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Thursday
Aug112016

Compliance Alert: Gift-giving, rebates and kickbacks in South Korea

It is customary to send gifts and make cash donations in the regular course of business in South Korea. Exchanging gifts is a deeply rooted custom in Korean society, and this practice has historically been the source of various compliance issues for multinational companies operating in South Korea.

In our e-book on navigating anti-corruption compliance in emerging markets, we include a chapter about South Korea's gift-giving practices, and the issue of kickbacks. Here's part of that discussion.

A particular concern relates to the Korean term “ttokkap,” which translates to “rice-cake expenses” in English. Historically, these were gifts of money offered to cover the expense of buying rice-cakes, a precious delicacy in the past. “Ttokkap” was largely offered for the sake of hospitality or as a token of gratitude.

Today, the practice of giving gifts or payments such as “ttokkap” has become customary and ingrained into Korean society. These gifts are considered symbolic, and essential to maintaining business relationships.

During specific occasions such as weddings or funerals, it is customary to provide family members, friends, colleagues, and business partners and their families with small gifts of cash. During major holidays, mainly Seolnal (Lunar New Year) and Chuseok (Korean Thanksgiving), it is customary to provide business partners, colleagues, and clients with gifts that can include gift cards, fruit, wine, tea sets, or rare or exotic foods.

Over the years, “ttokkap” payments have often times degenerated into a means to improperly obtain favors from public officials.

From a legal perspective, the challenging question in Korea is whether, and under what circumstances, the payment of “ttokkap” might be considered an illegal bribe. This ambiguity has been addressed by the Code of Conduct and the “social courtesy” exception, as established by the Supreme Court.

The Code of Conduct, a guideline for administrative and disciplinary proceedings against public officials, provides specific exceptions to the prohibition against receiving any cash, gifts, or entertainment from anyone who has an interest in the performance of the public official’s duties.

Public officials may accept benefits in the form of meals, transportation, and telecommunication services valued at up to KRW 30,000 per person (approximately $26). They may also accept cash or gifts of value for commemorative occasions, such as weddings and funerals, no more than KRW 50,000 per event (approximately $44).

It is important to note that these exceptions do not provide an automatic “safe harbor” against a bribery charge, but rather allow a possible affirmative defense against prosecution.

The “social courtesy” exception is a court-established doctrine acknowledging that certain payments and gifts made to officials are customary in Korean culture. In determining whether a gift constitutes a bribe, the Supreme Court has focused on whether the benefit was given “in connection with” the public official’s duties. Thus, the Court looks at several factors, including, but not limited to:

  • the scope and nature of the recipient’s duties
  • the relevance of the recipient’s duties to the giver
  • the purpose of the benefit
  • whether there is a pre-existing personal relationship between the recipient and the giver
  • the circumstances of the benefits conferred, including the frequency, timing, and amount or value of the gift or benefit, and
  • whether the benefits caused the recipient to carry out his official duties in a way that would lead the general public to question the propriety of his actions.

The social courtesy exception has been invoked in previous instances involving fees associated with meals, drinks and entertainment, and gifts and contributions made in connection with a marriage or funeral.

For example, in a 1979 case, the Supreme Court held that the social courtesy exception did not apply to the defendant because sufficient evidence existed to find that the payment was part of a request for a favor stemming from the duties of a public official from the Ministry of Culture.

The Court emphasized that the two payments given to the official were significantly large because they were more than double the public official’s base salary.Thus, the payments exceeded socially acceptable levels and constituted bribery.

In 1984, in perhaps the leading case on the social courtesy exception, the Supreme Court found a public official of the Ministry of Labor guilty of bribery for, among other things, being treated to a KRW 70,000
(approximately $61) dinner by a company director.

The Court held that sufficient consideration existed because the director requested a favor in connection with the official’s duties. Although the monetary sum involved was meager, this fact alone would not allow the payment to qualify as entertainment falling under the scope of the social courtesy exception.

The Court emphasized that the meal was clearly related to the duties of the official and that, in addition to the meal, the official had received two monetary payments, one before and one after the date of the dinner. Thus, despite the small sum, the Court held that the value of the dinner constituted bribery because specific requests were made and additional monetary payments were exchanged.

Another and more recently identified compliance risk in South Korea concerns kickbacks, or “rebates” in the pharmaceutical industry. As is the case in other countries, kickbacks, although prohibited in South Korea, are becoming a common form of bribery. This concern is increasing as more pharmaceutical companies engage with doctors in South Korea.

