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Corruption presents moderate risks for businesses operating or planning to invest in South Korea. The Criminal Code criminalizes the main forms of corruption, and the Act on Anti-Corruption and the Establishment and Operation of the Anti-Corruption & Civil Rights Commission includes a Code of Conduct for public-sector employees and regulates conflicts of interest and asset disclosure. The Improper Solicitation and Graft Act eliminates a requirement to provide direct evidence between a monetary reward and a favor to secure a corruption conviction and holds companies liable for their employees’ corrupt misconduct. Anti-corruption legislation is increasingly enforced in South Korea. Facilitation payments are prohibited. Strict limits for hospitality and gift-giving to public officials have come into force. South Koreans recently witnessed the largest corruption case the country has ever seen. Following numerous allegations of corruption and influence peddling, ex-President Park faced impeachment in late 2016 and was, months later, indicted on charges of bribery, abuse of office and other corruption-related offenses. The scandal has spread to involve the highest echelons of the conglomerate Samsung as well.
Last updated: May 2017
Companies operating with the judiciary face high corruption risks. According to business executives, bribery often occurs in return for obtaining favorable court decisions (GCR 2015-2016). Four in ten Koreans perceive the judiciary as corrupt (GCB 2017). The judiciary is highly professional and formally independent, providing a check on the country’s strong presidential powers. However, the judiciary is not completely free from political pressure. Likewise, the prosecutors’ office is reportedly often misused for political purposes (BTI 2016).
Businesses do not believe the legal framework to be efficient enough when it comes to settling disputes and challenging regulations (GCR 2016-2017). Even though commercial disputes can be adjudicated in a civil court, foreign companies do not perceive this method as a practical means to resolve disputes (ICS 2016). In addition, foreign court judgments are not enforceable in South Korea (ICS 2016). Enforcing contracts takes an average of 290 days, which is much lower than the average for OECD high-income countries (DB 2017).
Businesses are unlikely to encounter corruption when dealing with police in South Korea. Effective mechanisms are in place to investigate and punish police corruption and, according to the Korean National Police Agency, there were no reports of police impunity during the year (HRR 2016). However, four in ten Koreans believe that most or all of the police are corrupt (GCB 2017). Companies believe that the police performs well in terms of their reliably in protecting businesses from crime (GCR 2016-2017). In addition, companies perceive the costs of crime and violence to be fairly low (GCR 2016-2017).
Businesses contend with low to moderate corruption risks when dealing with South Korea’s public services sector. Companies do not find bribery to be widespread when applying for public utilities (GCR 2015-2016). However, the Korean regulatory environment poses a significant challenge for foreign and domestic investors, and laws and regulations are often framed in general terms and are subject to differing interpretations by government officials (ICS 2016). Businesses rank policy instability as the premier problem for doing business; inefficient government bureaucracy is cited as the second most problematic factor (GCR 2016-2017).
Corruption is rare within South Korea’s land administration. Private property rights are enshrined in the Korean Constitution and are generally well protected (BTI 2016). There is very little chance of expropriation taking place; however, legal proceedings concerning contractual issues can be time-consuming (BTI 2016). Foreigners are permitted to acquire land under the Foreigner’s Land Acquisition Act, but reciprocity between Korea and the foreign national’s country is a precondition for foreign real estate purchases. Expropriations of private property can only take place when it is non-discriminatory, for public purposes, follows due process, and takes place with prompt and adequate compensation (ICS 2016). Registering a property involves seven procedures, but only takes five days; just a fourth of the average time in takes in OECD high-income countries (DB 2017).
In April 2015, the prime minister of South Korea, Lee Wan-Koo, resigned after being named in connection with a large-scale corruption scandal in which the head of a construction company allegedly made political donations to high-ranking government officials in return for support in obtaining government loans (ABC News, Apr. 2015). Lee Wan-Koo was found guilty of taking the bribe in January 2016 and received a suspended sentence of eight months of imprisonment (New York Times, Jan. 2016).
