liability. The FAS may impose a fine on cartelists for entering into or participation in a cartel, which amount depends on the share of a company’s income from sales of a product on which market the violation has been committed.

If the cartelist’s income from sales of the above-named product does not exceed 75 per cent of the total company’s income, the imposing fine ranges from 1 to 15 per cent of the company’s income from sales of the above-named product.

Calculation of fines is also very simple due to the latest amendments to the Administrative Code. The default amount will be 8 per cent of the relevant income. Any mitigating circumstance reduce the standard amount of fine by 1.75 per cent of the relevant income, while aggravating circumstances increase it by the same percentage.

If the cartelist’s income from sales of the above-named product exceeds 75 per cent of the total company’s income (or the violation has been committed on the regulated price market), the imposing fine ranges from 0.3 to 3 per cent of the company’s income from sales of the above-named product, but not less than 100,000 roubles. The default amount will be 1.65 per cent of the relevant income. Any mitigating circumstance reduce the standard amount of fine by 0.3375 per cent of the relevant income, while aggravating circumstances increase it by the same percentage.

The special amount of fine is provided for cartels that lead or may lead to increasing, reducing or maintaining prices on tenders. It ranges from 10 to 50 per cent of the tender object amount, but is not less than 100,000 roubles.

Any of the following circumstances shall be deemed as aggravating the administrative liability. If an offender:

• initiated a cartel;
• forced other undertakings to participate in the cartel;
• continues performing the cartels arrangements in spite of the binding prescription of the FAS to terminate doing the same;
• repeatedly committed the similar offence, to the extent that the offender had been held administratively liable and one year from the date of performing of the relevant decision on the case of administrative offence has not expired;
• committed an ongoing offence for the duration of over one year; or
• inflicted damages to individuals, organisations or the state as a result of the offence in the amount exceeding 1 million roubles or derived income as a result of the same in the amount exceeding 5 million roubles.

As mentioned above, a new system of calculation of fine makes it very easy for undertakings to understand the risks.

Along with the administrative fine the Competition Law allows the FAS to require an offender to transfer the revenue gained from violation of the Competition Law to the federal budget. The Constitutional Court of the Russian Federation held that the FAS may use both of these forms of liability with respect to a single violation. This is a much criticised opinion that is not content with the view of the Supreme Arbitration Court of the Russian Federation. However, the FAS usually imposes pecuniary penalties.

It is also worth mentioning that FAS may issue a prescription binding an offender to eliminate the negative consequences of the cartel’s activity and perform actions aimed at procuring the competition. The FAS is also entitled to bring actions in arbitration court to invalidate the agreements conflicting with the Competition Law.

The sanctions for company officers are dual in nature due to the existence of both administrative and criminal liability. Administrative liability for entering into or participation in a cartel may entail a fine amounting from 20,000 roubles to 50,000 roubles or disqualification for up to three years. Criminal liability for the same offence having material consequences (as mentioned above) leads to either a criminal fine of up to 1 million roubles or up to five years’ imprisonment with or without disqualification from one to three years. Some qualified offences may be punished with more severe criminal liability.

Disqualification means prohibition from taking a position in the executive body of a legal entity, being a member of the board of directors (supervisory board), conducting business activity on management of a legal entity, and conducting management of a legal entity in other cases stipulated by Russian legislation. The FAS will actively strive to apply the new rules for disqualification. The minutes on the administrative offence is prepared by the FAS, but the court imposes a penalty.

Article 178 of the Criminal Code has not been yet enforced by Russian courts, although some investigations are currently being carried out by the MIA. In accordance with the FAS official annual report on competition situation in Russia for 2012, the FAS sent to the MIA divisions for initiation of criminal proceedings 31 case materials in 2011 and 18 case materials in 2010. However, only five criminal investigations have been opened.

Leniency

The Third Antimonopoly Package introduced a new special set of mitigating and aggravating circumstances applied by the FAS when hearing the cartel cases. This also may be referred to the leniency programme for cartel violations.

