It’s time to start thinking twice about your South Korean suppliers

How comfortable would you be hiring a supplier in a country where all of these activities have occurred in just the past few months:

  • The impeachment of the President, due to numerous allegations of bribery and corruption, is before the Constitutional Courts
  • New laws have been called for to combat the view that the country is largely soft on bribery
  • Charges are coming down against the vice-chairman for the largest company in South Korea. Also one that is a global household name
  • Over 1 million citizens have marched in protest against what is considered widespread government corruption at both local and national levels.

This is South Korea, home to many of the world’s consumer goods and technology industry suppliers.

Even in this environment of political scandal and widespread accusations of bribery in the corporate world, many companies are not increasing their level of scrutiny in South Korea.  With corruption seemingly rampant in the highest levels of government, companies should be seriously reconsidering their third party compliance efforts in South Korea.

The impact of Samsung vice-chairman Jay Y. Lee’s interrogation on companies

The alleged involvement of Jay Y. Lee, the head of Samsung Group and vice-chairman of Samsung Electronics Co., in a bribery scandal has brought into question the integrity of Samsung Group.  

Lee has been implicated in a multi-million-dollar bribery scandal involving the country’s president, Park Geun-hye, and her close advisor, Choi Soon-sil. He is the first high-profile business executive to be questioned in connection with a corruption scandal that has embroiled many people and led to the downfall of Park Geun-hye's presidency.

It is no longer business as usual

Samsung Group is South Korea’s largest conglomerate and contributes significantly to the country’s economy. Additionally, its electronics arm, Samsung Electronics Co., is one of the biggest manufacturers of smartphones and LCD TVs. Therefore, any negative activity that happens at such a high profile company can have widespread effects on other businesses as well.

There is a potential reaction to events:

  1. The calls for the president’s resignation or impeachment have a negative impact on business sentiment. In turn the country’s economic fundamentals are shaken.
  2. An executive is questioned, or even arrested, or measures are taken on a faulty product, like the Samsung Note 7 recall, leading to the company’s stock price falling. This rocks general business confidence and reduces exports. In turn, the country’s business environment is affected.

If the economy becomes too unstable; then the country’s risk profile should be reviewed, and if appropriate. revised accordingly.

While it may currently be an overstatement to say that the South Korean economy is unstable, there are still doubts about how business is being conducted on every level. 

It is for this reason that compliance professionals should take keen interest in what is happening in South Korea, to help them mitigate any potential risks that may arise in their own businesses. For some companies, it will be virtually impossible to cut ties with their Korean third parties as doing so may essentially shut down their production.

However, you need to be wary and ensure that your third parties, big or small, operate within the confines of local and applicable international laws. While Samsung Group and its executives may successfully move past their current issues, other Korean companies, some of which are your suppliers, may not have the stamina to overcome such reputational stigma.

Looking forward – Supplier integrity matters

As this incident develops amid a protracted political crisis in South Korea, if you have suppliers in South Korea you may want to consider the following:

  • Be proactive with your compliance initiatives
  • Conduct on-the-ground assessment of suppliers
  • Adopt routine high level due diligence on suppliers
  • Seek additional affirmation from suppliers
  • Adopt continuous and real-time monitoring
  • Adopt additional blocks or barriers to commit bribery such as accounting checks, compliance audits, and greater scrutiny of third party programmes
  • Undertake additional training of third parties on the importance of compliance
  • Discuss risk management strategies with stakeholders from other departments within your company
  • Source a new supplier if remediation cannot be made
  • Adopt a technological platform that is able to consolidate all of these elements for easier monitoring. 
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