It Is Inappropriate to Grant the Fair Trade Commission Search and Seizure Powers

- 2003.9.2. Bill No. 162595, proposed by member of the National Assembly Hoonpyeong Lee:

Partial Amendment Bill to the Monopoly Regulation and Fair Trade Act -

1. Proposal of an amendment to grant compulsory investigatory powers

On September 2, an amendment to the Fair Trade Act was proposed by 12 members of the National Assembly, the core of which is to grant Fair Trade Commission (hereinafter, the FTC) investigative officials compulsory investigatory powers (seizure and search powers).

1)

The background section of the bill first states the following. Under the current law, the FTC has no compulsory investigatory powers, and even if a company obstructs or refuses an investigation, only an administrative fine is imposed. From the company’s standpoint, doing so is more advantageous than having illegal conduct uncovered and paying a large surcharge, and thus cases of refusing or obstructing investigations occur frequently. Accordingly, the stated reason for the bill is that, in order to respond effectively to unfair collaborative acts that impede market competition and directly infringe consumer interests, it is unavoidable to newly grant seizure and search powers to investigative officials in order to enhance the effectiveness of the FTC’s investigative function.

2. Review of the key issues in the amendment bill

Since the FTC’s primary duty is to promote competition, there can be no objection in principle to the proposal that its investigative function should be strengthened in order to uncover unfair collaborative acts such as cartels that restrict competition. However, because strengthening the FTC’s authority does not necessarily increase regulatory efficiency, there is room for debate as to whether granting seizure and search powers is a sufficient condition for strengthening the FTC’s investigative function. Therefore, for the bill proposed in the National Assembly to be persuasive, it must be demonstrated that the FTC’s lack of physical coercive power is a decisive obstacle in uncovering unfair collaborative acts such as cartels. Below, I examine the validity of the bill with a focus on its key issues.

The first issue is whether, as stated in the explanation of the proposal’s background, cases in which firms avoided or obstructed FTC investigations in connection with illegal acts actually occurred “frequently.” It is only natural that lawful investigative activities should not be obstructed. If they were, that would amount to firms challenging public authority without justification. But one must ask what firms would be relying on in choosing to avoid or obstruct an investigation. Since evading or obstructing an investigation does not exempt a firm from the investigation itself, there is no reason from the firm’s standpoint to confront the FTC recklessly while incurring administrative fines. In 2001, the FTC sharply raised the administrative fines for noncompliance with investigations: for officers and employees, from 10 million won to 50 million won, and for corporations, from 100 million won to 200 million won, thereby making it difficult for firms not to comply with investigations. In addition, where an administrative disposition or corrective order is not carried out without just cause, a compulsory performance charge of up to 2 million won per day is imposed. Accordingly, it is nearly impossible for firms to refuse or obstruct investigations. Moreover, the actual number of cases in which administrative fines were imposed for noncompliance with investigations was only two, indicating that firms in fact complied with investigations.

2)

Accordingly, the explanation that cases of firms avoiding or obstructing investigations occur frequently is a considerable exaggeration of reality. In the end, this explanation for the bill is nothing more than a strained justification for granting seizure and search powers. Even if such cases had occurred frequently, this is not a problem to be solved by seizure and search powers. The proper course would be to raise administrative fines further to induce firms to cooperate with investigations.

Another issue is whether it is really necessary under the current circumstances to grant seizure and search powers to the FTC. The FTC already possesses investigative and enforcement means that are, in substance, little different from judicial investigative powers, including on-site inspection powers, the power to demand submission of materials, and the power to retain materials. In addition, with respect to joint acts such as cartels, the FTC is obligated to refer cases to the prosecution, and the prosecution may request such referrals. Therefore, the FTC’s “lack of coercive power” is not a factor preventing it from uncovering unfair collaborative acts. Rather, it has been pointed out that the statutory provision serving as the basis for investigating violations, etc. (Article 50 of the Fair Trade Act), is drafted broadly in terms such as “when deemed necessary for the enforcement of this Act” and “order the submission of materials or objects necessary for the investigation,” thereby encouraging authoritarian and excessive administration in the exercise of public power. Moreover, the FTC’s power to trace bank accounts is stronger than the prosecution’s investigative power in that it may be exercised without obtaining a warrant from a court. In such circumstances, if the FTC were to acquire seizure and search powers as well, it would amount to placing an all-powerful sword in its hands. Therefore, unless the lack of physical coercive power is functioning as an obstacle to law enforcement, granting FTC investigative officials the status of judicial police officers could produce the adverse effect of excessive concentration of power.

