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.
Tag: SEC
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.
As the villain Le Chiffre says to James Bond just before he began to torture him in the movie version of Casino Royal, “Sometimes the old ways are the best.” He then begins to beat Bond’s family jewels with a knotted hemp rope. It is one very painful scene to watch.
I thought of the movie line, but not the torture scene, when I read the most recent Foreign Corrupt Practices Act (FCPA) enforcement action where the Korean entity KT Corporation settled 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. The reason for the prescience of the Le Chiffre line was that the first bribery schemes in South Korea largely revolved around cash. We have not seen those ‘little brown bags’ of cash in too many recent FCPA enforcement actions. This makes the KT Corp. matter worth looking at in some detail.
In terms of financial penalties, the total amount is obviously low. However, there are multiple lessons to be garnered from the enforcement action that are worth exploring. Over the next few blog posts, I will be taking a deep dive into the enforcement action and exploring it in some detail.
Background
First a word on jurisdiction as you may be asking why is the US SEC bringing a FCPA enforcement action against Korea’s largest telecoms operator? For KT Corp., the answer is that it has American Depositary Shares, (ADRs) which are registered with the SEC and trade on the New York Stock Exchange (NYSE). Additionally, KT Corp. files periodic reports, including Form 20-F, with the SEC. If you represent companies which have ADRs in the US, you might want to inquire if they have any internal controls around the FCPA and whether they even have a compliance program.
According to the SEC Press Release announcing the resolution, KT Corp. is “South Korea’s largest telecommunications operator, engaged in multiple schemes to make improper payments in Korea and Vietnam.” However, the company did not have “sufficient internal accounting controls over charitable donations, third-party payments, executive bonuses, and gift card purchases.” This failure of internal controls leads to numerous compliance failures and FCPA violations where “high-level executives, were able to generate slush funds that were used for gifts and illegal political contributions to government officials in Korea who had influence over KT Corp.’s business. Other employees were able to make payments in connection with seeking business from government customers in Vietnam.”
Moreover, as specified in the Order, “the misconduct involved former high-level managers and executives and occurred under circumstances whereby KT had no relevant anti-corruption policies or procedures with respect to donations, employment candidates, vendors, subcontractors, or third-party agents. In certain instances, this allowed KT employees to provide benefits improperly to government officials and to seek business from government customers. As a result of this misconduct, KT violated the books and records and internal accounting controls provisions of the FCPA.”
Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit, was quoted in the SEC Press Release for the following, “For nearly a decade, KT Corp. failed to implement sufficient internal accounting controls with respect to key aspects of its business operations, while at the same time lacking relevant anti-corruption policies or procedures. Issuers must be sure to devote appropriate attention to meeting their obligations under the FCPA.” Finally, “in November 2021, South Korean authorities indicted KT Corp. and 14 executives for criminal violations related to illegal political contributions from the slush funds.”
Culture
There were multiple bribery schemes involving KT Corp., which we will detail at some length in this series. However, one thing that is made clear in this Order is the complete and total failure of a culture of compliance at KT Corp. or at least something coming close to an appearance of doing business by not paying bribes. 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. These included gifts, entertainment and, ultimately, illegal political contributions to members of the Korean National Assembly serving on committees relevant to KT’s business.”
When this 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 business that was committed to feathering its nest via bribery and corruption.
Join us tomorrow where we take a deep dive into the bribery schemes.
In today’s edition of Daily Compliance News:
- NY AG can question Trump, kids under oath. (NYT)
- SEC widens investigation into Activision Blizzard. (WSJ)
- Surprise Surprise, BoJo drops Minster to fight corruption. (Business Insider)
- Tesla says SEC being unfair to Musk. (WSJ)
Welcome to the only roundtable podcast in compliance. The entire gang was also recently honored by W3 as a top talk show in podcasting. In this episode, we have the full gang of Jonathan Marks, Karen Woody, Jonathan Armstrong, Tom Fox, Matt Kelly and Jay Rosen. We discuss a potpourri of issues. We conclude with our fan favorite Shout Outs and Rants.
