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2023 Compliance Outlook Newsletter As 2023 begins in earnest, we would like to take this opportunity to make some observations on trends that impacted the practice of white collar criminal defense and compliance in Korea in the past year. As further discussed below, there is ongoing impact arising from the re-balancing of investigative authority between the police and prosecutors, a reform which began in 2021. Another notable trend in 2022 was a surge of in-house financial crimes, which became the subject of high profile media coverage. Additionally, at the end of 2021, the Supreme Court issued a decision which has had a material impact on the scope of directors’ duties in Korean companies. Lastly, the trend towards a sustained level of activity by companies in engaging internal investigations continues, and we explore some issues which have arisen in cases the past year. This issue includes: Latest Prosecution Reforms and Criminal Investigation Trends Prevention and Management of Large Scale In-House Financial Crimes Increasingly Stringent Application of the Director’s Duty to Monitor and Supervise the Company Recent Trends in Internal Investigations .content_view .view_area a { text-decoration: none; color: #2c3e50; }
2023.02.24

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Amendment to the PIPA Passed by the National Assembly The plenary session of the National Assembly voted to pass the proposed amendments to the Personal Information Protection Act (“PIPA”) on February 27, 2023. The amendments (“Amended PIPA”) will come into force six months after the promulgation by the President. The amendment bill that was ultimately passed by the National Assembly had been partially revised during the review by the Legislation and Judiciary Committee since the version that was initially passed by the National Policy Committee (“NPC”) last year (“NPC Version”). Please refer to our previous newsletter (Link) for the details of the NPC Version. The key changes from the NPC Version are explained below. The Amended PIPA adds a provision that allows data subjects to withdraw their data transmission requests (Article 35-2, Paragraph (5)). The Amended PIPA excludes automatic decisions issued by administrative authorities from the scope of automated decisions (Article 37-2, Paragraph (1)) for the sake of consistency with the Framework Act on Administrative Affairs, which provides that an automatic decisions may be imposed only in accordance with other laws. The data subject’s right to object to an automatic decision by an administrative authority is expected to be discussed in relation to the law that provides for the grounds for such decision. Under the current PIPA, a data controller may process “pseudonymized data” without the consent of the data subject for the purpose of compiling statistics, conducting scientific research and preserving records for the public interest (Article 28-2, Paragraph (1)). The NPC Version included “pseudonymization of personal information” itself in the scope of processing that can be performed without the consent of the data subject, but the Amended PIPA excludes this due to concerns that it can be misunderstood as expanding the scope of pseudonymization. The NPC Version stipulated that if it would be impossible for the central government or a local government to perform its legal duties if it had to publicly display the fact that the government was filming in the course of operating a mobile visual data processing device, it did not have to notify such fact. The NPC Version also provided that in such case, the central or the local government would be required to give an ex post facto notice to data subjects that it was filming, as well as the purpose, date, time, and place of filming. However, the Amended PIPA deleted this exception because of the concerns that this could lead the government to use drones to surveil civilians. In conclusion, if the central or a local government uses a mobile visual data processing device, it must without exception display that it is doing so to the data subjects (Article 25-2, Paragraph (3)). The NPC Version required the data controller’s “compliance with the Guidelines on Preparation of a Privacy Policy” be considered in assessing a privacy policy’s compliance with the PIPA. However, this was seen as inconsistent with Article 30, Paragraph (4) of the PIPA which only recommends data controllers to comply with the Guidelines on Preparation of a Privacy Policy. The Amended PIPA now reads that “whether matters required under the PIPA are included in the privacy policy” would be considered in assessing a privacy policy’s compliance with the PIPA (Article 30-2, Paragraph (1), Item one of the PIPA). Other than the above, the Amended PIPA is not significantly different from the NPC Version. Other the key details and implications are as follows: Integrated Regulations on Personal Information Processing [Key Points] Expand the duty to notify details of use and third party provision of personal information and the duty to designate a local privacy agent to general data controllers. Integrate provisions on obtaining consent to collection and use of personal information, data breach notification and reporting obligation and obligation to take various security measures. Abolition of the obligation to delete or segregate the personal information of dormant users. [Implications] As the principle of “same conduct, same regulation” will apply to all online and offline data controllers, it will be necessary to ensure compliance with regulations that will be newly applicable. Shift from Criminal Sanctions to Financial Penalties [Key Points] Impose an administrative fine of up to 3% of the total sales revenue (the sales revenue not related to the violation will be excluded from the total sales revenue) for major violations. Expand grounds for imposing an administrative fine on general data controllers. Remove criminal penalty for online service providers for failure to obtain consent for collection and use of personal information and for causing data breach due to failure to delete personal information or take protective measures. [Implications] As the base amount for calculating the administrative fines is increased and the grounds for imposing administrative fines expanded, there is a greater need to comply with the PIPA. Strengthen the Rights of Data Subjects [Key Points] Introduce the right to request the transmission of personal information and the right to refuse or request an explanation regarding a decision made based on fully automated processing of personal information. [Implications] It is necessary to pay attention to the Presidential Decree that will follow the amendment of the PIPA as it will determine matters, such as the scope of information subject to transmission request. The Amended PIPA is expected to bring about significant changes to the practices of protecting and using personal information, such as introducing the right to request transmission and the right to respond to automated decisions, integrating the previously binary regulations on data controllers and online service providers, and shifting the focus of sanctions to fines. However, the amendments leave a number of important matters to be determined in the Presidential Decree of the PIPA, such as (i) the method of displaying and notifying filming when operating mobile visual data processing devices, (ii) the scope of information that may be subject to transmission request, and (iii) the standards and procedures for automated decisions and what information must be disclosed for automated processing. Therefore, it is necessary to keep an eye on how the Presidential Decree of the PIPA will fine-tune the Amended PIPA. [Korean Version]
2023.03.02

