6th ASIAN ROUNDTABLE ON6th ASIAN ROUNDTABLE ONCORPORATE GOVERNANCECORPORATE GOVERNANCE

Yong-Jin JungYong-Jin JungSeoul North Distric Prosecutor’s OfficeSeoul North Distric Prosecutor’s Office

KoreaKorea

Theme III, Session 2Theme III, Session 2

Relations between Regulators and ProsecutorsRelations between Regulators and Prosecutors

Seoul, KoreaSeoul, Korea

2-3 November 20042-3 November 2004

Relations between Relations between Regulators and Regulators and

Prosecutors on Corporate Prosecutors on Corporate Governance in KoreaGovernance in Korea

Relations between Relations between Regulators and Regulators and

Prosecutors on Corporate Prosecutors on Corporate Governance in KoreaGovernance in Korea

- - ContentsContents - -

ⅠⅠ.. Acts on Regulations of Corporate GovernanceActs on Regulations of Corporate Governance ⅠⅠ.. Acts on Regulations of Corporate GovernanceActs on Regulations of Corporate Governance

ⅡⅡ.. Administrative Bodies Regulating Corporate Administrative Bodies Regulating Corporate Governance and Governance and its Regulatory Actionits Regulatory Action

ⅡⅡ.. Administrative Bodies Regulating Corporate Administrative Bodies Regulating Corporate Governance and Governance and its Regulatory Actionits Regulatory Action

ⅢⅢ.. Characteristics of Korea’s Prosecution System Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies

ⅢⅢ.. Characteristics of Korea’s Prosecution System Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies

ⅣⅣ.. Real Investigative Cases Real Investigative Cases (Misappropriation Case of S group)(Misappropriation Case of S group)

ⅣⅣ.. Real Investigative Cases Real Investigative Cases (Misappropriation Case of S group)(Misappropriation Case of S group)

Regulating LawsRegulating Laws - - Part III Companies of the Commercial Act Part III Companies of the Commercial Act -- The Securities and Exchange Act The Securities and Exchange Act - The Monopoly Regulation and Fair Trade Act- The Monopoly Regulation and Fair Trade Act

Legislate the OECD Corporate Governance Legislate the OECD Corporate Governance PrinciplePrinciple - Since the economic crisis at the end of 1997, the Korean - Since the economic crisis at the end of 1997, the Korean

government has steadily pursued the amendment work on government has steadily pursued the amendment work on the the Acts mentioned aboveActs mentioned above-- Legislate most part of the OECD Corporate Governance Legislate most part of the OECD Corporate Governance

Principle Principle

Regulations on Criminal PunishmentRegulations on Criminal Punishment -- Stipulate the related regulations on the Chapter covering Stipulate the related regulations on the Chapter covering the the punishment under the Acts abovepunishment under the Acts above

ⅠⅠ.. Acts on Regulations of Corporate GovernanceActs on Regulations of Corporate Governance ⅠⅠ.. Acts on Regulations of Corporate GovernanceActs on Regulations of Corporate Governance

The Korea Fair Trade Commission (KFTC) and the Financial The Korea Fair Trade Commission (KFTC) and the Financial Supervisory Commission (FSC) and etc.Supervisory Commission (FSC) and etc.

1.1. The KFTC’s Tasks.The KFTC’s Tasks.

Tasks as competition authorityTasks as competition authority

Monitor and regulate business activities of large business Monitor and regulate business activities of large business conglomerates, as their corporate governance can trigger hconglomerates, as their corporate governance can trigger huge side effects in market competitionuge side effects in market competition

ⅡⅡ.. Administrative Bodies Regulating Corporate Administrative Bodies Regulating Corporate Governance and Governance and its Regulatory Actionits Regulatory Action

ⅡⅡ.. Administrative Bodies Regulating Corporate Administrative Bodies Regulating Corporate Governance and Governance and its Regulatory Actionits Regulatory Action

2.2. Problems of Corporate Governance in Business Problems of Corporate Governance in Business

Conglomerates Conglomerates

Characteristics of Corporate Governance of Business Characteristics of Corporate Governance of Business

