KT Corporation is a Seoul, South Korea based telecommunications company with American Depositary Shares registered with the SEC and traded on the New York Stock Exchange.
Yesterday, the SEC announced that the company agreed to pay $6.3 million “to resolve charges that it violated the Foreign Corrupt Practices Act by providing improper payments for the benefit of government officials in Korea and Vietnam.”
In summary fashion, this administrative order finds:
“This matter arises out of KT Corporation’s (“KT”) violations of the books and records and internal accounting controls provisions of the FCPA in the Republic of Korea and Vietnam. KT lacked sufficient internal accounting controls over expenses, including executive bonuses and purchases of gift cards, which enabled managers and executives to generate slush funds. In addition, the misconduct involved former high-level managers and executives and occurred under circumstances whereby KT had no relevant anti-corruption policies or procedures with respect to donations, employment candidates, vendors, subcontractors, or third-party agents. In certain instances, this allowed KT employees to provide benefits improperly to government officials and to seek business from government customers. As a result of this misconduct, KT violated the books and records and internal accounting controls provisions of the FCPA.”
Under the heading, “Conduct in Korea,” the order finds:
“Slush Funds
From at least 2009 through 2017, high-level executives of KT maintained slush funds, comprised of both off-the-books accounts and physical stashes of cash, in order to provide items of value to government officials, among others. These included gifts, entertainment and, ultimately, illegal political contributions to members of the Korean National Assembly serving on committees relevant to KT’s business.
From 2009 to 2013, a KT then-Executive Officer and another KT senior executive orchestrated a scheme through which the Executive Officer approved inflated bonuses to company officers and executives, which was then returned to the Executive Officer in cash and used to generate a slush fund of approximately $1 million. Some of the funds were held in a KT executive’s personal bank account, while the cash was stored in a safe on the sixteenth floor of KT’s offices in Bundang. The Executive Officer used the cash as a slush fund for gifts to, among others, government officials with the ability to influence KT’s business. No one at KT maintained records of the recipients of the gifts, although other KT executives knew about the conduct. KT booked the slush fund amounts as executive bonuses, even though the money was used for gifts and for payments to government officials.
In October 2013, there were media reports about the bonus scheme, resulting in the resignation of the Executive Officer in November 2013 and criminal charges in April 2014. As a result, the bonus scheme became impossible to maintain. Rather than cease the misconduct and institute improved internal accounting controls to detect and prevent such schemes in the future, KT officials instead devised a new method to continue generating a slush fund. From 2014 to 2017, KT’s Corporate Relations (“CR”) Group purchased gift cards, which were then converted to cash and used for a new slush fund. On numerous occasions, a CR senior manager (“Manager A”) told a CR midlevel manager (“Manager B”) how much cash to obtain. In response, using an internal purchasing system, Manager B purchased gift cards from a particular vendor (“Vendor”). When buying gift cards to convert to cash, Manager B inserted a tag phrase, “CR Case Benchmarking,” in the purchasing system as the purported purpose for the purchase.
When the cash was ready, Vendor called Manager B as he arrived outside the KT office building where Manager B worked. Manager B then met Vendor in a van in the parking lot next to the KT building. Vendor gave Manager B a paper bag containing a large manila envelope of cash, corresponding to the value of the gift cards purchased, less a commission for Vendor. Manager B then gave the cash to Manager A, who placed it in a double-locking cabinet.
Over time, Manager A passed the cash to KT officers and managers, with the understanding that they would transfer the funds electronically to the contributions accounts for various Korean lawmakers. Once the transfer was made, a CR employee would inform the particular lawmaker’s aide that the contribution came from KT. This scheme was used to evade Korea’s Political Funds Act, which prohibits corporations from making political contributions. Most of the funds went to lawmakers in the National Assembly who sat on committees with the ability to impact the telecommunications industry and KT’s business.
The individual contributions ranged from KRW 1M ($893) to KRW 14M ($12,500). KT ranked the lawmakers (A, B, and C) according to the amounts that the CR Group anticipated spending on each one. CR managers reported the amounts and recipients of the contributions to upper management. The political contributions amounted to approximately $393,574,and were given to 99 Korean lawmakers and candidates. The CR Group generated an additional $910,211 for improper gift and entertainment expenses, for a combined total for the slush fund of $1.3 million.
KT booked the gift card expenses used to fund the slush fund as either “research and analysis” or “entertainment,” which was inaccurate or did not fairly reflect the transactions. In November 2021, Korean authorities indicted KT and fourteen high-level executives for criminal violations in connection with the gift card scheme.
