The Enterprise Act 2002 (the Act), which received Royal Assent on 7th November, 2002 introduces, among other things, widespread changes to competition regulation in the UK. It seeks to bolster, some say prematurely, the relatively untested regime established under the Competition Act 1998 (1998 Act) (see also , Bulletin, Competition, this issue). The most controversial element of the Act is the introduction of a criminal offence for individuals who dishonestly enter into cartel agreements. This will operate alongside the current national and EC civil procedures when the competition provisions of the Act come into force (expected by summer 2003).

"Enterprise Act 2002"The new regime is modelled on the US system, which can claim a number of successful prosecutions relating to cartels and the resulting imprisonment of US and foreign nationals. UK prosecutions will be assisted by the introduction of "no-action letters" under which whistleblowers may be given immunity from prosecution in exchange for their assistance. Directors may be disqualified for their involvement in any breach of competition law, not limited to hardcore cartel offences. The government's intention is that the Act will help establish a "world class competition regime". Much will depend on the success or otherwise of the criminal cartel offence.

References to section numbers in this article are to section numbers in the Act unless otherwise stated.

An individual will be guilty of an offence if he dishonestly agrees with one or more persons to make or implement, or to cause to be made or implemented, arrangements between at least two undertakings which would fix prices, limit or prevent supply, limit or prevent production, divide markets or customers or rig bids (section 188). The offence will apply only to horizontal agreements (between undertakings at the same level of supply or production) and not to vertical agreements (between producer and distributor). Proceedings may only be brought in respect of an agreement that is implemented in whole or in part in the UK. A person guilty of an offence may be imprisoned for up to five years or fined or both.

The offence will be extraditable, so that it will be possible for individuals to be extradited to the UK from countries that also apply criminal sanctions to the same activities and individuals may be extradited from the UK to face similar charges abroad, most likely in the US.

The offences of attempt and conspiracy to commit an offence will apply automatically to the new offence by virtue of the Criminal Attempts Act 1981 and the Criminal Law Act 1977. Therefore, even where an attempt has been made to commit the offence that is ultimately unsuccessful, individuals will still face the risk of prosecution.

The Office of Fair Trading (OFT) may conduct a criminal investigation if there are reasonable grounds for suspecting that a cartel offence has been committed (section 192). Criminal proceedings may be instituted by or with the OFT's consent or by the Director of the Serious Fraud Office (SFO). The SFO will initially be given the role of lead prosecutor in recognition of its experience in prosecuting white-collar crime.

During the course of the investigation, the OFT will have powers modelled broadly on those already available to the SFO in its investigations of serious and complex fraud under the Criminal Justice Act 1987. It may, by notice in writing, require the person under investigation or any other person who it has reason to believe has relevant information, to answer questions, provide information or produce documents (section 193). Restrictions on the use in court of any statement provided will apply to protect (or, some would say, circumvent) an individual's right not to self-incriminate (section 197). This means that a statement given under section 193 may not be used against that individual unless later inconsistent statements are made. This does not at present prevent, however, the investigators using compelled statements as a basis to search out evidence to use against that individual in a later prosecution. In certain circumstances, the OFT may also obtain a warrant to search premises and seize documents (section 194).

Failure to comply with these requirements will itself constitute a criminal offence (section 201). In certain cases the OFT will be authorised to carry out intrusive surveillance of those suspected of involvement in a cartel (section 199), for example, the planting of surveillance devices in residential premises including hotel accommodation and private vehicles.

In short, the Act will introduce into the competition environment draconian and invasive powers which, in the form currently exercised by the SFO and other authorities, have already been the source of considerable human rights concerns.

