Author:
Global | Publication | June 2023
In August 2022 the Competition Commission conducted its first dawn raid in almost four years. In prior years the Commission regularly used dawn raids to gather evidence to prosecute firms involved in anticompetitive conduct in South Africa, having conducted 13 dawn raids from March 2015 to November 2017.
These unannounced search and seizure operations are hugely invasive and disruptive to businesses. The Commission has broad powers (although these are not unlimited) to enter and search premises, including to search any person on the premises if there are reasonable grounds for believing that the person has personal possession of an article or document that has a bearing on the investigation, to examine any article or document on the premises that has a bearing on the investigation, to seize relevant documents that have a bearing on the investigation, and to reproduce a record from electronic systems (computers and cell phones).
To obtain a warrant to conduct a dawn raid, the Commission must have reasonable grounds to believe that a prohibited practice in terms of the Competition Act has taken place or is taking place on those premises, or anything connected with the investigation is in the possession or control of a person on those premises. It is also possible for the Commission to conduct a dawn raid without a warrant if the investigator gets permission from the owner or person in control of the premises to enter and search the premises; or if there are reasonable grounds to believe that a warrant would be issued if applied for, and that the delay in first obtaining the warrant would defeat the object or purpose of the search.
Dawn raids are an effective tool used by regulators to get firms to consider applying for leniency (an incentive for a firm that participates in cartel activity to terminate its participation and inform the Commission of the conduct). The first firm “through the door” (who fulfils certain requirements including providing the authority with information which will lead to the successful prosecution of the other cartelists) may receive immunity from the Commission for its participation in the conduct such that no administrative penalty will be imposed.
The recommencement of using this effective tool highlights the need for firms to have a comprehensive plan in place to deal with a search and seizure operation and minimise business disruption.
Here are 10 things to know about dawn raids in South Africa.
The Commission has explicitly said that it will prioritise investigations in ‘priority sectors’ which is evident from the Commission’s most recent raid on eight insurance firms in August 2022.
Besides the focus on ‘priority sectors’, the Commission can and does conduct dawn raids on firms operating in other sectors. This means that all firms should be properly prepared for a dawn raid – not just those involved in priority sectors, being food and agro-processing, healthcare, intermediate industrial inputs, construction and infrastructure, banking and financial services, information and communication technology, and energy.
There are multiple examples of dawn raids in non-priority sectors including dawn raids conducted on suppliers of fire control and protection systems, furniture removal firms, recruitment advertising agencies, suppliers of liquefied petroleum gas and cylinders, as well as the LPG Association, automotive glass fitment and repair services, suppliers of particle board and medium-density fibreboard, cargo shipping liners, suppliers of packaging paper, installers of automatic fire sprinklers and suppliers of set top boxes and accessories.
The Commission can raid premises to obtain evidence for an investigation, even if the firm is not itself the subject of an investigation and can also search a private dwelling if it has a warrant and the premises is listed in that warrant.
Search operations can be hugely disruptive for both the firm and its employees, unless they are dealt with in a carefully coordinated manner. A firm may face serious interference with its operations on the day of the raid and thereafter, as well as the risk that its confidential pricing, customer and other information will enter the public domain. You need a comprehensive plan to deal with the risks posed by a raid. For example, unless the firm has proper records of what documents and electronic data have been copied and removed, and which employees were questioned and what the nature of the discussions were, it may be difficult to defend the allegations of anticompetitive conduct. If staff destroy or conceal documents during a raid, or obstruct the competition authorities during the search, they may be liable for criminal prosecution.
The Commission usually issues a press release on the day of the raid which lists the names of the firms raided. A communication plan should be in place to manage communications with customers, suppliers and other third parties to limit potential reputational impact.
Your dawn raid plan should identify the core team who will be responsible for dealing with a search, this includes senior management, in-house legal counsel, and the IT and security managers responsible for each site. An external support team, including the firm’s competition legal advisers, investor relations personnel and a communications expert, should also be identified. This part of the plan needs to be practical in view of travelling distances, and the size and number of firm premises potentially involved.
External competition legal advisers should be contacted as soon as the Commission arrives on-site enabling them to get to the premises as soon as possible. Expert competition law advisers will ensure that the Commission conducts the raid within the ambit of the warrant by ensuring for example that only identified premises are raided, only authorised personnel are on site, no substantive interviews take place, and a smooth process for the conduct of the raid is negotiated. If the Commission seeks to raid without a warrant, the competition advisers will advise whether the legal requirements for inspection without a warrant are met.
As firms increasingly shift to digital rather than physical records, the Commission is more focussed on searching electronic data like emails, chats and spreadsheets for evidence of a contravention of the Competition Act. These searches provide an efficient way to gain access to large volumes of potentially relevant information.
It is common for the search warrant to authorise the Commission’s staff to undertake an electronic search of a firm’s records (which can include personal devices if they are on the premises and the Commission has reason to believe they contain information relevant to the investigation) and the Commission frequently take a complete electronic copy of the server and computer hard drives during a raid. This has the potential to be enormously disruptive on the day, and your IT expert needs to be clear on how to assist the Commission, without the firm’s operations grinding to a halt. Appropriate measures need to be taken to ensure that the Commission’s electronic searches, in particular, are conducted within the ambit of the Competition Act and the warrant, if obtained.