Payments at the Behest of Government Officials
Between 2015 and 2016, KT made payments of over $1.6 million to three organizations at the request of high-level government officials. KT paid $972,616 to Foundation A, described as a foundation for the promotion of Korean culture, and $603,791 to Foundation B, described as a foundation for the promotion of sports. A close associate of a senior Korean government official set up both foundations, and the payments were made at the behest of the Blue House, Korea’s presidential residence and office. The third payment, of $88,420 to another organization, Association C concerning e-Sports, was solicited by a member of Korea’s National Assembly who served on legislative committees important to KT’s business. All of these payments were booked incorrectly, either as charitable donations or as a sponsorship.
Despite the circumstances – direct requests for payment coming from or on behalf of high government officials – KT took no steps to determine if the payments were legitimate donations, rather than illicit payments made at the behest of government officials. Further, neither Foundation A nor B was established when the donation request was made or when KT managers agreed to make the payments.
In 2015 and 2016, a Blue House official urged, and KT senior management agreed, to hire two advertising executives with personal connections to the Blue House and then, once hired, transferred them to more desirable positions. KT also altered its criteria for outside advertising agencies in order to hire a new agency established by the same close associate of a high Blue House official who had established Foundation A and Foundation B. The requesting Blue House official was clear with KT senior management that “the VIP” – whom KT officials understood was the Blue House official’s ultimate boss – “had major concerns about KT’s advertisements” and that these moves were “important to the VIP.” Notwithstanding these circumstances, and without conducting due diligence on the individuals or the agency, KT paid the two individuals a total of $454,009 in salaries and the advertising firm a total of $5.88 million in fees.”
Under the heading, “Conduct in Vietnam,” the order finds:
“Between 2014 and 2018, KT employees internally discussed providing money to third parties connected to government officials in Vietnam in order to obtain contracts for two projects. The first project was with the People’s Committee of Quang Binh province in Vietnam to construct a solar cell power system (“Solar Power Project”), and the second was with the Vietnam Ministry of Labor, Invalids and Social Affairs to provide hardware, software, and training for five vocational colleges (“Vocational Colleges Project”). At the time, KT lacked sufficient internal accounting controls regarding third parties and no relevant compliance policies regarding due diligence. Moreover, KT took no meaningful steps in response to allegations of improper payments in connection with the contracts.
Solar Power Project
In 2014, KT entered into an arrangement with a construction company to pay a bribe of $95,031 to a high-level official of Vietnam’s Quang Binh province in order to obtain the contract for the Solar Power Project. On September 10, 2014, a junior employee in KT’s Hanoi office told an employee of a subcontractor to the construction company, “KT Hanoi will handle the matter of deliver[ing] money to the right person. Only KT Hanoi office now can handle this matter because others couldn’t make it. We will do it in the right way and make it work. So please arrange to transfer the money within today or before next Monday.”
The construction company wired money to the employee’s bank account, which the employee then withdrew as cash. The employee and a construction company subcontractor representative traveled to the Sun Spa resort in Quang Binh, where the government official received the money. Subsequently, a member of the sales team described the payment as “a rebate to the project owner.”
In 2018, the construction company sought reimbursement from KT for the bribe payment, described as “expenses for engaging in sales activities with the ordering organization . . . ($95K),” as well as other expenses. KT paid the construction company approximately $200,000 to settle all the claims, including reimbursement for the bribe payment, and it booked the payment as “Support/consulting for performance of the business (completed).”
As part of the Solar Power Project, the government customer contracted to pay KT an advance payment in January 2015. As of March 2015, the government customer had not made the payment, due to delays in the Ministry of Finance. A KT senior vice-president (“SVP”) instructed a senior employee in the Hanoi office “to give money to the public officials so that they can speed up the performance of their duties.” Using a KT Hanoi office credit card, the senior employee conducted four cash-back transactions at a Hanoi restaurant, and he used the cash to pay the Ministry officials approximately $3,000. The effort was successful and resulted in the government transmitting the advance payment to KT.
Vocational Colleges Project
In 2013-2014, KT participated with a consortium to bid on the Vocational Colleges Project. The customers were the Vietnam Ministry of Labor, Invalids and Social Affairs (“MOLISA”) and the General Department of Vocational Training (“GDVT”). The Project Management Unit (“PMU”) within MOLISA coordinated the project.
