Probable Outcomes of Turkish Banking Sector Investigation

One of the years’s most highly anticipated investigation, Banking Sector Investigation II (“BSI”), will premier in Turkey probably early 2013. As you may have already witnessed, there were significant amount of coverage in the media last week in relation to BSI, which is currently in the third written plea level and at least 2-3 months prior of its completion. I think there are both positive and negative aspects of this investigation’s extra ordinary involvement on television’s or in the newspapers. The positive aspect of this extra ordinary involvement of the investigation in the media is creating a suitable environment to increase the public awareness of competition law by giving individuals or corporate pause to think about the Turkish Competition Law and Turkish Competition Authority (TCA). The negative aspect is unfortunately the purpose of creating pressure on the Rapporteurs and Competition Board when the investigation is still in the third written plea stage, which means there is still plenty of time before the completion.

The purpose of the establishment of independent regulatory authorities in Turkey in early 2000s, such as the TCA, is to protect the decision makers from the pressure and lobbying activities of political and business world in the future and give them space to take their decisions in full independency, such as important investigations like this. I think recently resurged adverse publicity against independent regulatory authorities, including TCA, in Turkey is very meaningful in the context of desired public pressure creation on the TCA. For this reason, despite of all all adverse publicity such as "I wonder if those regulatory authorities are needed," or "they are more independent than what we expect them to be”, the TCA should be ignore them all, since the TCA is one of the most indispensable regulatory authority for our free market economy system; therefore, stands above compare to all other regulatory and mostly sector specific regulatory authorities of Turkey.

I think it is also proper and beneficial to say a few words about a recent trend around the world, triggered by the global economic crisis, which also confirms and promotes my ideas above. Due to the economic crisis, there is an ocular pressure on governments around the world including Turkey for tighter budget control and decreasing the public spending (or increasing the savings). In line with that pressure, some of the countries, such as the Netherlands or Spain, are disputing to merge the various sector specific regulatory authorities with the competition authorities for the purpose of promoting efficiency, increasing savings and reducing the bureaucracy.

In other words, these sector specific regulatory authorities are about to enter into the organizational charts of their national competition authorities to where I believe they originally belonged. Similar choice is also implementable for Turkey. Therefore, sector specific authorities in energy, telecom, banking, sugar, tobacco and alcohol (whose regulatory body had recently been closed) could be merged with TCA and delegate the task of protecting and promoting competition to TCA (already which I believe in the jurisdiction of TCA) while handing over their technical duties through primary and secondary legislation to relevant ministries. I am sure TCA is fully capable of reaching the goal of promoting and protecting competition along with the liberalization of these network industries which are also natural monopolies in that sense.

As I said earlier, we have been witnessing ongoing speculations about the results of the investigation in particular on the amount of fines. Even though the relevant provisions of the Turkish Competition Law mandate imposition of an administrative fine up to ten percent of annual gross revenues of undertakings and associations of undertakings which generate by the end of the financial year preceding the decision, everybody in the competition law practices business know that an administrative fine more than % 6 has not been imposed by TCA so far. Therefore, it is still appropriate to expect a total fine in the range of % 2-6 for each bank which are being investigated in this investigation.

In fact, those who are familiar with the administrative procedures of the TCA within the past 15 years know that the TCA publishes all reasoned decisions on its website about the investigations, preliminary inquiries, M&As and exemption cases. This policy creates one of the most important differences between the TCA and all other regulatory authorities in Turkey. Thanks to the clues revealed in those reasoned decisions, without any necessity of making excessive speculations, we are now able interpret the Article No. 4054 on Protection of Competition Act (“The Act”) by ourselves comprises of total 65 provisions which are no longer than a couple of paragraphs, if the similar situations may occur in the future. Therefore, should we put aside the ongoing speculations on the potential penalties for the investigated banks; we can use our own assumptions in the light of the reasoned decisions about the banking sector and/or about the cartel cases in the past few years to be able to present the possible outcomes of the investigation:

1.      This investigation is a cartel investigation. In other words, this investigation is being carried out to define whether or not aforementioned 12 banks have violated the Article 4 of the Act.

