2016 - The Year of Unanticipated Risks and Unintended Consequences

As the winds of 2016 wind down, companies in Korea need to take a step back and reflect on the major events that have shaped 2016 and will shape the years to come.

Originally published in the February issue of Value Chain.

The major events such as (i) Samsung Galaxy Note 7, (ii) Park Geun-hye impeachment, (iii) Brexit, (iv) KFTC‘s aggressive behavior, (v) Donald Trump, (vi) the implementation of the Kim Young Ran Act, and (vii) Volkswagen, will have a major impact on Korean business and society as a whole for many years. For the most part, these events could not have been anticipated or accurately forecasted a year ago. They were either unanticipated or were the result of unintended consequences. All of the events listed above will impact companies doing business in one form or another and in-house counsel and corporate risk managers must be on guard for potential risks caused by these unlikely events.

Samsung Galaxy Note 7

The Samsung Galaxy Note 7 debacle has for the most part, far reaching economic consequences for Korean industry. Samsung Electronics, the largest company in Korea, which depends a great deal on sales of its high end cell phones, suffered a massive PR nightmare as its new cell phone - the Galaxy Note 7 was found to have serious battery issues resulting in personal as well as property damage due to explosions and fire. Not only did the CPSC in the US ban the sale of the Galaxy Note 7 but major airlines refused to allow Galaxy 7s on board. Samsung originally thought it was due to a defective battery but after the battery was replaced by other batteries the fires still continued. This points to a problem that perhaps is not related to defective batteries but perhaps to a faulty design. However, nothing is conclusive with regards to the root cause.

The major question that confronts Samsung as well as Korean industry is why was a defective design not found but allowed to proceed during the design and testing phase? Why wasn’t the design flaw discovered? It appears that in order to gain market share, Samsung management may not have closely monitored the design process but in its rush to beat Apple, it may have rushed the development and manufacture of the product. If so, this points to a major Chaebol problem - hubris or arrogance. Hubris from Korea’s largest chaebol is something that was not probably intended. But after decades of government support, Korea’s chaebols are definitely viewing themselves as somewhat protected and perhaps shielded from society.

Park Geun-hye

The meltdown of Park Geunhye’s administration and resulting impeachment could not have been foreseen by most people. Korea’s President, Park Geun–Hye - though rather unpopular, looked like she had smooth sailing until the end of her term in 2017. Then the scandal broke when it was revealed Choi Soon-sil, the daughter of the founder of an obscure sect called the Church of Life, and friend of Park, had manipulated or controlled Park for monetary gain. In fact, Choi allegedly used her relationship with Park to coerce the Chaebols to donate upwards of $70 Million USD to two nonprofit foundations run by Choi. How did this scandal really evolve? Why did Choi become so powerful?

Korea has a history of producing cults and sects - take Mooneyism for example. After Park’s father was assassinated, it was Choi’s father that helped Park Geun-hye. Corruption has been commonplace in Korean politics for many years-this is another example. Though people thought Park would be an effective president when she was elected, her past should have been an indication. The generation she is from is known for such corruption.

Volkswagen

The Volkswagen (VW) scandal has certainly affected the automotive industry in Korea. The importation of German cars into Korea, which once was a flood, has now turned into a trickle. Korea has fined VW Korea and its affiliate Audi Korea 37.3 Billion Won or approx. USD $32.7 Million for fabricating emissions results. Five current or former VW execs are now being investigated by the Prosecutor’s Office for crimes. What happened?

Upon investigation by the KFTC it was found that VW had advertised it met pollution standards during qualification tests. It was found however, that VW had manipulated the rest results by manipulating the vehicle’s emission reduction system. It is unknown whether the VW executives knew about the manipulation - however the result was catastrophic for VW around the world.

Kim Young Ran

The Kim Young Ran Act is Korea’s latest attempt at anti-bribery legislation. The Kim Young Ran Act (the Act on the Prevention of Improper Solicitation and Receipt of Money and Goods) recently went into effect, and promises to not only penalize various acts of public corruption but also extends the reach of the anti-bribery laws into certain areas of the private sector. In strengthening various provisions of Korea’s current anti-bribery and corruption laws and regulations, the Kim Young Ran Act (the Act) focused on 4 areas: (I) the expansion of the acts that may be punished; (2) the expansion of the definition of “public official”; (3) the prohibition of improper solicitation without the payment of money; and (4) the introduction of liability provisions to ensure corporate accountability. Now, domestic companies must also be concerned not only about potential FCPA issues but violations of the Act and the risk of reputational damage.