- Karen Woody reviews the recent HeadSpin SEC enforcement action, explaining how the SEC has jurisdiction over a private company, the significance of an enforcement action with no fine or penalty and the corporate governance issues involved. Karen shouts out to the Super Bowl Halftime show for throwing love on 90s music and musical stars.
- Jay Rosen discusses the recently released Commission on Combatting Synthetic Opioid Trafficking Report. Rosen shouts out to celebrity chef Jose Andreas for creating the Gazpacho Police in the 1990s long before Marjorie Green Taylor accused Nancy Pelosi of doing so and for inviting Rep. Taylor to join, provided she is vaccinated and wears a mask to the restaurant.
- Matt Kelly looks at the Joe Rogan and Spotify imbroglio, focusing the attempts of Spotify CEO Daniel Ek to focus the spotlight on Rogan and not Spotify. Kelly shouts out to that unknown US criminal enforcement agency, the National Archives which raided Mar-A-Lago where the former President had purloined some 15 boxes of Presidential papers and materials. He also gives a minor shout out to New York Times columnist Maggie Haberman who in an upcoming book reported the former President flushed documents down the toilets at the White House.
- Jonathan Marks discusses continuous controls monitoring and continuous auditing as best practices for compliance, risk management and fraud prevention programs. Marks shouts out to the Philadelphia 76ers for getting rid of Ben Simmons who refused to play for them. He implores Simmons to get a new agent for his disastrous handling of the entire situation.
- Jonathan Armstrong discusses the civil verdict for HP in its case against Autonomy and the Extradition Order delivered by the Home Secretary for Mike Lynch to go to America to stand for a US criminal trial. Armstrong shouts out to Queen Elizabeth II for her 70-year reign on the English throne.
- Tom Fox has a melancholy shout out to the University of Michigan School of Law and greater legal education profession, which lost two stalwart professors recently; Yale Kamisar, Father of Miranda and Terrance Sandalow, former Dean of the Law School.
The members of the Everything Compliance are:
- Jay Rosen– Jay is Vice President, Business Development Corporate Monitoring at Affiliated Monitors. Rosen can be reached at JRosen@affiliatedmonitors.com
- Karen Woody – One of the top academic experts on the SEC. Woody can be reached at kwoody@wlu.edu
- Matt Kelly – Founder and CEO of Radical Compliance. Kelly can be reached at mkelly@radicalcompliance.com
- Jonathan Armstrong –is our UK colleague, who is an experienced data privacy/data protection lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com
- Jonathan Marks is Partner, Firm Practice Leader – Global Forensic, Compliance & Integrity Services at Baker Tilly. Marks can be reached at marks@bakertilly.com
The host and producer, ranter (and sometime panelist) of Everything Compliance is Tom Fox the Voice of Compliance. He can be reached at tfox@tfoxlaw.com. Everything Compliance is a part of the Compliance Podcast Network.
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 return to one of Matt’s favorite topics Elon Musk/Tesla. Some of the issues we consider:
· What happens when a business is lead by a runaway CEO?
· Implications of new SEC investigation.
· State of California investigation into racial discrimination.
· Where has the Board been all this time?
· Will the attitude of the SEC regarding enforcement change?
Resources
Matt in Radical Compliance
In today’s edition of Daily Compliance News:
- Corruption at the Olympics or just sour grapes? (YaHooNews)
- Rio Tinto Chair to review CEO. (Reuters)
- Shareholder voices could grow louder under this SEC. (WSJ)
- Wells Fargo Chief Auditor Passes (Radical Compliance)66
In today’s edition of Daily Compliance News:
- Credit Suisse had more training on how to talk and eat than on compliance. (FT)
- Rio Tinto and toxic culture. (Economist)
- After Clayton tried to decrease whistleblower awards, Gensler widens them. (WSJ)
- Is Roger Ng a scapegoat, rogue employee or active fraudster. (Reuters)