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Overhaul of the Regulatory Regime around the Issuance and Distribution of Security Tokens in Korea On February 6, 2023, the Financial Services Commission (the “FSC”) announced its plan to overhaul the regulatory framework for the issuance and distribution of security tokens (the “Plan”). The Plan defines a “security token” as a new form of security that is digitized using distributed ledger technology and thereby announces that security tokens must be issued or otherwise distributed in accordance with the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”) and its related laws and regulations. Under the Plan, digital assets that are not considered security tokens would be governed by the Framework Act on Digital Assets when enacted at the National Assembly. The Plan further introduces (i) the Guideline for Security Tokens (the “Token Guideline”), setting out the principle for the classification of digital assets as “security tokens,” and (ii) how the issuance and distribution of security tokens would be institutionalized under the Act on Electronic Registration of Stocks and Bonds (the “Electronic Securities Act”) to be amended (including via an electronic securities issuance system, issuer account management agencies and over-the-counter brokerage). The details are available in the link below.
2023.02.27

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Subcontracting Arrangement in Direct Production Process Found to be Legal On February 17, 2023, the Daegu District Court (“District Court”) overturned a lower court decision and acquitted a subcontractor, the principal company and its representative, all of whom were indicted for having engaged in an alleged unlawful subcontracting arrangement (so-called “illegal worker dispatch”) in violation of the Act on the Protection, etc. of Dispatched Workers (“Dispatch Act”). In this regard, the Korean Supreme Court has established a five-prong test for determining a legitimate subcontracting arrangement as follows: Whether the principal company exercises substantial supervision and control over the subcontracted workers. Whether the subcontracted workers perform tasks together as one unit with the regular employees of the principal company, such that the subcontracted workers may be deemed to be a part of the business of the principal company. Whether the subcontractor exercises independent decision-making over personnel matters with respect to the subcontracted workers (who are its employees), in relation to hiring, headcount, training and education, and managing start and end times, among other things. Whether the object of the subcontract agreement between the subcontractor and the principal company is subject to a prescribed work scope, where the work so prescribed is distinguishable from the work performed by the principal company, as well as whether such work requires expertise and technical skills on the part of the subcontractor. Whether the subcontractor has its own organizational structure and equipment which are necessary to fulfill the object of the subcontract agreement. The District Court held that the above first and second prong tests are determinative, and if the evidence clearly suggests that subcontracting arrangements are legitimate based on these tests, in principle, the Court cannot deem such arrangements as illegal worker dispatch, even if there is ambiguous or inconclusive secondary evidence that may appear to be inconsistent with such conclusion. Furthermore, the District Court held that in-house subcontracting, which is modeled on a subcontracting arrangement permitted under the Korean Civil Code, has been widely used before the enactment of the Dispatch Act, the purpose for which was not to prohibit existing in-house subcontracting arrangements in the direct production process. Citing the Supreme Court Decision No. 2014Da211619, the District Court ruled that the substantive nature of subcontracting arrangements should be considered in determining the legality of such arrangements. In addition, the District Court ruled that given that there are differences in the nature of working relationships between the subcontracted workers and the principal company among the various production processes and types of work performed, it is necessary to determine the nature of working relationships for each process and type of work and consider the proportion of the number of workers for each process when determining whether subcontracting arrangements are lawful. Based on the above, the District Court ruled that “the subcontracted workers cannot be deemed to have been substantially incorporated into the principal company’s business and formed a worker dispatch relationship under substantial supervision and control of the principal company” for the following reasons: Under the Civil Code, in case of a subcontracting agreement, a principal company may give instructions to the subcontractor and its workers on the performance of the subcontracted work and has the right to inspect the work results. The work order documents delivered by the principal company to the subcontractor are akin to purchase orders specifically describing the required work for production. Therefore, whether subcontracted workers had the discretion to change the details of work order documents cannot be deemed as evidence of supervision or control by the principal company. The subcontracted workers independently performed the entire production work in a space physically and functionally separated from other processes performed by the employees of the principal company, and there was no joint or consolidated work or replacement work between the subcontracted workers and employees of the principal company. When the principal company plans to change the scope of subcontracted work, such as the quantity, the principal company merely provided the subcontractor with production volume information and had discussions in that regard, and it was the subcontractor who made decisions on the hiring, workforce reduction, and workforce allocation, accordingly. The work of the subcontracted workers is clearly distinguished from the work of the employees of the principal company, the work performed by the subcontractor does not require independent physical facilities, and the subcontractor has an independent production organization. This judgment is an important precedent for determining a legitimate subcontracting arrangement in the direct production process. The District Court presented clear guidelines in the case of in-house subcontracting and denied that there was an illegal worker dispatch relationship. [Korean Version]
2023.02.27

