Introduction

In today’s business milieu, the importance of regulatory compliance is self-evident. In practice, regulatory compliance is an existential must, not a mere option at the whim of market participants, in the face of stiff sanctions that may await the rogue entity in the event of non-compliance. In the context of the Republic of Korea (“RoK”), whose economy is largely dominated by chaebols, or family-fun business conglomerates, regulatory compliance is still at its nascent phase – as the local appellate court remarked in recent criminal court proceedings involving Lee Jae-yong, head of Samsung Group.

In fact, recent United States Government (“USG”) enforcement records involving some of the most prominent chaebols reveal that regulatory compliance among them is not a proven forte. The purpose of this piece is to show that in an increasingly globalized environment of commerce and law enforcement, chaebols ought to consider regulatory compliance a top priority and behave accordingly. To this end, the piece will examine and analyze pertinent USG enforcement records involving chaebols in the areas of antitrust, trade secrets, and anti-corruption.

Chaebols united against the USG

For the past six decades, the USG has maintained an ongoing military presence on Korean soil through sizable installments including Camp Humphreys in Pyeongtaek, which is the United States’ largest overseas military base. These installments require local fuel supplies for operational purposes. From March 2005 until October 2016, SK Energy Co., Ltd., GS Caltex Corp, and Hanjin Transportation Co., Ltd. (collectively the “First Defendants”) allegedly colluded with each other to defraud the USG in relation to these military fuel supply arrangements, contrary to Section 1 of the Sherman Act, 15 U.S.C. § 1. Under this collusive scheme, the First Defendants, along with their co-conspirators, charged inflated fuel prices, thereby realizing substantial, illicit profit margins on the fuel supplied to the USG in excess of $100 million.

Against the foregoing backdrop, the Department of Justice (“DOJ”) sought criminal and civil remedies and, in November, 2018, the First Defendants agreed to pay a total of $236 million in criminal fines and civil damages. In addition, the DOJ settled in March 2019 with the second wave of chaebol defendants, including Hyundai Oil Bank Co., Ltd. and S-Oil Corporation (together “Second Defendants”), for their involvement in military fuel bid rigging. Not unlike the First Defendants, the Second Defendants pled guilty to criminal charges and agreed to pay a total of approximately $75 million in criminal fines, in addition to $52 million in civil damages.^[1]

A tale of two chaebols: SKI and LG

Recently, in the realm of unfair import involving trade secrets infringement under section 337 of the Tariff Act of 1930 (“Section 337”), SK and LG, two iconic RoK chaebols, went to loggerheads with each other before the International Trade Commission (“ITC”). In this case, LG Chem, Ltd., one of the largest chemical companies in the world, filed a complaint on April 29, 2019 against SK Innovation Co., Ltd. (“SKI”), a leading oil and chemical company, alleging that SKI had misappropriated LG’s trade secrets while importing and selling certain lithium ion batteries, among others.

On February 14, 2020, the presiding judge (“ALJ”) Cameron R. Elliot issued an initial determination (“ID”) finding SKI in default in light of the “breadth of SKI’s intentional spoliation.” In this regard, the ALJ noted that the day after the filing of LG’s complaint, an SKI employee circulated an email instructing recipients to “[d]elete every material related to the rival company from every single individual’s PC, mail storage archives and team rooms…” On February 10, 2021, the ITC issued a notice of its final determination affirming the ID and finding a violation of section 337 in favor of LG.

Most dreaded anti-corruption legislation

Lastly, in the realm of the Foreign Corrupt Practices Act (“FCPA”), in November, 2019, Samsung Heavy Industries Company Ltd (“SHI”), a shipbuilding entity, entered into a deferred prosecution agreement with the DOJ and agreed to pay more than $75 million in global penalties. According to SHI’s admissions, from 2007 to 2013, the RoK company conspired to violate the FCPA by making $20 million in corrupt commission payments to a Brazilian intermediary with the knowledge that certain of those payments would be paid out as bribes to officials at a Brazilian state-owned and controlled oil and energy entity.

Analysis and implications

When it comes to regulatory compliance vis-à-vis the USG, it is becoming imperative for chaebols to understand that what they do – or fail to do – in the RoK may incur regulatory scrutiny in foreign jurisdictions, including the United States. In this regard, extraterritorial application of United States laws and regulations is something to which they should pay close attention. For instance, in the cases against Korean companies for defrauding the USG in relation to military fuel supply arrangements in RoK,, the U.S. courts assumed jurisdiction over both the First and Second Defendants based on the underlying contracts they had entered into with the USG, which were in all material aspects governed by U.S. laws and regulations. This was the case even though the illegal actions taken by the defendants, arranging and supplying fuel to the USG under these contracts, had all taken place on Korean soil.

As a related point, while whistleblowing is generally considered a lethal act of betrayal in the RoK, a legitimate act of whistleblowing may trigger regulatory scrutiny and ultimately lead to civil and criminal suits and prosecutions, as evidenced by the USG settlements with the First and Second Defendants. In these cases, the USG’s civil investigation resulted from a whistleblower lawsuit filed under the qui tam provisions of the False Claims Act, under which anyone with evidence of fraud against federal programs or contracts is granted standing to sue the wrongdoer on behalf of the USG and to share in the resulting recovery.

Further, as exemplified by the LG-SK ITC dispute, a cause of action between multiple RoK entities that stems from alleged wrongdoings in the RoK may wind up being hauled before the United States judiciary. A party to such a dispute may make a deliberate, tactical decision to sue their counterparty in the United States, taking advantage of the procedural and evidentiary advantages afforded under U.S. laws (including e-discovery). For instance, under the Federal Rules of Civil Procedure, when faced with a reasonable prospect of litigation, parties to a civil suit are obligated to preserve electronically stored information (“ESI”) that may be needed or used in the course of proceedings, and to not destroy or tamper with any such records. If a party should fail to duly perform its duty byintentionally or unintentionally deleting, modifying, changing, disposing of or otherwise destroying any ESI, commensurate sanctions may be imposed including a default judgment against the infringing party.

All in all, faced with a steady rise in cross-border investigations including in the domains of antitrust and anti-corruption, it would be in chaebols’ best interests to carefully navigate through the requirements of regulatory compliance not only in the RoK, but also in overseas jurisdictions including the United States, before mapping out and implementing business action plans with multi-jurisdictional implications. Going forward, it is believed that the USG will continue to play the much-needed role of regulatory gadfly.

^[1] In this regard, acts of price collusion and bid rigging between Chaebols in the context of government contracts is an ongoing phenomenon. For instance, following almost three years of an in-depth investigation, the KFTC issued a decision on February 5, 2012 penalizing four domestic defense contractors including Samsung Thales and LIG Nex 1, for perpetrating bid-rigging in connection with the KSS-III submarine development project. After a lengthy process of judicial review, the Korean Supreme Court affirmed the KFTC findings.

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Joe Cho is a dual qualified lawyer (qualified in New York, U.S. and in England and Wales) and writer based in Seoul, Korea. He is currently working with a chaebol entity as in-house counsel. This piece is in the loving memory of the author’s late father who was a devout fan of Fred Couples, the winner of the Masters Tournament in 1992. All views and opinions expressed in this piece are solely those of the author and do not necessarily reflect the official policy or position of any client or employing entity.