South Korea - Fri February 10, 2017

Anti-graft law to change South Korea

As is all too often the case, it took a national tragedy to induce much-needed change.

On April 16 2014, a South Korean ferry, the MV Sewol, capsized en route from Incheon to Jeju. On board that morning were 467 passengers and crew, mostly secondary-school students from the capital, Seoul. Just 172 survived, including the school’s vice principal, who later took her own life.

Horror quickly turned to grief – and then anger. The ferry was dilapidated and manned by an inexperienced crew. It had also been massively overloaded.

But these were causes not symptoms. The real culprit was hiding in plain sight: the willingness of regulators to overlook the shortcomings of the Sewol’s owners, the local firm Chonghaejin Marine.

Corruption is rife at all levels of Korean society. In July, a senior prosecutor was charged with bribery after allegedly receiving more than 950 million won (Dh3.13 million) in cash and shares from a gambling boss. The same month, the 73-year-old heiress of the chemicals-to-confectionery conglomerate, or chaebol, Lotte was arrested and accused of malpractice and embezzlement.

South Korea was ranked 37th out of 177 countries in Transparency International’s 2015 league table of perception of corruption, one rung above Cape Verde and the Seychelles. (The UAE ranked 23rd, up from 28th place in 2010, with the top-10 dominated by Scandinavian and anglophone nations).

Many feared that corruption in Korea had calcified, making it all but impossible to tackle, let alone eliminate.

But the Sewol changed all that. Within weeks of the tragedy, a public outcry had forced government to bow to the need for binding legislation that tackled venality at source. The net result is an anti-graft bill set to take effect on September 28.

From that day, any state official – legislator, civil servant, regulator – who is treated to a meal worth more than 30,000 won, or who receives gifts worth more than 50,000 won, can be jailed for up to three years, and fined a maximum of 30m won. The same penalties will be levied on those who offer or receive blatant bribes, or are perceived, through subtler means, to have done so.

So how will the new legislation affect South Korean firms operating in the Arabian Gulf?

Perhaps less than they may fear. Gift giving, notes Peter Pender-Cudlip, the Dubai-based co-owner of the international business intelligence firm GPW, “isn’t a major factor in the UAE”.

“Relationship building is the key to success. It’s not about spending, but spending time with people, and building up a mutual level of trust and respect.

“That might take time, but it doesn’t necessarily require you to spend much money,” he says.

However, in addition to the new law, Seoul has also adopted the Foreign Bribery Prevention in International Business Transactions Act (FBPA).

Attorneys from the international law firm Arnold & Porter say both Korean and foreign nationals can be liable for violating the law. Individuals could face up to five years in prison or a fine of up to 20m won. If the amount gained through bribery is more than 10m won, the resulting fine could be up to twice the amount of the total profit earned.

Furthermore, corporations can be prosecuted if a representative or employee is found to have engaged in bribery of foreign officials for a business transaction. Businesses could face fines of up to 1 billion won, or up to twice the total profits gained through the bribery if those profits are in excess of 500m won.

“Our connection-oriented culture provides a fertile ground for corruption and injustice. People’s distrust of the public sector including the judiciary runs high, while our society suffers huge economic losses from bribery and favouritism,” says Chang Yoo-shik, a lawyer with the civic group People’s Solidarity for Participatory Democracy. The president Park Geun-hye said the new legislation should be seen as a spur to domestic economic growth.

“Once the law is implemented and transparency and fairness in our society are improved, the effectiveness of our economy will increase and South Korea’s potential growth may be improved,” she told a cabinet meeting last month.

A backlash against the new bill says much about the rapidly evolving nature of South Korean society. Laws have long struggled to keep pace with breakneck economic development: in truth, an anti-graft bill, following in the footsteps of, say, the UK Bribery Act or the US Foreign Corrupt Practices Act – not to mention the UAE’s Penal Code of 1987 – is long overdue.

It also comes at a time of great change in the corporate sector. When Hanjin Shipping filed for bankruptcy on the last day of August, it naturally turned to Seoul for support. The government’s refusal to extend state aid to the nation’s largest container carrier signalled its latent willingness to stand up to the powerful chaebol – and to seek to force these huge corporates to work within the bounds of law, rather than finding ways to work around them.

Yet the new rules have also left many reeling. South Korean society is a carefully assembled collage of interwoven societal and hierarchical traditions, many stretching back thousands of years. Gift-giving is ingrained, from pharmaceutical firms paying doctors to prescribe their drugs, to journalists being lavishly entertained by politicians or corporates seeking a nice write-up. More people bribe than don’t, yet few see the act as graft – simply as a way to get ahead.

South Korea’s diplomats, who also face the same fines and jail terms if they accept bribes, are also looking at a nervy and uncertain future. Easing the path of South Korea’s energy and electronics majors into new markets, then expanding their footprint, is widely seen as integral to their job. Removing their ability to lavishly entertain state officials and regulators, wherever they go in the world, will require them to learn new skills.

Critics of the new corruption legislation also point to an ancillary concern: that the new laws set to take effect in the weeks ahead will dampen spending and weaken growth. Economic output is projected by the IMF to swell by 2.7 per cent in 2016 and 2.9 per cent in 2017. GDP expanded by 3.3 per cent year-on-year in the three months to end June, boosted by a robust construction sector, following a poor first quarter.

Yet this masks a key underlying weakness: namely, that South Korean households are consistently spending less and saving more. According to the national information service Statistics Korea, the average household consumption propensity, which reflects the ratio of retail spending to disposable income, fell to 70.9 in the second quarter of the year, the lowest reading since government began collecting data in 2003. Average household spending remained unchanged in the second quarter, at 2.49m won.

Economists fear the anti-graft legislation will eat into the earnings posted by everyone from the largest chaebol to the smallest merchant. Some are pushing the government to raise the cap on what constitutes bribery and gift-giving, fearing a further hit to bars and restaurants.

But with the tragedy of the Sewol still fresh in the public’s memory, legislators in Seoul, for now at least, seem unlikely to yield.

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