Korea: anti-corruption compliance

Decades from now, it may very well be the case that historians look back on the period of April 2014 to September 2016 as a watershed period for the development of anti-corruption law in Korea. April 2014 marked the month in which the Sewol tragedy occurred – the sinking of a ferry that led to the tragic deaths of over 300 people, including many high-school students. The tragic incident gave way to a widespread crackdown, initially on cosy relationships between government regulators in certain safety-related industries such as transportation and nuclear power, but eventually on other industries as well. Another result of the tragedy was renewed political momentum to pass the Act on the Prohibition of Improper Request and Provision/Receipt of Money and Valuables (often referred to as the Kim Young Ran Law or the Anti-Graft Law). This landmark law is expected to herald significant changes to the anti-corruption environment in Korea, and is expected to take effect on 28 September 2016.

Overview of Korea’s anti-corruption regulatory framework

Official bribery and commercial bribery

The crime of bribery is divided into the bribery of public officials (official bribery) and bribery solely involving private parties (commercial bribery) and the relevant provisions are found in the Korean Criminal Code. In both cases, both the giver and receiver of the bribe are liable. What is noteworthy is that the Criminal Code does not impose liability on corporate entities, and only natural persons (which in a corporate setting can include not only relevant employees but also senior managers involved in the misconduct) can be found guilty of the crime of bribery. At the same time, anti-bribery conduct remains a matter of corporate concern because prosecutions of relevant managers and employees can lead not only to reputational damage for the company but also non-criminal sanctions such as debarment by relevant public organisations or state-owned enterprises.

To establish a criminal charge of official bribery, the elements of the crime are:

  • an economic benefit given to a public official;
  • in connection with his or her official duties; and
  • that the benefit goes beyond the bounds of what is usually given as a matter of custom or social courtesy.

As for commercial bribery, the Criminal Code defines a commercial bribe as the giving of economic benefits to a person who is entrusted with conducting the business of another person or entity, where such benefits are (i) related to an ‘improper request’ made in connection with the duties of the recipient and (ii) the benefits go beyond the bounds of what is usually given as a matter of custom or social courtesy.

Neither the Criminal Code nor court precedents establish any firm monetary thresholds for determining when a given benefit rises to the level of a bribe, including what would constitute conduct subject to the ‘social courtesy’ exception. Instead, the Korean courts have developed through precedents a list of the factors to be considered in a case-by-case application of the ‘social courtesy’ exception:

  • the scope and nature of the recipient’s duties;
  • the relevance of the recipient’s duties to the giver;
  • the purpose of the benefit (eg, whether it is to influence the recipient’s conduct or to relay information useful in business or legislation or policy-making);
  • whether there is a pre-existing personal relationship between the recipient and the giver;
  • the circumstances of the benefits conferred, including the frequency, timing and amount or value of the gift or benefit; and
  • (in the case of official bribery) whether the benefits caused the recipient to carry out his or her official duties in a way that would lead the general public to question the propriety of his or her actions.

Code of conduct for public officials

For the last decade or so, another element of the anti-corruption framework in Korea has been the Code of Conduct promulgated at various government organisations and state-owned enterprises, in accordance with the Public Officials’ Ethics Law of 2003. Based on a model template, various government agencies have promulgated codes of conduct that set out prohibitions regarding payments, meals, gifts, etc and include some monetary thresholds. In many cases, the 30,000-won limit on meals and 50,000-won limit on congratulatory and condolence payments (at weddings and funerals) were replicated into the codes of various organisations. Over time, these thresholds have not been adjusted to reflect rises in the cost of living and a decade later many would take the view that the thresholds determined at that time were quite unrealistic.

