How much does it hurt? How Australian businesses think about the costs and gains of compliance and noncompliance with the Trade Practices Act.

• Jurisdiction: Australia
• Author: Parker, Christine E.
• Date: 01 August 2008

[Law-makers, courts and regulators all assume that businesses' compliance with the law is at least partly influenced by management's rational calculations about the costs and gains of compliance and noncompliance. In this article, the authors use evidence from a survey of 999 large Australian businesses and these businesses' experiences of compliance and enforcement under the Trade Practices Act 1974 (Cth) ('TPA') to examine how large Australian businesses perceive the costs and gains of compliance and noncompliance with the Act. First, the authors look at how serious these businesses perceive the threat of financial penalties, criminal convictions, and economic and social losses to be in the event of noncompliance, as well as whether they see benefits such as organisational learning as gains of compliance. Secondly, the authors examine whether enforcement action of the Australian Competition and Consumer Commission ('ACCC') or stakeholder criticism changes the way that these businesses calculate the costs and gains of compliance and noncompliance. The authors end by drawing some policy conclusions for the TPA and the A CCC.]

CONTENTS I Introduction II The TPA, the ACCC and Deterrence Theory A The TPA and Deterrence of Anti-Competitive Conduct B The TPA and Deterrence of Breaches of the Consumer Protection Provisions C The ACCC and 'Leveraged Deterrence'. D 'Mere Deterrence'--The Likelihood and the Costs of Formal Legal Enforcement E 'Extended Deterrence'--Informal Social and Economic Sanctions F Extending Deterrence Analysis to Include the Costs and Gains of Compliance G 'Perceptual' (or 'Behavioural') Deterrence--How Businesses Perceive the Likelihood and the Costs of Being Caught H Understanding and Explaining Perceptions of the Costs and Gains of Compliance and Noncompliance III Methodology IV How Australian Businesses Perceive the Costs and Gains of TPA Compliance and Noncompliance A Introduction B Australian Businesses' Perceptions of the Costs of TPA Noncompliance 1 Sanctions Resulting from ACCC Enforcement Action 2 Likelihood and Severity of ACCC Enforcement Action 3 Informal Social and Economic Sanctions from Third Parties 4 Risk of Being Caught by Third Parties C Gains of Noncompliance D Costs and Gains of Compliance V Why Do Businesses Perceive the Costs and Gains of Compliance and Noncompliance the Way They Do? A Introduction: Research Strategy and Measures B Results 1 Influence of Experience of Breach, Investigation and Third Party Criticism 2 Influence of Internal Factors: Size, Resources and Managerial Approach 3 Influence of Market Position 4 Influence of Source of Awareness VI Conclusion A Summary of Findings B Implications for Understanding Deterrence and Business Calculations about Compliance C Increasing the Deterrent Power of the TPA: Criminalisation and Imprisonment VII Appendix: Additional Statistical Information I INTRODUCTION

The Federal Court of Australia has long stated that deterrence is the guiding principle for quantification of penalties in cases where the competition provisions of the Trade Practices Act 1974 (Cth) ('TPA') are breached. (1) Recently, these penalties have been increased on the basis that they should be high enough to 'take into account the expected gains' from anti-competitive behaviour in breach of the TPA. (2) Moreover, criminal penalties have been promised as an additional deterrent, with the possibility of imprisonment for 'serious cartel conduct'. (3)

Underlying the deterrence approach to penalising a breach of the TPA is the assumption that businesses and individuals calculate the personal costs and gains of compliance and noncompliance and go on to behave, at least to some extent, in a way calculated to minimise costs and maximise benefits. It is certainly plausible to assume that calculated self-interested thinking does play an important part in motivating businesses' compliance and noncompliance. (4) However, empirical regulatory compliance research clearly shows that self-interested calculation (that is, deterrence) is not the only factor determining whether or not individuals and businesses comply with the law in any given situation. (5)

