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

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The First FCPA Resolution Of 2022 Revisits Old Themes


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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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  6. 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.


  7. 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).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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