by Kara Brockmeyer, Andrew M. Levine, Karolos Seeger, and Konstantin Bureiko
On February 17, 2022, the SEC brought a settled FCPA administrative proceeding against KT Corporation (“KT” or the “Company”), a South Korean telecom operator with American depository shares trading on the New York Stock Exchange.[1] In its Cease-and-Desist Order (the “Order”), the SEC found that KT engaged in multiple schemes to make improper payments in Korea and Vietnam, including through purported charitable donations and third-party payments. The SEC also found that KT paid executives inflated bonuses in order to generate slush funds to pay for gifts and illegal political contributions. As a result of the settlement, the Company agreed to pay $6.3 million in disgorgement and civil penalties, and to a two-year reporting obligation.[2] The settlement with the SEC came several months after the Company and fourteen executives were indicted in South Korea for the political contribution scheme.
Of particular note, the KT settlement is the SEC’s most recent action involving charitable contributions, and it goes somewhat beyond earlier cases in that the Order does not find that the donations were made as part of any quid pro quo. It is also a cautionary tale demonstrating various ways that slush funds can be created.
Political and Charitable Donations in Korea
The SEC found that, between 2009 and 2017, KT employees engaged in a scheme to create slush funds that could be used to make illegal political contributions to Korean politicians. Beginning in 2009, two senior executives paid inflated bonuses to KT employees, who returned the cash to the executives in order to generate a slush fund of approximately $1 million. The cash was kept either in one of the senior executive’s personal bank accounts or in a safe on the company premises and was used to provide gifts and payments to government officials. According to the Order, KT failed to record the recipients of the gifts and improperly accounted for the funds as bonuses. This scheme was exposed in the South Korean press in 2013, leading to the resignation and indictment of the Company’s then-CEO on charges of embezzlement.[3]
The SEC found that, after the bonus scheme was exposed by the press, KT executives shifted to generating slush funds using the purchase of gift cards. A KT employee bulk-purchased gift cards through KT’s procurement system from a particular vendor. The vendor converted some of the gift cards into cash, which the SEC found was handed over to the KT employee in a paper bag at a parking lot next to KT’s office building in Seoul. These funds were then passed to senior managers and used to make campaign contributions to Korean lawmakers on committees relevant to KT’s business, in circumvention of Korean campaign finance laws.
Funds generated from this scheme were used to make a total of almost $400,000 in contributions to 99 lawmakers and candidates for political office. The individual contributions ranged from approximately $900 to approximately $12,500. Another approximately $910,000 from the scheme was allegedly used for “improper entertainment and gift expenses,” all of which was generated by gift-card expenses improperly recorded as “research and analysis” or “entertainment.”[4] In November 2021, three months before the Order, prosecutors in Seoul indicted fourteen senior KT executives, including its former CEO, for violations of campaign finance laws and embezzlement. The Company was also indicted.[5]
In addition to the political contributions, KT executives also funneled more than $1.6 million to various charitable foundations at the request of senior Korean officials, including former President Park Guen-hye.[6] The SEC faulted KT for not taking any steps to determine if the payments were legitimate charitable donations. According to the SEC, if KT had conducted due diligence, it would have learned that the requests were illegitimate, given that the charitable foundations did not even exist at the time of the requests were made.[7] Around the same time, KT hired two advertising executives at the urging of officials from the presidential office and altered its internal criteria for selecting advertising agencies in order to hire an agency connected to the charitable foundations. No due diligence was conducted on the individuals, who received a combined total of around $450,000 in salaries, or on the agency, which received $5.88 million in fees.[8]
Payments in Vietnam
The SEC also found that KT engaged in two improper schemes in Vietnam. In the first scheme, in 2014, an employee of KT’s Hanoi office allegedly agreed to pay approximately $95,000 to a senior provincial official in order to obtain the contract for a solar cell power system. The SEC found that KT Hanoi arranged for a construction company involved in the project to wire funds to an employee’s personal bank account, which were then withdrawn in cash and delivered to the official at a resort. Four years later, KT reimbursed the construction company, improperly booking the payment as “support/consulting for performance of the business (completed).”[9] The SEC also found that a KT employee used an office credit card to conduct cash-back transactions at a restaurant in Hanoi to generate approximately $3,000 in order to “give money to the public officials so that they can speed up the performance of their duties.”[10]
In the second scheme, the SEC found that KT employees used a Vietnamese agent to funnel money to a government official in 2014 and 2015, in order to win a contract to provide technology services to vocational colleges. According to the Order, KT participated in a consortium to bid on the project. A high-level government official introduced KT to a Vietnamese agent. KT understood from its consortium partner that the agent would kick back 7% of its 10% fee to the government official. KT’s consortium partner decided that it was not willing to pay the agent’s fee, given the risk. KT Hanoi employees then brought on a second consortium partner to retain the agent, in part “in order to conceal the agent from KT’s agent review process.” KT reimbursed the second consortium partner two years later, reimbursing it for a “site survey for installation.”[11]
The SEC ultimately found that KT violated the books and records and internal controls provisions of the FCPA by its actions in Korea and Vietnam. The Company did not receive self-reporting credit, but did receive credit for cooperating with the SEC’s investigation by, among other things, providing translations of some relevant documents, providing “certain facts” developed in the Company’s own internal investigation, and making some current and former employees available to SEC staff. The SEC’s Order also noted the Company’s remedial efforts, including terminating employees, enhancing its compliance organization, internal controls, and relevant polices, and increasing anti-bribery training. Despite the fact that the Company’s remedial efforts were ongoing, the SEC did not require an independent compliance consultant (its version of a monitor), but instead required the Company to report on the status of its compliance implementation every six months for the next two years.
