1. 6th ASIAN ROUNDTABLE ON CORPORATE GOVERNANCE Yong-Jin Jung Seoul North Distric Prosecutor’s Office Korea Theme III, Session 2 Relations between Regulators and Prosecutors Seoul, Korea 2-3 November 2004

2. Relations between Regulators and Prosecutors on Corporate Governance in Korea

3. - Contents - Ⅰ.Acts on Regulations of Corporate Governance Ⅱ.Administrative Bodies Regulating Corporate Governance and its Regulatory Action Governance and its Regulatory Action Ⅱ.Administrative Bodies Regulating Corporate Governance and its Regulatory Action Governance and its Regulatory Action Ⅲ.Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies Ⅲ.Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies Ⅳ.Real Investigative Cases (Misappropriation Case of S group) (Misappropriation Case of S group) Ⅳ.Real Investigative Cases (Misappropriation Case of S group) (Misappropriation Case of S group)

4. Regulating Laws - Part III Companies of the Commercial Act -The Securities and Exchange Act - The Monopoly Regulation and Fair Trade Act Legislate the OECD Corporate Governance Principle - Since the economic crisis at the end of 1997, the Korean government has steadily pursued the amendment work on the Acts mentioned above -Legislate most part of the OECD Corporate Governance Principle Legislate the OECD Corporate Governance Principle - Since the economic crisis at the end of 1997, the Korean government has steadily pursued the amendment work on the Acts mentioned above -Legislate most part of the OECD Corporate Governance Principle Regulations on Criminal Punishment -Stipulate the related regulations on the Chapter covering the punishment under the Acts above Ⅰ.Acts on Regulations of Corporate Governance

5. The Korea Fair Trade Commission (KFTC) and the Financial Supervisory Commission (FSC) and etc. 1.The KFTC’s Tasks. Tasks as competition authority Monitor and regulate business activities of large business conglomerates, as their corporate governance can trigger huge side effects in market competition Ⅱ.Administrative Bodies Regulating Corporate Governance and its Regulatory Action Governance and its Regulatory Action Ⅱ.Administrative Bodies Regulating Corporate Governance and its Regulatory Action Governance and its Regulatory Action

6. 2.Problems of Corporate Governance in Business Conglomerates Characteristics of Corporate Governance of Business Conglomerates -The structure takes the form controlling overall group through shareholdings between affiliates only with 4% of small share ownership by controlling shareholder ※ A : The same person ※ A : The same person B : Specially related person B : Specially related person C : Affiliates C : Affiliates Internal Ownership Ratio External Ownership Ratio ABC 1.5%2.5%40.8%55.2%

7. Internal Problems -Gap between Cash Flow Right and Voting Right ⅰ ) Serving as elements of economic concentration ⅱ ) Blocking effective functions of internal and external business monitoring mechanism: The governance structure can be the foundation for controlling shareholder to pursue his personal profits rather than that of minority shareholders

8. -It will lead to undue supportive behavior ⅰ ) Hamper competition in the market ⅱ ) Chain-reaction bankruptcy of overall business group External Problems -Lack of interest of minority shareholders on business monitoring -Ineffective external monitoring mechanism

9. 3.What to regulate? Companies under business conglomerates with more than 2 trillion won of total assets -Prohibition of cross shareholdings -Prohibition of debt guarantee -Obligation to disclose large-scale internal trading * Prohibition of undue supportive behavior -Restraint on voting rights (financial affiliates)

10. Companies under business conglomerates with more than 5 trillion won of total assets -Restraint on total amount of shareholdings in other domestic companies ⅰ ) Companies cannot hold shares of other domestic companies surpassing 25% of their own net assets ⅱ ) Allow exceptions for equity investment necessary for business activities - Pursue the exceptions of application for companies well equipped with internal control system

11. 4. Preventive and Corrective Measures, and Criminal Punishment Preventive Measures -Notification and reporting system Corrective Measures - Investigative power ⅰ ) Rights to ask alleged violator to attend the investigation, that to request data, and questioning rights ⅱ ) The KFTC does not have any rights for coercive disposal

12. -Commission order and non-commission order ⅰ ) Order for shares disposal, order to prohibit the exercise of voting rights -Disposal of surcharges and administrative fines ⅰ ) For large companies with strong capital power, imposing huge amount of surcharges might be effective

13. Criminal Punishment - Most violating activities are regarded as crime -The KFTC’s complaint is the condition to institute a public action against criminal activities mentioned above. : Severe punishment is required for controlling shareholders and high executives

14. 5. Regulations taken by the FSC Monitoring on overall financial sector Securities and Futures Committee (organization under the FSC) - Investigation into unfair trade practices in securities and futures market -In charge of tasks related to corporate accounting standards and accounting supervision.

