In today’s edition of Daily Compliance News:
Tag: FCPA
Categories
Will Roger Ng Walk?
One of the most interesting Foreign Corrupt Practices Act (FCPA) criminal trials in sometime is ongoing in New York, that of Roger Ng. The lead up to the trial and in trial reporting efforts have been led by Law360and its lead reporter Stewart Bishop and most of information in this post comes from that site. Unfortunately, it is behind a paywall so if you want to follow it going forward you will have to subscribe. According to Bishop, Ng was charged with conspiring to violate the FCPA and money laundering conspiracy along with his employer Goldman Sachs Group, Inc., its former Southeast Asia chairman Tim Leissner and financier Jho Low. The charges were bribery of “Malaysian and Emirati officials and to circumvent the internal accounting controls of Goldman, which underwrote more than $6 billion in bonds issued by 1MDB in three offerings in 2012 and 2013. Leissner pled guilty over his role in the alleged scheme, while Low has remained abroad, out of reach of U.S. authorities for now.”
The prosecution’s case turns almost exclusively on the testimony of Leissner, one of the most pathological liars ever to grace the witness stand. Indeed, Matthew Goldstein, writing in the New York Times, reported this question by Ng’s defense counsel to Leissner, “Do you think you are good at lying?” Leissner demurred on this question but did admit he had “lied a lot”. Goldstein cited to Rebecca Roiphe, a former prosecutor and a professor at New York Law School who specializes in legal ethics, who related “it could be tricky to rely on such a witness, but “it isn’t a fatal blow.”” She said a prosecutor can argue that a witness is “a horrible person” and “a serial liar” who has had “a come-to-Jesus moment. That can work when you have really bad people who have lied a lot,” she said.””
What do Leissner’s admitted lies consist of? Leissner admitted under cross-examination that he had presented “a bogus divorce decree to his now-estranged wife, the model and fashion designer Kimora Lee Simmons, so that she would marry him eight years ago.” Defense counsel also got Leissner to “recount the many ways he deceived his wives, particularly Ms. Simmons. Mr. Leissner admitted that he had used an email account in the name of his second wife, Judy Chan, to communicate with Ms. Simmons while dating her, and that he was still married to Ms. Chan when he and Ms. Simmons were wed. (Mr. Leissner was also legally married to another woman when he married Ms. Chan.)” Leissner also admitted that some $10MM of his ill-gotten gain from 1MDB was used to “buy a $10 million house for one of his girlfriends (while married) so she would not go to the authorities.”
Of course, Leissner now maintains he is “telling the truth about Mr. Ng, who prosecutors say helped line the pockets of officials in Abu Dhabi and powerful Malaysians close to then Prime Minister Najib Razak.” Leissner testified “Mr. Ng was his primary contact at Goldman, which earned roughly $600 million in fees to arrange the $6.5 billion in bond deals for the fund. “Roger made him one of his clients,” Mr. Leissner said. He testified that Mr. Ng had set up many of the meetings to plan the scheme, including one at Mr. Low’s London apartment during which Mr. Low drew boxes on a piece of paper with the names of all the officials that would get bribes and gifts. For helping arrange the payments, Mr. Leissner said, he raked in more than $80 million. Prosecutors contend that Mr. Ng’s share was $35 million.” Leissner tried to paint Ng as someone very close to Low, even placing Ng “at a star-studded 31st birthday party that Mr. Low arranged for himself in Las Vegas in 2012, although Mr. Ng was not on the guest list.”
But here’s problem No. 1 with this testimony, Ng always worked for and under Leissner during the 1MDB scandal and not the other way round. Leissner admitted under cross that “he — not Mr. Ng — oversaw the payment of most of the bribe money.” As Roiphe later told Goldman, “In a case like this, you hope to avoid a situation where you have a cooperator testifying against someone who is a subordinate.”
Then there is problem No. 2 for the prosecution, which is the government’s claim that Ng received some $35 million in ill-gotten gains from the 1MDB scandal. Ng’s lawyers have responded that any money Ng received, was repayment of a debt one of Leissner’s wives owed Ng’s wife. The prosecution has to show Ng received this money.