The Act has gone further than SFO powers of investigation of serious and complex fraud. It introduces a leniency regime under which a whistleblower of criminal cartel activity can be given full immunity under a "no-action letter" from the OFT (section 190(4)). A similar leniency regime is in operation in the US and has been highly successful in flushing out cartel activity. The OFT's consultation period on the proposed guidance for the issuing of no-action letters has now finished and the published draft guidance suggests that leniency will not be afforded to an instigator of the cartel. In addition, the individual seeking a no-action letter must first admit participation in the relevant offence, continually co-operate and provide all information available to the OFT before it will consider issuing a no-action letter. An individual seeking leniency may, therefore, in some respects, be taking a leap in the dark if the OFT does not subsequently issue a no-action letter.

The Act will amend the Company Directors Disqualification Act 1986 (1986 Act) to permit the disqualification of a director where the company of which he is a director has committed a breach of competition law and his conduct as a director makes him unfit to be concerned in the management of a company (section 204(2)). This is not limited to the new cartel offence and will apply to any breach of Chapters I and II of the 1998 Act and/or Articles 81 and 82 of the EC Treaty (broadly, the prohibitions against anti-competitive agreements and abuse of a dominant position).

An application for a disqualification order will be made where the director's conduct contributed to the breach; he had reasonable grounds to suspect that the conduct of the undertaking constituted the breach and he took no steps to prevent it; and where he did not know but ought to have known that the conduct of the undertaking constituted the breach (section 9A(6), 1986 Act as inserted by section 204, the Act). The OFT has recently published draft guidance on its intended approach to competition disqualification orders.

The commercial implication of the new regime is that the company whose employees become the subject of a criminal cartel investigation will face a prolonged period of uncertainty and costs in addition to that caused by the civil competition investigation, which will almost certainly arise from the same set of facts. The criminal justice system is slow at the best of times, but especially so where complex commercial relationships are the source of the criminality.

The history of the SFO has shown that discharging the higher criminal burden of proof in a criminal prosecution to be heard by a lay jury is no easy task. The decision to prosecute will not be taken lightly by the OFT or SFO and, as a result, the company can expect extensive use of the authorities' investigative powers to find the "smoking gun" that will secure the simplest and quickest conviction. In circumstances where the company is likely to have been the commercial beneficiary of cartel activity, the investigators and the prosecutors may have little sympathy for the company or its commercial concerns.

The company must therefore be prepared to have its employees called repeatedly for compulsory interview; it must expect onerous requests for documents and it should be prepared to have its employees cautioned and even arrested. The OFT and the SFO may return on a number of occasions to collect documentary and witness evidence to strengthen the planks of the prosecution case. The company should expect the process to take years rather than months and, given the likelihood that related civil proceedings will be stayed pending the outcome of the criminal proceedings, the consequences of the alleged cartel activity will be prolonged. The company must also expect the process to be acrimonious. Defendants in criminal proceedings (and their advisers) will rarely shy away from "mud-slinging" to mitigate their own position. They will frequently base a defence on the complicity of executives or the assertion that their cartel activity was sanctioned by the company at the highest levels and the proposed leniency regime is likely to place the company and its key employees at loggerheads early in the process.

The company must manage the position in the short-term. It will need to get its own house in order and deal with the announcement of a criminal investigation quickly and resolutely. The company's internal investigation, its analysis of what went wrong and where, must be protected by legal professional privilege and therefore be immune from disclosure. It will have to assess its market obligations and the commercial and public relations ramifications of the allegations by coming to a prompt assessment of the problem. It must get its commercial relations with competitors, customers and suppliers back on a legitimate and sound commercial footing, isolate the legal risk and limit the reputational damage and internal disruption that such an allegation will inevitably cause. In addition to the criminal and civil investigations, the company is likely to face follow-on claims for damages.

Compliance with competition laws is already a high priority for most companies currently facing the possibility of civil investigations and fines of up to 10% of worldwide turnover. It is likely that the introduction of the criminal cartel offence for individuals taking part in hardcore cartels will provide an additional incentive for both individuals and companies. From the companies' perspective, they must ensure the creation of a compliance culture in order to avoid the possibility of a criminal prosecution.

Elizabeth Morony is a partner and Luke Tolaini is an associate at Clifford Chance LLP.