The problem is the unintended consequence - basically changing Korean society on how it does business. The offering of gifts will be greatly affected, causing not only domestic industries such as restaurants and gift or promotion related companies to greatly suffer, but also the extensive use of personal relationships will also be diminished and that will have its own consequences.

Brexit and Donald Trump

Korea has been caught off guard by Brexit as well as the election of Donald Trump. As an export driven economy, Korea exports many products, goods and services to the US as well as the EU (and UK too) and greatly depends on the stability of its relationships with the US and EU. In fact it has major trade agreements with the US and EU. However, after Brexit and the election of Donald Trump, who has indicated he is not in favor of free trade agreements as they stand, Korea now faces potential trade issues that it did not think would exist by the end of 2016. Trade issues because of Brexit as well as President Trump revisiting the KORUS FTA was definitely unanticipated by the Korean Government, and is now something that Korean industry will have to deal with.

The KFTC

In 2016, the KFTC proved to be quite aggressive. Not only has it increased its cartel enforcement but it also is getting ready to implement the new Fair Distributor Transactions Act (FDTA) which will have major consequences regarding the enforcement of distribution agreements in Korea between small distributors and large or multinational suppliers and manufacturers. The FDTA, upon review can be seen as very harsh as it applies to suppliers or manufacturers that are in violation under the FDTA. Among the penalties that can be levied by the KFTC are (i) Damages - the FDTA provides that any person incurring loss or damage due to forced purchases or economic disadvantage may recover treble damages; (ii) Administrative Penaltythe FDTA provides that depending on the specific violation, administrative penalties up to the amount of 80% of the transaction amount in question may be levied; and (iii) Criminal Sanctions - though the supplier’s conduct may be ambiguous , the KFTC may still refer the matter to the Prosecutor’s Office. Under the FDTA, individuals may receive prison sentences of up to 2 yrs. and pay a fine of 150 Million KRW. Companies are also subject to criminal penalties.

As with most legislation or administrative guidelines enforced by the KFTC, there is room for abuse or misinterpretation. The potential impact of the FDTA cannot be underestimated as it is not only very onerous, it will have a major impact on the Korean economy as many multinationals decide not to pursue distribution agreements in Korea, thereby negatively effecting the distribution channels in Korea. I expect many multinational companies as well as Chaebols will review their distribution agreements in light of the FDTA.

Conclusion

For in house counsel or risk managers in Korea or in companies doing business in Korea, this year is definitely one of unanticipated or unintended consequences. Black swan events seem more likely than not. It is therefore advisable for everyone to take a good look at their company’s current compliance program and risk management processes as what was once thought impossible is now possible or what was once thought probable may be now improbable. I suggest that everyone start thinking about managing risk considering the above mentioned events. What steps can be taken in 2017 to improve risk identification or risk mitigation when considering the election of Donald Trump or the Park Geun-hye matter? What about the Samsung Galaxy Note 7 catastrophe? In essence, how can you improve your risk management processes in 2017? How can you do a better job? Maybe the questions you should ask would include:

“What are the major risks in my department that could or would generate legal liability in 2017 or have a negative impact on my company’s brand?” And of course - “How can I manage the risks? “

Once you answer the question above, think about how these risks are identified? Maybe you can increase risk identification through the use of risk assessment tools such as employee interviews, focus groups, industry literature, surveys, document reviews, etc. It is important to understand that the key however is to ask the right questions. A risk that will or might negatively impact a company’s brand is a risk that must be minimized or controlled. But the risks don’t always become evident unless the right questions are asked and the right risk management tools are used.

Managing risk is an ongoing and evolving process. An organization is never completely protected from risk and new risks are always surfacing. It is the risk manager’s job to manage the process and to help identify the risks a company faces. It is the in-house counsel’s job to manage legal risks that the company faces. Managing risk may involve asking tough questions. It always involves an on-going process that must be implemented wisely. And for those companies doing business in Korea, managing risk has just become more complicated as we look back upon 2016 as the year of unintended consequences.

 

Bryan Hopkins


Bryan Hopkins is a Special Counsel to Lee & Ko in Seoul, Korea. Formal law professor at Sejong University and former General Counsel at Samsung Electronics America. He has extensive experience in management of complex commercial litigation, compliance, eDiscovery and risk management.

 

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