2.      We do not know anything about the documentary outcomes of conducted dawn raids in the context of this investigation nor do we know anything about the observations made by the Rapporteurs during the investigation process. Therefore, we can only make educated guesses about the possible findings of this investigation.

3.      In this respect, given the news on the press are correct, we can tell that there have been an exchange of information between the top executives of the 12 banks under investigation, which in normal circumstances should not have happened.

4.      Types of violations that may occur due to exchange of information among the competitors’ can be divided roughly into two categories:

a.       Claim: Joint determination of interest rates in the Turkish Treasury bond auctions

Potential infringement: Bid rigging (Art. 4 of the Act),

Affected party: Turkish Treasury

b.      Claim: Joint determination of individual and / or commercial loan rates, credit card interest rates and various commission rates

Potential infringement: Price fixing, customer and may be market sharing (Art. 4 of the Act).

Affected party: The commercial and individual users.

5.      I think the exchange of information in terms of customer credibility intelligence in banking sector is somehow partially defendable up to some extent. However, I am not sure those who are being investigated have already passed that diligent red line where they would find themselves on the wrong side of the Art. 4 of the Act which is the provision about agreements, concerted practices and decisions limiting competition. In other words, if the banks under investigation have jointly defined the interest rates for loans or credit cards or commissions and share individual or commercial customers in the context of ongoing information exchange or gentlemen agreement or whatever you named it,  that would change the whole story.

6.      As I said earlier, if exchanging information about commercial or individual customers had been really sine qua non for banks, they should have established a company or association and made an application to TCA for its charter in order to request an exemption or negative clearance to perform all diligent duties such as exchanging information business under the frame work of TCA’s decision. However, this chance has already been missed as well.

7.      The more serious part of aforementioned infringement claims relate to primary dealership mechanism of Turkish Treasury’s bond auctions. A primary dealer is a bank which buys certain amount of government securities directly from the Turkish Treasury, with the intention of reselling them to others by giving continuous two-way quotations in the secondary market, thus acting as a market maker of government securities. In 2012, the primary dealers approved by the Turkish Treasury in the Turkish banking sector are Akbank, Deutsche Bank, Finans Bank, HSBC Bank, ING Bank, Ziraat Bankası, Türk Ekonomi Bankası, Garanti Bankası, Türkiye Halk Bankası, İş Bankası, Vakıflar Bankası, Yapı ve Kredi Bankası.

8.      Except Deutsche Bank, eleven of these primary dealers are subject to BSI which also confirms how serious the potential infringements not only against commercial or individual customers but also the government might have been, should the TCA decide and accept any violation of the Act based on the evidences they found inside the investigation report. In addition, bid rigging also incorporates a criminal law dimension so that those banks might also be subjected to a criminal case apart from TCA’s investigation.

9.      Reserving the administrative discretion of TCA aside, if we assume to see a violation decision, we can drive rule of thumb results by looking at  the Regulation On Fines To Apply In Cases Of Agreements, Concerted Practices And Decisions Limiting Competition, And Abuse Of Dominant Position (“Regulation on Fines”) about the level of potential fines:

a.      The penalty will be based on the banks’ annual gross revenue turnover which shall be borne by end of the year 2011.

b.     However, based on the piping hot decision of the Council of State about HES Cable Company, this gross revenue turnover of 12 banks under investigation should be their gross revenue turnover calculated by the sum of their interest or dividend income, fees and commissions income, dividend income, trading profit / loss (net) and other operating income enacted by the  "Communiqué on the Mergers and Acquisitions Calling for the Authorization of the Competition Board; Communiqué No 2010/4".