The FAS should take into account the following mitigating circumstances when holding an undertaking administratively liable:

• an offender did not initiate a cartel and/or received binding instructions to participate therein;
• an offender has not started to perform the cartel arrangements;
• an offender voluntarily ceased performance of the cartel arrangements;
• an offender voluntarily notified the FAS of the cartel arranged;
• an offender assisted the FAS in establishing circumstances of the cartel;
• an offender prevented harmful consequences of the cartel;
• an offender voluntarily compensate for damages or recovered the harm inflicted; and
• an offender voluntarily and duly performed binding prescription issued by the FAS before the case on administrative violation was completed.

The current legislation does not provide for such a ground to reduce the amount of fine owing to ‘financial hardship’ or the ‘inability to pay’. Before the amendments to the Administrative Code were made a court when challenging the decision of antimonopoly authority was entitled at its own discretion to decrease the amount of fine through applying another mitigating circumstances that was allowed by the general provisions of the Code. Now only limited number of mitigating circumstances is allowed.

The full immunity from administrative liability is available to offenders. A cartelist that has voluntarily notified FAS about entering into or participating on a cartel shall be relieved from administrative liability provided that all the following cumulative requirements are met:

• the FAS does not already have in its possession documents and information with respect to the committed offence when the leniency application is received. It should be noted that there is no agreed opinion on the deadline for submitting the relevant information. One view states that such application may be submitted prior to announcement by the FAS of its decision on the case of competition law infringement;
• an offender terminated current or further participation in or performing of the cartel arrangements; and
• information and documents provided by an offender were sufficient to establish circumstances of the offence.

The release from liability applies for a cartelist that first satisfied all the conditions mentioned above and the FAS will not consider a joint application submitted by several cartelists.

Unfortunately, Russian legislation does not provide effective guarantees for undertakings who wish to use the leniency programme. The FAS expressly declares the guarantee of confidentiality of a leniency application on its official website. However, this regime is not reflected in legislative acts. Notwithstanding that an offender may admit the fact of a cartel and notify the FAS officials orally, the risk of disclosure of this information continues to exist. Moreover, the applicant is not exempted from providing the evidencing documents.

From one point of view, if a company intends to take advantage of the leniency policy, the application shall be made in a written form. Due to the absence of ‘marker’ system in Russia written application may minimise the risk of being beaten by another cartelist. In any case, such information may at first be announced orally (eg, via the phone number specified on the FAS’s website).

From another point of view, the complainant and any other concerned persons have access to the antitrust case materials, but the law does not bar them from access to written, or transcripts of oral, leniency statements and the supporting documents. This issue is expected to be one of the main concerns of further development of the competition legislation.

The current legislation also does not provide detailed regulation for ‘continuous cooperation’ with the FAS. Generally, the applicant should provide the FAS with the information and documents it requires and that it considers to be sufficient to identify a competition law infringement. But it seems difficult to determine the exact moment when such cooperation requirement ceases to apply while the expression ‘sufficient for detection’ is of an evaluative nature and depends on each case.

The Competition Law does not provide for any special early resolution, settlement or plea bargaining procedures (other than leniency). The FAS may close the cartel investigation early if the violation of the Competition Law was ceased and its consequences were eliminated voluntarily by cartelists. We are not aware of new approaches or tendencies of the FAS with respect to settlements.

Appeal process

The appeal process in Russia is represented by both administrative and judicial procedures. A cartelist may appeal the decision on the case of competition law infringement and/or binding prescriptions issued by an antimonopoly authority to a competent state arbitration (commercial) court.

Procedural violations committed by a territorial subdivision of the FAS or its official may be appealed to the FAS Russia (Central Office) or to such subdivision respectively. An appeal shall be considered within 30 days of the date of its registration. If additional information or documents are required the antimonopoly authority is entitled to extend the term for another 30 days. As the current regulations do not provide the right of the applicant to attend the out-of court hearings, this form of appeal is used very rarely in practice.

Pursuant to the Competition Law decisions and binding prescriptions of antimonopoly authorities may be appealed within three months from the day they are passed or issued respectively. In case of judicial proceedings a commercial court should try a case within three months (without taking into account any allowed postponements). If the case is particularly complex the chairman of the court may extend this term for up to six months.