Staff need to be clear on the procedures to be followed when dealing with the regulator in the event of a raid. For example, if no warrant is provided, the Commission should not be permitted entry without first seeking advice from legal advisers. If the Commission does present a warrant, Commission staff should be asked to wait for the firm’s legal advisers to arrive before commencing the search. The applicable warrant should be photocopied. The identification of each official involved in the raid should be obtained and recorded. Staff should be appointed to monitor the authorities’ conduct during the search, and record each document reviewed or removed by the authorities. These employees need to receive training to ensure that they understand the crucial role they will play on the day of the raid, including to ensure that staff are aware that documents or electronic files should not be concealed, altered, destroyed or removed, that no interviews or discussions of substance with the authorities should occur and that staff must not inform anyone outside the firm that the inspection is taking place (including through social media channels).
It is crucial to understand that the interests of the firm and certain employees may not necessarily be aligned. A process should be implemented to ensure that everyone involved understands their rights (including an individual’s rights against self-incrimination). Where interests are not aligned, employees may require separate legal representation.
Adequate measures to protect the firm’s legally privileged and highly confidential documents should be put in place. Unless you file a formal confidentiality claim, there is no obligation on the Commission not to release your documents to third parties, like customers, competitors, other regulatory authorities or trade unions. If you don’t clearly identify and withhold documents which are legally privileged, like legal opinions written by your lawyers, the Commission may unlawfully read them during the raid and remove them from your offices. A procedure to identify legally privileged information and store this in separate sealed bags, before these documents are reviewed by Commission officials, needs to be agreed with the Commission when the raid starts.
The Commission usually releases a press statement while the raid is ongoing which names the firms being raided and provides some details about the anticompetitive conduct which it is investigating. You need an external communication plan to deal with questions from the media and to minimise any damage to your reputation resulting from news of the raid. Listed firms will need to communicate clearly with their shareholders and other interested parties, like analysts. You will need an internal communication plan to make sure that your staff keep the details of the raid confidential and to deal with the impact on staff morale as far as possible.
Once the search is over, the firm will need to conduct a thorough internal investigation to determine whether the Competition Act (or legislation that is applicable in one or more African jurisdictions in which they operate or trade) has been contravened. If so, it may be possible to negotiate a substantial reduction in fines if the firm offers to co-operate with the investigation being conducted and cure any problem.
It is also crucial to carefully consider whether the search warrant was validly obtained. If not, an application to have the warrant set aside can be brought. In June 2018, the High Court set aside the search warrant obtained by the Commission on the basis that the Court, in granting the application, acted on incomplete, inaccurate and incorrect information. In particular, the Commission had relied on hearsay evidence in applying for the warrant but did not file any confirmatory affidavits from individuals with personal knowledge of the information. It is important for the Commission to demonstrate that there is a reasonable belief that the targets of the search are engaged in or have evidence of anti-competitive conduct. In this case, the court found that the allegations based on double hearsay “could never ground ‘reasonable belief’”.
The Commission’s Corporate Leniency Policy offers the first member of a cartel who comes forward and co-operates fully with the Commission immunity from administrative penalties in terms of the Competition Act. Leniency may potentially still be available in relation to the conduct which prompted the raid, or there may be other anticompetitive practices which the Commission does not know about, which could form the basis for a leniency application.
Leniency is only available to a firm and provides immunity from the imposition of an administrative penalty. It does not protect the firm from criminal or civil liability resulting from its participation in the cartel and does not extend to individuals for their participation in cartel conduct. The Commission can, however, make submissions to the National Prosecuting Authority that an individual is ‘deserving of leniency’.
It is essential to conduct a thorough internal investigation and hold a discussion with your external advisors as soon as possible after a raid to obtain legal advice on the approach to be taken.
Competition legislation is actively enforced in a number of other African jurisdictions. Further, the competition authorities in these neighbouring countries regularly liaise with one another and collaborate with respect to enforcement policy and to coordinate simultaneous raids on an industry. Firms that trade or have operations in neighbouring countries may find that if they are subject to investigation in South Africa, that they may similarly face investigation in other jurisdictions including being subject to a dawn raid in multiple jurisdictions. For example, in April 2022, the Botswana Competition and Consumer Authority conducted a dawn raid on insurance firms. This investigation involves different conduct to that which the Commission is investigating in South Africa but provides an indication that competition authorities across the continent focus on similar industries.
Cross-border collaboration is assisted through the entry of memorandum of understanding (MOU) between the Commission and other regulatory authorities. In Africa, the Commission has entered into an MOU with competition regulators in Egypt, Nigeria, Kenya, eSwatini, Namibia and Mauritius.
Dawn raids are an intrusive and disruptive event in the life of your business which merit careful preparation. In the event of a raid, or if you have any questions, please contact:
Cape Town: Marianne Wagener on 082 807 4352
Durban: Rosalind Lake on 082 807 4429
Johannesburg: Candice Upfold on 079 502 3209
Publication
Miranda Cole, Julien Haverals and Emma Clarke of our Brussels/ London offices are the authors of a chapter on procedural issues in merger control that has been published in the third edition of the Global Competition Review’s The Guide to Life Sciences. This covers a number of significant procedural developments that have affected merger review of life sciences transactions.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023