c.      In other words, unlike “salary promotions” investigation in 2011 banking, TCA will not be able to scale down the relevant annual gross turnover during the calculation of fines by defining various sub-markets (such as market for retail banking or commercial banking market or credit cards market etc.) just because the annual gross turnovers of the banks’ are high. The Council of State’s HES Cable Company decision was a milestone in this respect and would change the course of TCA’s “lets reduce the fine with our administrative discretion and define sub markets to be able to have small fines” behavior during calculation of fines for the companies and/or industries whose turnover is high. Any alternative turnover calculation contrary to the Council of State’s HES Cable Company decision from the TCA would also corrode and damage the its deterrent force among the market players.

d.     Since the violation in question is a cartel, pursuant to Regulation of Fine’s  Article 5 (1) / a., the base fine would be between 2-4%.

e.      In the determination of the fine, duration of violation, issues such as the market power of the undertakings or associations of undertakings concerned, and the gravity of the damage which occurred or is likely to occur as a result of the violation shall also be considered.

f.      In terms of duration of the infringement during the determination of the base fine, there are very clear rules (Article 5 (3) a/b) that tell us if the duration of infringements is in between 1-5 years of time, the base fine is expected to be increased by half; if the duration of infringement is longer than 5 years, the base fine is expected to be increased by one fold. The only option that may be in favor of the banks is the duration of infringement is less than a year which means no increase in base fine.

g.     The aggravated factors are considered in the Article 6 of Regulation of Fines’s. The base fine shall be increased by half to one fold; for each instance of repetition in case the violation is repeated, when the cartel is maintained after the notification of the investigation decision, where the commitments given by undertakings are not met, where no assistance with the examination is provided, when coercing other undertakings into the violation of the Act.

h.      If we take into account the decision of the TCA on 7.3.2011 about the “salary promotion” investigation that punishes seven banks due to the infringement of the Article 4 of the Act, we can clearly say that the base fine will be increased by half to one fold for those (Akbank, Garanti Bankası, Finans Bank, Yapı ve Kredi Bankası, Vakıflar Bankası, İş Bankası) who infringed the very same article of the Act not later than one calendar year of their previous infringement.  For the first time infringers (other six banks under investigation), there is no such risk of repetition.

i.       The mitigating factors are defined in the Article 7 of the Regulation of Fines. The TCA would take into account the relevant (in case any) mitigating factors during the calculation of fines and reduce the fine accordingly.

j.       Taking into account of all these factors above, rule of thumb calculation with a less conservative approach, we are likely to encounter with a base fine of 2%. If the duration is longer than 1 year but shorter than 5 years, it would increase the fine by half to 3% due to the violation of the criminal. Due to gravity and the magnitude of the damage (especially if we take into account the primary dealers market size) and the bank's position in the relevant market, the fine might be increased to 4%. Finally, the fine will be increased by half to 6% for those 6 banks who are in repeated violation.

k.     It is difficult to say the amount of reduction based on mitigating factors. However, let’s assume that the total fine is reduced by 60 % where we have   2,4 % for those  six banks in repeated violation, and 1.6 % for those who are the first time infringers.

l.      The final amount of the fine can be calculated by multiplying the percentages from previous clause with the annual gross revenues calculated according to Article 9 of "Communiqué on the Mergers and Acquisitions Calling for the Authorization of the Competition Board; Communiqué No 2010/4".

10.  If the TCA would decide a violation of the Article 4 of the Act has occurred in the context of BSI, potential private damage claims against those banks up to three fold of the damage in question would be another very important aspect of this investigation. Since there is no class action law suits in Turkey, we can assume that individual sufferers probably would not carry the TCA’s decision to the courts for their individual compensation due to their lack of individual knowledge or economic power or legal help and information asymmetry.

11.  However, on the other hand, most of the corporate clients of those banks, who are suffering from prevention, distortion or restriction of competition, are very well equipped and capable of suing those banks and may claim their damage up to three fold which would be the difference between the cost they paid and the cost they would have paid if competition had not been limited.

