Hee Won (Marina) Moon and Miji Song, Kim & Chang
In December 2016, former South Korean President Park Geun-hye was impeached on corruption-related grounds, the culmination of a sustained protest movement that brought out almost a third of the nation’s population. Subsequently, in May 2017, Moon Jae-in was elected to the presidency. President Moon had run on a strong anti-corruption platform, and his administration has continued to prioritise anti-corruption enforcement during his term.
In this article, we introduce some key developments that are consistent with the Moon administration’s stated commitment of uprooting corrupt practices:
We also discuss amendments to the statute governing external auditors, which could potentially change the applicable calculus when actors consider voluntary disclosure, and special issues arising in the context of dawn raids, which are often used by various Korean authorities.
A wide-ranging investigation into corrupt hiring practices has drawn a great deal of media attention, especially as levels of unemployment among recent college graduates reached record-high levels during the Moon administration. As high rates of unemployment among recent college graduates became widespread knowledge, news that government officials were using their positions to seek sought-after openings for their friends or relatives became a high-profile social issue.
The investigations began in late 2017, when the Financial Supervisory Service (FSS) began reviewing hiring practices in Korea’s financial services industry, targeting a number of private and public financial institutions including major banks. As a result, several commercial banks were later subject to criminal investigations, resulting in indictments issued against a total of 38 former and current employees, including four chief executives. The indictments were based on allegations that the hiring evaluation scores of certain job candidates were manipulated pursuant to improper hiring-related requests from government officials or other individuals (eg, officers and directors of client companies). In the related criminal investigations, the Seoul Prosecutors Office (SPO) concluded that the commercial banks accepted the improper hiring-related requests with the expectation of potentially favourable treatment by the government officials or individuals making the requests. The SPO found that this conduct amounted to “criminal business interference”, as the improper hiring requests allegedly interfered with proper hiring practices.
In late 2018, the first lower court rendered its decision against a former bank chairman and head of HR, imposing suspended sentences in relation to charges of business interference. Subsequently, there was widespread criticism of the court’s decision as being overly lenient on the charged individuals. In January 2019, the chairman of another bank was given a prison sentence of one year and six months for business interference, without suspension of the sentence. Both cases are currently pending appeal.
Meanwhile, the scope of investigations of illicit hiring practices has expanded beyond the financial services industry to public officials at the FSS (ie, the financial regulator itself), as well as officers and employees of various state-owned enterprises for having engaged in illicit hiring. The expanded investigations included two current members of the National Assembly who were indicted for allegedly exercising influence in hiring decisions at Kangwon Land, a state-owned casino resort known for its relatively generous compensation and benefits. The subsequent investigation by prosecutors revealed that hundreds of employees had been hired at the request of government officials. As for the two indicted National Assembly members, prosecutors alleged that they made the hiring requests in exchange for exercising influence on the audit of Kangwon Land by the Korean Board of Audit and Inspection, a Korean government entity tasked with performing audits on all government agencies and state-owned enterprises.
We expect the illegal hiring probe to continue to expand, especially given the current political and socioeconomic climate, with its focus on youth unemployment, labor protection, and uprooting corruption. Indeed, on 12 September 2018, the Moon administration established the Committee for Eradication of Illicit Hiring Practices in Public Entities under the government-run Anti-Corruption and Civil Rights Commission (ACRC), which further expanded the scope of the investigations of illicit hiring practices to all public entities and state-owned enterprises.
In 2018, the chairman of a pharmaceutical company was found guilty of various offences relating to the bribery of healthcare professionals, and was sentenced to three years imprisonment (reduced to two-and-a-half years on appeal) and a criminal fine of 13 billion won in fines. The same company’s former CEO was sentenced to a suspended prison sentence and a fine of 13 billion won; two other former executives, meanwhile, were sentenced to imprisonment of one-and-a-half years each. This was a notable case not only because the chairman and other high-ranking executives were subject to relatively heavy sanctions, but also because the prosecutors took the approach of charging the defendant’s use of company funds for bribes as a form of embezzlement of company funds, as well as a form of tax evasion.
Specifically, the court found that the acts undertaken to generate the kickbacks to healthcare professionals (false receipts and sham purchases) constituted embezzlement of corporate funds, as well as corporate tax evasion through the issuance of false corporate expense receipts. This allowed the court to impose greater sanctions on the defendant than would have been available solely under the anti-bribery provisions of the Pharmaceutical Affairs Act or commercial bribery under the Criminal Code.
This case represents an aggressive approach to enforcing bribery offences, as it allows individuals to be sanctioned in cases where the kickbacks are relatively clear, but otherwise have a weak basis for a bribery offence (eg, where it is difficult to establish quid pro quo, or that bribes actually went to the intended recipients). It also increases the risk of exposure to individuals that direct or engage in corrupt activity of not only being in violation of the bribery offence itself, but other related laws concerning use of corporate funds such as embezzlement, improper accounting (eg, issuance of false invoices) and tax evasion (eg, where illegal kickbacks are falsely recognised as tax-deductible expenses).
