The First FCPA Resolution Of 2022 Revisits Old Themes – Corporate/Commercial Law

On February 17, 2022, KT Corporation (KT, formerly known as
Korea Telecom) resolved a Foreign Corrupt Practices Act (FCPA)
enforcement action with the Securities and Exchange Commission
(SEC) related to corruption schemes in South Korea and Vietnam.
Without admitting or denying the SEC’s allegations, KT
consented to the SEC’s order and agreed to pay $3.5 million in
civil penalties and another $2.8 million in disgorgement. This
matter comes shortly after South Korean officials indicted KT and
14 executives for criminal violations related to illegal political
contributions from slush funds in November 2021.

Although KT is the first FCPA resolution of 2022, the
underlying misconduct revisits a number of well-known areas of
compliance risk and highlights ongoing enforcement priorities.

1. Slush funds and off-the-books accounts.
   “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.”¹ Specifically, from
   2009 to 2013, the off-the-books accounts were funded via a scheme
   to pay inflated bonuses to company officers and executives, who
   then held the excess cash either in personal bank accounts or in a
   safe at the company’s corporate headquarters. In October 2013,
   media reports uncovered the bonus scheme, resulting in resignations
   and, subsequently, criminal charges in 2014. KT employees then
   devised a new method to continue the slush funds by using gift
   cards (see below).²

   Slush funds and off-the-books accounts hark back to the origins of
   the FCPA. Congress enacted the FCPA in 1977 after Watergate
   investigations identified widespread corporate misconduct,
   including an SEC finding that more than 400 U.S. companies had paid
   hundreds of millions of dollars in bribes to foreign government
   officials in order to win business mandates and that those
   companies were falsifying their books and records to conceal the
   illegal payments. The SEC further found that companies were making
   illegal political donations through slush funds and off-the-books
   accounts.³ As a result, slush funds, off-the-books
   accounts, and related accounting controls have been FCPA compliance
   concerns and SEC enforcement priorities since the FCPA’s
   inception. Accordingly, companies should design compliance and
   accounting controls that promptly identify and close any
   off-the-books accounts.




2. Gift cards and cash equivalents. From 2014 to
   2017, KT’s Corporate Relations Group purchased gift cards,
   which then were converted to cash. A KT manager would meet the gift
   card vendor in a van in a parking lot next to KT’s corporate
   headquarters, where the vendor would hand over a manila envelope of
   cash corresponding to the amount of gift cards purchased, less the
   vendor’s commission. The KT manager then distributed the cash
   to other KT officers and managers with the understanding that they
   would distribute the funds to the political contribution accounts
   of various Korean lawmakers. The purpose of this scheme was to
   evade the Korean Political Funds Act, which prohibits corporate
   political donations, and to curry favor with members of the Korean
   National Assembly who sat on committees with oversight over the
   Korean telecommunications industry. KT incorrectly recorded the
   gift card purchases on its books and records as either
   “research and analysis” or “entertainment,”
   when, in fact, the gift cards were used to fund off-the-books
   accounts and to make illegal political
   contributions.⁴

   Gift cards, pre-paid credit cards, coupons, and vouchers have long
   been an area of FCPA compliance concern because they function as
   cash equivalents and often have a limited audit trail. For example,
   in China, it is customary to give mooncakes, a pastry-like food
   item, as a gift to business contacts for the Mid-Autumn Festival.
   Often, the gift takes the form of a voucher to retrieve mooncakes
   at a bakery, which is logistically more practicable than mailing
   perishable items. However, some commercial bakers in China will
   provide the voucher holder with cash or a store credit in lieu of
   mooncakes. In addition, there is a secondary market for mooncake
   vouchers, and the voucher holder may be able to sell the voucher
   for cash. Accordingly, what may seem to be an efficient manner to
   extend a simple business courtesy—a gift of holiday
   pastries—in practice can be a way to provide cash corruptly
   to government officials and thus raises a significant compliance
   risk. As a compliance best practice, gift cards, pre-paid credit
   cards, coupons, and vouchers should be used in limited
   circumstances, if not avoided entirely.




3. Charitable contributions. Between 2015 and
   2016, KT made $1.6 million in donations to three foundations at the
   behest of high-ranking Korean executive branch officials.
   “Despite the circumstances—direct requests for payment
   coming from or on behalf of high government officials—KT took
   no steps to determine if the payments were legitimate donations,
   rather than illicit payments made at the behest of government
   officials. Further, neither Foundation A nor B was established when
   the donation request was made or when KT managers agreed to make
   the payments.”⁵

   Charitable donations have been a known-area of FCPA compliance risk
   for at least 20 years. For example, from 2000 to 2003, Eli Lilly
   and Company’s Polish subsidiary donated $39,000 to a small
   charity in Poland that was the pet project of a Polish government
   official who exercised influence over a state-run medical
   facility’s procurement decisions.⁶ As a compliance
   best practice, charitable contributions should be thoroughly
   diligenced, and the rationale for the donation should be
   contemporaneously documented.




4. Employment decisions. “In 2015 and 2016,
   a Blue House⁷ official urged, and KT senior management
   agreed, to hire two advertising executives with personal
   connections to the Blue House and then, once hired, transferred
   them to more desirable positions … The requesting Blue House
   official was clear with KT senior management that ‘the VIP’
   – whom KT officials understood was the Blue House
   official’s ultimate boss – ‘had major concerns about
   KT’s advertisements’ and that these moves were
   ‘important to the VIP.’ Notwithstanding these
   circumstances, and 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.”⁸

   For more than 20 years, hiring and employment opportunities have
   been an ongoing area of FCPA compliance risk and
   enforcement.⁹ Indeed, there have been numerous recent
   FCPA enforcement actions related to the hiring of family, friends,
   and associates of government officials in order to obtain business
   or to gain a business advantage.¹⁰ As a compliance best
   practice, any request from a government official to hire a
   particular individual or company should be carefully scrutinized,
   and a decision to engage any such individual or company should be
   well-documented and based on objective criteria, such as price,
   ideally established through a competitive selection process.

