On February 17, 2022, the United States Securities and Exchange Commission (SECOND) announced its first enforcement action of the year: a $6.3 million settlement (the Rules) with KT Corporation (KT Corp.), South Korea’s largest telecommunications company, involving alleged violations by KT Corp. the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA).
This case has three key points: (1) the settlement of KT Corp. with the SEC demonstrates the Commission’s ongoing FCPA enforcement efforts and the potential for foreign issuers to be held liable for what could be supervisory violations, even if the underlying conduct has no link with the United States; (2) the Settlement is notable in that it relates to an alleged scheme involving employee bonuses and gift cards, highlighting potential red flags to consider; and (3) the settlement requires KT Corp. make future reports on the status and implementation of its corrective and compliance actions, demonstrating that the SEC can take a proactive approach in monitoring compliance commitments arising from enforcement actions. We discuss these three key points in more detail below.
(1) Exposure of foreign issuers to the FCPA
As discussed above, the FCPA has broad extraterritorial reach. In this case, the SEC brought an enforcement action against KT Corp., a foreign issuer with sponsored American Depositary Receipts (ADR), pursuant to the provisions of the FCPA relating to books and records and internal accounting controls.
Unlike the application of anti-corruption provisions, alleged violations of books and records and internal accounting controls do not require proof of a corrupt payment made to influence, induce, or obtain an improper advantage from a foreign official; instead, the books and records and internal accounting controls provisions only require that the company has mischaracterized payments or other transactions in its books and records and may therefore require a lighter burden of proof. In this case, the SEC alleged that KT Corp. “had earmarked the slush fund amounts as executive bonuses, even though the money had been used for gifts and for payments to government officials.” In KT Corp.SEC No. 3-20780 (February 17, 2022) at ¶ 4, and recorded gift card expenses as “research and analysis” or “entertainment, which were inaccurate or did not accurately reflect transactions.” Identifier. at 9 o’clock.
Given the SEC’s description of the conduct at issue, it is interesting that the SEC chose to resolve this matter as a matter of books and records and internal controls. This may signal an interest in pursuing enforcement actions under these provisions in cases where a substantial bribery case might be more difficult to prove. Or it may signal the SEC’s intention to pursue cases where the conduct is more akin to a failure of controls. Of course, we also note that many companies might prefer resolution based on the accounting provisions, as opposed to the anti-corruption provisions, of the FCPA in an effort to potentially mitigate the collateral consequences of resolution. The key message for non-US issuers is that they may be subject to scrutiny by the SEC even when the conduct at issue occurs entirely outside the United States and when the evidence in the case show that the payments were recorded inaccurately, nothing more.
Although this is a familiar scenario for the fight against corruption and bribery (ABC) practitioners and compliance professionals, KT Corp. reminds non-U.S. issuers operating in high-risk jurisdictions that, in addition to substantial anti-bribery and corruption risks, potential control failures can create significant exposure under the FCPA.
(2) The risks of inflated bonus payments and gift cards
According to the settlement of KT Corp., from 2009 to 2017, the officers of KT Corp. reportedly maintained an off-book fund of approximately $1.3 million from bonuses. Identifier. at ¶¶ 3–8. Two executives from KT Corp. reportedly “approved inflated bonuses to company executives and executives, which [were] then returned. . . in cash and used to generate a slush fund. KT Corp. allegedly used the fund for illicit gifts and political contributions to Korean government officials who had influence over the company’s operations. Identifier. at ¶ 4. The employees also allegedly made improper payments while soliciting business from government customers in Vietnam under the same scheme. Identifier. at ¶¶ 13–24. According to the SEC, KT Corp. recorded the bonuses as compensation, even though the funds were used for gifts and payments to officials. Identifier. at ¶ 4. In 2013, Korean media reported KT Corp.’s alleged bonus scheme; Officials at KT Corp. allegedly “devised a new method to continue to generate a slush fund” by which KT Corp. allegedly purchased gift cards from a vendor and converted them into cash. KT Corp. allegedly then recorded the purchase of the gift cards, even though the funds were used for additional contributions in an alleged attempt to influence politicians. Identifier. at ¶¶ 5–12.
While gifts – whether in the form of cash, gift cards or donations – have long been a focus of ABC compliance, the SEC’s alleged bonus system demonstrates that compensation programs can be a source of ABC risk, especially in high-risk jurisdictions. . One method to help mitigate this risk is to have premium controls in place, which could include policies and procedures to guide how premiums are set or assess whether premiums are consistent with prevailing market conditions, as well as the training of employees and managers involved in determining the premiums on these and other ABC policies. Additionally, the settlement serves as a further reminder that gift cards are often a red flag, given how easily they can be misused.
(3) The SEC Could Raise Its Expectations About Future Compliance
The rules of KT Corp. notes that the company’s remedial efforts are “ongoing” and that the company “continues to correct its anti-corruption risk assessment process, 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. Identifier. at ¶ 29. The settlement provides for a two-year reporting period, during which the company is required to complete three reviews of its remediation and compliance program and submit written reports to the SEC. This type of forward-looking reporting is often a feature of resolutions and settlements involving the DOJ, and the SEC has signaled that it also intends to consider “continued agency oversight” when resolving allegations. corporate misconduct. Although the SEC has refrained from requiring a third-party monitor, this case demonstrates that the SEC could become more proactive in enforcing and monitoring ongoing compliance measures.
The settlement demonstrates the SEC’s continued attention to control violations and the importance of implementing reasonable risk-based controls to prevent the creation of off-the-books accounts, which can be used to make improper payments. The resolution may also signal a potentially growing interest by the SEC in imposing forward-looking reporting requirements, even for companies whose alleged wrongdoing has little connection to the United States. To address relevant risks, companies may consider assessing – as part of their overall ABC compliance programs – the controls they have in place to address ABC risks related to discretionary bonuses and other compensation arrangements. , especially in high-risk jurisdictions.