The Public Interest Whistleblower Protection Act

Even before the Sewol incident, there were some recent moves towards a strong anti-corruption regime. One such development was the passage of the Public Interest Whistleblower Protection Act (the Whistleblower Act), which came into effect on 30 September 2011. Historically, there has been a culture of discouraging whistleblowing in corporate Korea as such activity is more often seen as an act of betrayal rather than as the ‘right thing to do’. In recent years, however, there has been an increasing number of corporate investigations (both internal and government-driven) that were first prompted by whistleblower reports. The shift reflects changing attitudes towards reporting wrongdoing, and is spurred in part by increased protections and incentives afforded to whistleblowers. The Whistleblower Act provides: protection from retaliatory measures or other disadvantages resulting from whistleblowing; and rewards for the whistleblower if the whistleblowing meets certain requirements set forth in the Whistleblower Act. The Whistleblower Act covers only whistleblower reports of illegal activity that ‘violates the public interest’, and currently the Act specifies 181 laws that concern the ‘public interest’ in this context. The Whistleblower Act was amended in 2015 to expand the scope of public interest to cover 279 laws, which took effect in January 2016.

The Anti-Graft Law and expected impact

Background

The new Anti-Graft Law is informally named after its author, Young-Ran Kim, who served both as a Justice of the Supreme Court of Korea from 2004 to 2010 and as the chairwoman of the Anti-Corruption and Civil Rights Commission of Korea (ACRC) from 2011 to 2012. During her time in the latter role, the ACRC conducted a survey regarding public trust of public officials. According to the ACRC’s survey conducted in August 2011, 84.9 per cent of respondents from the general public indicated that public officials were heavily involved in influence peddling and providing improper favours while of those respondents who were public officials themselves, only 21.8 per cent believed this was a serious issue. It was evident that there was a substantial discrepancy between how the general public and public officials perceived the gravity of improper interactions involving public officials.

The draft legislation proposed by the ACRC was initially aimed at primarily curbing improper practices taking place between current and former officials. During the ensuing political process, the provisions concerning conflict of interest (which comprised a substantial portion of the initial draft) were omitted from the final draft of the law. In any case, the initial draft of the bill was proposed in 2012 and remained pending National Assembly committee and plenary review for several years until 2014.

After the Sewol incident, there was a renewed push in the legislature to adopt this law, and finally, after significant modification through political compromises, the bill passed the National Assembly on 3 March 2015. The fact that the adoption process was so contentious is evident in the subsequent news reports of numerous efforts to oppose the law even after its adoption, either through a constitutional challenge or the adoption of yet another law to amend the new law.

A constitutional challenge was filed shortly after the Law was passed, with plaintiffs primarily arguing the unconstitutionality of the following:

  • applying the Anti-Graft Law to member of media and private schools;
  • using vague language of provisions prohibiting improper requests;
  • setting forth the specific details of the exceptions in the Presidential Decree (rather than the Law itself); and
  • imposing sanctions for failure to report benefits given to public official’s spouses.

The Korean Constitutional Court, however, found that all of the challenged provisions of the Anti-Graft Law are constitutional, and dismissed the plaintiffs’ claims in their entirety. The Anti-Graft Law will therefore enter into force in its current form on 28 September 2016.

Key provisions

The following is a brief summary of the key provisions of the new Anti-Graft Law.

Improper benefits and exceptions

In contrast to the anti-bribery provisions in the Criminal Code which require the crime of official bribery to include a showing that a payment or benefit was provided or received ‘in connection with the receiving official’s duties’ in order for liability to attach, under the provisions prohibiting the giving or receiving of ‘improper benefits’ under the Anti-Graft Law, criminal liability would be imposed without showing such link to the public official’s duties, as long as the value of benefits received by the public official exceeds 1 million won in a single instance or the aggregate value of benefits in a one-year period exceeds 3 million won.

The Anti-Graft Law also restricts any benefits given ‘in connection with the receiving official’s duties’, imposing administrative fines even for benefits that do not exceed the above thresholds.

There are several exceptions to this prohibition, most notably that meals up to 30,000 won per person, gifts up to 50,000 won per person, and wedding and funeral cash gifts of up to 100,000 won are exempt from administrative sanctions, and are not counted when aggregating the total amount per fiscal year. Other key exceptions include honoraria (1 million won per hour for members of media and private school employees, sliding scale of limits for other public officials, according to rank), benefits exchanged among close family members, and benefits provided uniformly to all attendees at official events relating to the public official’s duties.