As further reported by Bishop, the prosecution concluded its direct case with “An FBI agent on Tuesday outlined how kickbacks allegedly flowed from Malaysian sovereign wealth fund 1MDB to former Goldman Sachs managing director Roger Ng and others.” Bishop wrote the monies allegedly from Chan Leissner’s account, “to another shell company in the name of Ng’s mother-in-law, initially called Silken Waters but later changed to Victoria Square.” Then came another web of shell company transfers into entities controlled by some combination of Ng, his wife, Lim Hwee Bin, and Lim’s mother. Around $300,000 was spent on diamond jewelry, another $20,000 for an hourglass and over $200,000 for the purchase of Bristol Myers Squibb shares, according to the government.” Finally, there was another $3.15 million which went into yet another “account the government couldn’t identify.” Nothing in this adds up to $35 million.
Got all that. Does that money transfer convince you that Ng was the mastermind that Leissner and the government is trying to make him out to be? By putting one of the great liars of all time on the stand as their key witness with only this as the ‘documented’ evidence, the government is risking everything on Leissner’s testimony; that it will be believable and credible and will not taint the government’s case in one juror’s eyes so the government can garner a guilty verdict. Remember, it doesn’t take 12 to acquit, only one.
There is lots of other unbelievable things going on in the Ng trial, but I will save them for another day.
What is the intersection of tax and compliance? Why does a Chief Compliance Officer (CCO) or compliance professional need to sit down with the corporate head of tax? How does a corporate tax function fit into a best practices compliance program? It turns out there is quite a bit a compliance professional can learn from a tax professional. Moreover, there are many aspects of tax which should be considered by a CCO and compliance professional from an overall risk management perspective. Unfortunately, these questions are rarely explored in the compliance community.
To explore these issues (and remedy this lack of awareness) I recently sat down with noted tax professional Tracy Howell to explore these and other questions. We tackled these issues and others in a five-part podcast series for Innovation in Compliance. In Part 2, we turn to the question of what is transfer pricing and what does this have to do with compliance?
We began at the beginning – what is transfer pricing and what methodologies are used to determine or estimate price transactions? Howell began with the rather astute obligation that if you are “a compliance officer and you can say anything more than just the words “transfer pricing”, you are indeed an FOT (Friend of Tax).” He went onto explain, “Transfer pricing encompasses the methodologies required by tax code and regulations around the world to price transactions between affiliated companies. It is the provision of and sale of goods between affiliates, sale of services, provision of services, including the licensing of intangibles. Finally, transfer pricing requires you to press the transactions at an arm’s length rate.”
Transfer pricing is a critical issue when you have transactions between related parties, which in a large multi-national organization is almost always. To help illustrate the issues involved, Howell compared two transactions. First if you are selling goods, “such as Ford Motor Company selling an automobile, it is easily comparable if manufactured in Canada and sold to the US, because you could compare that transaction to something that was manufactured by Chevrolet.” However, Howell noted, “when it gets really complicated is if you’re manufacturing proprietary products. In oilfield services for instance, your organization might manufacture a very unique valve. What would the arms-length rate be if it’s manufactured in the US and sold to Mexico?” Here the tax professional must have a process to prove the arms-length rate of value for sale between related parties. The methodology to do so would be to get some comparables for those kinds of transactions. But this may be hard to do if you are selling proprietary top specialized manufactured equipment.
As Howell related, “it becomes an art, and that art is developing and applying an arms-length rate for comparable transactions between comparable entities. Even trickier is if a one-off piece of equipment does not have a comparable, so then you have to broaden the scope of finding manufactured goods, for instance, or something comparable. It is an art and its normally tax issues of an exact nature and transfer pricing is not but the key is to have a defined methodology.”
We then turned to the several entities involved in the government side of transfer pricing and how they may at times be at odds, complicating the job of the tax professional as well as the compliance practitioner. Initially Howell noted that governments are involved with their different regimes for the selling and buying side of tax jurisdictions. This means in every case you have a seller of goods or services and a buyer. The objective of governments and their taxing jurisdictions is to get their fair share. In reality, this means that every government is trying to expand its tax base. They do that by trying to grab as much of multi-jurisdictional transactions profit as possible.
