The Financial Services Commission announced that revision proposals for the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) and the Act on External Audit of Stock Companies have been approved by the government at the cabinet meeting held on May 20.
Key Revision Details
a) Improving rules on whistleblower reward
On February 25 this year, the FSC introduced a plan to overhaul the whistleblower reward program to strengthen incentives for insiders to report unfair trading and accounting fraud. The approved rules change today is a follow-up measure to this plan, abolishing all caps (KRW3 billion for unfair trading and KRW1 billion for accounting fraud) on whistleblower rewards. In this regard, authorities will also seek to update rules on subordinate regulations in line with the changes in relevant legislation.
First, with the reward payout caps abolished, the method for calculating the amount of whistleblower reward will be linked to the amount of illicit gains or penalties (up to 30 percent), calibrated to the level of contribution made by whistleblowers for uncovering rule-breaking activities. This method will significantly increase the amount of rewards payable if the scale of unfair trading or accounting fraud is extensive, which will help to provide more incentives for insiders to report wrongdoings.
Second, a whistleblower’s reporting submitted to an authority other than the FSC or the Financial Supervisory Service (FSS)—such as the National Police Agency or the Anti-Corruption and Civil Rights Commission—will also qualify for rewards as the establishment of an inter-agency consultative mechanism will ensure seamless referrals and information sharing between related authorities.
Third, if the whistleblower is also an accomplice in unfair trading activities, reward payouts were not possible previously. However, under the revised rules, reward payouts will be made possible in part if the whistleblower did not coerce others to take part in illegal activities or engage in repeated violations for five years. This will provide a greater incentive for insiders to come forward with illegitimate activities.
Fourth, whistleblower rewards are generally payable only after the confirmation of the payment of monetary penalty in principle. However, there may be potential delay in the payment of whistleblower rewards if the payment of monetary penalty gets delayed or does not take place at all due to lawsuit, etc. Thus, under the revised rules, a partial reward (10 percent, up to KRW100 million) can be paid out first at the time of reaching a decision to impose monetary penalty against the rule-breaker.
Fifth, under the revised rules, whistleblower rewards can be paid out in part even if the amount of money used in market manipulation is subject to confiscation and collection.
b) Strengthening sanctions on accounting fraud
First, there will be aggravated penalties introduced for repeated violations of accounting fraud based on the period of violation. Since the monetary penalty was first introduced in 2017 for accounting fraud, there have been no instances where penalties were imposed in an aggravated level for repeated violations due to concerns over exorbitant levels of penalty amounts. Thus, so far, only the fiscal year in which the greatest amount of accounting fraud was uncovered was subject to monetary penalty. However, under the revised rules, a 20 percent to 30 percent of aggravated penalty for each year of violation will be imposed depending on the nature of accounting fraud (intentional or gross negligence). In this regard, the level of aggravated penalty will not exceed the total sum of penalty amounts for all violation years.
Second, the revised rules will establish a regulatory ground to impose a more reasonable level of monetary penalty against the person who bears the actual responsibility for accounting violation. The level of monetary penalty imposed on company-related persons was previously based on the monetary compensation he or she received from the company. In this regard, it remained challenging to impose a monetary penalty if there was no direct monetary compensation paid out by the company to the person who is actually behind accounting violation.
Thus, under the revised rules, it will be made possible to impose a monetary penalty on company-related persons even though there was no monetary compensation paid out directly by the company if there were financial gains made from accounting fraud in the form of misappropriation, embezzlement, or breach of trust, or if there were direct monetary compensations paid out by a financially affiliated company. Moreover, if it is deemed to be difficult to objectively assess the amount of financial gains made from accounting fraud, the person involved in accounting violation will be subject to the minimum penalty amount of KRW100 million.
Further Plan
The revised rules on whistleblower rewards and strengthened sanctions on accounting fraud are scheduled to take effect immediately after promulgation (May 26). The regulatory update will help the authorities to more quickly identify and detect rule-breaking activities for more swift responses. The FSC will continue to work to ensure strict enforcement of rules on unfair trading activities and accounting fraud to improve fairness and transparency in the capital markets.
* Please refer to the attached PDF for details.