Overview
On February 17, the Securities and Exchange Commission (SEC) announced a settlement with KT Corporation (KT Corp.), South Korea’s largest comprehensive telecommunications operator, for alleged violations (neither admitted nor denied by the company) of the books and records and internal accounting control provisions of the Foreign Corrupt Practices Act (FCPA).[1]
This matter, the first FCPA corporate settlement in 2022, is of interest for several reasons:
- First, it is the first corporate FCPA matter arising, at least in part, out of a national corruption scandal in South Korea which led to, among other things, the ouster and subsequent criminal prosecution of then-President of South Korea, Park Geun-hye, in 2017-2018. That scandal exposed an apparently entrenched political patronage system, where officials in the highest levels of the government extracted illegal political contributions, bribes, jobs for friends and family, and charitable contributions to foundations controlled by officials or their associates, from numerous South Korean corporations.[2]
- In the KT Corp. matter, the company allegedly made illegal political contributions to various Korean lawmakers, including members of that country’s National Assembly, as well as political candidates; gave gifts and cash, and paid for entertainment, for government officials; agreed to hire as executives two individuals with personal connections to the South Korean president’s office, known as the Blue House, and whose hiring was understood to be a request or demand of that office; and made charitable contributions to two foundations established by a close associate of a senior government official, which contributions were allegedly made at the behest of the Blue House.
- The conduct alleged in the KT Corp. matter is not, however, limited to South Korea, but also includes various alleged actions relating to Vietnam, including payments to third parties connected to government officials in order to obtain contracts.
- Second, the allegations reflect the power of the books and records and internal accounting control provisions applicable to issuers, including non-U.S. issuers such as KT Corp., since those provisions require neither proof of bribery nor, in a civil enforcement action, proof of intent. For example:
- The allegation of illegal political contributions to Korean lawmakers and political candidates, for example, could appear to be purely a matter of Korean law. They came within the scope of the books and records and internal control provisions, however, because, allegedly, the monies used to fund those contributions were generated through bonus payments to company executives as well as gift card purchases by the company’s Corporate Relations office, creating what the SEC terms as a “slush fund,” and were inaccurately recorded rather than being documented as what they really were, i.e., political contributions. The charges thus underscore the applicability of the FCPA’s accounting provisions to all expenditures of an issuer, not just those implicating the FCPA’s anti-bribery provisions.
- Two of the instances of alleged improper conduct in Vietnam involved payments to expedite actions by government officials. In one case, a government customer had contracted to make an advance payment on a project, but the payment was delayed. In order to secure release of the delayed contract payment, company personnel organized $3,000 in cash payments to the relevant officials. In the other case, the company was awaiting government approval for a project. Upon learning that the approval would take a week, company personnel arranged for a cash payment to a government official to get the approval taken care of in a day. While certainly we cannot reach a legal conclusion, including because the full factual record is not publicly available, under an anti-bribery analysis consideration might need to be given to whether the facilitation payments exception could apply to one or both scenarios. Such considerations are irrelevant, however, under the books and records and internal control provisions. In both cases, the payments were recorded, inaccurately, as either “research and analysis” or “entertainment.” That was sufficient to bring them within the scope of the FCPA’s accounting provisions.
- Third, the KT Corp. matter is one of only a small number of FCPA matters brought by SEC in recent years in which that agency has imposed a forward-looking requirement that the company report out to the agency on the status and implementation of the company’s remediation and compliance measures. In cases where both the DOJ and SEC are involved, it has become standard for DOJ to impose prospective self-assessment and reporting requirements pursuant to deferred prosecution or non-prosecution agreements, and companies subject to such joint agency settlements will typically report out to the SEC as well. In SEC-only matters, however, this type of forward-looking obligation is less common. In fact, over the past five years, during which there have been more than two dozen SEC-only FCPA corporate resolutions, fewer than a third have included such a requirement.