Then there are third party organizations that are involved, such as the Organization of Economic Cooperation and Development (OECD). The OECD is pushing standard transfer pricing laws and regulations throughout the world. They provide model laws, treaties and transfer pricing strategies. As Howell noted, their objective is to “try to standardize the government’s laws and regulations, so that you do not have a mismatch between very aggressive and very liberal transfer pricing laws. The OECD is trying to provide some guidance on what is a fair share.” But as Howell further related, “at the end of the day, what is fair? And that’s just somebody’s opinion; what is fair.”
We concluded with a look at the transfer pricing negotiation process. Most interestingly, the process Howell described mirrored the process when negotiating with the Department of Justice (DOJ) in a Foreign Corrupt Practices Act (FCPA) investigation or enforcement action. It all starts with your credibility. You must demonstrate credibility to the taxing authority and then back up that credibility with documentation (Document, Document, and Document). From there it is demonstrating your consistent process and methodology to demonstrate how you came up with a rate for transfer pricing of a good or service, similar to how a CCO would demonstrate compliance program effectiveness to the DOJ. But here the tax professional will face an added wrinkle from a that of a CCO. Howell explained that if you are in a country like Kazakhstan, your submission must in the format required by Kazakh law. If you are required to use local language in your submission, you are partway there. Howell ended with “you have not gone all the way. You must follow the laws, even if they are a little bit different. That includes language and formatting in all your jurisdictions.”
Join us tomorrow when we explain why tax needs a seat at the table. Check out the full podcast series Taxman: On the Intersection of Tax and Compliance on the Compliance Podcast Network. Check out Tracy Howell on LinkedIn.
What is the intersection of tax and compliance? Why does a Chief Compliance Officer (CCO) or compliance professional need to sit down with the corporate head of tax? How does a corporate tax function fit into a best practices compliance program? It turns out there is quite a bit a compliance professional can learn from a tax professional. Moreover, there are many aspects of tax which should be considered by a CCO and compliance professional from an overall risk management perspective. Unfortunately, these questions are rarely explored in the compliance community.
To explore these issues (and remedy this lack of awareness) I recently sat down with noted tax professional Tracy Howell to explore these and other questions. We tackled these issues and others in a five-part podcast series for Innovation in Compliance. We begin with why compliance should talk to tax and why tax needs to have a seat at the table when it comes to a best practices compliance program.
All publicly traded companies and all organizations have an Enterprise Risk Management (ERM) system. Companies, especially compliance professionals, work diligently to assess and then monitored the identified risks. Moreover, significant efforts are put in place to mitigate and manage these risks. A key risk that every multinational company’s faces is corporate tax. Unfortunately, as Howell noted, “many times corporate tax risk remains under the radar from what is characterized as your normal risk. An entity normally will identify the risk, a legal risk, environmental risk, transactional risk, supply chain risk, and others. But one of the risks that frequently doesn’t get much attention in a formalized ERM program is tax risk.”
These tax risks can be substantial, especially for multinational companies operating in many jurisdictions. Across the globe, jurisdictions are in different stages of development economically and Rule of Law sophistication, which includes tax jurisprudence. This means there are different levels of risk associated with where a company is performing its work, what type of work it is it doing, how it is delivering goods and services and the overall development of the jurisdiction.
Howell asserted that experienced international tax professionals and multinational entities are usually very good at identifying and mitigating tax risk. Unfortunately, such specialized risk management talent does not usually get outside the visibility of a tax department. Howell provided an example of a transactional risk where a company manufactured in one country and then sold the goods through a foreign affiliate in another country to a customer in a third country. “An Indian affiliate contracted with a customer in outside India. The Indian entity needed for the sale of a manufactured good in the US, but it was a drop shipment. The sale was between the Indian entity and a third-party for the delivery in a third country. Legally, the contract went from US to India to the third party in the third country. However, the flow of goods went in a different way; going directly from the US directly to the third country. Internally, the India subsidiary reported the third-party sale as income and then India was trying to deny the deduction for those goods because the goods never entered the territory of India. In other words, India is saying, okay, we’re going to tax the revenue, but we’re not going to let you deduct the cost of goods. And that’s because the goods never entered and left, were exported for the country. It was a tax risk, and it was huge.”
Typically, such a series of events would have no visibility to the corporate compliance function. Now imagine that same series of events where a tax dispute arises and goes on for literally years. Would compliance ever have visibility into it? What would happen if a bribe was paid, or other type of illegal conduct was involved to resolve it? Now you can perhaps begin to see the issue, more particularly if you consider the Lisa Monaco October 2021 speech about the Department of Justice (DOJ) reviewing all disputes and corporate culture.
