Client Alert 07-022 Antitrust, Competition, Regulatory Litigation & EU Law Fraud Act 2006 This note examines the Fraud Act 2006 (“FA”) from a competition law perspective. It seeks to assess what impact the FA could have on competition law in the UK and, in particular, how it relates to existing legislation dealing with cartel activity and the common law If you have questions or would offence of conspiracy to defraud. like additional information on the material covered in this Bulletin, General summary please contact the author: The FA came into force on the 15th January 2007. By introducing a general offence of Noel Watson-Doig (London) “fraud”, the aim was to simplify the law by replacing the various deception offences under ddi: +44(0)20 7772 5786 the Theft Act. This new general offence of fraud is set out in section 1 of the FA. It can be [email protected] committed in three ways: ...or the Reed Smith Richards • Fraud by false representation; Butler attorney with whom you regularly work, or any of the • Fraud by failing to disclose information; following lawyers in our Antitrust, Competition, Regulatory • Fraud by abuse of position. Litigation & EU Law Group: A person who is guilty of fraud is liable on conviction on indictment to imprisonment for a Katherine Holmes (London) term not exceeding 10 years or to a fine (or both). ddi: +44(0)20 7772 5945 Of the three ways that the general offence of fraud can be committed under the FA, perhaps [email protected] the most applicable to anti-competitive activities is fraud by abuse of position. Marjorie Holmes (London) Fraud by abuse of position ddi: +44(0)20 7816 3837 [email protected] Under section 4 of the FA a person commits the offence of fraud by abuse of position if he: Edward Miller (London) • occupies a position in which he is expected to safeguard, or not to act against, the ddi: +44(0)20 7556 6778 financial interests of another person, [email protected] • dishonestly abuses that position, and Fred Houwen (London) ddi: +44(0)20 7772 5825 • in so doing, intends to make a gain for himself or another, or to cause loss to another [email protected] or to expose another to a risk of loss. Lesley Davey (London) The relationship between the directors of a company and its shareholders would seem to be ddi: +44(0)20 7816 3754 covered by subsection (a) above. The term “abuse”, under subsection (b), has deliberately [email protected] not been defined in the FA to ensure that it covers a broad range of activities. It seems highly likely that cartel behaviour would be deemed to be a dishonest abuse of the position Richard Waite (London) of a director. Indeed, in its response to a consultation on the final report of the Attorney ddi: +44(0)20 7816 3925 General’s fraud review, the OFT stated that it considered cartels to be a serious form of [email protected] fraud. It is important to note that under subsection (c) above, a “gain” includes a gain by keeping what one already has, as well as a gain by getting what one does not have. In theory, therefore, a director of a company involved in cartel activities could be prosecuted under the FA. If found guilty, he would be liable to imprisonment for a maximum term of 10 years or to a fine, or to both. Under the Enterprise Act 2002 (“EA”), a person found guilty of a cartel offence is liable on conviction on indictment to imprisonment for a term not exceeding five years or to a fine, or to both. The FA therefore provides for a harsher criminal sanction than the EA. The Fraud Act, the Enterprise Act and the common law offence of conspiracy March 2007 to defraud However, whilst the FA might provide for tougher sanctions, that does not necessarily make This bulletin is presented for information purposes and is not intended to constitute legal advice. it the most suitable or likely means of prosecution for cartel activity. Reed Smith Richards Butler LLP is a limited liability partnership registered in England and Wales with registered number OC303620 and registered office at The EA introduced a stand-alone criminal offence relating to the pursuit of cartel conduct. Beaufort House, Tenth Floor, 15 St Botolph Street, It is a tightly defined statutory offence which also provides for a leniency regime. It is, London EC3A 7EE. Reed Smith Richards Butler is regulated by the Law Society. therefore, a piece of legislation which is highly specific as to subject matter, as to who can ©Reed Smith Richards Butler LLP 2007. be prosecuted and as to the relevant penalties. In many circumstances where an individual All rights reserved. is found to be involved in potential cartel activities, therefore, it will be more appropriate to www.reedsmith.com base a criminal prosecution on the provisions of the EA rather than the FA. Client Alert 07-022 Antitrust, Notwithstanding the above, it should be noted that the cartel offence under the EA only applies to horizontal agreements. In relation to a price-fixing arrangement, for example, for Competition, the offence under the EA to be applicable, the relevant undertakings must operate at the same level of the supply or production chain. In addition, there can be no criminal offence under Regulatory the EA if the arrangement in question only requires one undertaking to fix prices or limit Litigation & production or supply. Arrangements to carry out such prohibited activities must be reciprocal. The FA, however, is not restricted in scope to horizontal agreements, nor does it contain the EU Law same requirement for reciprocity. Potentially, therefore, it could be used to prosecute those cartel activities which do not fall within the ambit of the EA. In addition to both the EA and the FA, the case of Ian Norris has shown that the common law offence of conspiracy to defraud is also potentially applicable to charges of dishonest price- fixing and cartel activity (although it should be noted that the case may go on appeal to the House of Lords). The FA has not abolished the common law offence of conspiracy to defraud. The fact that there is an overlap between the statutory and common law offences does not negate the fact that the common law could also be used to prosecute cartel activity1. Such situations, where offences are potentially covered both by statute and common law, are dealt with by the Interpretation Act 1998, which states that the offender is liable to be prosecuted under either statute or common law, but not under both for the same offence. Should a fraudulent cartel be deemed to be outside the scope of the EA, therefore, there is no reason why the common law would not be applicable. Clearly, until the FA has been in force long enough to be properly tested by the courts, it will not be possible to reach any firm conclusions as to its potential use in a competition law context. However, although the general offence of fraud under the FA would seem to potentially cover cartel activity, it seems likely that both the cartel offence as provided for under the EA and the common law offence of conspiracy to defraud will remain the more appropriate and potentially effective means of prosecution of such activity. 1Ian Norris v The Government of the United States of America [2007] EWHC 71 (Admin), para 89.