Commodity trading dominates world trade, with hard and soft commodities accounting for 33% of world trade volumes. Soft commodities alone account for 5% of world trade volumes, while the World Bank recently reported that the value of agricultural commodities under management amounted to $320bn.1 Firms trading in soft and hard commodities have the opportunity to generate huge revenues, with the largest such firms regularly generating annual revenues greater than the GDP of entire countries.
Companies active in agribusiness and commodities are of course subject to the legal frameworks and regulatory obligations that apply in each relevant country - but what is noteworthy is that developments in some recent competition law cases suggest that the application of competition law to commodities trading in particular may be broader than has previously been appreciated.
Competition law concerns have traditionally arisen at what may be termed the more ‘tangible’ stages of the supply chain, for example, in relation to the production, supply and retail of agricultural goods. The European Commission’s investigations into cartel activity in the European banana market is indicative of this more traditional approach.
This year has seen European Court judgements rejecting appeals in relation to both the so-called Northern and Southern Europe banana cartels.2 These cases both involved alleged collusion between banana importers, but what was particularly notable was the judgement and the Commission’s reasoning in the Northern Europe case. This case confirmed that a cartel could arise not only when competitors discussed their current or future prices, but also when market participants discuss information ‘relating to price’. In this case, this related to discussions on likely future market conditions, and the Commission’s theory of competitive harm was that sharing this information between otherwise competing entities reduced uncertainty as to how the market would develop between the banana suppliers, and that this might facilitate coordination of their market behaviour, for example in setting prices.
Importantly, this case also confirmed that under such conditions where there were direct exchanges between competitors, it was not necessary for the Commission to demonstrate that the conduct led to any actual anticompetitive effects – i.e., that prices were any higher than they would have been absent the cartel behaviour. Fines imposed on the banana importers in the two cases totalled around €70m.
These cases therefore highlight both the low legal threshold for the Commission to make out an infringement, and the severity of penalties when illegal behaviour is found.
Away from agri-business, the post- Financial Crisis era has been marked by a series of high-profile regulatory investigations into sectors of the national and global financial markets. The European Commission has been at the forefront of a number of these investigations, including the ongoing Forex investigation, while in 2013, the Commission levied fines totalling over €1.7bn on eight financial institutions for participating in illegal cartels in markets for interest rate derivatives.3 As discussed below, what is interesting in these cases is the type of behaviours that have been the focus of the authorities’ attention.
The rate of investigations into trading markets has shown no signs of slowing and, of greater relevance to the agrisector, has increasingly ventured into the realm of commodities. One example is the Commission’s on-going probe into potential anti-competitive behaviour in the biofuels sector, in an investigation marked by a series of unannounced dawn raids on multinational energy companies and the pricing agency Platts. The Commission has recently announced it is focussing this investigation on possible collusion affecting the setting of ethanol benchmarks.4
Separately the European Commission and the Swiss competition authority (Weko) are conducting a probe into precious metals pricing. The Weko has stated that their focus is on collusion around the setting of ‘spreads’ – that is, the difference between the bid and offer prices – in the markets for gold, silver, platinum and palladium5. The message is clear: commodity trading is now firmly in the regulatory spotlight – with potential implications trading in agricultural products as well as other commodities.
The application of competition law to trading markets is complicated as a result of the way in which traders interact. Unlike traditional markets for the sale of goods and services, in trading markets traders will buy from each other one day, and sell to each other the next. There is a legitimate and necessary interaction between market participants in order to (i) gather information on counterparty trading opportunities and negotiate transactions, and (ii) better understand future market movements. However (as discussed in the Bananas case above), information exchange between traders could constitute a concerted practice if it reduces uncertainty in the market. This is the case even in the absence of evidence of co-ordination.
In this context, illegal information exchange might include:
Each of the above may not constitute coordination in and of itself and may not necessarily lead to such behaviour; however, in certain specific circumstances each may be sufficient to establish a competition infringement. As mentioned above, this results in a relatively low threshold for triggering an investigation into a trading market, thereby heightening the contingent risk to market participants.
A striking feature of the cases relating to traders was the reliance of the Commission on internet chatrooms (such as those provided by Bloomberg), in which traders would participate in discussions through their working day which covered topics ranging from purely social to allegedly anticompetitive. The increasingly advanced technology used by the competition authorities when investigating potential infringements means these communications can now be recovered and forensically searched.
Indeed, there has been a significant change over the last decade or so in the way in which authorities carry out investigations. A key tool in the authorities’ investigatory toolbox is the unannounced dawn raid. Where authorities used to send large teams to trawl through file archives, the focus now is on imaging hard drives, and making forensic copies – or searching – phones, tablets and other portable media. The relevant authority is likely to focus their search on the IT infrastructure of the undertaking in question. The European Commission’s revised dawn raids guidance published in September 2015 focuses in detail on its wide powers to search IT systems and hardware, and it is not unusual for thousands, or even millions of emails to be subject to searches for key terms during competition investigations.
Chatrooms are a particularly high-risk area because regulators may be able to take multiple information exchanges between numerous market participants which cross the line into illegality, and string these together to find one ‘single continuous infringement’ (in other words, a long-running cartel). Critically, the scale of any fine imposed on an undertaking participating in an illegal cartel is usually linked to the duration of the anti-competitive activity – so the effect of such findings can be extremely significant. Evidence gleaned from chatrooms has been integral in building the cases of the various authorities in the various financial trading investigations.
It is clear that trading markets remain a priority for national and supranational competition authorities, with regulators having also focused on trading activity in global commodity markets in recent years. In the UK, the Competition and Markets Authority (CMA) and Financial Conduct Authority (FCA) both have significant new resources and a policy agenda of increasing enforcement of competition rules. They have also lowered the legal threshold for criminal prosecutions (broadly speaking, from ‘dishonesty’ to ‘concealment’ of the illegal behaviour). This will make it easier to punish individuals involved in competition infringements in the future.
This should sound as a warning bell to those involved in agri-trading – to ensure that compliance with competition law is a priority, but also that the nuances of the law are well understood by those on the frontline. It was notable that certain of the financial traders involved in these investigations voiced an opinion that they were just ‘doing their jobs’ – companies need to ensure their employees recognise compliance as a key responsibility in this respect.
See, for example, Amity Insight January 2014 and Commodity Markets Outlook: October 2015, World Bank.
See Case C-286/13 P - Dole Food Company Inc and Dole Fresh Fruit Europe v Commission, judgment of 19 March 2015 (the ‘Northern Europe banana cartel’) and Case 469-15 P - FSL Holdings, Firma Léon Van Parys, Pacific Fruit Company Italy SpA, judgement of 16 June 2015 (the ‘Southern Europe banana cartel’).
Publication
The US Supreme Court has ruled that a “pure omission” under Item 303 of Securities and Exchange Commission Regulation S–K cannot give rise to a private action for securities fraud under Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act of 1934.
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