- In the SEC’s order regarding KT Corp., the agency noted remedial efforts made to date, but also stated that the company’s remedial efforts are “ongoing,” and that the company “continues to remediate its process around anti-corruption risk-assessments, the effectiveness of its audit program, and other internal accounting controls relating to third parties and procedures for regular testing of its internal accounting controls.”[3]
- KT Corp. is subject to a two-year reporting period during which the company is required to conduct a minimum of three reviews of its remediation and compliance program measures and to submit written reports of those reviews to the SEC.
- KT Corp. has not, however, been required to engage an independent compliance consultant, which is a measure that SEC has at times imposed as part of a prospective review and reporting obligation. (The last SEC-only FCPA settlement in which that agency imposed an independent compliance consultant requirement was in 2018.) The middle ground solution reached in the KT Corp. matter indicates that the SEC had a sufficient level of trust in the company’s ongoing remediation efforts to allow the company to undertake a self-review and assessment.
- Fourth, the SEC specifically credited the company’s cooperation as the reason for not imposing a larger civil penalty, and then caveated that outcome on the condition that no subsequent information is obtained that undermines the SEC’s evaluation of the cooperation. In FCPA cases the SEC frequently refers to a company’s cooperation as one basis among others for accepting a settlement. The KT Corp. matter, however, is unusual in tying the penalty amount so specifically to cooperation, and in expressly reserving the right to revisit the amount in light of subsequent information about that past cooperation.
- The order states, “the Commission is not imposing a civil penalty in excess of $3,500,000 based upon [the company’s] cooperation,” and then goes on to state that if the SEC later obtains information indicating that the company “knowingly provided materially false or misleading information or materials to the Commission,” then the SEC staff may, in their “sole discretion,” seek an order reopening the matter and imposing an additional civil penalty.[4]
- The SEC’s qualified characterization of the company’s cooperation is also worth noting. The order describes that cooperation as consisting of “providing translations or summary of some relevant documents, providing certain facts developed in its own internal investigation, and making certain current and former employees available to the Commission staff[.]”[5]
- Disgorgement and prejudgment interest, to be paid to the US Treasury, were also imposed in the KT Corp. matter. Consistent with disgorgement orders in other SEC FCPA resolutions since the Supreme Court’s June 2020 decision in Liu v. SEC,[6] the order in this case states that payment of the “disgorged funds to the US Treasury is the most equitable alternative…and returning the money to Respondent would be inconsistent with equitable principles.”[7] (Liu affirmed that disgorgement constitutes permissible equitable relief in an SEC enforcement proceeding, but left open the question of whether and to what extent ordering deposit of disgorgement funds with the Treasury will satisfy the SEC’s obligation to award equitable relief “for the benefit of investors” when it is not feasible to distribute such funds to investors.)[8]
- Finally, the KT Corp. matter is a rare FCPA case, at least to date, in which the SEC has expressly noted the lack of a voluntary disclosure, albeit while also commenting on the company’s remediation and compliance efforts. Often, the fact that a company did not voluntarily disclose its FCPA issues to the SEC can be inferred, because typically the agency will mention when there has been a voluntary disclosure, whereas in other cases the settlement documents will be silent on this point. Historically, cases where the DOJ is involved have provided a clearer record on this point, as DOJ settlements incorporate Federal Sentencing Guidelines calculations and discussion of application of the Department’s Corporate Enforcement Policy, both of which expressly account for voluntary disclosure or lack thereof.
- In the KT Corp. matter, the SEC specifically noted that the company “did not self-report the conduct described in this Order, but did cooperate with the Commission’s investigation ….”[9]
- As far as how the SEC learned of the conduct, no information is provided, which is typical. That said, not only the larger scandal but also KT Corp.’s potential entanglement in that scandal were a matter of public record. Indeed, as the SEC’s order notes, both the company and a number of its executives were indicted by South Korean authorities last year for certain of the alleged conduct.