This type of problem is amplified globally because of the differences in maturity of governmental tax functions across the globe. I asked Howell about this key difference. He said, “it’s the difference between night and day. I lived and worked in Canada, a very mature, sophisticated and developed tax regime, great environment for jurisprudence. And one of the things you learn once you go outside of the US to get rid of the idea of asking the question, well, this is different, why does it work that way? You focus on the rules, laws, and regulations.”
Howell then compared the maturity and sophistication of the tax regime in Canada with that in Russia. He said, “You compare it to some of the other jurisdictions that I’ve lived and worked in, most jurisdictions will all have a tax code, but the street rules or the rules of the jungle play, those are in play. You go into the remote parts of a country that’s five time zones away where it’s very cold and you’re summoned by a tax official in a very remote place, they want to audit you, you’re a multinational. You’re thinking in a traditional sense, this is very organized, there’s a tax law which is your taxable on profits, but the conversation goes something like the following, “Okay, how much tax are you going to pay me?” That’s the question that was asked by a tax official. And I said, “Well, it’s all calculated based on profits, you have the tax returns.” He said, “No, I want to know, how much are you going to pay me now to resolve this?” And he says, “I have a budget and I have to have some contributions.””
This means the tax function must establish the fact that you do not pay bribes, you do not make facilitating payments regarding tax issues, or any other types of payments and, as Howell noted, “you make it real clear. The reality is if you are doing business outside the US more than likely your organization will have complicated tax issues and while it may seem more expensive to deal with them above board, the bottom is you have to follow the Foreign Corrupt Practices Act (FCPA) so you do not put the company at risk, but you have to be strong and you have to be firm.”
Join us tomorrow when we discuss transfer pricing. Check out the full podcast series Taxman: On the Intersection of Tax and Compliance on the Compliance Podcast Network. Check out Tracy Howell on LinkedIn.
The Compliance Life details the journey to and in the role of a Chief Compliance Officer. How does one come to sit in the CCO chair? What are some of the skills a CCO needs to navigate the compliance waters in any company successfully? What are some of the top challenges CCOs have faced, and how did they meet them? These questions and many others will be explored in this new podcast series. Over four episodes each month on The Compliance Life, I visit with one current or former CCO to explore their journey to the CCO chair. This month, my guest is Audrey Harris, who handled FCPA cases before the explosion of FCPA enforcement actions in the early 2000s, sat in the CCO Chair, led compliance program work back in private practice, and now as Managing Director for Global Anti-corruption, Compliance, Ethics & Non-Financial Risk at Affiliated Monitors Inc.
Audrey graduated from Central Florida with a BA, got a MA at the University of Miami, and her law degree from Georgetown. A question about whether she wanted to go to South Beach when she was a summer clerk at Kirkland & Ellis led to FCPA work and eventual partnership at Kirkland. When she began, it was a different time in FCPA enforcement, pre-2004, and the explosion in FCPA growth. In this role, she loved problem-solving and seeing patterns, and asking why (and why and why).
Resources
Audrey Harris on LinkedIn
Audrey Harris on Affiliated Monitors, Inc.
As Russia invades Ukraine, Tom and Jay settle in and are back looking at some of the week’s top compliance and ethics stories this week in the Russia Invades edition.
Stories
- What Russia invasion could mean for corporate governance. Michael Peregrine in Forbes.com. What do sanctions mean for US companies? Jaclyn Jaeger in Compliance Week (sub req’d)
- Why is subculture audits so critical? Vera Cherepanova explains in the FCPA Blog.
- KT Corp. settles FCPA enforcement action. Tom (FCPA Compliance and Ethics Blog) and Mike Volkov (Corruption Crime and Compliance) both have 3-part series. Matt Kelly’s take in Radical Compliance. Tom and Matt in Compliance into the Weeds.
- National Cryptocurrency Enforcement Team and what it means. Kathleen McDermott and Mark Krotoski in CCI. David Smagalla in WSJ Risk and Compliance Journal.
- How Credit Suisse facilitated crime, corruption, and dictators. Jessie Drucker and Ben Hubbard in the New York Times.