ConglomeratesConglomerates

-- The structure takes the form controlling overall group The structure takes the form controlling overall group

through through shareholdings between affiliates only with 4% of shareholdings between affiliates only with 4% of

small share small share ownership by controlling shareholderownership by controlling shareholder

< Internal Share Ownership Ratio of 10 Private Business Groups (as of April 2004)>< Internal Share Ownership Ratio of 10 Private Business Groups (as of April 2004)>

※ ※ A : The same person A : The same person B : Specially related person B : Specially related person C : AffiliatesC : Affiliates

Internal Ownership Ratio Internal Ownership Ratio External Ownership Ratio External Ownership Ratio

AA BB CC

1.5%1.5% 2.5%2.5% 40.8%40.8% 55.2%55.2%

Internal ProblemsInternal Problems

-- Gap between Cash Flow Right and Voting Right Gap between Cash Flow Right and Voting Right

)ⅰ)ⅰ Serving as elements of economic concentration Serving as elements of economic concentration

)ⅱ)ⅱ Blocking effective functions of internal and external Blocking effective functions of internal and external

business monitoring mechanism: The governance business monitoring mechanism: The governance

structure structure can be the foundation for controlling shareholder to can be the foundation for controlling shareholder to

pursue pursue his personal profits rather than that of minority his personal profits rather than that of minority

shareholders shareholders

-- It will lead to undue supportive behavior It will lead to undue supportive behavior

)ⅰ)ⅰ Hamper competition in the market Hamper competition in the market

)ⅱ)ⅱ Chain-reaction bankruptcy of overall business group Chain-reaction bankruptcy of overall business group

External Problems External Problems

-- Lack of interest of minority shareholders on business Lack of interest of minority shareholders on business

monitoring monitoring

-- Ineffective external monitoring mechanism Ineffective external monitoring mechanism

3.3. What to regulate?What to regulate?

Companies under business conglomerates with Companies under business conglomerates with

more than 2 trillion won of total assetsmore than 2 trillion won of total assets

-- Prohibition of cross shareholdings Prohibition of cross shareholdings

-- Prohibition of debt guarantee Prohibition of debt guarantee

-- Obligation to disclose large-scale internal trading Obligation to disclose large-scale internal trading

* Prohibition of undue supportive behavior* Prohibition of undue supportive behavior

-- Restraint on voting rights (financial affiliates)Restraint on voting rights (financial affiliates)

Companies under business conglomerates with Companies under business conglomerates with

more than 5 trillion won of total assetsmore than 5 trillion won of total assets

-- Restraint on total amount of shareholdings in other Restraint on total amount of shareholdings in other

domestic domestic companiescompanies

)ⅰ)ⅰ Companies cannot hold shares of other domestic Companies cannot hold shares of other domestic

companies surpassing 25% of their own net assetscompanies surpassing 25% of their own net assets

)ⅱ)ⅱ Allow exceptions for equity investment necessary for Allow exceptions for equity investment necessary for

business activities business activities

- Pursue the exceptions of application for companies well - Pursue the exceptions of application for companies well

equipped with internal control system equipped with internal control system

4.4. Preventive and Corrective Measures, and Preventive and Corrective Measures, and

Criminal PunishmentCriminal Punishment

Preventive MeasuresPreventive Measures

-- Notification and reporting system Notification and reporting system

Corrective MeasuresCorrective Measures

- Investigative power- Investigative power

)ⅰ)ⅰ Rights to ask alleged violator to attend the Rights to ask alleged violator to attend the

investigation, investigation, that to request data, and questioning that to request data, and questioning

rights rights

)ⅱ)ⅱ The KFTC does not have any rights for coercive The KFTC does not have any rights for coercive

disposaldisposal

-- Commission order and non-commission order Commission order and non-commission order

) ⅰ) ⅰ Order for shares disposal, order to prohibit the exercise Order for shares disposal, order to prohibit the exercise

of of voting rightsvoting rights

-- Disposal of surcharges and administrative finesDisposal of surcharges and administrative fines

)ⅰ)ⅰ For large companies with strong capital power, For large companies with strong capital power,

imposing huge amount of surcharges might be imposing huge amount of surcharges might be

effectiveeffective

Criminal PunishmentCriminal Punishment- Most violating activities are regarded as crime- Most violating activities are regarded as crime

-- The KFTC’s complaint is the condition to institute a pubThe KFTC’s complaint is the condition to institute a pub

lic lic action against criminal activities mentioned above.action against criminal activities mentioned above.