This article uses systematic, representative and quantitative survey evidence collected from mid 2004 to mid 2005 to examine how large Australian businesses perceive the costs and gains of compliance and noncompliance with the TPA. Recent policy discussions have tended to assume that deterrence will automatically increase when legislators increase the amount and range of formal legal sanctions available under the TPA and when the Australian Competition and Consumer Commission ('ACCC') increases its enforcement activity. (6) This article argues that this is not necessarily a correct assumption when one considers scholarly literature on deterrence and our own empirical data. It is necessary to extend our understanding of deterrence beyond the 'sheer deterrence' (7) of formal legal sanctions. In doing so, we see that businesses' calculations of the costs and gains of compliance and noncompliance are influenced by a complex range of factors beyond merely the risk of enforcement action by an official government enforcement agency and the amount of any formal legal penalty. This article sets out what those factors are and how they influence the thinking of Australian businesses about compliance with the TPA.

In Part II of this article, we consider how the provisions of the TPA and the enforcement activities of the ACCC attempt to deter noncompliance with the TPA. We also briefly review the key concepts in the literature on deterrence and rational calculation in relation to regulatory compliance. To explain and ultimately influence the way people in business perceive the costs and gains of compliance, we need to extend our view of 'deterrence' beyond the likelihood and amount of legal penalties to businesses' perceptions of the informal social and economic costs of noncompliance, as well as to the costs and gains of compliance. Moreover, since people and firms will generally be motivated to act only on what they subjectively perceive to be true, we also need to understand the range of internal and external factors that affect businesses' very perception of the risks and benefits of compliance and noncompliance. (8)

In Part III of this article, we briefly describe the interview and survey methodology used to gather the empirical data from Australian businesses. In Part IV, we use these data to critically examine how Australian businesses perceive the broader social and economic costs of noncompliance with the TPA, as well as the potential for formal enforcement and sanctions in the event of noncompliance. We also examine how Australian businesses that have breached the TPA assess the benefits of noncompliance in hindsight, and how they perceive the costs and benefits of positive TPA compliance--the 'business case' for compliance.

Part V of this article examines what factors most influence businesses' perceptions of the costs and gains of compliance and noncompliance. We also consider the influence of various factors on the way that different businesses perceive the costs and gains of compliance. Our analysis includes internal factors (such as whether firm leaders take a long- or short-term view of management), external factors (such as the market position of the firm), and the influence of the key people or agencies who have brought about awareness of the TPA.

This article concludes with a brief summary of our empirical findings and their implications for ACCC enforcement and deterrence policies, including criminalisation and the availability of jail penalties for cartel conduct.

It is not our purpose to test the extent to which calculations about the costs and benefits of compliance and noncompliance are more or less significant than other explanations for compliance with the TPA. (9) We start from the assumption that the weighing of costs and benefits is likely to be one (but only one) strand that helps explain business compliance or noncompliance with the TPA. Further research is required to consider how much impact, if any, these perceptions of the costs and gains of compliance and noncompliance actually have on compliance of Australian businesses with the TPA.

II THE TPA, THE ACCC AND DETERRENCE THEORY

A The TPA and Deterrence of Anti-Competitive Conduct

When the TPA was first introduced in 1974, the sanctions available for anti-competitive conduct were poorly suited to deterrence. Only civil, not criminal, penalties for breach of the relevant provisions of the Act are available (at the time of writing). In 1974, the maximum penalties were minuscule--only $250 000 for corporations and $50 000 for individuals. (10) Indeed, an individual interviewed for our research who admitted being part of a cartel commented that when the cartel first began before 1993, 'the fines were relatively small--$100 000. Fines that small were unquestionably palatable in the context. We never would have done it if we had known what fines we would subsequently receive.' (11) Moreover, the actual penalties imposed by the courts were much lower than the maximum penalties available. (12)

In 1993, the civil penalties available for breach of the TPA anti-competitive conduct provisions were increased to $500 000 for individuals and $10 million for corporations. (13) This reform is still seen by ACCC staff and trade practices lawyers as a quantum leap in the deterrent power of the sanctions available under the TPA. (14) Nevertheless, the penalties introduced in 1993 were still paltry compared with the possibility of imprisonment and fines of a percentage of turnover, penalties that are available in other jurisdictions such as the United States, Europe and Japan. (15) Additionally, by 2000 the penalties actually levied by the courts had not increased in proportion to the legislative increase of the maximum penalty. (16) In fact, in three...