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Shipping line fined $34.5 million for criminal cartel conduct

06 August 2019

#Transport, Shipping & Logistics

Nathan Cecil

Published by Nathan Cecil, Rebecca Niumeitolu

Shipping line fined $34.5 million for criminal cartel conduct

The Federal Court has ordered Japanese shipping company, Kawasaki Kisen Kaisha Ltd (K-Line), to pay a fine of $35.5 million for criminal cartel conduct [1].

The criminal conduct for which K-Line entered a guilty plea occurred between about 24 July 2009 and 6 September 2012 in respect of an agreement or understanding known as the “Respect Agreement” that K-Line reached with five other shipping companies (including Nippon Yusen Kabushiki Kaisha (NYK) which was fined $25 million on 3 August 2017).

The Respect Agreement covered trade routes for ‘roll-on, roll-off’ cargo, mainly motor vehicles and trucks, to Australia from India, Thailand, Japan and South Korea. It contained a price fixing provision pursuant to which the parties would from time to time:

  • share information about their freight rates and proposed freight rates for customers
  • agree on freight rates and freight rate variations to be charged, bids and proposed bids for customers
  • submit bids, decline to submit bids to fix, control and maintain prices for their services and their existing market shares
  • enter contracts with customers for the supply of services on the routes to Australia which reflected the bids to the customers.

As the Federal Court observed, there was little doubt that K-Line’s conduct in giving effect to the price fixing provision “had the capacity to substantially limit or distort the competitive setting of freight rates on the relevant routes to Australia, the likely result being that the rates were higher than they would have been in a competitive market”. While it was difficult to quantify the extent of this market distortion, its significant impacts on the market could be appreciated in light of the sheer volume of 106,247 vehicles shipped by K-Line pursuant to contracts affected by its criminal conduct and the considerable revenue of about AU$97.4 million it earned from those shipments.

Penalty imposed

The maximum penalty for K-Line’s offence was $100 million. The Court fined K-Line $34.5 million.

In determining the appropriate sentence the Court considered that factors contributing to the seriousness of K-Line’s offence included that:

  • it engaged in a long-standing global cartel
  • its criminal conduct spanned longer than three years
  • its conduct impacted on a market of considerable economic importance to Australia
  • it took deliberate steps to avoid detection of the Respect Agreement, including by ensuring that communications were generally oral, and, at times, marking written correspondence Confidential. Dispose after Reading
  • K-Line’s corporate culture facilitated its participation in the cartel in the fact of staff training in anti-trust laws
  • K-Line engaged in the cartel for its own profit and benefit.

The Court found that K-Line’s cooperation with and assistance given to law enforcement agencies, its guilty plea and genuine contrition and remorse warranted a 28 per cent discount of the penalty that would otherwise have been imposed. K-Line’s good prospects of rehabilitation also mitigated against the severity of its sentence.

The final sentence imposed on K-Line also took account of the sentence imposed on NYK, to avoid unjustifiable disparity between the two offenders involved in the cartel. The Court used a lower starting point for K-Line’s sentence because it was a smaller company than NYK, however, the ultimate sentence for NYK was lower for reasons that included the 50 per cent discount afforded to it for its guilty plea at the earliest possible opportunity, its considerable cooperation with authorities leading up to its sentencing and its undertaking to provide future assistance to authorities.

Lessons

Driving down penalties

The shipping cartel that K-Line was engaged in had been on foot since at least February 1997, although it only became liable to criminal sanction in Australia on 24 July 2009.

As a result of the wide-reaching and global impact of the cartel, K-Line has been fined or otherwise ordered to pay about AU$68.3 million by the Japan Fair Trade Commission, about AU$77.3 million by the United States of America, about $61.4 million by the European Commission and about AU$5.1 million by China’s National Development and Reform Commission. K-Line and one of its subsidiaries have also been ordered to pay about AU$8.38 million by the Federal Economic Competition Commission of Mexico with further proceedings in South Korea, Chile and South Africa yet to be finalised or on appeal.

Notwithstanding the significant nature of these foreign fines and payment orders, the Court afforded them limited weight in the present sentencing. This was because they related to different transgressions in foreign jurisdictions and primarily concerned civil and administrative proceedings rather than criminal proceedings, as was the case here in Australia.

The judgment emphasises that ultimately, the key factors driving down sentences where an accused pleads guilty are entry of its plea at the earliest opportunity and cooperation with authorities. This appears to be the principal factor that reduced K-Line’s sentence.

Be careful about your cooperation

The Competition and Consumer Act 2010 (Cth) heavily regulates the type of commercial activities that parties can engage in with their competitors and unilaterally that would have the purpose, effect or likely effect of substantially lessening competition in the market. That said, Part X provides certain exemptions for shipping lines to coordinate their services and freight rates, provided that they enter and register their conferencing agreements.

K-Line was party to one liner conference agreement, but its conduct in this case fell outside of the scope of that agreement and the exemptions under Part X.

Whilst K-Line acted deliberately in its cartel conduct, the case nevertheless reminds shipping lines to ensure that their activities fall within permissible competition limits. As this and NYK’s sentences show us, getting caught is simply not worth it! This is particularly so where the Courts are likely to use sentencing to deter other cartel conduct due to the notorious difficulties in detecting, investigating and prosecuting such conduct.

Authors: Nathan Cecil & Rebecca Niumeitolu

[1] Commonwealth Director of Prosecutions v Kawasaki Kisen Kaisha Ltd [2019] FCA 1170.

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Nathan Cecil

Published by Nathan Cecil, Rebecca Niumeitolu

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