:: Severe punishment is required for controlling Severe punishment is required for controlling

shareholders and high executives shareholders and high executives

5. Regulations taken by the FSC5. Regulations taken by the FSC

Monitoring on overall financial sectorMonitoring on overall financial sector

Securities and Futures Committee (organization Securities and Futures Committee (organization

under the FSC)under the FSC)

- Investigation into unfair trade practices in securities and - Investigation into unfair trade practices in securities and

futures marketfutures market

-- In charge of tasks related to corporate accounting In charge of tasks related to corporate accounting

standards standards and accounting supervision.and accounting supervision.

Criminal punishmentCriminal punishment

- Unfair trade practices, such as internal trading- Unfair trade practices, such as internal trading

-- Behavior making false financial statement, violating the Behavior making false financial statement, violating the

accounting standardsaccounting standards

** The complaint of the FSC is not the condition to The complaint of the FSC is not the condition to

institute a public action.institute a public action.

1.1. Characteristics of Prosecution System in Characteristics of Prosecution System in

KoreaKorea

Power to investigate crime and institute a public Power to investigate crime and institute a public

action and etc.action and etc.

- Judicial police should get prosecutor’s control in investigating - Judicial police should get prosecutor’s control in investigating

crime.crime.

Public Prosecution by State (Public Prosecutor), Public Prosecution by State (Public Prosecutor),

Discretionary IndictmentDiscretionary Indictment

ⅢⅢ.. Characteristics of Korea’s Prosecution System Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies

ⅢⅢ.. Characteristics of Korea’s Prosecution System Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies

2.2. Relationship between Prosecutor Office and Relationship between Prosecutor Office and

Administrative BodiesAdministrative Bodies

Separate national organizationSeparate national organization

-- Prosecutors do not have any control over executing Prosecutors do not have any control over executing

administrative investigationadministrative investigation

Close cooperative relationshipClose cooperative relationship

- Administrative body can file a complaint or ask for - Administrative body can file a complaint or ask for

investigation to the Prosecution Officeinvestigation to the Prosecution Office

)ⅰ)ⅰ Investigative data for administrative body is used for Investigative data for administrative body is used for

basic information for prosecutors’ investigationbasic information for prosecutors’ investigation

-- Prosecutor announces the investigation to administrative Prosecutor announces the investigation to administrative

bodybody

-- In conducting criminal and administrative investigations In conducting criminal and administrative investigations

at at the same time, they closely work together by the same time, they closely work together by

exchanging exchanging relevant in formation relevant in formation

-- Prosecutor is seconded to administrative bodiesProsecutor is seconded to administrative bodies

3.3. Team Investigation of Korea’s Prosecution Team Investigation of Korea’s Prosecution

OfficeOffice

When the case has many suspects and complicated When the case has many suspects and complicated

issues, and needs to be completed in a short period issues, and needs to be completed in a short period

of time, the investigation team is formed for each of time, the investigation team is formed for each

department in the District Public Prosecutor’s department in the District Public Prosecutor’s

Office. Office.

When concentrated and unified investigation, and When concentrated and unified investigation, and

professional investigative ability are required, the professional investigative ability are required, the

investigation team is formed in the Central investigation team is formed in the Central

Investigation Department in the Supreme Public Investigation Department in the Supreme Public

Prosecutors’ Office.Prosecutors’ Office.