Greater regulatory power does not mean greater regulatory authority. Regulatory authority rises only when businesses subject to the Fair Trade Act comply with regulation. During the five years since 1998, of the total 1,444 corrective orders issued by the FTC, parties filed lawsuits in court against 263 of them. The proportion of cases in which firms challenged the FTC’s corrective measures and brought administrative litigation reached 18%. The problem is that, due to the FTC’s overly aggressive application of the law, the rate at which it loses in court has gradually increased. According to materials submitted to the National Assembly for the 2002 audit of state affairs, the FTC’s loss rate in Supreme Court appeals rose steadily from 16.67% in 1998 to 23.33% in 1999 and 25.0% in 2000. This signifies a decline in the FTC’s regulatory authority.

These losses by the FTC stem from its overly broad application of cartel standards. In April 2003, the Supreme Court ruled that the FTC’s corrective order was improper when it regarded the three beer companies’ identical rate of beer price increases as collusion and imposed surcharges of 280 million to 680 million won on them. In its opinion, the Court stated that “even though the three beer companies, which accounted for 99% of the domestic market at the end of 1997, raised prices by the same rate, this was because the rate of increase permitted at the time by the Ministry of Finance and Economy and the National Tax Service was far lower than the figure they had requested, leaving them no choice but to fully reflect the permitted rate of increase in their price hikes.” And in October 2002 as well, the Seoul High Court ruled that the FTC’s administrative measure imposing 7.4 billion won in surcharges on 11 non-life insurance companies on the ground that they had collusively raised automobile insurance premiums was erroneous.

3)

The reason the FTC’s collusion determinations were checked by the courts was that the FTC merely “presumed” collusion without clear physical evidence. Article 19 of the Fair Trade Act provides that where a business engages in conduct that substantially restricts competition in a certain line of trade (for example, raising prices to similar levels at around the same time), such conduct is “presumed” to constitute an unfair collaborative act even in the absence of an explicit agreement among businesses. Of course, most cartels are formed implicitly and secretly, making clear physical evidence difficult to obtain. However, determinations of collusion based on presumption can also brand natural price increases as collusion and produce many victims. Therefore, the key to uncovering unfair collaborative acts such as cartels is not physical coercive power but enhanced expertise. In this context, granting FTC investigative officials the status of judicial police officers is unlikely to lead to an increase in successful detection of unfair collaborative acts. Ultimately, policy approaches other than granting seizure and search powers are required.

3. Other alternatives for detecting and preventing unfair collaborative acts

Because unfair collaborative acts such as cartels are secretive by nature, proving them is by no means easy. Therefore, the already effective “leniency program for persons reporting collaborative acts, etc.” needs to be activated more vigorously. This would enhance both procedural legitimacy and policy effectiveness in cartel determinations and the imposition of surcharges. In addition, the “constant information-gathering system” for securing circumstantial evidence of cartels should be expanded beyond its current application in bidding for government-funded construction projects to other lines of trade and business associations where collaborative acts are relatively more likely. In particular, various business organizations carrying out tasks entrusted by the government, such as industry associations and professional qualification groups, have considerable potential for collusion, including by disadvantaging nonmembers. Accordingly, rewards for cartel whistleblowers should be strengthened and the information-gathering system should be operated on a continuous basis.

At the same time, the damages system should be supplemented in order to enhance private enforcement of the Fair Trade Act. Private litigation can broaden the base of enforcement of the Fair Trade Act by establishing a joint public-private front against unfair collaborative acts. In this way, if private parties harmed by unfair collaborative acts such as cartels are able to directly seek damages in court, cartels can be deterred in advance. At that time, in light of the difficulty victims face in proving the amount of damages, courts should be allowed to determine the amount of damages directly on the basis of relevant evidence, etc.