Corporate liability

While the anti-bribery provisions under the Criminal Code do not impose liability on corporations for bribes made by its employees, under the Anti-Graft Law corporate criminal liability may be imposed for the provision of a payment or benefit by employees unless the corporation exerted due care and supervision to prevent such provision.

Liability for payments received by spouses

Another significant provision provides that criminal sanctions would be imposed on a public official if a payment or benefit is provided to the public official’s spouse in connection with the public official’s duties, and the public official knowingly fails to report such provision to the authorities.

Reporters, teachers, and ‘those who serve public functions’

While the public bribery prohibition under the Criminal Code applies to the provision of bribes to government officials and employees of state-owned enterprises and other public entities, the Anti-Graft Law applies not only to such officials and employees, but also to employees of public and private schools, members of the media, and ‘those who serve public function’ (eg, private citizens on government-appointed committees).

Improper requests

The Anti-Graft Law prohibits ‘improper requests’ (ie, causing public officials to violate laws or to abuse their position or authority), irrespective of whether such request involves any payment or provision of benefits.

Expected impact

It is difficult to predict precisely how the Anti-Graft Law will be implemented, or what impact it will have once it comes into force. Nevertheless, it would still be reasonable to expect that the implementation of this law will have far-reaching effects across industries and various sectors of society (foremost of which would be teachers and reporters, who now find themselves subject to the same restrictions as public officials).

It is also important to note that the Anti-Graft Law, once implemented, is intended to work in tandem with the existing provisions regarding official bribery and commercial bribery under the Criminal Code, and not to replace them.

From a corporate compliance perspective, the most significant development under the Anti-Graft Law is the concept of imposing corporate liability for individual employee misconduct. This means that the adoption of effective compliance policies and implementing them in practice is not merely a matter of meeting ‘global standards’ but a means to avoid potential corporate liability under mandatory law. The fact that the company can be held liable for the acts of its employees under the Anti-Graft Law also means that companies must make reasonable efforts to monitor the use of the company’s funds for meals, gifts, entertainment, travel, etc, lest they are spent in a manner that violates the new law.

In some respects, none of this may be new from the perspective of a global company that has implemented sophisticated policies and procedures as a result of the emergence of the US FCPA, the UK Bribery Act and other anti-corruption regimes that are applied on a cross-border basis. The Anti-Graft Law could be seen as a means of bringing Korea into alignment with other developed signatories of the OECD Anti-Bribery Convention.

On the other hand, from a Korean company’s perspective, the concept of keeping a tighter grip on sales and marketing activities through control of funds and engaging in detailed expense reporting will be, especially for small and medium-sized enterprises, quite novel. At a broader level, developments such as the Anti-Graft Law and the Whistleblower Protection Act, and ongoing active enforcement campaigns by the Prosecutors’ Office and other enforcement authorities should work to indicate that the ‘old ways’ or ‘Asian ways’ of currying favour through relationships (especially through school ties) with government officials is now in decline, and the anti-corruption regime in Korea is, if not already at a level equivalent to other OECD members, at least changing rapidly.

Implementing effective compliance in Korea

Especially with the corporate liability provisions of the Anti-Graft Act, it has become all the more important for companies to ensure that they have effective compliance programs and policies in place. In a 2010 case involving a similar corporate liability provision, the Supreme Court of Korea ruled that a company may not be subject to corporate liability for the misconduct of an employee if it exercised due care and supervision, based on consideration of the following factors:

  • the legislative intent behind the statute at issue;
  • the extent of infringement of the corporate interest;
  • the legislative intent behind imposing vicarious liability for the violation at issue;
  • the details of the violation;
  • the extent of harm caused to the victim;
  • whether it was possible for the employer to supervise the employees from a practical perspective; and
  • measures the employer took to prevent the violation.