- Why diversity on investigation teams matters. Karin Portlock and Jabari Julien in Compliance and Enforcement.
- Could small-cap directors & officers could face ESG liability. Lawrence Heim in practicalESG.
- Global trends in corporate governance for 2022. Richard Fields, Rusty O’Kelley III, and Laura Sanderson, in Harvard Law School Forum on Corporate Governance.
- Roger Ng trial in danger of collapse due to prosecution ‘inexcusable error .’Stewart Bishop in Law360. (sub req’d)
- Using the FCPA to fight the demand side of bribery. Matthew Stephenson in GAB.
Podcasts and More
- In February on The Compliance Life, I visited with Ellen Smith, a former Director of Trade Compliance who recently started her consulting firm. In Part 1, she discussed her academic background and early professional career. In Part 2, Ellen discussed her move in-house. In Part 3, Ellen discusses being a part of the Compliance Dream Team at Weatherford. In Part 4, Ellen moves into the world of consulting.
- On the FCPA Compliance Report, Tom began a 2-part series with Trade Compliance guru Matt Silverman on possible Russia sanction (Part 1) and the corporate response (Part 2). Part 2 posts Monday, February 28.
- CCI releases a new e-book from Mike Volkov, “Compliance Culture Revolution .”Available free from CCI.
- Gwen Hassan has a special 2-part pod series on Hidden Traffic with Jeff Bond, from the Global Fund to End Modern Slavery, on the impact of climate change on modern slavery. Part 1 and Part 2.
- Are you a Star Wars fan? How about an uber-Geek? You will love the 5-part series on Science of Star Wars in the Greeting and Felicitations podcast series on the Compliance Podcast Network if you are either or both. In this series, Tom visits astrophysicist Dr. Ben Locwin on the following topics: Episode 1-Traveling in Hyperspace, Episode 2-Fighting with a Light Saber, Episode 3-Mechanical Prosthetics, Episode 4-Cyborgs, and Robots and Episode 5- Death Star. It is a ton of fun, and you will love it.
Tom Fox is the Voice of Compliance and can be reached at tfox@tfoxlaw.com. Jay Rosen is Mr. Monitor and can be reached at jrosen@affiliatedmonitors.com.
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.
Compliance into the Weeds is the only weekly podcast which takes a deep dive into a compliance related topic, literally going into the weeds to more fully explore a subject. This week, Matt and Tom turn to the recent FCPA enforcement action brought by the SEC involving the Korean company KT Corp. Some of the issues we consider
- Background facts and a corrupt culture, literally from the top.
- How does the SEC have jurisdiction over KT Corp?
- Why you need a flow chart of the bribery schemes and a scorecard of the players.
- Corruption leading to the Korean Blue House.
- Bags of cash delivered and kept in office safes.
- Was the resolution an interim step before a monitor is employed?
Resources
Tom with a 3-part series in the FCPA Compliance and Ethics Blog
Matt in Radical Compliance
Matt Kelly and I did an episode on our podcast, Compliance into the Weeds, about 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. One of the most prescient lines that came out of the podcast was that you need a flow chart to follow all the bribery schemes and you needed a scorecard to follow all the persons and entities involved in those schemes. In today’s post we will look at the bribery schemes in some detail.
I. South Korea
a. Getting Cash
As I mentioned yesterday, the bribery schemes used by KT Corp. harkened back to some older FCPA enforcement actions in one respect as one of the key bribery schemes used involved cash. The cash was garnered to fund a series of bribes from 2009-2017. The Order noted, “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. These included gifts, entertainment and, ultimately, illegal political contributions to members of the Korean National Assembly serving on committees relevant to KT’s business.”
The cash was obtained in two distinct ways. In the first scheme, 2009-2013, the Chief Executive Officer (CEO) and another senior approved inflated bonuses to other executive officers and executives. The recipients laundered the bonus payments into cash and next returned the cash to the CEO. This generated a slush fund of approximately $1 million. Some of the funds were held in another executive’s personal bank account, while the cash was stored in a safe in the corporate offices. The CEO then used the cash as a slush fund for gifts and payments to Korean government officials with the ability to influence KT Corp.’s business. There was no accompanying spreadsheet recordation’s of the gift recipients, although these payments were apparently common knowledge within the executive ranks. In a massive accounting fraud, the company “booked the slush fund amounts as executive bonuses, even though the money was used for gifts and for payments to government officials.”
