What are the relevant statutes and which government authorities are responsible for investigating and enforcing them?
The primary statute related to securities in Korea is the Financial Investment Services and Capital Markets Act (the Capital Markets Act). The regulatory authorities, primarily the Financial Services Commission (FSC), the Securities and Futures Commission (SFC) and the Financial Supervisory Service (FSS), have the power to enforce this Act.
Korea has several primary securities or related law enforcement authorities. The FSC sets and enforces financial and supervisory policies across all financial institutions and markets in Korea. The SFC, established under the FSC, deals with matters related to unfair trading on the capital markets, as well as accounting and auditing. The FSS supervises, inspects and investigates financial institutions under the FSC’s or the SFC’s guidance and supervision. All three agencies have a broad range of investigatory powers.
Self-regulatory organisations, including the Korea Exchange, the Korea Financial Investment Association and the Korean Institute of Certified Public Accountants, also play a role in the regulatory and supervisory processes. In the case of foreign investment, the Bank of Korea is involved in overseeing foreign exchange transactions.
The Fair Trade Commission has the authority to review the terms of certain financial contracts and to bring actions related to anticompetitive activities, including manipulation.
What conduct is most commonly the subject of securities enforcement?
The FSC, the SFC, the FSS and other related law enforcement authorities are mainly concerned with the following violations with regard to securities or market-related law enforcement:
- fraud or unfair trading, including fraudulent or misleading information in public disclosures, which is mainly prosecuted under Article 178 of the Capital Markets Act;
- market-price manipulation, which is mainly prosecuted under Article 176 of the Capital Markets Act;
- insider trading and use of material non-public information, which are mainly prosecuted under Articles 172 and 174 of the Capital Markets Act, respectively; and
- failure to report on the status of specific securities owned by the executives or significant shareholders, which is mainly prosecuted under Article 173 of the Capital Markets Act.
Regulatory or criminal securities and related investigations may be targeted at both the company and the individuals directly involved.
What legal issues commonly arise in enforcement investigations?
Generally, a regulatory authority may begin an investigation based on information from various sources, such as whistleblowers, public complaints, media coverage, examinations or reviews of information by the regulatory authority, or referrals from other government authorities and regulatory filings conducted by companies. Once there are indications that suggest wrongdoing, the FSC and the FSS may exercise their investigatory powers at any time as part of their regular supervisory activities.
The Act on the Protection of Public Interest Whistleblowers offers legal protection and financial incentives to whistleblowers who report wrongdoing in the private sector because it is in the public interest to do so. Whistleblowers are granted anonymity during investigation and court proceedings, in addition to police protection, if deemed necessary. However, due to a recent incident where a whistleblower’s identity was accidentally revealed, whistleblowers are not a common source of information for securities and related investigations, at least at the time of writing.
On a somewhat stricter level of suspicion of wrongdoing, prosecutors may initiate – generally after a referral from the FSC or the FSS – a criminal investigation if there is an initial suspicion. This requires factual indications that a criminal offence was committed. Often, the prosecution will have received all the information that the FSS, the FSC or the SFC collected in the course of its investigation.
Under the Capital Markets Act, the FSC has the authority to conduct raids pursuant to a court-issued warrant; however, it has rarely exercised this power and leaves it to the prosecutors. The prosecutors may, in the course of a criminal investigation, conduct a dawn raid pursuant to a court-issued warrant. To obtain a search warrant, the prosecutor must apply to the relevant court, upon which the court will consider probable cause, the risk of destruction or tampering of evidence and the necessity of such evidence. To conduct raids before sunrise and after sunset, the warrant must specify this.
As part of general compliance obligations, companies are advised to closely investigate cases of actual or potential wrongdoing in cooperation with the financial authorities. There is, however, no specific legal requirement for a company to hand over an internal investigation report to the financial authorities. However, the financial authority may request that the companies submit internal investigation or other reviews as a reference to the investigation.
In a typical securities investigation, once the regulators identify potential wrongdoing or non-compliance, they typically send an information request (e.g., voluntary production of documents) to the company or individuals involved. They may also summon and question individuals and request information from third parties, including other governmental authorities.
If the regulators discover what they deem to be a criminal offence, they can either lodge a criminal complaint with the Prosecutor General or refer the case to prosecutors. In any event, regulators send over information they obtained in the course of their investigation. The prosecutor then conducts its own investigation and, if it concludes that there is enough evidence, it will bring charges.
