On February 17, 2022, the U.S. Securities and Exchange Commission (SEC) announced its first enforcement action of the year: a $6.3 million settlement (the Settlement) with KT Corporation (KT Corp.), South Korea’s largest telecommunications company, involving KT Corp.’s alleged violations of the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA).
This case has three key takeaways: (1) KT Corp.’s Settlement with the SEC demonstrates the Commission’s ongoing FCPA enforcement efforts and the potential for foreign issuers to face liability for what may be control violations, even if the underlying conduct has no nexus with the US; (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. to make future reports on the status and implementation of its remediation and compliance measures, demonstrating that the SEC may take a proactive approach in monitoring compliance undertakings arising from enforcement actions. We discuss these three key take-aways in more detail below.
(1) Foreign Issuers’ Exposure to the FCPA
As we have previously discussed, the FCPA has broad extra-territorial reach. In this case, the SEC brought an enforcement action against KT Corp., a foreign issuer with sponsored American Depositary Receipts (ADRs), under the FCPA’s books and records and internal accounting controls provisions.
Unlike enforcement under the anti-bribery provisions, alleged books and records and internal accounting controls violations do not require proof of a corrupt payment made to influence, induce, or secure an improper advantage from a foreign official; instead, the books and records and internal accounting controls provisions only require that the company has inaccurately characterized payments or other transactions in its books and records and therefore may require a lower burden of proof. In this case, the SEC alleged that KT Corp. “booked the slush fund amounts as executive bonuses, even though the money was used for gifts and for payments to government officials,” In the Matter of KT Corp., SEC No. 3-20780 (Feb. 17, 2022) at ¶ 4, and recorded gift card expenses as “research and analysis” or “entertainment, which was inaccurate or did not fairly reflect the transactions.” Id. at ¶ 9.
Given the SEC’s description of the conduct at issue, it is interesting that the SEC chose to resolve this matter as a books and records and internal controls case. This may signal an interest in pursuing enforcement actions under these provisions in cases where a substantive bribery case might be more challenging to prove. Or, this may signal the SEC’s intent to pursue cases where the conduct is more akin to a controls failing. We of course also note that many companies might prefer a resolution based upon the accounting provisions, as opposed to the anti-bribery provisions, of the FCPA in an effort potentially to mitigate collateral consequences from the resolution. The key message for non-US issuers is that they may be subject to scrutiny by the SEC even where the conduct at issue occurs wholly outside the US and where the evidence in the case demonstrates that payments were inaccurately recorded, without more.
While this is a familiar scenario to anti-corruption and bribery (ABC) practitioners and compliance professionals, KT Corp.’s Settlement is a reminder for non-US issuers operating in high-risk jurisdictions that – in addition to substantive anti-bribery and corruptions risks -- potential control failings may create significant exposure under the FCPA.
(2) The Risks of Inflated Bonus Payments and Gift Cards
According to KT Corp.’s Settlement, from 2009 through 2017, executives at KT Corp. allegedly maintained an off-the-books fund of about $1.3 million derived from bonuses. Id. at ¶¶ 3–8. Two KT Corp. executives allegedly “approved inflated bonuses to company officers and executives, which [were] then returned . . . in cash and used to generate a slush fund.” KT Corp. allegedly used the fund for gifts and illicit political contributions to Korean government officials who had influence over the company’s business. Id. at ¶ 4. Employees also allegedly made improper payments while soliciting business from government customers in Vietnam under the same scheme. Id. 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. Id. at ¶ 4. In 2013, the Korean media reported KT Corp.’s alleged bonus scheme; KT Corp. officials allegedly “devised a new method to continue generating a slush fund” whereby KT Corp. employees allegedly purchased gift cards from a vendor and converted them to cash. KT Corp. then allegedly recorded the purchase of the gift cards, even though the funds were used for additional contributions in an alleged attempt to influence politicians. Id. at ¶¶ 5–12.
While gifts – whether in the form of cash, gift cards, or donations – have long been a focus of ABC compliance, the bonus scheme alleged by the SEC demonstrates that compensation programs may be a source of ABC risk, particularly in high-risk jurisdictions. One method to help mitigate this risk is to put in place controls relating to bonuses, which could include policies and procedures to guide how bonuses are set or evaluating whether bonuses are in line with prevailing market conditions, as well as training employees and executives involved in determining bonuses on these and other ABC policies. In addition, the Settlement serves as yet another reminder that gift cards are often a red flag, given the ease with which they may be misused.
(3) The SEC May Be Increasing Its Expectations Regarding Future Compliance
The KT Corp. Settlement notes that the company’s remedial efforts are “ongoing” and that the company “continues to remediate its process around anti-corruption 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.” Id. at ¶ 29. The Settlement sets forth a two-year reporting period, during which the company is required to conduct three reviews of its remediation and compliance program and to submit written reports to the SEC. This type of forward-looking reporting is often a feature of resolutions and settlements involving DOJ, and the SEC has signaled that it also intends to consider continued “on-going agency oversight” when resolving allegations of corporate misconduct. Although the SEC stopped short of requiring a third-party monitor, this case demonstrates that the SEC may be becoming more proactive in mandating and monitoring ongoing compliance measures.
Conclusion
The Settlement demonstrates the SEC’s continued focus on controls violations and the importance of putting in place reasonable, risk-based controls to prevent the creation of off-the-books accounts, which may be used to make improper payments. The resolution may also signal a potentially increasing interest by the SEC in imposing forward-looking reporting obligations, even for companies whose alleged misconduct has little nexus with the US. To address relevant risks, companies may consider evaluating – as part of their overall ABC compliance programs – the controls they have in place to address ABC risks relating to discretionary bonuses and other compensation arrangements, particularly in high-risk jurisdictions.
