Recently the U.S. Department of Justice (the “DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) released a guide on the U.S. Foreign Corrupt Practices Act (the “FCPA”), A Resource Guide to the U.S. Foreign Corrupt Practices Act. The U.S. government’s FCPA enforcement has been regaining attention globally as several U.S. multi-national companies were reported by the Wall Street Journal to be under investigation by the DOJ and the SEC for FCPA violations. Korean companies should also be wary of potential FCPA liabilities as the expanding scope of the FCPA’s jurisdictional reach includes not only U.S companies and their activities in the U.S. but also non-U.S. nationals or non-U.S. companies which have certain connection to the U.S. or their non-U.S. activities.
- Scope of Regulations under the FCPA
The FCPA is a U.S. federal law enacted in 1977 to prevent U.S. companies from paying bribes to foreign officials and political figures or conducting other corrupt practices in the course of international business transactions.
The FCPA contains both anti-bribery provisions which prohibit corrupt practices such as payments of bribes to foreign officials and accounting provisions which prohibit false accounting. Several companies were punished under the FCPA due to their false accounting although they have not been found liable for foreign corrupt practices.
The elements of an anti-bribery violation under the FCPA are:
- an act by (i) U.S. persons and businesses (domestic concerns), U.S. and foreign public companies listed on stock exchange in the U.S. or required to file periodic reports with the SEC (issuers) (along with their officers, directors, employees, agents and stockholders), and some foreign non-residents
- in furtherance of corrupt payment of anything of value
- to a foreign official
- in order to obtain or retain business or gain improper advantage.
It should be noted that a Korean company that lists shares on stock exchange in the U.S. through American Depository Receipts (“ADRs”) will be included in “issuers”. Besides, a U.S. parent company may be subject to the FCPA sanctions for an act by its Korean subsidiary. For that reason, in an acquisition of a Korean company or shares in a Korean company, a U.S. acquirer-company often requires the Korean target company to represent and warrant regarding the FCPA compliance, or conducts the FCPA due diligence. Purchas prices of transactions may be cut down or the transactions themselves may not be closed due to the FCPA compliance issues.
- Korean Anti-Corruption Laws and Regulations
In Korea, Act on Combating Bribery of Foreign Public Officials in International Business Transactions (the “Act”) has been enforced since it was enacted in 1998. The Act was enacted to implement OECD Anti-Bribery Convention to which Korea is a party since 1997. The enactment and enforcement of the FCPA served as a momentum to the enactment of the Act. Article 3 of the Act provides criminal sanctions for an offer, payment, promise to pay, or authorization of payment of bribery. Under Article 4 of the Act, not only the wrongdoer himself but also his employer or the representative of the relevant company shall also be subject to penalties. Unlike the FCPA, however, the Act only includes anti-bribery provisions with no accounting provisions.
- Enforcement Cases
- FCPA Cases
Korean companies have not yet been under direct investigation by the U.S. law enforcement authorities. However, a handful of U.S. issuers have been investigated by the U.S. law enforcement authorities for its Korean subsidiaries’ paying bribes to Korean officials. For example, a U.S. company was prosecuted for FCPA violations when a joint venture between the U.S. company and a Korean company offered to Korean officials bribes in cash or payment for entertainment and travel expenses in total amount of USD 200,000 in return for receiving confidential bidding information and promise for guaranteed supply of goods from 1998 to 2003. The U.S. company ended up with a settlement agreement with the SEC in the amount of USD 10 million. A British company that issued ADRs was also prosecuted for offering bribes in total amount of approximately USD 2.7 million through its subsidiaries to Indian, Korean and Thai government officials, and settled with the SEC in the amount of USD 16.4 million.
- Cases under the Act
Notable rulings have recently been issued in Korea relating to the application of the Act. In 2011, Inchoen District Prosecutors Office prosecuted under the Act a representative of a Korean logistics company for offering bribes to a Korean branch head of a Chinese government-run airline company. Although both the trial court and the appellate court in the case ruled that the evidence was insufficient to decide whether a Korean branch head of a Chinese government-run airline company would constitute a “foreign public official” under Article 2 of the Act, it has shown Korean regulators’ willingness to apply the Act to foreign bribery cases. The case is still pending on the Supreme Court of Korea.
As discussed above, Korean companies are not immune from liabilities under the FCPA, not to mention under the Act, and should be equipped with understanding of both the FCPA and the Act and prepared to address the risks involved. Yoon & Yang Newsletter will keep you alert for cases and trends of anti-corruption efforts both in Korea and overseas, offering views on anti-corruption compliance programs.
This article was first published in IFLR 2013 guide to Mergers and Acquisitions. (www.iflr.com)