Bringing an appeal to the court suspends execution of the binding prescription issued by the antimonopoly authority until the court decision comes in force.

Damages actions

The Third Antimonopoly Package stipulated the clear rule granting to persons who rights and legal interests were breached by antimonopoly law infringement the right to claim damages (article 27(3) of the Competition Law). This rule, based on articles 10, 12, 15 and 1064 of the Civil Code of the Russian Federation, provides the general provisions of civil liability for damages and respective remedies.

The procedure for civil damages actions is governed by the Civil Procedure Code of the Russian Federation or the Commercial Procedure Code of the Russian Federation without any specifics. The Commercial Procedure Code establishes the exclusive competence of commercial courts to consider disputes concerning business and any other economic activity.

It is obvious that the FAS has large powers to investigate antimonopoly law infringements detected than a single company or individual has. Therefore, ‘follow-on’ actions in comparison to ‘stand-alone’ actions may be considered more easily arguable since a claimant has the opportunity to use the evidences collected and deliverables made by the FAS in its decision on the particular case of antimonopoly law infringement. In this respect, the decision of the FAS may be a reasonable ground to justify one’s claims before the court. Still, we are not aware of any court decision regarding damages actions derived from a cartel agreement.

There are few cases of private damages actions in Russian practice. The key victory case is Voskresensk Mineral Fertilizers, OJSC v Apatit, OJSC and Fosagro AG, CJSC (No. A40-46424/10-59-378), 2011. However, this dispute was settled on the appeal stage. The latest attempts to claim damages in ‘stand-alone’ actions were made in 2012 by car dealers against distributors (Modus-Novorossiysk, LLC v Hyundai Motor CIS, LLC, No. A40-84943/2012 and Stuttgart, LLC v Porshe Rusland, LLC, A63-12018/2012). However, none of the named cases concern cartel infringements.

Class action regulation in Russia has a number of problems that affect private damages actions. The Commercial Procedure Code in general allows class actions as well as representative actions, but civil procedure rules do not. However, the Civil Procedure Code provides for, so-called in the theory of Russian procedural law, public and organisational (or institutional) class actions. A civil case may be initiated (with some limitations) by a procurator acting on its own behalf to secure rights, liberties and legal interests of other persons, indeterminate group of people or to protect interests of Russia, constituent entities of the Russian Federation or municipal authorities. In some other cases set forth by the laws state and municipal authorities as well as organisations and individuals may bring a claim to the court for protection of rights, liberties and legal interests of other persons or indeterminate group of people.

The general concern is that the Commercial Procedure Code provides the requirement of class members to be connected by the common legal relationship (the objective criterion of a class action). Private property class actions seem not to be available under the current wordings of procedural law as each member of a group has the right in personam against the defendant derived from breach of contract or civil injury. However, this problem has not been challenged in courts yet. Professional society continues to advocate the necessity of amendments to be made into the procedural legislation. We hope that the results of these efforts can be seen in the near future.

In accordance with the Civil Code of the Russian Federation the general limitation period of three years from the day a claimant learned or should have learned about the infringement of its rights is applied to private damages claims.

The common discussing matters with respect to private damages action are also applicable to Russia. So, the current Russian legislation does not regulate the ‘passing-on’ defence. Still some basic approaches set by this doctrine are rarely applied by the Russian courts in single antitrust cases for abuse of a dominant position.

Court practice of private damages claims has been gradually developing in Russia over the past two years. It proves that both courts and claimants are likely to adduce the FAS’s decision on recognising the violation of competition law. At the moment, the practice of defending the interests in court by submitting private damages claims has not yet been formed.

Art De Lex Law Firm

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Yaroslav Kulik

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Art De Lex is a Russian law firm advising Russian and foreign businesses, both in Russia and abroad. Art De Lex has a great experience of providing comprehensive legal support in multiple jurisdictions. The firm is a result-driven adviser and values its reputation and the reputation of its clients. It is committed to the careful selection of projects and jobs and keeps any information received from clients strictly confidential.

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