Two faces of secret-for-pardon policy
Is Korea's corporate leniency program too lenient for large firms?
By Kim Da-ye
Is a carrot doing its magic again? The Fair Trade Commission (FTC), the anti-trust watchdog, is investigating if financial institutions fixed in collusion one of the benchmark interest rates for lending.
The media initially reported that the investigation began with a member of the cartel confessing to the crime in order to avoid hefty fines.
The watchdog neither confirmed nor denied the allegation, while another governmental authority, the Financial Supervisory Commission, denied the possibility of rate fixing because it couldn’t find the financial firm that leaked the wrongdoing.
If the secret-for-pardon policy does turn out to have played a role in the probe, it may moderate the mounting doubt that the policy has failed to control the country’s unscrupulous large corporations.
The so-called leniency program is based on the prisoner’s dilemma example — a well-known thread of the game theory in economics.
In the scenario, two men get arrested and separated. If one man testifies against the other, he will be freed and the other will get a full sentence. If they betray each other, their sentences will be reduced. If both remain silent, it is highly likely they face no charge.
Economists argue that they would eventually betray each other to avoid a jail term.
The theory apparently works well in real life. In 2010, in Korea, the corporate leniency program played a role in investigations for 17 out of 25 uncovered and fined cartels, according to the anti-trust authority.
In the U.S. where the program was first introduced in 1978, about 50 international cartel investigations are open at a time and more than half of them are initiated or advanced by information received from a leniency applicant, according to the U.S. justice department’s 2010 paper.
The policy touted as the most effective tool in cartel investigation, however, nowadays face increasing criticism.
In October last year, the FTC slapped a total fine of 365 billion won on 16 life insurance companies for fixing rates that are used to calculate the prices of insurance plans and amount of future payout.
Penalties were the heaviest for the three largest players in the industry — 158 billion won for Samsung Life Insurance, 134 billion won for Kyobo Life Insurance and 49 billion won for Korea Life Insurance.
They ended up paying no fine or receiving a massive deduction on the punishment.
Kyobo was the first company that owned up on the cartel, so was fully exempted from paying the fine. Samsung was the second to betray, qualifying for a 50 percent deduction, followed by Korea Life that got the fine reduced by 30 percent.
While those largest firms by revenue are likely to have benefited the most from collusion, mid-size firms ended up taking the blow, critics said, questioning if Korea’ leniency policy suffers structural problems.
US vs. Korea
A comparison between Korea’s corporate leniency program and that of the U.S. shows what may have led to the controversy.
Since the revision in 1993, the U.S. Department of Justice has maintained the key conditions cartel members need to meet for immunity.
The member has to be the first to come forward before the investigation is yet to have evidence against it. Upon discovering cartel activity, it had to immediately terminate its part. It has to fully cooperate with the investigation and, if possible, compensate the victims. Those played lead roles in cartels would also find it difficult to qualify for amnesty.
Despite some initial similarities, the Korean system is developing into a different kind through multiple revisions.
The biggest difference is that in the U.S., amnesty is granted only to the first company that comes forward to report illegal activity. Both in the U.S. and Korea, companies can apply for a leniency before or after an investigation has begun.
“Under the policy that only the first qualifying corporation receives conditional leniency, there have been dramatic differences in the disposition of the criminal liability of corporations whose respective leniency applications to the division were very close in time,” the U.S. justice department said on the website.
“Thus, companies have a huge incentive to make a leniency application as quickly as possible.”
As seen in the life insurance case, the Korean watchdog granted amnesty to three companies.
When the program was first introduced here in 1997, only the first could qualify. In 2001, the regulation changed in a way that an unlimited number of those willing to cooperate with investigation qualified for deduction.
In 2005, the regulation was revised again, limiting the number of those qualifying into two — the first would get full exemption and the second a 30-percent reduction. Another revision in 2007 raised the deduction rate from 30 percent to 50 percent.
In 2009, the antitrust regulator would even allow companies to make a joint application for leniency.
Another major difference is closely related to the debate on if the leniency program ultimately benefits large companies.
In the U.S., in order to qualify for amnesty, the applicant company has to prove that it was not the “leader, or originator,” of the cartel activity and it did not coerce others to participate.
When a company comes forward before an investigation begins, it has relatively little duty to prove that. But as the investigation advances, the evidence of the firm’s leadership in a cartel would increasingly work against winning amnesty, the justice department says.
In Korea, the strict yardstick against those who forced others to participate in cartel activities came and went throughout multiple revisions.
The latest revision re-introduced it, but it appeared to be no use.
The probe into the cartel in the life insurance industry found that Samsung, Korea Life, Kyobo and three other companies agreed on the rates first and spread them to the rest. The first three, however, still qualified for amnesty.
Critics said that small- and medium-sized members of cartels often get to know about the opening of an investigation later than big companies do and that they have relatively little legal resources to make a prompt decision to come clean and file an application for leniency.
Korea’s leniency program started out stringent but became increasingly inclusive.
In 1997, only the first company that reported an illegal activity before an investigation begins could apply for leniency. Amnesty wouldn’t be granted to those that led cartel activities. In 2001, firms were allowed to apply for leniency after an investigation has begun.
In 2005, the “Amnesty Plus” program was introduced, reducing penalties for companies, which don’t qualify for leniency in the ongoing investigation but blow whistles on other wrongdoings. The no-tolerance-against-cartel-leaders rule was also removed.
That year, the number of cartels exposed by insiders and fined shot up to seven from two in the previous year.
The authority is also concerned with possible abuse of the program among rivals. In January, it modified the regulation in a way that companies cannot apply for leniency more than once in five years.
More sticks needed
Korean firms are among the most fined for cartel activities in the global markets.
According to the FTC, domestic companies have been slapped with a total fine of 2.4 trillion won by overseas anti-trust authorities since 2000 for price-fixing.
LG Display was slapped with the second heaviest fine of $400 million in the U.S. history after $500 imposed on a Swiss firm in 1999. The panel maker was convicted in 2009 for fixing the price of liquid crystal display panels and recently agreed to pay $380 million to settle the lawsuit.
In 2005, Samsung Electronics was found to have fixed prices of dynamic random access memory chips with Hynix Semiconductor and the German Infineon Technologies. In the same year, Korean Air was caught for its involvement in price fixing with 20 other airlines including Lufthansa and British Airways.
The U.S. justice department says that a carrot wouldn’t work alone — and it needs to accompany an iron rod.
In addition to massive fines, the American authority is seeking to have individuals accountable. More officers, executives and employees who violate U.S. antitrust laws are being sent to jail and serving a longer period of time in prison.
Scott D. Hammond, the deputy assistant attorney general at antitrust division of the U.S. justice department, said in a 2010 paper, “... the division is serious about its policy of insisting on jail sentences for both U.S. and foreign defendants. This realization provides further incentives for corporations to apply for leniency...”