This week I have been exploring the KT Corporation settlement Foreign Corrupt Practices Act (FCPA) with the Securities and Exchange Commission (SEC) via a Cease and Desist Order (the Order) for “disgorgement of $2,263,821, prejudgment interest of $536,457, and a civil money penalty in the amount of $3,500,000” bringing the total fine and penalty to just over $6.3 million. In prior blog posts, we looked at the background and considered the bribery schemes in some detail. In this post we conclude with some lessons learned for the compliance professional.
Culture
It really is all about culture and one can only conclude from reading the Order, that KT Corp. had one of the most corrupt cultures around. First was the length of the bribery schemes detailed in the Order, which stated, “From at least 2009 through 2017, high-level executives of KT maintained slush funds, comprised of both off-the-books accounts and physical stashes of cash, in order to provide items of value to government officials, among others.”.
Next, it all started at the top where the Chief Executive Officer (CEO) himself was running a slush fund for the payment of bribes from 2009-2013. How was the pot of money created to pay bribes? The CEO simply created fake bonus payments for other senior execs, who cashed in those fraudulent payments and proceeded to return them to the CEO. He then kept the cash in a company safe on premises of the corporate headquarters.
When the slush fund story was broken open by the Press in South Korea, the company did not take the opportunity to self-disclose, remediate the deficiencies discovered or even stop the bribery and corruption. Instead, KT Corp. officials “devised a new method to continue generating a slush fund.” Clearly this was a company that was committed to feathering its nest via bribery and corruption.
That next method was to order gift cards from a vendor who laundered the payments from KT Corp. This vendor literally delivered cash in manilla envelopes to his designated bag man at KT Corp. in the parking lot of the corporate headquarters. This money was kept in a series of locked strong boxes. Who ran this fraud and money laundering scam? The Corporate Relations Group. Clearly this was an organization with corruption burned into its DNA.
Lesson – If your CEO is corrupt, it will flow all the way down the organization. This is the direct responsibility of the Board of Directors to terminate the CEO and oversee the required changes. Here the Board was on full notice as late as 2013 and did nothing.
Hiring
Another feature of the bribery scheme was hiring close associates of corrupt government officials. While this does not neatly fit into a Princeling claim as it was not apparently a family member, the connection was close enough to be “something of value”. Moreover, KT Corp also directed millions of dollars in marketing work to an agency that was so inept, it could not pass KT Corp. vendor retention requirements. As the Order somewhat dryly noted, “without conducting due diligence on the individuals or the agency, KT paid the two individuals a total of $454,009 in salaries and the advertising firm a total of $5.88 million in fees.”
Lesson – Human Resources (HR) and Supply Chain (SC) both have a role in any best practices compliance program. If a hiring candidate cannot meet the hiring criteria, it should be the end of the process, full stop. Similarly, if a third-party cannot meet your vendor requirements, you should not hire them. If you have to rewrite the rules to bring on a new vendor, that is a red flag that usually cannot be cleared.
Business Ventures
Most compliance professionals are aware of the risks of joint ventures (JV). But risk and their management must go beyond the technical form of a legally created JV to all types of business ventures. In Vietnam, KT Corp. participated with a consortium to bid on the Vocational Colleges Project. KT Corp. learned from its original consortium partner that a corrupt agent was to be paid a fee of 10% of the project cost. This corrupt agent would then pass on 7% of the project cost to a corrupt government official for sending the business their way. However, this consortium partner did not want to be responsible for the agent’s fee due to the risk involved. KT Corp. reorganized the consortium and assumed responsibility for paying the agent’s fee. KT Corp. also negotiated with the corrupt agent that the fee would be 8.5% of the project cost, which included $550,000 for Official 1.
KT Corp. did not end there as it arranged for a subcontractor in the consortium to become its new consortium partner and tasked them with the responsibility of paying the agent fee. The purpose of the arrangement was to distance KT Corp. from the agent, as well as to conceal the agent from their internal review process. The agent review process was a financial risk review, not an anticorruption review, the KT Corp. managers wanted to avoid any questions about the relationship with the agent. Paying the agent through Partner 2 enabled KT Corp. managers to bypass the review.
Lesson – Your full risk management strategy must be used in all different types of business ventures, not simply legally formed JVs. Consortiums, teaming agreements and other types of informal partnerships are all subject to the FCPA and present different types of risks which must be managed.
Jurisdiction
Finally, a word about FCPA jurisdiction. You might reasonably wonder how a private South Korean company, paying bribes to South Korean politician as well as Vietnamese government officials could generate US legal jurisdiction. The answer is relatively straight-forward and was stated in the Order, “KT Corporation (“KT”) is South Korea’s largest comprehensive telecommunications operator, with its principal executive offices in Seoul, South Korea. KT’s American Depositary Shares (ADRs) are registered with the Commission pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock Exchange. KT files periodic reports, including Form 20-F.” ADRs refers to a negotiable certificate issued by a US depositary bank representing a specified number of shares—usually one share—of a foreign company’s stock. ADRs trade on the US stock market as any domestic shares would. ADRs allow foreign entities to attract American investors and capital without the hassle and expense of listing on US stock exchange. The tradeoff is that by listing ADRs, a foreign firm subjects itself to US jurisdiction. In this case it was FCPA jurisdiction, and it generated a requirement for accurate books and records and effective internal controls. KT Corp. has neither.
Lesson – If you are a non-US entity you should check with your legal department to see if your company is listing ADRs and determine how your organization will meet the books and records and effective internal controls requirement. You might also do some type of analysis to see if your potential FCPA risk is worth the ADR listing because any enterprising whistleblower could put themselves in line for a SEC bounty payment by turning in their organization for FCPA violations.
