Companies that collude with competitors are putting more than just their reputation on the line. So why, with the regulator handing out big fines and immunity for informers, are they still taking the risk?

When supermarkets get together to decide a price for milk, or airlines conspire over surcharges on flights, public condemnation of the companies involved is swift, and understandably harsh. Morally, price-fixing is an open and shut case. As any regulatory lawyer will assure you, no one engages in this type of practice by mistake, or without knowing that it is wrong.

UK cartel law makes it a criminal offence to agree prices with competitors, share markets or limit production in order to raise prices, or to rig bids. Yet some still think that what they are doing is a minor violation of competition law, unaware that they can now be imprisoned for up to five years. So why do companies still risk the corrosive damage to their brands and reputation, and the large fines and prison sentences that result from prosecution?

The tourism industry offers a good example of how easily a company can overstep the mark: a hotel sells rooms in bulk to a tour operator at prices below its published rate, for the operator to sell on to its customers. From time to time, the tour operator agrees with the hotel not to charge its customers less than the advertised rate. That may not seem so terribly wicked, but it's price-fixing, and both parties could be fined up to 10 per cent of global turnover. If the authorities chose to bring criminal charges, the consequences could be even more severe.

Seldom is individual greed the motivation for cartel involvement. "Price-fixing cases very rarely involve personal enrichment," says Michael O'Kane, partner and cartel specialist at London law firm Peters & Peters. "They sometimes result from historical contacts between competitors when the law was more loosely applied. More commonly, they want to do something concrete about their market at a time of short-term economic difficulty—such as high oil prices—and think it's permissible to have contact on the issue. Sometimes, the motive is to save jobs in the UK, keeping prices artificially high to stop all the work moving to China, for example."

More importantly, companies have not committed to stamping out anticompetitive behaviour because the chances of getting caught have historically been very low. Various US and European studies have assumed a detection and punishment rate ranging from 13 to 17 per cent. Against that, they estimate an average overcharge rate of anywhere from 15 to 25 per cent. According to Wouter Wils of the European Commission Legal Service, this could typically lead to an increase in profits of 10 per cent of turnover—making it worth doing for someone who didn't mind breaking the law.

"Companies that engage in price-fixing feel they are more likely to get away with it than not," says O'Kane. "Academic research suggests that only about 15 per cent of cases are uncovered."

That situation may be about to change. Regulators are trying to skew the odds in their favour by combining the stick of criminalisation with the carrot of leniency for whistle-blowers. The Office of Fair Trading (OFT) has warned UK companies of a tougher attitude, including more criminal prosecutions. "Watch this space," promises Simon Pritchard, OFT senior director for mergers. "We have criminal enforcement high on the agenda." The OFT is also stepping up its civil-enforcement activities. In March, it announced it would offer rewards of up to £100,000 to informers who blew the whistle on cartels and price-fixing conspiracies. In addition, the OFT can now apply for company directors to be disqualified.

Tough regulation has been a long time coming. The Enterprise Act made price-fixing a criminal offence in 2003, yet it wasn't until December 2007 that the regulator brought its first criminal case to court. It charged three businessmen with cartel offences, alleging that they were part of a so-called "marine-hose cartel" that rigged bids and fixed prices in the supply of hoses to the international offshore oil industry. The men—two from Dunlop Oil and Marine and one from PW Consulting—had already pleaded guilty to similar charges in the US. This June, the three men were jailed for up to three years. In a statement, the OFT said it would "continue to investigate and prosecute cartels vigorously, with the aim of ensuring strong competition within the UK economy."

The regulator has stepped up the pace. In April this year it issued a statement of objection (SO)—its way of saying it had investigated a situation and was giving notice of an intended infringement decision—in two major cases. The first SO went to 112 construction companies that, the OFT believed, were guilty of bid rigging and cover pricing. Within a week, a second SO was delivered to Imperial Tobacco, Gallaher and 11 retailers—including Asda, the Co-op, Morrisons, J Sainsbury and Tesco—alleging unlawful practices in setting prices for tobacco products.

A few days later, the OFT raided the offices of a number of major supermarket chains, investigating possible price-fixing involving around 100 grocery, health and beauty brands. Newspaper reports claimed that Wal-Mart, Asda's parent, blew the whistle in return for immunity. When you consider what 10 per cent of Wal-Mart's $374.5bn turnover adds up to, that wouldn't be surprising.

The OFT's largest fine to date was levied against British Airways last year. The airline had to pay £121.5m for colluding with Virgin Atlantic over fuel surcharges. Virgin Atlantic was granted immunity for blowing the whistle—more leniency at work—but the matter hasn't ended there, and the OFT is now conducting a criminal investigation into the affair.

In a global business environment, growing international regulatory cooperation has increased the risks for any UK companies still prepared to take their chances. The US is waging an international campaign against price-fixing (much as it has against tax evasion), and countries including Ireland, Israel, Japan and Brazil have made it a criminal offence. Australia is about to do the same.

The US regime is particularly aggressive, claiming extra-territorial jurisdiction over any price-fixing company and its officials who have transacted business in the US or with US firms. It ceased its "no jail" policy and, since 1999, 33 foreign defendants have been locked up in US prisons for violating anti-trust laws. There, sentences may be up to 10 years, compared with five years in the UK. And unlike the UK, where the prosecution must prove "dishonesty", US prosecutors have no such obligation.

Companies need a "very strict" compliance policy, advises Peters & Peters's O'Kane. "They need to educate their sales teams in particular as to what constitutes anticompetitive behaviour, and what the consequences are," he says. Above all, warns O'Kane, companies "need a whistle-blowing procedure. That's very important." Double-dealing is a dangerous game—and the regulators have just raised the stakes.