12.  In this regard, this case would be the milestone case of private damage claims in Turkish competition world and Turkish judicial system, even though claiming treble damages has been possible according to the Article 58 of the Act since the day one when the Act was approved.

13.  As matter of fact, apart from commercial or individual sufferers, I think it is also possible for the Ministry of Economy to be part of a treble damage claim against those banks as a complainant, if they had really infringed the Article 4 by bid rigging activities.  

14.  The European Commission (EC) imposed fines totaling more than 992 million Euros on Otis, Kone, Schindler and ThyssenKrupp's for their participation in cartels on the market for the sale, installation, maintenance and renewal of elevators and escalators in Belgium, Germany, Luxembourg and the Netherlands. In this respect, the EC brought the proceedings before the Brussels Commercial Court claiming 7.061.688 Euro compensation from Otis, Kone, Schindler and ThyseenKrupp based on the financial loss occurred due to number of contracts between the EC and those undertakings with the purpose of installation, maintenance and renewal of the escalators at Brussels and Luxembourg offices of the EC. Thereon, the Brussels Commercial Court has decided to refer number of questions to the European Court of Justice (ECJ) for preliminary ruling.

15.  The ECJ has ruled on 06.11.2012 that the European Commission (EC) is entitled to bring a damage claim case against members of a cartel case from which the EC itself also suffered the consequences. According to that interpretation, the ECJ also rules the Charter of fundamental Rights does not preclude the EC from beginning a treble damage action before a national court. In line with that decision, I think, in case of any damage caused by bid rigging activities of those banks in Turkish Treasury’s bond auctions are found to be a violation of the Act by the TCA, the Ministry of Economy would also be eligible  to sue the infringers and demand a compensation for its loses.

In summary, this file is neither the first nor the last cartel case for the TCA. So, the TCA will decide on that case by following the same procedures as it did during its previous decisions for similar violations. Therefore everybody should support and trust the TCA and the Rapporteurs until the end of investigation process.

Here, lessons must be learned primarily by those banks under investigation. Even though half of the investigated banks were punished by the TCA due to their violation of the Act earlier, they unfortunately became a subject of another one less than 1 year. Moreover, they are still in the mood of demanding immunity and making public speeches where they explicitly express the idea of “TCA should not do anything bad which would adversely affect the banking sector in this economic environment". I would like to remind them that the Act neither provide immunity for Banks or any other sectors from its provisions nor brings any exceptions for times of economic crisis.

Also, against their usual defensive claim above, I really wonder how they will respond
if someone asks them what about the tens of thousands of individual or corporate customers who had to face the burden of higher interest rates on the loans they took, higher interest rates on the credit cards they used and higher commissions the transaction they made due to the violation of Article 4 of the Act in this very environment of economic crisis as you always refer to.

During the past decade, banking sector of Turkey has helped Turkish economy and became a powerful driver of begrudged economic growth. However, this investigation has shown us that in terms of competition law consciousness level, banking sector is still way far behind the position they should be, like many other sectors in Turkey. What banks need to do is immediately define a clear objective of increasing their level of competition compliance by having and implementing a permanent compliance program inside their companies and straining their every decision from their compliance principles. Otherwise, they will inevitably keep being exposed to investigations like that and in the future as well.

The combination of constant business demands for improved performance, the rapid pace of business life and increased amount of competition law vigilance by enforcers like the TCA (and possibly the courts in the near future) will make competition compliance programs in the future all the more vital to companies of all sizes. If only Turkish companies can understand the relatively small amount of time, effort and resources necessary to structure and implement a competition compliance program is likely to pay enormous dividends in executives’ time and attorneys’ fees (let alone the potential fines and treble damage suits are ignored for a moment), the business like banking sector may cease to repudiate a cavalier or ignorant attitude towards Turkish Competition Law and competition compliance programs.

Hope to see you in the next article.