Earlier this year, the Seoul Western District Prosecutors’ Office raided Novartis Korea and confiscated the company’s documents and checkbooks on allegations that it had handed out money and other kickbacks, also known to industry leaders as “rebates,” to local doctors. The offering by pharmaceutical companies of kickbacks or other payments to physicians for prescribing the drugs they manufacture has been a long running illegal practice in the pharmaceutical industry that results in hiked up patient costs.

Furthermore, in June 2016, the Seoul Central District Prosecutors’ Office sent some 200 investigators and raided the offices of Lotte Group, the fifth largest Korean conglomerate, and seven affiliates over, inter alia, allegations that senior executives received kickbacks in return for providing shelf space for a local cosmetics company in its duty-free shops. In connection with this investigation, Shin Young-ja, the daughter of Lotte’s founder, was arrested in July.

These recent anti-kickback cases -- especially given its scope and target -- demonstrate how the Korean government’s appetite for enforcing its anti-corruption laws is intensifying

*      *      *

In the next post, we'll look at recent enforcement actions in South Korea and how to improve compliance there to reduce risks.

*     *     *

Our e-book, Anti-Corruption Compliance in Emerging Markets: A Resource Guide, is available here.

_____

Soo-Mi Rhee is senior counsel in Arnold & Porter’s Washington, DC office. She focuses her practice on economic sanctions laws, export control laws, antibribery laws, antiboycott laws, customs laws, and other foreign policy, national security, and economic policy-based trade and investment controls.

Keith Korenchuk is a partner in Arnold & Porter’s Washington, DC office. He counsels and advises global companies on regulatory and compliance matters worldwide, with a focus on compliance program effectiveness, compliance program implementation, operations and evaluation, and related regulatory counseling and advice.

Samuel Witten is counsel in Arnold & Porter’s Washington, DC office. He helps companies develop and implement FCPA compliance programs. He also represents clients in arbitrations at the International Center for Settlement of Investment Disputes. He joined Arnold & Porter in 2010 after serving for 22 years in legal and policy positions at the U.S. Department of State.

Reader Comments (1)

Thanks for a very useful analysis. A "social courtesy" gift is an issue in many Asian countries, and it was very helpful to see how Korean law and Korean courts have addressed it.

However, the answer they have hit upon sounds off the mark. Your post suggest that social courtsey gifts given to Korean public officials are part of the established tradition of lubricating business relationships with small gifts and that while the courts have come to accept the practice, they will find a gift to be a bribe if it was given "in connection with" an official's duty. That is a poor test as in every case the gift was given because of the recipient's position. If I am trying to sell my new, improved widget to the Ministry of Widgets, the only reason I am wining and dining Widget Ministry officials and sending them holiday gifts is because of their position. So strict application of the "in connection with" test would ban any gift no matter how small to a government official I am trying to inflluence -- presumably even if I were from an NGO trying to save the world from some peril.

On the other hand, your description of the 1984 case sounds suspicioulsy like how American federal courts have cabined the language in 18 USC 201(b), the primary federal antibribery statute. That law bans providing anything "of value" to a public official "with intent to influence any official act. . . ." American lobbyists buy public officials meals, send them bottles of liquor at Christmas, and most importantly contribute to their campaigns for office for exactly one reason: to influence them. To avoid equating a campaign contribution or the purchase of a coffee or (cheap) bottle of liquor with a bribe, U.S. courts led by Justice Kennedy (a former state lobbyist), require that the gift or campaign contibution be the "quid" side of a "quid pro quo."

In the 1984 case the Korean Supreme Court found that picking up the check at dinner was a bribe because the donor "requested a favor." If that were the test for distinguishing a social courtesy gift from a bribe, I would say the court has left the distinction between the two too fuzzy. That the court cited evidence of additional payments before and after the challenged $61 dinner makes me think that, at least implicitly, the court found the dinner one part of the "quid" element of a "quid pro quo."

Interestingly, the roots of 18 USC 201(b) are the banning of what one might term social courtesy gift to judges in Medieval England. That history, and how it has affected the tortious path the federal courts have followed in reading the quid pro quo requirement into section 201(b) are reviewed and analyzed in Professor Albert Alschuler's April 27, 2016, post on the Global Anticorruption Blog.

But again, thanks very much for the enlightening discussion of social courtesy gifts in Korea.
August 11, 2016 | Unregistered CommenterRichard Messick

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