Eventually this bribery scheme was uncovered, and the CEO was criminally charged on this matter. This did not deter KT Corp. in moving forward to continue to engage in bribery and corruption. From 2014 to 2017, the company’s Corporate Relations (“CR”) Group was brought in as the funding mechanism to create the pot of money to pay bribes. However, this vendor did not deliver gift cards to the CR Group but cash. The corrupt vendor even kept a percentage of the overall amount of cash as a fee. To facilitate the accounting fraud, the company used the phrase “CR Case Benchmarking,” in the company purchasing system as the purported purpose for the purchase.
But the cloak and dagger style used by KT Corp. continued as the vendor would meet a representative from the CR Group outside the KT office building where the vendor would give the CR Group representative “a paper bag containing a large manila envelope of cash, corresponding to the value of the gift cards purchased, less a commission for Vendor.” The cash was kept locked in the CR Group offices.
Unlike the first bribery scheme which was run directly by the CEO, in this second phase the cash was provided “to KT officers and managers, with the understanding that they would transfer the funds electronically to the contributions accounts for various Korean lawmakers. Once the transfer was made, a CR employee would inform the particular lawmaker’s aide that the contribution came from KT. This scheme was used to evade Korea’s Political Funds Act, which prohibits corporations from making political contributions. Most of the funds went to lawmakers in the National Assembly who sat on committees with the ability to impact the telecommunications industry and KT’s business.”
b. Hiring of Princelings
Here we saw a variety of the Princelings scandal that engulfed JPMorgan and other entities in bogus hiring’s of sons, daughters and other family members to provide illegal benefits to foreign government officials. Yet another scheme involved hiring individuals, as KT Corp. employees, with personal connections to the South Korean White House and ruling party, (the “Blue House”). Once they were hired these individuals were given even more cushy jobs in the company. In a derivation of the Princelings hiring schemes, the company also hired an entire advertising agency which did not meet KT Corp. criteria for retention as a vendor. In addition to hiring this unqualified advertising 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.”
II. Vietnam
a. Solar Power Project
In this project, KT Corp. used a sophisticated business venture, which was not a formal partnership or Joint Venture (JV) partnership. Under this bribery scheme, KT Corp. had another company involved in the project wire some $95,000 to KT Corp, who then would facilitate the payment of the bribe. The money was wired to a KT Corp. employee’s personal bank account, who then withdrew as cash. The employee and a construction company subcontractor representative met the corrupt government official and he was paid the money. Internally, the payment was described as “a rebate to the project owner.”
However, that did not end the matter for KT Corp. as they had to repay the construction company for the $95K. The construction company billed KT Corp. for the bribe, describing it as “expenses for engaging in sales activities with the ordering organization . . . ($95K),” as well as other expenses. KT Corp. paid the construction company approximately $200,000 to settle all the claims, including reimbursement for the bribe payment, and it booked the payment as “Support/consulting for performance of the business (completed).”
b. Vocational College Project
KT Corp. participated with a consortium to bid on the Vocational Colleges Project. KT Corp. learned from its original consortium partner (“Partner 1”), which was to pay the agent fee, that 10% of the project cost would go to the agent, who would pass on 7% of the project cost to Official 1. However, Partner 1 informed KT Corp. that it did not want to be responsible for the agent’s fee due to the risk involved. KT Corp. agreed to reorganize the consortium and assume responsibility for paying the agent’s fee. KT Corp. and a corrupt agent agreed that the fee would be 8.5%, which included $550,000 for Official 1.
KT Corp. then arranged for a subcontractor in the consortium to become a consortium partner (“Partner 2”) and KT Corp. “tasked Partner 2 with the responsibility of paying the agent fee. The purpose of the arrangement was to distance KT from the agent, as well as to conceal the agent from KT’s agent review process. While the agent review process was a financial risk review, not an anticorruption review, the KT managers involved preferred to avoid any questions about KT’s relationship with the agent. Paying the agent through Partner 2 enabled KT managers to bypass the review.”
As I said at the start of this post, you need a flow chart to follow the bribery schemes and a scorecard to follow the players.
Join us tomorrow where we look at some lessons learned for the compliance professional.
