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Designing a Competition Enforcement System: The Imperative of Credibility

Designing a Competition Enforcement System: The Imperative of Credibility

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It is not uncommon for post-communist societies to wrestle with the idea of competition enforcement. Executives of a more old-school bent are often confounded by having something which once was common market practice, sometimes even mandated by the state, now scrutinized and considered a serious infringement of law. This is why competition advocacy is a crucial tool for relatively inexperienced competition authorities – it would hardly be fair to beat upon market players legitimately unaware of changes to the modus operandi.

But advocacy can only get you so far. For less scrupulous actors, or when the market has had sufficient opportunity to become acquainted with the legal framework, strong enforcement is necessary. It is small wonder that, when considering the setup of an enforcement system, policy-makers usually focus on the amount of fines. Having a high-profile company under investigation and facing multimillion euro penalties does tend to grab headlines.

However, credibility represents an important issue that tends to be neglected in discussions about effective deterrence. There needs to be a credible threat of consequences for those who would be willing to commit an infringement. The more practice the authority has, and the more serious the actual risk of punishment is, the more common antitrust awareness becomes, making infringements taboo. This phenomenon is quite evident among some jurisdictions in the Western Balkans. In our experience, the business community struggled to take competition law seriously when facing authorities hesitant to take on difficult cases or imposing predominantly cautionary fines. In contrast, authorities which initiated high-profile investigations against major market players and imposed significant fines contributed much more effectively to an overall compliant culture. They may have made mistakes along the way and suffered failure in some of these cases, but the end result tended to be greater awareness of the legal framework and a significant reduction in the most serious infringements.

Therefore, it is not enough to have competition fines on the books – there needs to be a reasonable chance that an infringer would actually suffer them in case of a breach. An authority reluctant to use the tools at its disposal tends to erode respect for the legal framework in place. “Sure, the rules are there,” a crafty manager might think, “but my bonus depends on this arrangement, we will never get caught – and even if we are caught, they’re going to let us off with a warning.” 

Another important aspect involves efforts by the authority: a constantly developing practice as well as presence and visibility on the market, are critical. The authorities have a wide array of tools, such as leniency or dawn raids, to establish credible deterrence and make the companies aware that non-compliance carries a significant risk of sanction. Credibility also implies efficiency: if proceedings last a good many years and can be manipulated, short-term thinking kicks in and people stop caring about what will, most likely, turn out to be the next CEO’s problem.

Another question concerns the predictability and equality of outcomes. Competition rules are often broad, allowing enforcers significant discretion and requiring undertakings to closely follow the evolving practice. The authorities need to commit to a consistent application of the rules, so that companies are able to adapt their business accordingly. This is also a safeguard for the equal treatment of parties to the proceedings and directly depends on the overall state of the rule of law in a given jurisdiction. Discriminatory or selective enforcement can be devastating for an authority’s credibility. If it is possible to bend the rules or decide differently without clear reasoning or explanation, this incentivizes companies to focus not on compliance, but on regulatory capture and establishing a relationship with the authority when a problem arises. This is also why competition enforcers need to be aware of the wider legal framework, instead of focusing on their relatively narrow scope of authority: often enough, would-be infringers are simply trying to adapt to governmental policies drafted with scant regard for market competition. Furthermore, efficiency should never come at the expense of due process, as integrity demands procedural fairness. 

Stakeholders would do well to bear in mind the importance of credibility in institutional design. Without it, enforcement can be twisted into harming competition, instead of fostering it. Great power must be accompanied by great responsibility. 

By Bojan Vuckovic, Partner, and Veljko Smiljanic, Senior Associate, Independent Attorneys at Law in coop. with Karanovic & Partners

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Karanovic & Partners at a Glance

Karanovic & Partners is a regional legal practice in Southeast Europe with a tradition spanning over 25 years and cooperating offices in Serbia, Slovenia, Croatia, Bosnia and Herzegovina, Montenegro, North Macedonia, and Albania. With more than 150 attorneys at law working together across the region, we take pride in our work, dedication, and understanding of our clients' industries and needs.

We work with some of the most respected and reputable businesses in the world, banks, as well as governments, state-owned entities, start-ups, and NGOs. We see our clients as long-term partners. We focus on straightforward solutions and tailor-made advice. Lawyers cooperating with us are fully immersed in our clients’ culture and industry to ensure that the work is delivered intelligently and reliably.

In our company culture, excellence is a must. We are reliable, adaptive, and fast. We operate under the “one team” principle, combining our regional reach and local know-how to deliver coordinated legal advice necessary for achieving our clients’ goals.

We are ambitious to propose innovative legal solutions and we are at the forefront of legal developments in Southeast Europe, pioneering new areas of the law and paving the way for new practices and regulations.

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