Since 2011, South Korea has been debating its new anti-corruption law, now set to take effect on Sept. 28 this year. Since it was promulgated by President Park Geun-hye in March, the law – officially called the Improper Solicitation and Graft Act – has already provoked a backlash and stirred a great deal of controversy, leaving those in sectors where gift-giving is customary particularly worried.

The act is also dubbed the Kim Young-ran Law, named after the former head of the Anti-Corruption & Civil Rights Commission (ACRC) who led the preparation of the original bill. It was passed partly as a response to the unrest caused by the conviction of former prime minister Lee Wan-koo, who accepted 30 million Korean won (around $27,000) in illegal campaign funds during a parliamentary election in 2013, as well as in reaction to a 2015 ACRC survey revealing that 59.2 percent of South Koreans believed the country to be corrupt.

The Kim Young-ran Law “imposes fines on those individuals who make improper solicitation to public officials, executive and staff members of public service-related organisations, journalists and officials of private education institutions, as well as public officials who do not report such requests,” according to a spokesperson for newly formed compliance team at Bae Kim & Lee (BKL) that was set up to help companies navigate the law.

The act also notes that parties will face criminal penalties if they receive gifts in money or in kind that exceed 1 million won per incident or a total of 3 million won within a year, regardless of whether it is in exchange for favours or related to their work. Similar laws can be found in the U.S. and Germany. 

Ho Seung Yang, managing partner of Yoon & Yang, says that the act is different from the anti-bribery provisions under the current Korean Criminal Code (KCC). “The Kim Young-ran law prescribes the joint penal provision that punishes not only employees who actually violate the act, but also imposes fines on the corporations, unless such corporations have not been negligent in exercising due care and supervision over the relevant duties of the employees to prevent such violation,” he notes. “The law also differs from any predecessor as it implements a principle of ‘dual punishment’, enabling authorities to penalise both the giver and receiver of bribes.”

Yang adds that given this joint penal provision, a statutory sanction imposed against a corporation under the Kim Young-ran Law would generally be accompanied by significant damages to its corporate reputation, in addition to the actual penalties under the law. “Corporations subject to the Foreign Corrupt Practices Act (FCPA) in the United States or any other foreign anti-corruption regulations may face possible enforcement actions under the FCPA or other foreign anti-corruption regulations that may result in significant managerial risks involving a large amount of monetary fines, disgorgement of profits and/or other penalties,” he says.

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TOOTH AND NAIL

The path from bill to law has been far from smooth. In March last year, once the bill was passed by parliament, the Korean Bar Association, along with private school employees and private kindergarten directors, filed constitutional appeals last year, according to the Korea Times. 

BKL’s spokesperson says that a key criticism of the Kim Young-ran Law was that it imposes excessive regulation, as it is now applicable to a larger group of people. Additionally, the scope of illegal activities has been expanded to punish both unlawful solicitations without the acceptance of a bribe and acceptance of a bribe with no strings attached. “There are growing concerns over the law’s economic impact on the restaurant business and other relevant industries,” the firm notes. 

The law has been interpreted by many as something that will potentially detract from sectors such as farming and entertainment, harming those that make an honest living instead of those that abuse the more relaxed KCC to get away with corruption. “The anti-graft law may impact sectors that actively engage in government relations or have relatively high entertainment expenses, such as construction, healthcare, finance and national defence. There is a high chance that some of the government relations work that used to be considered as customary business practices will now be classified as ‘unlawful acts’,” the BKL spokesperson says.

However, Jarrod Baker, a senior managing director at FTI Consulting, observes that from the point of view of those who provide the gifts and entertainment, the backlash is not justified. “The law [is] aimed at creating a level playing field and nullifies the effect of excessive gifts and entertainment being used as a conduit to bribe,” says Baker. “However, it will be crucial for the law to be actively enforced so that companies that take compliance seriously are not at a competitive disadvantage to those that do not.”

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FALL IN LINE

To prepare for the Kim Young-ran Law, corporations need to establish and revamp internal guidelines as well as reinforce preventative, detective and corrective control relating to personal provision of money or things of value by employees, according to guidlines issued by Yoon & Yang. They should also create and adopt a separate firm-wide process or system through which they can monitor provision of money or things of value and conduct continuous education sessions for employees. In particular, they should heed Article 24 of the law, which states that “businesses should be exempt from fines or penalties if considerable caution and supervision was exercised to prevent violations.”

In Baker’s view, the biggest concern for a compliance department will be changing the cultural norms and getting employees to understand that it is against the law to conduct business in such a way. “What will help with getting the message across is active enforcement of the law so that no company or individual feels they can easily get away with ignoring it,” he says. “However, the wider concern in the business community does not appear to be complying with the law. [Instead, it’s] the negative impact it will have on decreasing business for those providing goods and services that are used as gifts [or for] entertainment.”

That said, “an ounce of prevention is worth a pound of cure,” notes Baker. “Should the unthinkable happen and the company finds itself subject to regulatory scrutiny, it must take appropriate action to put itself in a defendable position. This means having a crisis response plan that includes conducting a thorough investigation to determine the scope of any improper transactions and associated misconduct, and undertaking appropriate remedial actions.”

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WAIT AND WATCH

The coming implementation of the law has already inspired specialised divisions within law firms, with BKL creating the aforementioned targeted compliance team. Yoon & Yang is also launching a task force.

Overall, the new law will undoubtedly cause concern initially, but compliance shouldn’t be an issue, provided that companies exercise caution and educate employees about it. Time will tell how detrimental the new provisions are to sectors that contribute to corruption. Still, there are parts of the law that will remain subjective until tested. As the BKL spokesperson puts it, “It is still not clear in which cases public officials and etc. will be punished for ‘relevance to work’ and in which cases businesses can be exempted from ‘dual punishment’. For the time being, it is difficult to determine whether certain common gift-giving and entertainment situations would constitute a violation or not. Because circumstances vary from case to case, a considerable number of judgments on various cases need to be rendered to set a clear legal standard.”

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