Key Takeaways
- The Order is the latest example of the SEC policing charitable contributions. While prior SEC charitable donation settlements involved facts suggesting a clear quid pro quo, either in exchange for contracts or avoidance of an administrative penalty, here the link is not as clear.[12] The Order finds internal controls and books and records violations for the failure to diligence charities when donations were made at the “behest” of government officials, without a finding that KT received a specific benefit for the donation. The SEC clearly intends to continue to scrutinize charitable donations and expects issuers to develop systems to conduct due diligence on recipients of charitable donations, especially where red flags are present.
- The use of gift cards in Korea (and the cash-back transactions in Vietnam) highlight the risk that cash equivalents can easily be converted into slush funds. The conduct described in the Order demonstrates that, like payments to travel agencies,[13] anything that can be easily refunded or turned into cash can be misused.
- KT had disclosed some of the Korea-related allegations in its SEC filings beginning in 2014,[14] and included detailed disclosure about the charitable donations since 2017.[15] While there are significant questions around the merits of self-reporting in various circumstances, KT’s lack of self-reporting credit serves as a reminder that formal self-reporting is advisable whenever an issuer is already disclosing elsewhere potential conduct that could be seen as violating the FCPA.
Postscript on the South Korean Anti-Corruption Law
The KT Corporation enforcement action is a hit parade of classic FCPA schemes: slush funds derived from bonuses, gift cards, charitable donations, speed money (along with conspicuous avoidance of the facilitation payment exception), and even cash in paper bags.
Given this array of familiar fact patterns, it is notable that the SEC chose not to include a “sons and daughters” allegation. According to press reports, in 2012, a former Korean lawmaker named Kim Sung-tae asked the former CEO of KT to hire his daughter, who was already working part-time at KT, as a full-time employee. In exchange (according to press reports), the lawmaker protected the former CEO from being called as a witness for a parliamentary inquiry. Kim’s daughter received the job, and Kim was later charged with receiving a bribe. The district court acquitted Kim in 2020 on the grounds that he did not receive the benefits (his daughter did) and therefore did not receive a bribe under South Korean law. The court of appeals reversed the district court, holding that, under social norms, hiring a daughter amounted to a benefit to Kim (and therefore a bribe). This interpretation of South Korean law was affirmed by the South Korean Supreme Court and reported in the press on February 17, 2022, the same day as the Order.[16]
Footnotes
[1] In re KT Corp., Securities Exchange Act of 1934 Rel. No. 94279, Admin. Proc. File No. 3-20780 (Feb. 17, 2022), https://www.sec.gov/news/press-release/2022-30.
[2] Id. at 8.
[3] Id. ¶ 5.
[4] Id. ¶¶ 5-9.
[5] “KT CEO, company officials indicted on illegal political donations charges,” Korea Herald (Nov. 4, 2021), http://www.koreaherald.com/view.php?ud=20211104000823; see also Securities and Exchange Commission, “Largest South Korean Telecommunications Provider Agrees to Pay the SEC to Settle FCPA Charges” (Feb. 17, 2022), https://www.sec.gov/news/press-release/2022-30.
[6] KT Corporation, Form 20-F at 13-14 (filed April 28, 2017) https://www.sec.gov/Archives/edgar/data/0000892450/000119312517145082/d349157d20f.htm; see also Order at ¶¶ 10-11.
[7] Order at ¶ 11.
[8] Id. ¶ 12.
[9] Id. ¶¶ 14-16.
[10] Id. ¶ 17.
[11] Id. ¶¶ 18-24.
[12] See Colby Smith, Andrew M. Levine, Philip Rohlik, “Charitable Donations as FCPA Violations: SEC Settles with NuSkin over Donation by a Chinese Subsidiary,” FCPA Update Vol. 8, No. 2 at 15 (Sept. 2016) (discussing prior charitable donation cases).
[13] See In re GlaxoSmithKline, Securities Exchange Act Rel. No. 79005 (Sept. 30, 2016), https://www.sec.gov/litigation/admin/2016/34-79005.pdf (PDF: 190 KB).
[14] KT Corp., Form 20-F at 13 (filed April 28, 2014) https://www.sec.gov/Archives/edgar/data/0000892450/000119312514162033/d710660d20f.htm.
[15] KT Corp., Form 20-F at 13-14 (filed April 28,2017) https://www.sec.gov/Archives/edgar/data/0000892450/000119312517145082/d349157d20f.htm.
[16] “Top court confirms suspended prison term for ex-lawmaker in daughter’s hiring scandal,” Korea Herald (Feb. 17, 2022), http://www.koreaherald.com/view.php?ud=20220217000575.
Kara Brockmeyer, Andrew M. Levine, and Karolos Seeger are partners, and Konstantin Bureiko is international counsel, at Debevoise & Plimpton LLP.
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