The head of Samsung Group has been arrested in South Korea because of major bribery allegations. The details of the allegations offer some important lessons to companies about the importance of compliance to help prevent and mitigate bribery and corruption risk.
Allegations Emphasize Bribery and Corruption Risk
Lee Jae-yong was arrested last week on suspicion of bribery, embezzlement, perjury, moving assets abroad illegally and concealing evidence of criminal profit. South Korea's special prosecutor's office accuses him of bribing a close friend of the country's president. Mr. Lee allegedly paid $37 million to organisations linked to Choi Soon-sil, who is currently under detention related to abuse of power and attempted fraud charges—a scandal that also led to impeachment proceedings against President Park. Prosecutors allege that the payments were made to secure regulatory approval for a merger of two Samsung units in 2015 and smooth his succession to the head of Samsung.
At the time of writing, the investigation is ongoing, but the allegations offer some useful lessons for companies considering how to mitigate the risk of bribery and corruption:
1) Bribery allegations can damage reputation and share price
The reaction to the news of Mr. Lee's arrest has already affected the company's reputation and financial performance. Samsung's share price on the Nikkei 225 market dropped by 1.2 percent on the night that the news was announced. It had already been a difficult six months for Samsung, following the smartphone recall due to battery-related fires. Samsung's shareholders are unlikely to feel confident in the company's preparations for its next product launch while it is simultaneously facing bribery charges.
2) Beware associations with PEPs
The allegations are a timely reminder of the risks of companies having links to Politically-Exposed Persons (PEPs). A PEP's position of influence means that they can be targets for bribery, money laundering and terrorist financing. When a company is considering doing business with a PEP, they should first check the laws around PEPs in their country, as well as countries in which they conduct business. As we noted a few weeks ago, some anti-bribery and corruption laws—like the Foreign Corrupt Practices Act (FCPA)—have considerable extraterritorial reach. Then they should carry out PEP screening and further enhanced due diligence on a PEP and their business interests relative to the level of risk.
3) Compliance culture comes from the top
Implementing compliance policies, processes and systems is an important part of mitigating bribery and corruption risk, however, the leadership sets the tone. Companies must ensure that board members, the C-suite and other top-level management present a united front against corrupt practices and expect transparency and accountability at every level of the business. Sending mixed messages erodes confidence and makes whistleblowers less likely to come forward about questionable practices—increasing companies' vulnerability to reputational, regulatory, financial and strategic risk.
4) A strong compliance culture offers competitive advantages
The allegations against Samsung are part of wider corruption charges against South Korea's president. The country's parliament voted to impeach President Park in December, and if a court upholds the decision an election will be held this year. Perhaps because of these allegations, the country's score on Transparency International's Corruption Perceptions Index (CPI) has fallen from 56 in 2015 to 53 in 2016. Until these allegations are resolved, companies should increase their due diligence on entities with links to South Korea.
By contrast, Singapore was the best performing Asian state in last year's CPI with a score of 84. Last year, a report by ethiXbase found that Singapore's tough stance on corruption in the private and public sector has given it "a significant competitive advantage over its neighbours." Moreover, the Organisation for Economic Cooperation and Development (OECD) estimates that corruption typically equates to 10 percent of the value of a contract or transaction, which means companies must work that much harder to make a profit. Add in negative consumer responses, declines in stock values, and potential multi-million dollar fines and criminal charges, and the lesson for countries and companies is clear: Implementing effective anti-corruption measures and developing a reputation for integrity protects your interests and leads to financial rewards because the country or company is seen as a safer and more attractive place to invest.
5) It (usually) isn't too late to turn around a compliance culture
Were Samsung's executives and shareholders not already aware of the costs of being associated with bribery and corruption allegations, they are now. This could provide the company with an opportunity to overhaul and strengthen its compliance culture and systems. Daniel Gleeson, a senior analyst at Ovum, says this is "the opportune moment" for Samsung. He says Samsung's internal systems will likely come under greater scrutiny, and regulators and investors may push for a radical overhaul of the company's corporate structure.
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