There are also mechanisms for international cooperation and coordination. The FSC and the FSS use bilateral and multilateral agreements, such as memoranda of understanding (MOUs) or terms of reference (TORs) to share information with foreign authorities. They are also signatories to the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding (the IOSCO MMOU), which allows securities regulators from around the world to share information. Signatories allow the shared information to be used in civil or administrative proceedings, to pass the information on to self-regulatory organisations and criminal authorities, and to keep shared information confidential.
Prosecutors (through the Ministry of Justice or the Ministry of Foreign Affairs (or both)) may also use mutual legal assistance treaties, the Council of Europe’s Convention on Mutual Assistance in Criminal Matters and other informal channels to request evidence from foreign countries to facilitate cooperation in cross-border investigations.
The FSC, the FSS and other domestic regulators may take into account and use a foreign regulator’s findings. Similarly, prosecutors may use the information the foreign authorities provide.
Under the Capital Markets Act, the FSC has broad powers to request a person or company suspected of securities law violations to submit relevant documents, account books and other materials necessary for the investigation, as well as an affidavit describing factual circumstances involving the conduct at issue. When investigating a violation of provisions in the Capital Markets Act relating to unfair trade (e.g., insider trading and market price manipulation), the SFC may designate FSC employees to interview individuals, search businesses or seize evidence. Search and seizure requires a judge-issued warrant. Prosecutors may also seize or otherwise secure any documents or items, but only after obtaining a court order or a warrant to do so.
While Korean law does not impose document-hold obligations on parties that are facing litigation or prosecution, if the document is considered evidence and the accused company or individual intentionally destroys it, the prosecution may bring charges relating to destruction of evidence (although companies often have document preservation policies, especially in the context of compliance and enforcement matters). Moreover, individuals who destroy evidence run the risk of committing a criminal offence if their conduct impedes criminal investigations.
Financial regulators can also informally and formally request documents from foreign authorities using various informal channels, bilateral and multilateral agreements, MOUs and TORs. Moreover, the FSC and the FSS, as signatories to the IOSCO MMOU, can also request foreign authorities to share important information, including documents.
Prosecutors (through the Ministry of Justice or the Ministry of Foreign Affairs (or both)) may also use mutual legal assistance treaties, the Council of Europe’s Convention on Mutual Assistance in Criminal Matters, and other informal channels to request evidence (including documents) from foreign authorities.
There are some limits to what documents the authorities can request. Generally, Korea does not recognise an attorney–client privilege or a work-product doctrine, except in very limited circumstances. That said, lawyers are subject to a professional obligation to maintain confidentiality and may refuse to testify or provide documents containing confidential information if it falls within the scope of their professional duties. This protection does not necessarily extend to the client or its in-house counsel, and regulators may request and use these documents directly from the client.
In addition, Korean data privacy laws generally prohibit transfer of personal data and credit data (as defined by law) to a third party. However, production of the materials may be required when there is a formal court order or a court-issued warrant, or other laws specifically require it.
Foreign authorities’ requests or orders, including subpoenas from foreign courts, do not sufficiently constitute an exception to the data privacy laws, unless that foreign country has entered into a treaty suggesting otherwise. Foreign authorities usually have to rely on formal mechanisms of mutual legal assistance or the Hague Evidence Convention. Korean companies generally do not provide personal or bank customer data on a voluntary basis.
Once they have collected documentation, Korean financial regulators and prosecutors, like all Korean public officials, are subject to a strict confidentiality obligation. For example, the State Public Officials Act provides that all public officials must keep confidential the information they learn in the course of carrying out their duties, not only during their tenure but also after their retirement. Moreover, unauthorised disclosure of commercially sensitive information (e.g., trade secrets) may qualify as a criminal offence.
There are also internal regulations on storage of the documents or other forms of communication per each financial regulatory body (e.g., the FSC and the FSS). These rules provide guidelines on how the documents and evidence of communications must be stored or reviewed.
The recipient of a regulator’s voluntary document production request may refuse to comply; however, such refusal can subject the recipient to fines or other sanctions, depending on the circumstances.