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Korea Fair Trade Commission Announces Reorganization to Introduce More Predictability and Efficiency On February 16, 2023, the Korea Fair Trade Commission (the “KFTC”) announced its “Plan to Improve the KFTC’s Law Enforcement System” (the “Plan”). The Plan consists of reorganization of the KFTC’s organizational structure, amendments to its case handling procedure, and enhancement of its case handling capabilities. The KFTC noted that the Plan reflected the instructions originally given during its report to the President in August 2022, based on its finding that its enforcement system could be further improved in line with global standards and that its investigation and deliberation procedures could be reinforced to ensure respondent companies’ rights and predictability. As the KFTC plans to implement the Plan and complete the reorganization in the first half of this year, we advise paying close attention to the progress of the implementation of the Plan. Revision of Case Handling Procedures and Standards According to the Plan, the KFTC intends to revise its case handling procedures and standards to ensure transparent and swift handling of cases. In particular, the Plan includes the following action items: (i) clarification of investigation notices and inclusion of more details in investigation notices; (ii) developing a procedure for raising objections to the results of dawn raids; (iii) general prohibition on giving priority to the search of legal and compliance departments during dawn raids; and (iv) sufficient consultation with respondents and protection of respondents’ rights. Changes Details Inclusion of more details in investigation notices and placement of certain limitations during dawn raids Inclusion of more details in investigation notices: Notices will clearly state the category and type of transaction related to the alleged violation and the time period under investigation. - For the transaction category, the scope must be limited to the sub-categories of the businesses of the respondent company subject to the investigation, out of all of the businesses of the respondent company. - The investigation should be limited to the stated time period, but if the time period under investigation needs to be expanded, a separate official notice must be issued stating the expanded period under investigation and reasons for the expansion). Establishment of a process for the return of documents that were collected beyond the scope of an investigation notice: The KFTC will introduce a formal procedure for requesting the return of materials collected beyond the investigation scope specified in the official notice. Establishment of standards for investigating compliance and legal departments: Priority raids targeting the compliance or legal departments will be prohibited in principle, but strict searches will be conducted if necessary, such as when such departments are deemed to be directly involved in the violation of law or destruction of evidence. Reorganization of investigation and deliberation process Establishment of a preliminary opinion hearing process: The KFTC will introduce an official face-to-face meeting process between the respondent company and senior members of the case team during the investigation to clarify basic facts and issues. - Such meeting will take place in cases that require clarification of basic underlying facts, complex cases involving multiple issues, or cases that are expected to go to the KFTC hearing. Expansion of number of hearings: Two or more hearings will take place for cases that meet certain thresholds (scale and nature of the case). Improvement of case inquiry system: The KFTC will reorganize the case inquiry system so that the respondents and complainants can easily check online details regarding the case handler and progress of the case. Establishment of a fast track system for certain types of cases Management of long-term cases: The KFTC will establish a special management system for long-pending cases and cases that are nearing the expiration of statute of limitations. Promotion of fast track cases: The KFTC will encourage early resolution of cases that require quick remedies or cases that can be resolved only through fact-finding because they have the nature of a dispute between the parties. - The KFTC will promote alternative dispute resolution mechanisms (e.g., corporate compliance activities, dispute mediation, consent decrees) for cases requiring speedy relief. Internal Reorganization In the Plan, the KFTC announced that it will divide its investigation section from the policy section to increase accountability and expertise of each function. The KFTC plans to complete the reorganization within the first half of this year. Change Details Division of the Secretariat into Policy Section and Investigation Section The Secretary General will be responsible for policy, and the tentatively-named Investigation Supervisor will be responsible for investigations. Strengthening of Separation of Investigation Function and Deliberation Function The KFTC will strengthen the separation of the investigation and deliberation functions to enhance the independence and fairness of KFTC decisions. - Respondents and case handlers will be given equal opportunity to report to the Commissioners. - Transfer of KFTC officials between the investigation function and deliberation function will be limited. [Korean Version]
2023.02.17

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