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5. Use of third party intermediaries. Between
   2014 and 2018, KT employees in Vietnam engaged third parties
   connected to government officials to pay bribes in order to win
   contracts for two government projects. A Vietnamese government
   official introduced KT to one of the third party agents, and KT
   learned from its consortium partner that the agent would be paid
   ten percent of the project cost and would pass seven percent of the
   project cost back the government official. The third-party payments
   in Vietnam were recorded on KT’s books and records as
   “consulting services.” According to the SEC, KT lacked
   sufficient internal accounting controls regarding payments to third
   parties and had no compliance policies or procedures relating to
   third-party due diligence.¹¹

   Since the FCPA’s enactment in 1977, approximately 90 percent of
   all FCPA enforcement actions have involved the use of corrupt third
   party intermediaries, such as consultants, sales agents,
   distributors, lobbyists, public relations firms, expediters, and
   consortium or joint venture partners.¹² Accordingly,
   third parties arguably are the single largest source of FCPA
   compliance risk, and compliance programs should devote resources to
   third-party diligence, onboarding, and monitoring.




6. Not charging a “corruption”
   violation.Although KT allegedly was involved in numerous
   acts of corruption in South Korea and Vietnam, the SEC did not
   charge the company with a substantive corruption violation under
   Section 30A of the Exchange Act; rather, the SEC charged a
   violation of Section 13(b)(2)(A) of the Exchange Act (failure to
   maintain accurate books and records) and a violation of 13(b)(2)(B)
   of the Exchange Act (failure to maintain a system of internal
   accounting controls to prevent books and records errors).

   This disposition is consistent with an SEC enforcement trend of
   resolving FCPA cases by charging violations of the FCPA’s books
   and records provisions but not charging violations of the
   anti-corruption provisions.¹³ Accordingly, issuers of
   securities trading on a U.S. exchange should be mindful that the
   SEC can and will bring an enforcement action that solely charges
   bookkeeping and internal accounting controls failures while
   nevertheless describing a much wider-range of corporate misconduct,
   and therefore issuers would be well served to continually assess
   and enhance their accounting controls.

Footnotes

1. In the Matter of KT Corporation, Admin. Pro.
File No. 3-20780 (Feb. 17, 2022) (the “SEC Order”) at
para. 3, https://www.sec.gov/litigation/admin/2022/34-94279.pdf.

2. See SEC Order at paras. 4-5.

3. Dep’t of Justice and SEC, “A Resource Guide
to the U.S. Foreign Corrupt Practices Act,” Second Edition
(July 2020) at page 2 https://www.justice.gov/criminal-fraud/file/1306671/download.

4. SEC Order at paras. 4-9.

5. SEC Order at para. 11.

6. See SEC v. Eli Lilly and Company, Case No.
1:12-cv-02045 (Dec. 20, 2012) (Complaint at paras. 7-15) https://fcpa.stanford.edu/fcpac/documents/3000/001962.pdf.

7. South Korea’s official presidential residence and
office.

8. SEC Order at para. 12.

9. See, e.g., SEC v. Tyson Foods, Inc., Case No.
1:11-cv-00350 (D.D.C. Feb. 10, 2011) (Complaint) (providing
“no show” jobs to the wives of Mexican government
officials responsible for inspecting the company’s meat
processing facilities); SEC v. BellSouth Corp., Case No.
1:02-cv-0113 (N.D. Ga. Jan. 15, 2002) (Complaint) (hiring the wife
of an influential Nicaraguan legislator to lobby for changes to
Nicaraguan law so that Bell South could fully acquire a local
Nicaraguan telecommunications company).

10. See, e.g., In the Matter of Deutsche Bank
AG, Admin. Pro. File No. 3-19373 (Aug. 22, 2019); In the
Matter of Credit Suisse Group AG, Admin. Pro. File No. 3-18571
(July 5, 2018); In the Matter of JP Morgan Chase &
Co., Admin. Pro. File No. 3-17684 (Nov. 17, 2016).

11. See SEC Order at paras. 13-24.

12 . See Stanford Law School Foreign Corrupt Practices
Act Clearing House, “Third-Party Intermediaries Disclosed in
FCPA-Related Enforcement Actions” https://fcpa.stanford.edu/statistics-analytics.html?tab=4.

13. See, e.g., In the Matter of Credit Suisse Group
AG, Admin. Pro. File No. 3-20629 (Oct. 19, 2021) (charging
violations of Section 10(b) of the Exchange Act (securities fraud),
Section 17(a)(1) of the Securities Act (securities fraud), Section
13(b)(2)(A) of the Exchange Act (failure to maintain accurate books
and records), and a violation of 13(b)(2)(B) of the Exchange Act
(failure to maintain a system of internal accounting controls to
prevent books and records errors)); In the Matter of Deutsche
Bank AG, Admin. Pro. File No. 3-20200 (Jan. 8, 2021) (charging
violations Section 13(b)(2)(A) of the Exchange Act (failure to
maintain accurate books and records) and a violation of 13(b)(2)(B)
of the Exchange Act (failure to maintain a system of internal
accounting controls to prevent books and records errors)); In
the Matter of Herbalife Nutrition, Ltd., Admin. Pro. File No.
3-19948 (Aug. 28, 2020) (same).

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