In her address to the National Assembly on October 29, 2014, President Park Geun-hye expressed her strong intention to eradicate corruption in the defense industry. Her affirmation is expected to be followed by a government-wide implementation of measures to crack down on, and to prevent recurrence of, corrupt practices in the defense industry. As a first step in such efforts, a joint investigation team of prosecutors, military officers and government officials was launched on November 21, 2014 to probe corrupt deals in the defense industry.

  1. Background

President Park Geun-hye affirmed her commitment to combat corruption in the defense industry against the backdrop of a series of defense procurement scandals including one surrounding the procurement of the military rescue vessel Tongyeong. A recent investigation has revealed that corruption was involved in the procurement of the military rescue vessel Tongyeong that was intended, but failed to be dispatched for the rescue operation after the disastrous sinking of the ferry Sewol on April 16, 2014.

  1. Current System for Securing Transparency and Fairness in the Defense Industry
    1. Overview of the System

The Defense Acquisition Program Administration (the “DAPA”) has implemented measures to promote transparency and fairness in the defense industry. Such measures include (i) the integrity pledge requirement for defense contractors or other participants in the defense industry; (ii) ombudsman system; (iii) cancellation of designation as a defense contractor, restriction on bidding participation, or termination of an existing contract, where a pledge of integrity is violated; and (iv) restitution of unjust enrichment derived from submitting fraudulent cost information.

  1. Sanctions against Corruption under the Defense Acquisition Program Act

The Defense Acquisition Program Act (the “DAP Act”) provides that defense contractors or other participants in the defense industry may be restricted in their participation in bidding for up to one year, and a related contract may be terminated, if they violate a pledge of integrity by offering, or promising to offer, gifts or entertainment expenditures to a government official for a favorable decision, bid, conclusion or performance of a contract (Article 59 of the DAP Act and Article 70 of the Enforcement Decree of the DAP Act).

In addition, a company may lose designation as a defense contractor if its officer violates a pledge of integrity (Article 48(1) of the DAP Act). If defense contractors or other participants in the defense industry have derived unjust enrichment from submitting fraudulent cost information, such unjust enrichment may be restituted along with additional levies equivalent to the amount of the unjust enrichment (Article 58 of the DAP Act).

Furthermore, in case a U.S. company (including its subsidiary in Korea) engages in corrupt practices such as offering bribes to a foreign government official in international transactions including defense-related ones, the company would be subject to sanctions under the U.S. Foreign Corrupt Practices Act.

  1. Joint Investigation Team

As a first move to expand the probe under the current system, the government launched a joint investigation team on November 21, 2014. Led by Kim Gi-dong, head of the Goyang District Prosecutors Office, the joint investigation team consists of 105 prosecutors and veteran investigators from the military, police, National Tax Service, Financial Supervisory Service, Customs Service, and Deposit Insurance Corporation, divided into 4 sub-teams. The joint investigation team will probe (i) leaks of military secrets including plans for weapons systems; (ii) bribery schemes linked to the test and evaluation process; (iii) fabrication of testing results; (iv) network of corruption between private and public spheres involving retired  soldiers; (v) defense contractors’ submission of insufficient cost data; and (vi) defective supplies and bribery.

  1. Expected Follow-up Measures

In line with the joint investigation team’s probing into procurement corruptions and irregularities, government-wide robust measures are expected to be implemented to reform the defense industry. Extensive sanctions will be imposed against those involved in corrupt practices in the defense industry. It is also anticipated that the DAPA will speed up its pace to increase the ratio of civilian to military personnel and to coordinate or reorganize its structure to strengthen expertise.

Meanwhile, the passage of the currently pending “Bill of the Act on Cost Management for the Fairness of Defense Industry Contract” is expected to be accelerated to secure transparency, fairness and expertise as to cost evaluation. As President Park Geun-hye’s affirmation of her commitment to combat corruption in the defense industry is expected to be followed by the implementation of heightened sanctions and improved measures to address corruption, coupled with extensive audits of procurement programs, defense related companies would need to review their current anti-corruption and compliance programs and gear up for the expected changes in the industry.