Based on the foregoing, there is every reason for a company doing business to adopt robust anti-corruption policies and procedures and to implement them vigorously to show that the company has taken the effort to comply with applicable norms. Over the years, we have worked with many companies both in implementing these types of policies and in matters that involved actual violations of such policies. Based on our experience, we believe it would be helpful to share some insights relating to compliance policies and procedures that may be somewhat unique to the Korean context. To do this, we have devised a ‘Top 12’ list of issues that a compliance manager covering Korea may need to be aware of.

Know your customer

The phrase ‘know your customer’ would certainly be nothing new in a sales or marketing context. However, this phrase can equally apply in an anti-corruption context. Where a company deals with state-owned enterprises (SOEs), the status of whether a given SOE is deemed to be a public entity is set out in an objective manner under lists that are updated annually under the Act on the Management of Public Institutions and several other statutes. So, for one year a given SOE customer may be deemed a private entity and the next year it may be deemed a public one.

This is all the more important given the expansive definition of ‘public officials’ subject to the Anti-Graft Law, with an estimated 4 million individuals that will be subject to the Law (in a country of 50 million). Companies should therefore bolster their third-party due diligence by maintaining periodically updated lists not only of ‘traditional’ government employees (such as civil servants and SOE employees) but also of school employees, members of the media, and those who serve on government-appointed committees.

Commercial bribery is prosecuted under Korean law

As discussed above, commercial bribery is a crime in Korea. Policies should be oriented to address this issue along with public bribery. Typically, in an investigation prosecutors will seek to aggregate discovered instances of commercial bribes along with official bribes to produce more serious charges against employees or as leverage to induce them to admit to other charges.

Issue of a ‘Korea exception’

We have come across cases where the employees of the Korean affiliate will argue that Korea is a different market from others, and that lavish entertainment, etc, is a necessary part of business culture. So much so that they would argue for a less restrictive exception from globally applicable compliance policies, since the head office does not know the Korean market. However, in these types of cases, we sometimes observe that the Korean employees themselves may have a narrow view of what comprises ‘Korean business culture’ and not realise the shifting and changing compliance environment across different industries.

In fact, Korean laws and norms concerning compliance have changed so swiftly in recent years that now, a Korean addendum to globally applicable compliance policies may be necessary in many cases to contain more restrictive terms (as opposed to a more relaxed one). For example, if the global policy is to limit meals with government officials to US$50 (about 50,000 won) per person, it would exceed the 30,000 won limit of the Anti-Graft Law, applicable to ‘duty-related’ public officials. The global policy alone would thus not suffice to ensure the Korean entity’s compliance with local laws.

Improper requests based on personal ties

Personal relationships based on family, schools and hometowns do matter in Korea. It is not uncommon for people to make various requests (some improper) based on those ties, and as a matter of social custom, it can be very difficult to refuse such requests. Until the Anti-Graft Law, there had been no way to police such requests when there was no quid pro quo-type benefit, so the practice became quite prevalent throughout Korean society (for example, one might meet a government official through a university alumni event, and even without an otherwise personal or professional connection, ask the government official for a favour). The Anti-Graft Law, however, now prohibits such improper requests, and a company could be subject to corporate liability if its employee made an improper request on behalf of the company. This has notable implications for corporate government relation functions, and it will be imperative for companies to ensure that all requests to and interactions with public officials are properly vetted.

Special issues concerning local CEOs

On the one hand, we have come across situations where the CEO of the Korean affiliate, regardless of whether the CEO is a Korean national, will believe that his or her role of cultivating relationships with key customers in Korea will render him or her exempt from the company’s compliance policies. Effective compliance policies should be unequivocal in terms of applying to employees and managers of the company.

On the other hand, there have been several high-profile instances of local CEOs being subject to investigation and enforcement, for being involved in or supervising the illegal activity of his or her subordinates. Korean authorities typically seek to indict the highest-level official within the company, so local CEOs and other executives should be acutely aware of these risks and take measures to ensure that they and their subordinates conduct business in a compliant and transparent manner.