Corruption in the tax administration presents business with moderate risks. Bribes and irregular payments are sometimes exchanged in meetings with tax officials (GCR 2015-2016). Due to the complexity of Korean tax laws and the potential for misunderstanding provisions, foreign companies should consider hiring a local accounting company to file taxes (CCG 2017). Tax evasion among corporations is extensive; an example is a current investigation into Toyota Korea over a large tax evasion scheme (Yonhap News, Mar. 2017). In addition, investigations into tax matters are sometimes launched by high-ranking political figures to intimidate political opponents or other actors not toeing the line (BTI 2016). Family-controlled conglomerates, chaebols, dominate the economic sphere and receive lenient penalties for financial crimes such as tax evasion due to connections with government officials (ICS 2016; The Economist, Jan. 2017), and thus impeding fair competition.
In 2016, a corruption case involving the country’s fifth-largest conglomerate, Lotte, was unearthed. It is alleged that five family members behind the Lotte group have evaded a total of USD 76 million in taxes and embezzled USD 46 million of the company’s funds (BBC News, Oct. 2016). The trial commenced in March 2017 (BBC News, Mar. 2017).
Corruption levels are generally low in the border administration presenting companies exporting and importing across South Korea’s borders with low risks (GETR 2016). The country ranks among the best in the world in terms of trading across borders; Corruption is rarely cited as a problematic factor for importing and exporting and companies report efficient customs clearance procedures and high levels of transparency (DB 2017). Irregular payments and bribes are rare, but cannot be completely ruled out (DB 2017).
South Korea’s procurement sector carries a high risk of corruption. Companies report that public funds are sometimes diverted to companies, individuals or groups due to corruption, and that favoritism and bribery frequently occurs when deciding policies and contracts in South Korea (GCR 2016-2017). In the same vein, bribery and irregular payments are widespread in the process of obtaining public contracts and licenses (GCR 2015-2016). Transparency International has classified the corruption risk in Korea’s defense sector overall as moderate but warns of higher risks in public procurement procedures involving the defense sector (GDACI 2015). Public procurement regulations and announced tenders can be found at the Korean Government Procurement (PPS) website. Korea operates the Government e-Procurement System (GePS, in Korean), a one-stop shop for public procurement. The e-procurement system has led to savings amounting to USD 1.4 billion in the public sector and USD 6.6 billion in the private sector (OECD 2016). In addition, the time to process a bid has been reduced from 30 hours to 2 hours (OECD 2016). In one corruption case, eighteen construction companies that participated in the ‘Four Rivers Restoration Project’ were fined a total of KRW 111.5 billion for collusion in the bidding process (Korea Joongang Daily, Nov. 2014).
President Park Guen-Hye was impeached in December 2016 after becoming embroiled in allegations of large-scale corruption involving many senior figures in the Korean government and business community. The relationship between President Park and her long-time confidante Choi Soon-Sil came under scrutiny when it emerged she had been allowed to improperly interfere with policy making (BBC News, March 2017). Ms. Park has been formally indicted on charges including bribery, abuse of power, and leaking government secrets (NPR News, Apr. 2017). Moreover, it emerged Ms. Choi had used her position to solicit ‘donations’ to her two foundations from many of Korea’s largest conglomerates including Samsung, Hyundai, and Lotte. It has been alleged that Jay Y. Lee, Samsung’s vice chairman and heir-apparent, authorized payments totaling USD 36 million to Ms. Choi’s family and her foundations in exchange for help with a merger of two Samsung subsidiaries crucial for keeping control of Samsung in the Lee family (New York Times, Jan. 2017). Mr. Lee is standing trial over the allegations as of April 2017 (Bloomberg, Apr. 2017). The chairman of Lotte Group, Shin Dong-bin has also been indicted on bribery charges related to the case (CNN, Apr. 2017). To mitigate corruption risks associated with public procurement in South Korea, investors are advised to exert caution when bidding on public tenders and are recommended to use a specialized public procurement due diligence tool.
The Improper Solicitation and Graft Act eliminates the need to prove a direct link between a provided gift or monetary reward and a favor to secure a conviction of a public official. The Act broadens the definition of a public official to include teachers in private schools, employees of newspaper and broadcasting companies, and the spouses of public officials. The act also holds companies accountable for corruption committed by their employees. The Act imposes strict limits on the value of gifts to public officials; USD 27 for meals, USD 45 for gifts, and USD 90 for celebratory occasions. The imposition of these strict limits are expected to alter the Korean business culture of “jeopdae” (business entertainment) (Lexology, Sept. 2016). The Act entered into force in September 2016, yet due to the many changes and vaguely defined terms in the Act, companies are advised to assess the compliance of their policies with the new Act.