4)

Also, in order to promote private enforcement, lawsuits should be permitted even before the FTC’s corrective measures become final. Fortunately, such private suits prior to FTC measures have already been publicly announced in draft legislation and, if passed by the National Assembly within the year, will take effect in January 2004. However, private litigation should preferably be limited to unfair collaborative acts such as cartels. Otherwise, frivolous litigation could extend to other regulations under the Fair Trade Act unrelated to competition promotion, such as regulations on concentration of economic power.

4. Summary and conclusion

There has long been continuous debate over the broad scope of regulation under the Fair Trade Act. While a market economy should in principle be governed by the logic of individual markets, Korea’s Fair Trade Act encompasses the regulation of all markets. And the FTC has styled itself as an all-round player and arbiter. Seen from another angle, the FTC’s role as an all-round player may also mean that it has not remained faithful to the core mission of competition law: improving efficiency and increasing consumer welfare through the promotion of competition. Its octopus-like policy involvement and regulation may have helped strengthen its standing within the government, but the FTC’s regulatory authority for promoting competition has clearly declined.

In detecting unfair collaborative acts such as cartels, the key lies not in securing physical force but in enhancing expertise. Therefore, reinforcing physical coercive power through seizure and search powers does not increase regulatory authority. If such a policy mindset exists, it is the product of simplistic administrative convenience. The powers to trace bank accounts and to seize and search themselves may already have the effect of shrinking corporate activity. They may also lead the public, without realizing it, to perceive businesses as groups inclined to engage in illegal conduct.

Establishing a competitive order by suppressing unfair collaborative acts such as cartels is the very reason for the FTC’s existence. Therefore, before relying on compulsory investigatory powers that have little practical benefit and may create the misunderstanding of excessive concentration of power, it is necessary to attempt a multifaceted approach that makes faithful use of market discipline. The damages system should be supplemented to activate private enforcement of the Fair Trade Act, and the constant information-gathering system for securing circumstantial evidence of cartels should be strengthened. In addition, the existing internal whistleblower system should be fully utilized to enhance the policy effectiveness of cartel determinations.

Donggeun Cho (Professor, Department of Economics, Myongji University)

1) Quoting the bill’s statement of reasons verbatim:

“Under the current law, the Fair Trade Commission has no compulsory investigatory powers, and even where investigations are obstructed or refused only administrative fines are imposed, so from the standpoint of enterprises, this is thought to be more beneficial than having illegal conduct discovered and paying surcharges; accordingly, cases of refusing or obstructing Fair Trade Commission investigations occur frequently. Therefore, in order to enhance the effectiveness of the Fair Trade Commission’s investigative function, this bill seeks newly to grant seizure and search powers to the Fair Trade Commission with respect to unfair collaborative acts that impede market competition and directly infringe consumer interests.”

2) It is known that, in 2000, during an on-site investigation of affiliate B of Group A as part of an investigation into improper internal transactions by the four major conglomerates, the investigative activities of FTC personnel were obstructed. However, affiliate B has a different position. It contends that it could not comply with the investigation because the investigators demanded actions that risked damaging the computer system itself into which personnel data had been entered.

3) These partial losses by the FTC should not be used to disparage its performance in detecting unfair collaborative acts. In 2002, the FTC referred to the prosecution school uniform manufacturers and oil refiners that had engaged in unfair collaborative acts, and in 2003 it determined that seven cement manufacturers, including A Cement, had refused to supply cement as a “collusive act intended to interfere with business activities” and referred them to the prosecution.

4) This needs to be operated on a temporary basis until the damages system takes root. If courts determine the amount of damages, the plaintiff (victim) would bear no burden of proof, which could create room for frivolous litigation and, over the long term, have the adverse effect of weakening the evidentiary competitiveness of the private legal sector.

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Original title: 공정위에 압수'수색권 부여 적절치 않아

Author: Dong-geun Jo

Date: 2003-10-22

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=bill&pn=4&idx=25826