Trust issues: competition watchdog under fire

A series of excoriating court rulings has shone an unforgiving spotlight on South Africa’s competition authorities, heightening the case for Parks Tau, the minister overseeing the watchdog body, to intervene.

On Tuesday, the Constitutional Court handed down a ruling that surprised nobody: dismantling central tenets of a case which the Competition Commission had brought against 23 banks a decade ago, premised upon a conspiracy to rig the rand. 

The court, in a 133-page judgment, booted out the case against the local banks, Nedbank, FirstRand, Standard Bank and a slew of others. This week’s ruling leaves just five banks to face the charge of being part of a “single overarching conspiracy”. 

This was a body blow to the authority, coming weeks after the Competition Appeal Court described the conduct of the Competition Tribunal as “egregious” and “offensive to the constitution” in a cartel case involving steel producer Cape Gate.

In that case, it took six years for the tribunal to deliver a ruling on whether Cape Gate was indeed part of a scrap metal cartel – a delay that the appeal court said was a “serious dereliction of duty warranting censure”.

This week’s Constitutional Court judgment added more grist to that mill.

Not only was the commission “guilty of unreasonable delays” at several points of this rand-rigging case, but it had also overreached by adding banks to the charge sheet for which there was “no plausible” evidence. 

It says much about the waning legitimacy of the antitrust authorities that few experts were entirely surprised by this week’s ruling. 

“The complaint referral was filed … by the commission before many of the banks even had an opportunity to clarify whether they were foreign or local, or explain their communications with the other banks,” says Heather Irvine, a partner at law firm Bowmans. 

Another lawyer says it felt as if the commission had “bent to political pressure” to throw the book at the banks in the first place, when the evidence didn’t justify it. 

The story dates back to 2015, when the commission initiated a case against 11 foreign banks on the basis that they had “manipulated the US dollar/rand currency pair by fixing bids”. There was justification for this, since evidence that surfaced in the US of traders trying to rig currency deals in Bloomberg and Reuters chatrooms showed as much. 

Jason Katz, a currency trader who had worked in a number of banks including Barclays and BNP Paribas, pleaded guilty in a Manhattan court in January 2017 to this charge. Others followed, leading to jail time overseas.

Had the commission stopped with the evidence from those cases, it might have prevailed. But it got greedy, and overreached. 

In 2016, the commission jammed a slew of other banks into its complaint, including Standard Bank and Nedbank, alleging that they were part of a “single overarching conspiracy” to affect the value of the currency. In the end, its complaint encompassed 23 banks.

ANC politicians had a field day, using this as vindication for their suspicion that “white monopoly capital” had been undermining their efforts to revive the economy.

Khumbudzo Ntshavheni, minister in the presidency, said at the time that “the rand has been manipulated by the private sector”, which “continues to engineer and do machinations to make sure the government collapses”. 

The Constitutional Court ruling, which booted out the case against the local banks (except for Absa, which received “leniency” in exchange for its co-operation), lays bare how flawed Ntshavheni’s reasoning was. 

In the end, the case collapsed because the commission hadn’t been able to provide proper evidence that traders at all the banks were involved. Its case against many of the banks, especially the local ones, amounted to little more than guilt by association. 

Unjustifiable inference

The fragility of the case is clear from the case against Nedbank. For a start, none of its traders are named, there are no claims that it participated in any of the chatrooms in which prices were fixed, and only vague claims that it joined the conspiracy by 2008. 

The case against FirstRand Bank was just as sloppy. Earlier, the Competition Appeal Court had booted out the commission’s case, which it said was premised on “hopelessly incorrect information”. 

Rather than getting actual evidence, the commission said a single overarching conspiracy “could be inferred” from the fact that traders communicated frequently in these chatrooms. (FirstRand, notably, hadn’t even participated in these chatrooms.)

The case against Standard Bank illustrates how damaging the commission’s actions have been. There, the commission claimed one of the bank’s traders had participated in a chatroom where they “discussed the bid-offer spread” for the US dollar/rand currency pair.