15. Criminal punishment - Unfair trade practices, such as internal trading -Behavior making false financial statement, violating the accounting standards * The complaint of the FSC is not the condition to institute a public action.

16. 1.Characteristics of Prosecution System in Korea Power to investigate crime and institute a public action and etc. - Judicial police should get prosecutor’s control in investigating crime. Public Prosecution by State (Public Prosecutor), Discretionary Indictment Ⅲ.Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies Ⅲ.Characteristics of Korea’s Prosecution System and its Relations with Administrative Bodies and its Relations with Administrative Bodies

17. 2.Relationship between Prosecutor Office and Administrative Bodies Separate national organization -Prosecutors do not have any control over executing administrative investigation

18. Close cooperative relationship - Administrative body can file a complaint or ask for investigation to the Prosecution Office ⅰ ) Investigative data for administrative body is used for basic information for prosecutors’ investigation -Prosecutor announces the investigation to administrative body -In conducting criminal and administrative investigations at the same time, they closely work together by exchanging relevant in formation -Prosecutor is seconded to administrative bodies

19. 3.Team Investigation of Korea’s Prosecution Office When the case has many suspects and complicated issues, and needs to be completed in a short period of time, the investigation team is formed for each department in the District Public Prosecutor’s Office. When concentrated and unified investigation, and professional investigative ability are required, the investigation team is formed in the Central Investigation Department in the Supreme Public Prosecutors’ Office.

20. Tax officials in the National Tax Office and Certificate Public Accountant in the FSC can be also involved in the investigation if necessary Case: Joint Investigation Team on Public Fund - Many suspects (group owners, CEO etc) were restrained

21. 1. Chart of Corporate Governance of S Group Company B Company A Company F Company E Company D Company C Group Owner Ⅳ.Real Investigative Cases (Misappropriation Case of S group) (Misappropriation Case of S group) Ⅳ.Real Investigative Cases (Misappropriation Case of S group) (Misappropriation Case of S group) 49% 10.8%

22. 2.Facts of Crime Suspects - Owner of S group, CEO of Company B, Head of Restructuring Committee of the Group Criminal Act -Around March 2002, share swap contract was signed between company W’s shares owned by S group’s owner and company A’s shares owned by company B. : Exchange ratio - Shares in company W: shares in company A = 2:1

23. - Problems of contract above ⅰ ) Properly estimated share value – shares in company W: shares in company A = 1:2 ⅱ ) Through such contract, S group’s owner could get three quarters of profits of share value of company A and company B had to see that amount of loss. -Such behavior is subject to misappropriation under the Criminal Law

24. 3.Goal of Crime Owner of S group’s owner is controlling shareholder of company B - Control company A through company B -Company A serves as a holding company of overall group Through regulation setting the ceiling on total amount of shareholdings in other domestic companies, S group’s owner came to exercise voting rights only over 2% among 10.8% of company A’s shares owned by company B. This has led to the risk of losing control over the S group’s owner. Therefore, in order to maintain control, S group’s owner committed such behavior to take over more shares of company A.

25. 4.Progress of Investigation and Cooperation with Administrative Bodies After gaining information, the investigation team is formed consisting of 11 prosecutors and accountants working in the FSC - Through two months, the investigation team confirms the basic fact relationship. (Request for confirmation of document to administrative body) -Search and seizure (Ensure planning documents for this act) -Suspect investigation -Restraint of Group owner and head of restructuring committee

26. Administrative body take measures based on the investigation document done by prosecutors. *Even though the leniency program exists under the Administration Law, there is no regulation, like arraignment or plea bargaining in the field of criminal law. In other words, there is no special institutional equipment to draw any statement on undue behavior of senior executives from subordinates.