The past decade has seen a steep increase in public whistleblower reports, in no small part due to the protections and incentives provided by the Whistleblower Protection Act, enacted in 2011. Notably, in early 2019, the ACRC announced that a whistleblower in a price-fixing case received the highest whistleblower reward to date, about 690 million won; the maximum reward granted by the ACRC under the Whistleblower Protection Act is 3 billion won.
The Whistleblower Protection Act is applicable to those who report violations relating to the public interest, in areas such as health, safety, environment, consumer interest, and competition/fair trade. To further encourage prospective whistleblowers, the Whistleblower Protection Act was amended on 17 October 2018. The key provisions that were amended are as follows:
This increased public awareness of whistleblowing through the Whistleblower Protection Act and ACRC activity has coincided with an increase in internal whistleblowing activity within the private sector. This can be attributed to the legal protections against retaliation for whistleblowers, as well as changing societal norms: in the historically hierarchical business culture, a subordinate employee would be extremely wary of reporting a superior’s wrongdoing (and may not even have the channels to do so), but an increasing number of companies are now offering anonymous whistleblower hotlines, and employees are less tolerant of corrupt activity and other corporate misconduct.
Companies are also increasingly willing to respond to whistleblower complaints by engaging in internal investigations and taking corrective measures. This trend has been bolstered by legal requirements under Korean laws against sexual harassment and bullying in the workplace, which require companies to investigate, and take appropriate measures in response to, allegations of harassment. Furthermore, an increasing number of reports are being made public through both traditional media (with several notable cases reporting sexual harassment and other workplace harassment) and social networks, including anonymous workplace social networking apps. The global #MeToo movement caused a drastic uptick in such claims, resulting in criminal investigations in diverse fields and encouraging companies and other organisations to ensure they have the systems and capacity to promptly engage in effective investigation and remedial action.
In November 2018, an amendment to the Korean External Auditors Act became effective, imposing – among other things – new reporting requirements relevant to external auditors of Korean companies (an external auditor is required for all listed companies, as well as non-listed companies that meet certain criteria). First, a company that becomes aware of misconduct involving its registered director(s), and/or other severe violations of the law or its articles of incorporation, must report the conduct to its external auditor. The external auditor, having received such a report, in turn is obliged to report to the Korean Securities and Futures Commission (SFC), which may then refer the matter to the prosecutors’ office if deemed to be intentional conduct. The sanction for failure to report is up to five years’ imprisonment, or a fine of up to 50 million won.
This new requirement could effectively encourage companies to self-report misconduct directly to the enforcement authorities, given the heightened risk of detection and investigation through the external auditor and the SFC. It would represent a significant change in the enforcement environment, where there are very few self-reporting requirements, and few instances of concrete benefits to self-reporting (notably, the leniency regime available in the case of competition-related self reports). Prosecutors and regulators do, however, often have discretion to provide some form of cooperation credit, so this serves as an incentive to approach the authorities in advance of a SFC referral, via the company’s external auditor.
Dawn raids (unannounced on-site investigations) have long been one of the most frequently used investigative tools for various Korean authorities, including the prosecutors and police, the Korea Fair Trade Commission, tax and customs authorities, and even labour and environmental authorities. However, the scope and focus of raids have shifted in recent years, with a notable increase in cases where corporate legal departments have been targeted.
Under Korean law, communications with, and work by, in-house counsel are not subject to protection under attorney-client or other privilege. Furthermore, communications with, and work by, outside counsel found within a raided company’s premises are generally not protected from seizure. In this context, targeting the legal department can be an effective means of collecting critical and relevant evidence, given the legal department’s role in the review and analysis of related documents and materials and also the communications with the relevant parties when allegations arise concerning the company.
It should be noted that the authorities’ interest in the records of the legal department is not limited to the time period of the alleged misconduct at issue. It can also include communications involving the legal department that have taken place after the primary conduct has occurred. For example, if the company has been subject to a regulatory inquiry before the criminal investigation, internal communications involving the legal department at the time of the regulatory process will be deemed relevant by the authorities. Furthermore, to the extent that an initial raid uncovers evidence of misconduct beyond the scope of the initial warrant/mandate, investigators will often return with an expanded warrant/mandate based on the additional evidence, so it is not uncommon for raids focused on the legal department to lead to other charges or areas of investigation. Companies doing business in Korea should, therefore, be prepared for the potentially expansive consequences of raids, and understand that materials that may be protected by privilege in other jurisdictions may be vulnerable to seizure.