Freedoms of speech and press are constitutionally guaranteed in Korea, however, threats to press freedom in South Korea through the use of strict defamation laws to silence critics have raised concerns over the independence of the sector (FotP 2016, HRR 2016). Independent media outlets generally operate without major restrictions (HRR 2016). Newspapers are privately owned and report regularly on governmental policies and alleged official and corporate wrongdoings. Journalists regularly face defamation charges; in October 2014, journalist Tatsuya Kato was charged with defaming President Park by citing rumors concerning her whereabouts during the Sewol ferry disaster. Mr. Kato was subsequently acquitted of the charges, on the basis that his acts were a protected form of speech (FotP 2016; New York Times, Dec. 2015). The media environment is considered only ‘partly free’ (FotP 2016).
Korea’s civil society is among the most active in the Asia-Pacific region; civil society organizations (CSOs) have taken an active oversight role in monitoring and assessing the activities of the government and companies (BTI 2016). Civil society groups generally operate freely (FitW 2016). Civil society works actively with the Anti-Corruption and Civil Rights Commission (HRR 2016). Representatives of civil society have been given high-profile posts in the government, but it has been reported that those CSOs outside the conservative political spectrum face difficulties gaining access to the government and obtaining funding (BTI 2016). South Koreans generally trust the integrity of non-governmental organizations (Edelman 2017).
- US Department of Commerce: Country Commercial Guide – Korea 2017.
- World Bank Group: Doing Business 2017.
- Transparency International: Global Corruption Barometer 2017.
- Edelman: Trust Barometer 2017.
- World Economic Forum: Global Competitiveness Report 2016-2017.
- Bloomberg: “Korea Bribery Trial Focuses on Samsung Heir Talks With President”, 19 April 2017.
- CNN: “South Korea’s Corruption Scandal Ensnares 2nd Top Boss”, 17 April 2017.
- NPR News: “Ousted South Korean President Park Geun-hye Is Formally Indicted”, 17 April 2017.
- BBC News: “South Korea’s Powerful Lotte Family Goes on Trial”, 21 March 2017.
- BBC News: “South Korea’s Presidential Scandal”, 10 March 2017.
- Yonhap News: “South Korea Probing Toyota Korea over Suspected Tax Evasion”, 3 March 2017.
- The Economist: “Lee Jae-Yong Dodges Arrest on Charges of Bribery”, 21 January 2017.
- New York Times: “Samsung Heir Faces Arrest on Charges of Bribing South Korea’s President”, 15 January 2017.
- Bertelsmann Foundation: Transformation Index 2016.
- Norton Rose Fulbright: South Korea 2016.
- OECD: The Korean Public Procurement Service 2016.
- US Department of State: Investment Climate Statement 2016.
- US Department of State: Human Rights Practices 2016.
- World Economic Forum: Global Enabling Trade Report 2016.
- Freedom House: Freedom of the Press 2016.
- Freedom House: Freedom in the World 2016.
- World Economic Forum: Global Competitiveness Report 2015-2016.
- New York Times: “South Korea’s Whistle-Blowers Sound Off at Their Own Risk”, 7 November 2016.
- BBC News: “Lotte Leadership Indicted for Embezzlement and Tax Evasion”, 19 October 2016.
- Lexology: “Expansive Korean Anti-corruption Law Comes into Force”, 8 September 2016.
- New York Times: “Lee Wan-koo, Ex-Premier of South Korea, Guilty of Taking Illegal Funds”, 29 January 2016.
- Transparency International: Government Defence Anti-Corruption Index 2015.
- New York Times: “Court Acquits Journalist Accused of Defaming South Korean President”, 17 December 2015.
- South Korea’s Anti-Corruption & Civil Rights Commission: ‘Revised Act on the Protection of Public Interest Whistleblowers passed the National Assembly’, 6 July 2015.
- ABC News: ‘South Korea prime minister Lee Wan-Koo resigns over widening bribery scandal’, 27 April 2015.
- Korea Joongang Daily: “Four-River Fines Dog Korean Companies Abroad”, 24 November 2014.