Yet not only was the Standard Bank person not a trader but a salesperson, he had also played “no role in determining Standard Bank’s bid-offer spreads and could not bind [the bank] to foreign currency transactions”.

The court said that had the commission bothered to contact Standard Bank before lodging the case, it would have found out the truth.

Standard Bank argued in court that its inclusion in this case, based upon zero evidence, had “badly tarnished” its business reputation. So too with its salesman, who “was publicly named without having been given any opportunity to defend himself”.

On this front, the Constitutional Court was scathing in its criticism. “It was inexplicable that the commission persisted in claiming plausible evidence to link Standard Bank to the single overarching conspiracy,” it said. 

Asked for its response to the ruling, spokesperson Siya Makunga says the commission is “still studying the judgment” and will issue a statement soon.

But following so soon after the Cape Gate ruling, this judgment puts pressure on Tau to sort out leadership, and resources, at the competition authorities. 

Bongane Sibanyoni, the chief legal strategist for civic organisation CountryDuty, said in a research note that in the end, this wasn’t about whether the banks colluded, but rather whether the commission’s legal case was good enough to put them on trial. 

“Nearly a decade after the [rigging claims] surfaced, the bulk of the case against most of the implicated banks ends not with a finding that they did not collude, but with the finding that the regulator’s papers were not good enough to make them answer for it.”

This distinction matters, Sibanyoni said, not least for trust in the commission’s competence. 

Sand in the engine

Ahmore Burger-Smidt, head of regulatory practice at law firm Werksmans, describes the Constitutional Court ruling as deeply worrying. 

“Clearly, the commission is overloaded, but an authority must understand the facts in their own jurisdiction. Here, the court highlighted fundamental problems in both the lack of facts underpinning their claims, and their legal strategy,” she says. 

She says that for the court to go as far as to describe it as “inexplicable” that the commission persisted in the claim against Standard Bank despite a lack of plausible evidence indicates how much the authority has slipped.

Bowmans’ Irvine says this case is part of a wider pattern.

“What we’ve seen is that the commission will refer a vague complaint which doesn’t precisely identify exactly what anticompetitive conduct is alleged, hoping that in the lead up to the tribunal hearing, the companies they are accusing will produce more evidence to shore up their case, so that when it reaches trial, it has enough evidence,” she says. 

This is the opposite of how it should be: the commission should investigate first, produce a thorough case, then proceed to trial. 

Worse, she says, the commission is not generally held liable for the costs, even though it is spending taxpayer money on these cases. And, frequently, it will appeal a case all the way to the Constitutional Court, without consequence should it lose.

The ructions identified in both this judgment and the Cape Gate ruling are particularly worrying, since a capable antitrust body is vital to a well-functioning economy. 

“When they are not operating well, the competition authorities can be a massive bottleneck at the top of the economy,” says Irvine. 

“If you have a major deal, involving a foreign oil company for example, it’s a massively risky place to be. If a merger is contested or if the commission raises concerns, the commission investigation and tribunal hearing can take months,” she says. 

This raises exchange-rate risk, makes it far harder to quantify a break-free, and ratchets up costs. “It makes deals involving South African firms less attractive,” she says.

Even if you’re lucky, just getting a date at the Competition Tribunal can take months, pouring yet more sand into the engine of the economy. 

Burger-Smidt says this bank case, as well as the decision in the Cape Gate matter, has badly eroded trust in the institution from the business sector. 

“The authority should have the resources to build strong fact-based cases. Instead, we have seen more companies turning to the Constitutional Court and Competition Appeal Court to get to a proper outcome. That is inefficient, and clogs up the whole system,” she says. 

Over the 11 years in which this case has trudged slowly through the process, no less than 33 advocates have been involved, in addition to a swathe of attorneys. 

Burger-Smidt says this shows that Tau needs to act to ensure the authority has the required capacity. “The alternative is you have what we had here: years of fighting, and spending huge amounts – and for what?”

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