The US SEC kicks off the year with a FCPA settlement with a telecom giant

The US Securities and Exchange Commission (SEC) kicked off this year’s Foreign Corrupt Practices Act (FCPA) enforcement on February 17, 2022 with the announcement of a US$6.3 million settlement (disgorgement of US$2,263,821, prejudgment interest of US$536,457 and a civil money penalty in the amount of US$3,500,000) with KT Corporation (KT), the largest South Korean telecommunications operator, for alleged FCPA violations in Korea and Vietnam. The SEC contends that KT, which trades on the New York Stock Exchange, lacked sufficient internal accounting controls in violation of the books and records and internal accounting controls provision of the FCPA. In the absence of proper controls, high-level managers and executives were allegedly able to create slush funds from which they provided gifts, entertainment and improper political contributions to government officials.

The conduct

According to the SEC’s Cease and Desist Order, the alleged improper conduct took place from 2009 to 2018 and involved various schemes of alleged improper payments that were created to avoid detection in Korea and Vietnam. The first scheme took place from 2009 to 2013, during which time the company purportedly approved and booked inflated executive bonuses amounting to approximately US$1 million. This money then allegedly went into a slush fund for gifts and entertainment for government officials who had the ability to influence KT’s business. According to the SEC, media reports revealed these inflated bonuses, ending the practice and resulting in embezzlement charges against a KT executive (although the charged executive was ultimately found not guilty because the funds were used for the benefit of KT and not personal use). 

Criminal charges, however, did not appear to deter executives from continuing to make improper payments to government officials. Instead, from 2014 to 2017, KT officials supposedly adopted a new scheme involving the purchase of gift cards that were later turned into cash and contributed to a new slush fund with the same purpose: to make political contributions and provide gifts and entertainment to Korean lawmakers relevant to KT’s business. The gift cards at issue were purportedly purchased by managers through KT’s internal purchasing system via a third-party vendor and recorded in the system as “CR Case Benchmarking.” However, according to the SEC, KT never received the gift cards. Instead, KT’s manager allegedly would meet the vendor in the parking lot outside the company, where the vendor provided a manila envelope containing the cash equivalent to the gift cards’ value. The funds were then supposedly distributed to various KT officers and managers who became responsible for electronically transferring funds to lawmakers. This slush fund allegedly paid out around US$1.3 million dollars to government officials with the ability to influence KT’s business. The funds from the purchased gift cards were ultimately recorded as “research and analysis” or “entertainment” in KT’s accounting records, which, according to the SEC, did not fairly reflect the purpose of the transaction and violated the FCPA’s accounting provisions. In November 2021, Korean authorities indicted KT and fourteen high-level executives for criminal violations in connection with this gift card scheme.

KT also allegedly made improper payments at the behest of government officials. For example, it allegedly made several charitable contributions totaling US$1.6 million to organizations promoting Korean culture and sports at the request of high-level government officials. According to the SEC, these donations were improperly recorded in the accounts as “charitable donations” or “sponsorships” when the primary purpose of the transactions was to corruptly influence lawmakers to benefit KT’s business. The SEC found that KT took no steps to ensure that the charitable donations were legitimate and noted that some organizations were established just before the contributions were made.

In addition to these charitable donations, KT supposedly hired two advertising executives and an advertising firm with close ties to an influential government official and transferred them to desirable positions within KT. KT allegedly altered its hiring criteria for outside advertising agencies to ensure successful employment and conducted no due diligence on these individuals or the organization. The SEC contends that KT then proceeded to pay the individuals almost US$500,000 and the advertising agency US$5.88 million in fees.

From 2014 to 2018, KT allegedly utilized third-parties in Vietnam, including contractors, subcontractors and bidding agents, to make cash payments on KT’s behalf to government officials to obtain contracts to several lucrative projects. According to the SEC, certain third-parties sought reimbursement from KT describing, the request as “expenses for engaging in sales activities with the ordering organization.” KT allegedly made the requested reimbursements and improperly recorded the payments as “a rebate to the project owner” and “Support/consulting for performance of the business (completed).” Again, according to the SEC, these entries in the accounting record did not fairly reflect the true purpose of the transactions and violated the FCPA’s accounting provisions. 

Other third-parties were allegedly hired by KT to assist with bidding on projects and, once the contract was received, certain government approvals. According to the SEC, the third-party would facilitate the payment of certain fees on KT’s behalf, a percentage of which were passed along to a government official with the ability to influence who received the contract. When seeking reimbursement, the third party allegedly claimed the expense was for “Site survey for installation” or “Consulting Service” when it was actually for the alleged improper payments to government officials. At the time KT hired these third-parties, the SEC contends that it conducted no due diligence and had insufficient anti-corruption policies. It also failed to conduct any meaningful investigation into the alleged improper payments.

Finally, when one of the promised advanced payments for a Vietnam project was delayed by Vietnam’s Ministry of Finance, senior employees at KT allegedly approved and made payments to government officials to expedite the desired payment. Using a company credit card, the employee purportedly made four cashback transactions at a local restaurant and then used the cash to make improper payments. The charges appeared on KT’s credit card as restaurant expenses and did not accurately reflect the true nature of the transactions.

Key takeaways

The SEC states that an aggravating factor in this case was that, in addition to insufficient accounting controls, KT had no compliance policies or procedures regarding donations, employment candidates, vendors, subcontractors, or third-party agents. It also failed to self-disclose the misconduct but was given credit for cooperating and taking certain remedial actions, including terminating employees, enhancing its internal accounting controls and establishing a stronger compliance program, including training employees on anti-bribery issues. As a result, as part of the settlement, KT must undertake several forward-looking actions, including continued enhancement to its compliance program, which must be based on an anti-corruption risk assessment and include processes for an effective audit program and regular reporting to the SEC on its implementation of these compliance measures. Interestingly, despite the numerous and complex alleged schemes in this case and the fact that KT had no relevant compliance policies in place during the relevant time, the settlement does not require KT to retain an independent monitor. This appears to contradict recent announcements indicating that the SEC planned to ramp up its use of monitors in appropriate cases.

As always, this case exemplifies the need for a robust compliance program that can address creative bribery schemes, including the use of third-parties and fake charitable donations. The use of intermediaries and charitable donations are generally high risk for improper payments and companies must take steps to properly assess this risk. Employees must be trained on how to conduct due diligence and to detect red flags. In addition, companies must implement sufficient accounting controls to ensure that their books and records accurately reflect their transactions. Most importantly, companies must maintain a culture of compliance that encourages reporting and investigation of improper conduct.