Korean financial regulators may conduct witness interviews. Under the Capital Markets Act, for example, the FSC and the SFC may summon and question a person of interest to ensure compliance with the Act, and such powers are usually delegated to the FSS. Regulators may prepare interview minutes or otherwise record a witness interview. Prosecutors may also summon and question witnesses. Most of these witness interviews will be on the record. Interviews are not usually made public unless this is required in subsequent court proceedings.
Financial regulators may initially request that witnesses voluntarily participate in interviews or submit factual affidavits. Although an individual may decline to participate in a voluntary interview, financial regulators may incorporate this as a factor to consider when deciding whether to refer the investigation to prosecutors. Also, under certain circumstances, a witness may practically be compelled to provide a testimony but the witness may exercise his or her right not to incriminate himself or herself.
In a formal criminal proceeding, witnesses may refuse testimony only under a narrow set of circumstances, such as a close family relationship to the alleged offender or statutory confidentiality obligations of certain professionals (e.g., lawyers, accountants, doctors). Witnesses may also refuse to answer questions if they would incriminate themselves by doing so. No adverse inferences may be drawn from the alleged offender’s decision to invoke his or her right not to testify.
Generally, corporate executives and employees summoned to testify receive separate counsel owing to potential conflicts of interest, at least in high-profile cases. In practice, the company will often suggest suitable counsel, but the witness ultimately has the final call. The company usually pays or reimburses the legal fees, unless the witness is eventually found liable.
The target of a securities or related investigation cannot challenge the administrative investigation in court while the investigation is ongoing. However, the court has the authority to revoke or overturn investigative authorities’ final disposition if it is based on an unlawful or improper investigation.
There will be opportunities to respond to the investigation before charges are brought. The FSS provides notice to the accused, which includes: (1) title of the charge; (2) the facts that constitute the basis for the charge, the details of charge and legal theory; and (3) a standard statement that the accused may opine or provide testimony on the matter and the applicable process. According to the notice, the accused can state its opinion or position to the FSS in writing.
Further, in a case involving the Committee for Deliberation on Investigation of Capital Markets (the Deliberation Committee), which is an advisory organisation to the SFC and determines whether to lodge a criminal complaint, the accused may choose to appear before the Deliberation Committee to state its position.
Also, during the course of the investigation, the accused usually has a number of opportunities to respond to the FSS in writing or in person. These opportunities may be used to effectively respond to the accusation.
It is important to note that although the FSC and the FSS typically hand over all related materials when referring a matter to prosecutors, statements or advocacy positions taken by an investigated party during the investigation are not deemed admissions or otherwise binding in future proceedings unless otherwise qualified under the Criminal Procedure Act. Accordingly, prosecutors generally interrogate the accused with the same questions and materials as the FSC and the FSS.
The investigated party’s statements and positions are not generally made public, but the court may introduce or incorporate such statements and positions as evidence in the final criminal judgment, which may be public.
The limitation period for securities and related violation charges may differ based on the gravity of the violations. Under the Capital Markets Act, the same act can be punished differently according to the amount of the profit earned from the violation. For violations punishable by fines, the limitation period is five years and, depending on the magnitude of the possible punishment designed for that violation, the limitation period can be up to 15 years.
The limitation period begins to run when the act that constitutes the violation is committed. If the violation includes an accomplice, the limitation period begins to run when all acts of the accomplice were completed. The limitation period may be suspended for a number of reasons. For example, if the prosecution files a charge with the court or if the suspect flees the country for the purpose of avoiding criminal penalties, the limitation period is suspended. Korean securities and law enforcement authorities do not have power to enter into a tolling agreement.
A securities investigation will typically take more than a year. For example, in an unfair trading case, the FSS handles the preliminary investigation, and, once this is completed, the Deliberation Committee decides whether to refer the investigation to prosecutors. The prosecutors then conduct their own investigation.
What remedies and sanctions are available to government authorities?
There is no explicit resolution or settlement process set forth in the Capital Markets Act or other relevant laws. Unless provided otherwise, the investigation usually takes its due course and is resolved accordingly. However, during the course of the investigation, the accused may provide reasonable explanations regarding the accusation and the FSS may decide not to further investigate at its discretion.