The prevalence of congratulatory and condolence cash gifts

For someone new to the Korean environment, it can be surprising to learn that it is a part of accepted custom for envelopes of cash to be provided at weddings and funerals. What would be considered an appropriate amount depends on the ties between the giver and the recipient (or the recipient’s relatives). While it is difficult to say what would be an appropriate amount, most people would agree that the limit of 50,000 won provided in many public codes of conduct is impractically low, especially if given to a senior level manager or official. Meanwhile, the Anti-Graft Law provides for a somewhat more realistic 100,000 won limit for cash gifts to duty-related public officials. This cultural feature will need to be reconciled with global policies, which often contain an absolute prohibition on cash payments.

Differentiate between ‘foreign bribery’ and ‘local bribery’

In some instances, we have seen cases where employees of a Korean subsidiary receive training on the FCPA or the UK Bribery Act, and then conclude that these laws have no application to them because they refer to ‘foreign bribery’ (ie, bribery outside of Korea). In addition to emphasising the point that FCPA obligations require Korean employees to avoid bribery activity in Korea, it may be more effective to first clarify the application of Korean anti-bribery laws, before introducing the additional layer of complexity represented by the overseas application of the FCPA.

Venues for entertainment

Forms of treating customers and VIPs can include not only meals at restaurants but also going to a venue after dinner that can range from karaoke, singing rooms, various types of bars, to so-called ‘room salons’, which can involve drinking, singing and the participation of hostesses. Other venues for entertainment also include golf (as well as meals and drinks after a round of golf). Prices at premier restaurants will be in line with the high cost of living in Korea while bills for bars, golf courses, room salons can run into the hundreds or, in some cases, thousands of dollars, reflecting the fact that these establishments historically relied on customers paying with their corporate expense accounts. An effective compliance policy will recognise the existence of these types of venues and the cultural inclination to treat VIPs to these places.

Cultural aversion to splitting the bill

When sharing meals or drinks, whether in the business or personal context, there is a clear cultural tendency for one person to treat everyone in the group (usually the most senior person). Particularly when meeting a public official or commercial third party (or teachers or journalists) with a request, even a wholly legitimate request, if the discussion takes place over a meal, it is not realistic to expect that the participants would split the bill – the person making the request would be expected to pay. The Anti-Graft Law will essentially legitimise such meals where the per-person amount does not exceed 30,000 won, but that limit is viewed as impractical in many circumstances. It will be interesting to see if the Anti-Graft Law causes a shift in this cultural aversion to sharing the bill, especially as more public officials subject to the Anti-Graft Law will likely be more cautious in being treated to meals and other benefits.

Whistleblowing

It may be surprising for some companies to observe how prevalent whistleblowing by current and former employees at companies is. Notwithstanding the cultural stereotype of the Korean salary man as a ‘team player’ and the notion that whistleblowers are traitors to the company, the fact is that the concept of disgruntled employees having a story to tell is near-universal and one that transcends ‘Asian culture’. If serious misconduct has occurred, whistleblowing (both internally within the company and externally to outside authorities, the press, etc) is a real risk that should be addressed.

‘I did it for the company’

We have often come across responses during employee interviews where the employees admit spending substantial sums at venues to entertain a customer but emphasise that they did not enjoy it, did not keep any funds for themselves, and used the funds for the benefit of the company. The response is misguided in the sense that it indicates the employee believed the company’s compliance policies are a means of correcting the employee’s moral behaviour. This is incorrect because it fails to see that the compliance policies are a matter of the head office and to ensure that the Korean corporate entity complies with the law. In other words, it must be emphasised that breaching the policies is not a matter of good or bad behaviour, it is a matter of violating the law.

The role of internal audit departments

As discussed in this article, the Korean business environment is undergoing a period of rapid and substantial change in the area of anti-corruption compliance with respect to both the public and private sector. In this changing environment, it is not surprising to see instances where for a given customer, the procurement department will ask to be entertained under the ‘old ways’ while the internal audit department will assert its growing role of enforcing the code of conduct and other internal rule of the company. For some major companies in Korea, the scope of authority for audit and compliance departments is growing, and there have been high-profile incidents where long-term business relationships have been severed as a result of an internal investigation by the customer company.

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