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.