Tax officials in the National Tax Office and Tax officials in the National Tax Office and

Certificate Public Accountant in the FSC can be also Certificate Public Accountant in the FSC can be also

involved in the investigation if necessaryinvolved in the investigation if necessary

Case: Joint Investigation Team on Public FundCase: Joint Investigation Team on Public Fund

- Many suspects (group owners, CEO etc) were - Many suspects (group owners, CEO etc) were

restrainedrestrained

1. Chart of Corporate Governance of S Group1. Chart of Corporate Governance of S Group

Company BCompany B

Company ACompany A

Company FCompany FCompany ECompany ECompany DCompany DCompany CCompany C

Group OwnerGroup Owner

ⅣⅣ.. Real Investigative Cases Real Investigative Cases (Misappropriation Case of S group)(Misappropriation Case of S group)

ⅣⅣ.. Real Investigative Cases Real Investigative Cases (Misappropriation Case of S group)(Misappropriation Case of S group)

49%49%

10.8%10.8%

2.2. Facts of CrimeFacts of Crime

SuspectsSuspects

- Owner of S group, CEO of Company B, Head of - Owner of S group, CEO of Company B, Head of

Restructuring Committee of the GroupRestructuring Committee of the Group

Criminal ActCriminal Act

-- Around March 2002, share swap contract was signed Around March 2002, share swap contract was signed

between between company W’s shares owned by S group’s company W’s shares owned by S group’s

owner and company A’s shares owned by company B. owner and company A’s shares owned by company B.

:: Exchange ratio - Shares in company W: shares in Exchange ratio - Shares in company W: shares in

company A = 2:1company A = 2:1

- Problems of contract above- Problems of contract above

)ⅰ)ⅰ Properly estimated share value – shares in company W: Properly estimated share value – shares in company W:

shares in company A = 1:2shares in company A = 1:2

)ⅱ)ⅱ Through such contract, S group’s owner could get Through such contract, S group’s owner could get

three quarters of profits of share value of three quarters of profits of share value of

company A company A and company B had to see that and company B had to see that

amount of loss.amount of loss.

-- Such behavior is subject to misappropriation under the Such behavior is subject to misappropriation under the

Criminal LawCriminal Law

3.3. Goal of CrimeGoal of Crime

Owner of S group’s owner is controlling shareholder Owner of S group’s owner is controlling shareholder of company Bof company B- Control company A through company B- Control company A through company B-- Company A serves as a holding company of overall group Company A serves as a holding company of overall group

Through regulation setting the ceiling on total Through regulation setting the ceiling on total amount of shareholdings in other domestic amount of shareholdings in other domestic companies, S group’s owner came to exercise companies, S group’s owner came to exercise voting rights only over 2% among 10.8% of voting rights only over 2% among 10.8% of company A’s shares owned by company B. This has company A’s shares owned by company B. This has led to the risk of losing control over the S group’s led to the risk of losing control over the S group’s owner. owner.

Therefore, in order to maintain control, S group’s Therefore, in order to maintain control, S group’s owner committed such behavior to take over more owner committed such behavior to take over more shares of company A.shares of company A.

4.4. Progress of Investigation and Cooperation with Progress of Investigation and Cooperation with

Administrative Bodies Administrative Bodies

After gaining information, the investigation team is After gaining information, the investigation team is

formed consisting of 11 prosecutors and accountants formed consisting of 11 prosecutors and accountants

working in the FSCworking in the FSC

- Through two months, the investigation team confirms the - Through two months, the investigation team confirms the

basic fact basic fact relationship. (Request for confirmation of relationship. (Request for confirmation of

document to administrative body)document to administrative body)

-- Search and seizure (Ensure planning documents for this act)Search and seizure (Ensure planning documents for this act)

-- Suspect investigationSuspect investigation

-- Restraint of Group owner and head of restructuring Restraint of Group owner and head of restructuring

committee committee

Administrative body take measures based on the Administrative body take measures based on the

investigation document done by prosecutors.investigation document done by prosecutors.

** Even though the leniency program exists under the Even though the leniency program exists under the

Administration Law, there is no regulation, like Administration Law, there is no regulation, like

arraignment or plea bargaining in the field of arraignment or plea bargaining in the field of

criminal law. In other words, there is no special criminal law. In other words, there is no special

institutional equipment to draw any statement on institutional equipment to draw any statement on

undue behavior of senior executives from undue behavior of senior executives from

subordinates. subordinates.