A high-level official at GDVT (“Official 1”) introduced KT to a Vietnamese company to serve as a local agent. KT learned ”[t]he possibility of winning the business appears higher when using the company designated by [Official 1] as the local agent in the bid.” In addition, KT learned from its original consortium partner (“Partner 1”), which was to pay the agent fee, that 10% of the project cost would go to the agent, who would pass on 7% of the project cost to Official 1. Pre-bid, the agent served as a communication channel between KT’s consortium and government officials.
In May 2015, Partner 1 informed KT that it did not want to be responsible for the agent’s fee due to the risk involved. KT agreed to reorganize the consortium and assume responsibility for paying the agent’s fee. KT and the agent agreed that the fee would be 8.5%, which included $550,000 for Official 1, who planned to retire soon and did not want to wait for the project to be completed before receiving his share.
KT arranged for a subcontractor in the consortium to become a consortium partner, as well (“Partner 2”), and KT tasked Partner 2 with the responsibility of paying the agent fee. The purpose of the arrangement was to distance KT from the agent, as well as to conceal the agent from KT’s agent review process. While the agent review process was a financial risk review, not an anticorruption review, the KT managers involved preferred to avoid any questions about KT’s relationship with the agent. Paying the agent through Partner 2 enabled KT managers to bypass the review.
On May 19, 2015, Partner 2 sent KT a quotation that included “Site survey and Local legal & Technical Consulting.” Within this item, Partner 2 listed the agent fee of approximately $735,000, cloaked as “Site survey for installation.” The KT sales lead explained to the SVP, “As for the fee for the agent, . . . it would not be separately indicated . . . . Instead. it will be included in the estimate for additional tasks based on [Partner 2]’ s consent.” Thus, KT managers understood that this fee was for the agent and that it was concealed to avoid review. On May 28, 2015, KT executed the contract for the Vocational Colleges Project.
When KT had difficulty with the government customer, it turned to the agent for assistance. For example, on June 6, 2015, the SVP emailed the sales team: It is ridiculous that [GDVT] approval is going to take 1 week. Through [the agent], make [a PMU official] get the approval in one day. Do everything and anything to have this done. . . . Immediately push them to prepare the required documents for the [GDVT] approval. Also use [the agent] when you do this.. . . . You need to discuss these matters tomorrow, Sunday. When it is difficult, use [the agent] to move [a PMU official]. At least one interim payment was made to the agent for these services.
In January 2017, KT paid Partner 2 approximately $775,000 for undocumented “Consulting Service,” which was actually reimbursement for payments Partner 2 had made to the agent in order to bribe Official 1.”
Based on the above, the SEC found that KT violated the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, KT agreed to pay approximately $6.3 million (disgorgement of $2,263,821, prejudgment interest of $536,457, and a civil money penalty in the amount of $3,500,000). The order states: KT “acknowledges that the Commission is not imposing a civil penalty in excess of $3,500,000 based upon its cooperation in a Commission investigation and related enforcement action.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“For nearly a decade, KT Corp. failed to implement sufficient internal accounting controls with respect to key aspects of its business operations, while at the same time lacking relevant anti-corruption policies or procedures. Issuers must be sure to devote appropriate attention to meeting their obligations under the FCPA.”
Under the heading “Cooperation and Remediation,” the order finds:
“In determining to accept the Offer, the Commission considered those remedial acts undertaken by KT and the cooperation afforded the Commission staff. KT did not self-report the conduct described in this Order, but did cooperate with the Commission’s investigation by providing translations or summaries 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, including those who needed to travel to the United States.
KT’s ongoing remedial efforts included termination of certain employees responsible for the misconduct and introducing enhancements to its internal accounting controls. KT strengthened its ethics and compliance organization; enhanced its code of conduct, and policies and procedures regarding expenses; and increased training of employees on anti-bribery issues. Nonetheless, KT continues to remediate its process around anticorruption 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.”
Pursuant to the order, during a two-year period KT agreed to “report to the Commission staff periodically, at no less than six-month intervals, the status of its remediation and implementation of compliance measures.” The order states:
“During this two-year period, should KT discover credible evidence, not already reported to the Commission staff, that questionable or corrupt payments or questionable or corrupt transfers of value may have been offered, promised, paid, or authorized by KT, or any entity or person acting on behalf of KT, or that related false books and records have been maintained; or that KT’s internal controls failed to detect and prevent such conduct, KT shall promptly report such conduct to the Commission staff.”
Furthermore, during a two-year period, KT also agreed to conduct an initial review and submit an initial report, and conduct and submit at least two follow-up reviews and reports, and conduct and submit a Final Report “setting forth a complete description of its Foreign Corrupt Practices Act (“FCPA”) and anti-corruption related remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of KT for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews.”
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