Compliance Alert: Hospitality and hiring in South Korea

We’ve talked about South Korea’s foreign bribery laws and we looked at specific compliance risks related to gift giving, rebates, and kickbacks. In this post we’ll look at enforcement actions in South Korea and what specific steps can reduce compliance risks there.

This post is adapted from a chapter in our in our e-book on navigating anti-corruption compliance in emerging markets.

China Eastern Airlines. The most notable bribery case in South Korea’s history involved China Eastern Airlines  — the first case to go to trial concerning a violation of the Foreign Bribery Prevention in International Business Transactions Act (FBPA). This case specifically tackled the scope of the definition of “foreign official” under the FBPA.

Here, the CEOs of a logistics company and a travel agency allegedly bribed the CEO of the Korean subsidiary of China Eastern Airlines by requesting more favorable freight fees and more flight tickets for sale, respectively. The main issue was whether China Eastern Airlines’ CEO could be considered a “foreign official” for purposes of the FBPA. The trial court found that although there was some evidence to show that the CEO fell within the scope of the definition of a “foreign official,” the evidence presented by the prosecution did not satisfy the burden of proof. The trial court did not specify which prong of the FBPA’s definition of a “foreign official” the prosecution failed to prove.

On appeal, the prosecution sought to prove that the CEO of China Eastern Airlines was a “foreign official” by arguing that the Chinese government exercised de facto control over China Eastern Airlines, because a company wholly owned by the Chinese government owned more than 50 percent of the airline and the Chinese government appoints and dismisses the CEOs of China Eastern Airlines. Despite these arguments,
the appellate court affirmed the trial court’s decision without providing any additional reasoning.

The case has been appealed to the Korean Supreme Court.

Closed Circuit Television Case. In October 2015, the Seoul Central Prosecutors’ Office indicted three closed-circuit television (CCTV) manufacturers and their respective executives and employees for offering bribes to a U.S. military official (a U.S. citizen) stationed in Korea, alleging violation of the FBPA.

The CCTV manufacturers were charged with giving the bribes in exchange for inflating the number of CCTVs supplied to the U.S. military. The US military official allegedly accepted a total of KRW 128 million (approximately $112,400) from the three CCTV manufacturers, and has been arrested on charges of commercial bribery under the Korean Criminal Code. The case, which is pending, is in line with previous FBPA enforcement actions, which have largely related to U.S. military projects in Korea.

Investigations into Hiring Relatives of Public Officials. The District Prosecutors’ Office recently opened an investigation into the hiring of relatives of public officials in Korea. In August 2015, a member of the National Assembly of the Republic of Korea (“National Assembly”) allegedly reached out to the CEO of a company with a large factory in the member’s electoral district to inform the CEO of the company that the member’s daughter had applied for a job with the company’s in-house counsel.

Shortly thereafter, the company’s legal department hired the National Assembly member’s daughter, despite allegations that the company had not intended to hire anyone. Breaking news of this story garnered a big reaction from Korean society, and ultimately led to this investigation by the Prosecutors’ Office.

Suggestions on How to Improve Compliance and Control South Korea-Specific Compliance Risks

Update Compliance Programs and Internal Controls to Reflect Changes in Anti-bribery Law per the Anti-Graft Act. Companies need to keep their compliance programs consistent with the ever-changing anti-corruption laws, particularly the Anti-Graft Act, which will go into effect in September of 2016. Companies should be aware of the key five changes—including, the imposition of vicarious liability on corporations for bribes paid by their employees, agents, or representatives — reflected in the Anti-Graft Act and should ensure that their compliance programs account for all five of the noteworthy features set forth in the Anti-Graft Act.

Companies should also conduct enhanced training on the Anti-Graft Act and other anti-bribery laws. It is advisable that companies have an attorney who is familiar with the Anti-Graft Act review their current compliance programs and internal controls.

Fully Understand South Korea’s Gift Giving and Hospitality Culture and Implement Specific Compliance Guidelines. It is an accepted custom for envelopes of cash to be provided at weddings and funerals. What would be considered an appropriate amount depends on the relationship between the giver and the recipient (or the recipient’s relatives). It is therefore difficult to say in the abstract what would be an appropriate amount.
The Code of Conduct, however, places the upper permissible threshold at KRW 50,000 (approximately $44).

This payment culture will need to be reconciled with global policies, which often contain an absolute prohibition on cash payments.

Forms of treating guests can include not only meals at restaurants, but also going to a venue after dinner that can range from karaoke, bars, to so-called “room salons,” which can involve drinking, singing, and the participation of hostesses. Prices at premier restaurants will be in line with the high cost of living in Korea while bills for bars or room salons can run into the hundreds or, in some cases, thousands of dollars. Other venues for entertainment also include golf (as well as meals and drinks after a round of golf). A round of golf in Korea generally starts in the $200 range. An effective compliance policy will recognize the existence of these types of venues and the cultural inclination to treat highly valued guests to these places, and clearly establish what is and is not acceptable.

Establish and Enhance Internal Controls. Unlike in the United States, there is no explicit mechanism for companies to disclose violations in exchange for reduced penalties under South Korean law. However, a corporation or other legal entity may be fully or partially exempt from punishment if it proves that it has taken measures to prevent such FBPA violations by its representatives, agents, or employees. Therefore, each company should implement internal controls to both prevent and detect any irregular activity relating to the payment of bribes and/or questionable gifts, particularly “ttokkap”-related gifts.

Exercise Special Care in Hiring Practices. Given South Korea’s investigative authorities’ interest in investigating benefits in the form of improper employment of public officials’ relatives, companies should exercise special care in conducting due diligence and fully vetting any hires. Accordingly, companies should maintain evidence that shows that all hires were properly vetted, in addition to documenting the company’s efforts to prevent improper hiring processes.

For example, companies should keep written records documenting their entire hiring process, train employees on improper conduct and treatment of relatives of public officials, and regularly audit whether employees are complying with the companies’ rules regarding hires.

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Our e-book, Anti-Corruption Compliance in Emerging Markets: A Resource Guide, is available here.

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Soo-Mi Rhee is senior counsel in Arnold & Porter’s Washington, DC office. She focuses her practice on economic sanctions laws, export control laws, antibribery laws, antiboycott laws, customs laws, and other foreign policy, national security, and economic policy-based trade and investment controls.

Keith Korenchuk is a partner in Arnold & Porter’s Washington, DC office. He counsels and advises global companies on regulatory and compliance matters worldwide, with a focus on compliance program effectiveness, compliance program implementation, operations and evaluation, and related regulatory counseling and advice.

Samuel Witten is counsel in Arnold & Porter’s Washington, DC office. He helps companies develop and implement FCPA compliance programs. He also represents clients in arbitrations at the International Center for Settlement of Investment Disputes. He joined Arnold & Porter in 2010 after serving for 22 years in legal and policy positions at the U.S. Department of State.