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Lessons Learned from the KT Corp. SEC FCPA Settlement (Part III of III)

Even though the size of the KT Corp. SEC enforcement action is relatively small, the underlying misconduct provides a number of important lessons learned. Let’s look at some of the most significant lessons learned:

C-Suite Misconduct: KT’s slush fund was executed by a High-Level executive at KT Corp. and was funded through inflated bonus payments made to executives.  Each executive returned the over-payment to the high-level executive, who then maintained a cash slush fund. The High-Level executive appears not to have been subjected to any financial controls or audits.  As a result, a High-Level executive was able to engage in financial misconduct without fear of being caught.

C-Suite misconduct often is a relatively low risk but if it occurs the consequences can be significant. Risk assessments often exclude the C-Suite from review. At a minimum, the entire C-Suite has to be subject to internal accounting controls and compliance policies and procedures.

Failure to Remediate: The KT Corp. scandal resulted in domestic controversy in South Korea. KT Corp. made no effort to remediate the problem, adopt enhanced controls or implement an anti-corruption compliance policy.  KT Corp.’s failure reflects a basic governance omission – the KT Corp. board, compliance, internal audit and other important constituencies apparently were unable to bring about change or even address the root causes of the scandal and implement remedial steps.

Vendor Risks & Transaction Monitoring: KT Corp. resumed its slush fund operations, notwithstanding the criminal scandal surrounding the slush fund. As part of the new scheme, KT Corp. used gift cards and employed an outside vendor to help cash the cards and return the cash to the executives. The vendor was not subjected to due diligence and KT Corp failed to employ basic transaction monitoring to catch the gift card scheme.  

Political Contributions: KT Corp. made a number of illegal and improper contributions to South Korean members of the National Assembly.  The payments were not subjected to any controls nor compliance review.  The misconduct underscores yet again the danger of political contributions and the need for strict scrutiny.

Third-Party Due Diligence: The KT Corp. enforcement action is replete with failures to conduct due diligence – a vendor, a local agent in Vietnam, a consortium (joint venture) in Vietnam. 

In the Vietnam local agent case, a significant red flag occurred at the outset of the relationship.  The government official responsible for the contract referred the local agent to KT Corp.  The purpose of the referral was clear – the local agent would be used as a conduit to pay bribes.  This red flag should have stopped KT Corp. from engaging the third-party.  A government official referral and requirement is the proverbial “kiss of death” for a third-party.

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