In this article, first published on Halsbury's Law Exchange, Jane Hickman looks at competition law reform and the Government's crackdown on business crime

Adam Smith is often quoted for his comment on cartels:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices".

Less well known is the sentence which followed:

"It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice."

Last week the government announced a package of competition law reforms, including an amendment of s 188 of the Enterprise Act 2002 (the cartel offence) by removing the element of dishonesty. Like it or not, the change meets the current zeitgeist of cracking down on business crime and at this stage in the parliamentary cycle it is virtually certain to be enacted. The only question remaining is what it will mean in practice. Does this reform criminalise cartels in a way that is consistent with the ideals of liberty and justice?

The OFT already has extensive powers. It can obtain documents and information from businesses as well as from their competitors, customers or suppliers. It can give written notice to a business requiring documents and/or information. Anyone who fails to cooperate with the investigation, obstructs OFT officials or hides, destroys or falsifies relevant documents may be guilty of a criminal offence. The OFT also enjoys the fruit of a scheme where the first business to blow the whistle on a cartel gains substantial leniency. All of this makes it an even more fearsome investigator than the Serious Fraud Office.

However, the rate of prosecutions for cartels has remained persistently low. The UK has seen only two prosecutions for hard core cartel offences since 2002. This has embarrassed the UK government which is committed to strong market competition and faces huge pressure from the OECD to tackle cartels.

The OFT is under resourced and has a real problem with low pay (revealed in a 2005 National Audit Office report). But the problem is also cultural. Forming a cartel was not a criminal offence in Britain until 2002. As the House of Lords pointed out in 2008, in Norris v United States, price fixing was merely robust business practice until well into the 20th Century.

In contrast, the US first criminalised such behaviour in the 1890 Sherman Act with a strict liability misdemeanour carrying a one year jail term and a fine up to $5,000. In 1974 Congress passed the Antitrust Procedures and Penalties Act, upgrading fines to $1m for corporations and $100,000/three years jail for individuals. Prosecutions jumped dramatically – from 72 in 1972 to 92 in 1983. In 2004, Congress passed the Antitrust Criminal Penalty Enhancement and Reform Act increasing the Sherman Act corporate fine to £100m and the individual penalty to $1m/ten years. From 2001 the Antitrust Division of the US Department of Justice has placed foreign executives who get indicted on the Interpol "Red Notice" list.

The UK has a way to go in matching this level of zeal but the new announcement brings the UK cartel offence in line with most of the rest of the western world. Australia was the most recent country to criminalise cartels, in 2008, and it had no truck with a dishonesty get-out. It is widely believed that financial penalties are insufficient to deter companies and that the individuals concerned have to be placed in some jeopardy before they get the point.

The theory of strict liability is a good one. In Warner v Metropolitan Police Commissioner (1968) 52 Cr.App.R. 373, 377, [1969] 2 A.C. 256, 271, 272, Lord Reid referred to the "Long line of cases in which it has been held with regard to less serious offences that absence of mens rea was no defence". He said: "Typical examples are offences under public health, licensing and industrial legislation. If a person sets up as, say, a butcher, a publican, or a manufacturer and exposes unsound meat for sale, or sells drink to a drunk man, or certain parts of his factory are unsafe, it is no defence that he could not by the exercise of reasonable care have known or discovered that the meat was unsound, or that the man was drunk or that his premises were unsafe. He must take the risk and when it is found that the statutory prohibition or requirement has been infringed he must pay the penalty. This may well seem unjust but it is a comparatively minor injustice, and there is good reason for it as affording some protection to his customers or servants or to the public at large."

The problem in practice is that the list of offences of strict liability is now enormous and includes really serious crime. It has extended from the initial health and safety offences, through listed buildings, to sanction busting, and on to the fearsome provisions over money laundering. It is perfectly fair for a business to face conviction and substantial monetary penalty if it causes harm. But the impact on the individual business person of such a prosecution is devastating and often quite disproportionate to the crime.

In the US the unfairness of the Sherman Act is rationalised by reference to the wider good, an argument which is partially sustained by prosecution practice. The US Department of Justice is busy probing anti-trust giants like Microsoft and Google as well as the local hardware store. But in the UK prosecutors are often starved of funds and are unable to investigate the larger corporations with success. A series of failures and losses of nerve by the OFT including British Airways and the NHS cartel reflect not only the inadequacy of the law but also the shortfall in funding for the OFT to do the job properly.

We do not have a professional business class in the UK in the way they do in the US or Germany. Many businesses in the UK, particularly family firms and startups, prove slow to respond to regulation. Individuals running these companies who fail to keep up with the arc of law reform are a much softer target than the large corporation. Prosecuting agencies under pressure will always massage their productivity figures by taking the low hanging fruit, and we must be careful that any reform does not result in a string of sorry individuals facing prosecution while major companies manage to cheat the public.

Mindful of such problems, the American Bar Association (ABA) actually responded to the UK Consultation on competition law reform. The ABA said it would be better to replace the dishonesty element in s 188 with a mens rea that the defendant agreed to cause the relevant corporate entities to engage in the conduct specified in s 188 Enterprise Act 2002 and knew or ought to have known of the terms of the conduct engaged in.

It is not too late for the UK government to ponder this suggestion further. It is perfectly easy to enact a different criminal liability for individuals and the corporations in which they work as with the Bribery Act 2010. Adam Smith would be impressed.

Jane Hickman is a contributor to the Halsbury's Law Exchange blog. Click here to follow the Halsbury's Law Exchange on Twitter.