In a typical investigation, the FSS submits a report to the FSC that sets forth facts, alleged illegal activity and the FSS’s recommendation regarding the charges. The Deliberation Committee deliberates the case and decides whether to file a criminal complaint with the Prosecutor’s Office or refer the case to prosecutors, or both. If applicable, it will also decide whether to impose administrative fines, issue warnings or take corrective measures.
If the investigation does not reveal a violation of securities or related laws, the financial regulators, such as the FSS, do not take additional measures. The Prosecutor’s Office generally provides a written notice to the financial regulator that it will not prosecute.
If there is a violation, however, the securities or related law enforcement authorities, including the FSC and the SFC, and ultimately the court, have discretion in selecting the charge and the severity of the penalty or fine pursuant to applicable laws. In exercising such discretion, they consider many factors, including the intent and the magnitude of the violation, whether the violation was voluntarily reported to the authorities, whether the violation has been remedied, precedents involving similar violations and associated penalties, and the future impact that such charges and penalties might have on the market. The factors to be considered may vary from case to case.
The FSC or the SFC may consider a wide array of remedies, including filing a criminal complaint with the Prosecutor’s Office, imposing administrative fines, taking corrective measures, issuing warnings and ordering removal from office for those involved in illegal practices.
Criminal penalties are calculated according to the Capital Markets Act and other related laws. Penalties are usually linked to the amount of the benefit the accused has earned or the loss the accused has avoided. For example, the Capital Markets Act provides that, when found guilty of violations such as using material non-public information, market manipulation and unfair trading, illegally acquired property shall be confiscated. When the property cannot be confiscated, the equivalent value thereof will be collected according to the criminal trial procedure. However, in cases in which the court cannot determine the amount of ill-gotten gains from violations of the Capital Markets Act, the court may not confiscate the illegal profits.
Companies can also be charged for violations. The Capital Markets Act provides that, when company executives or employees are found guilty of violations, the company can be criminally prosecuted and punished by a fine for negligence in supervision.
Cooperation can lead to a reduced penalty or, in some cases, avoidance of a criminal complaint altogether. This is particularly true when the investigated party (1) is not a primary suspect, has no record of securities law violations and voluntarily reports criminal activity or (2) is not a primary suspect and provides critically important information with respect to unfair trading allegations. However, deferred prosecution agreements and non-prosecution agreements are not permitted, nor are settlement agreements with the FSC, the SFC, the FSS or prosecutors.
An investigated party that is dissatisfied with an FSC or an SFC disposition may file an objection with the authority within 30 days of the disposition. The party can also appeal to court within 90 days of the disposition. If the party files an objection with the FSC or the SFC, the adverse decision on appeal binds the authority and the case may be remanded or dismissed. However, if the party appeals to an administrative court and gets an adverse decision on appeal, that decision usually revokes the FSC’s or the SFC’s decision, and the case is usually remanded for further proceedings. The authority is bound by the court’s decision and may not come to the same conclusion as the previous decision.
The implicit collateral consequences of a conviction or the imposition of liability by a court can be a few, but, most noticeably, the violators may not qualify for large shareholder requirements for the financial services companies or be appointed as the executives of those companies for a certain period.
In addition, a person harmed by unfair trading activities (e.g., use of material non-public information) may bring a civil action for damages against the perpetrator. However, it is not practical to proceed with a civil action in parallel with an investigation by a financial regulator, such as the FSS. This is because US-type discovery is not permitted in civil lawsuits in Korea, and the plaintiff may face difficulties in acquiring the evidence necessary to establish liability until the financial regulator concludes its investigation.
Private plaintiffs do not have access to the files or documents collected by the FSS or related authorities. Public authorities, including the FSC, the FSS and the Prosecutor’s Office, may decline to disclose information pertaining to audit, supervision, regulation and investigation of a crime or prosecution under the Official Information Disclosure Act. However, a private plaintiff may ask the court for an order to submit the related documents to the extent permitted under relevant laws.
For findings by an authority in another jurisdiction, there is no particular restriction on the admission of evidence in private proceedings. Any foreign authority’s adverse findings can be submitted to the court, which may take the adverse finding into consideration in the plaintiff’s favour.
1 Robin J Baik and Daniel S Lee are lawyers at Kobre & Kim. This chapter was originally written as a collaborative project between Yoon & Yang and Kobre & Kim. Yoon & Yang contributed summaries of Korean law, and Kobre & Kim contributed thoughts on strategy in securities and investigations matters.