The "Korean way" of doing business can often be associated with the practices of making undocumented cash payments or providing lavish entertainment to those who wield influence, including government officials and politicians. For U.S. companies with interests in South Korea, these customs deserve closer attention.

The day-to-day business activities of employees of U.S. companies or foreign affiliates of U.S. companies overseas can carry substantial legal ramifications back in the U.S., including liabilities resulting from violations of the U.S. Foreign Corrupt Practices Act, or FCPA, if such payments are made or entertainment is provided. Significantly, actions taken by U.S. governmental authorities, including the Securities and Exchange Commission, have demonstrated that simply being a foreign corporation does not let you off the hook.

For example, as long as a foreign company's shares trade on a U.S. exchange via American Depositary Receipts or if it is affiliated with a U.S. company, the foreign company and its officers, directors, employees and agents are also required to comply with the provisions of this law. In the current environment of intensified FCPA enforcement activity, being a bilingual Korean-American in the forensic accounting and investigations field has been a mixed blessing.

On one hand, language skills and nuanced cultural understanding have kept me busy for the good part of the year. On the other hand, having a sentimental attachment to the land and ancestry, and a healthy dose of nationalistic pride, these pervasive practices have given me some pause and lead me to ponder what the underlying causes might be. Equally troubling is how many people make light of the practices as just the way things are done.

Local attitudes may shrug off the problem as a necessary evil, but it has adversely shaped perceptions abroad of doing business in South Korea. According to the 2008 Corruption Perception Index, or CPI, published by Transparency International, South Korea ranked 40th out of 180 countries surveyed, trailing 39 countries that were perceived to be less corrupt. It scored an unremarkable 5.6 on a scale of 0-10, where 10 signifies the perception of least corruption.

It's certainly not the worst, but leaves plenty of room for improvement. To its credit, though, South Korea has inched up steadily from 47th with a score of 4.5 in the survey conducted in 2004.

While not statistically tested, there appears to be more than a random degree of correlation between the economic status of a country and its ranking on the CPI. Clearly, all the countries occupying the top 20 spots on the CPI would be considered advanced or developed countries that enjoy political stability, well-established economies and relatively high standards of living. All but two are members of the OECD, which admitted South Korea as a member in 1998. Considering South Korea's economic standing relative to these top 20 countries, one might expect a stronger showing on the CPI as well. The fact that South Korea trails so far behind these countries on the CPI is puzzling. The South Korean economy, at nearly $1 trillion of GDP, was the 13th largest in the world according to the 2007 World Bank estimate. Of the top 20 countries on the CPI, only five (U.S., Japan, Germany, U.K. and Canada) achieved greater GDP. Yet, South Korea lags far behind in its CPI ranking. In a comparison limited to the 30 OECD member countries, South Korea has the ninth largest economy. Yet, it is 22nd out of 30 in CPI ranking.

So how can we explain South Korea's poor showing on the CPI relative to its much stronger economic standing? One 2002 study, "Independence and Corruption in Korea" by Craig P. Ehrlich and Dae Seob Kang, published in the Columbia University Journal of Asian Law, attributed the corruption problem to three factors.

First, an authoritarian government presided over by a long succession of former generals with an ill-defined rule of law characterized by vague or unwritten codes of conduct; second, the deeply rooted Confucian values system that places importance on family, regional and school ties; and third, the culturally common practice of giving "chonji" (money as a token of gratitude), and cash gifts at weddings, funerals, graduations, and the like. We can see how in an environment where these factors are coincident, a system based on relationships and favors could flourish over the rule of law and fair dealings. Corruption shifts the cost of individual gain upon society (e.g., poorly managed public construction projects jeopardizing public safety), but in the context of South Korea's rapid progress over the past five decades, it arguably produced results: "quick and certain outcome, coordinated action, reliable relationships," the study noted. It is not surprising, then, that the practice was so widely accepted that "undocumented cash payments" were recognized by the tax code as deductible expenses.

Shocking as it might be, "undocumented confidential business expenses" could be deducted up to 1% of net worth plus 0.035% of gross revenue. For the giant conglomerates, this allowance could mean millions of dollars of deductions for "bribes," or what locals euphemistically call "rice cake money." But in the process of gaining admission to the OECD in 1998, this article of the Corporate Tax Act was repealed. This was seemingly a change for the better, but was it really? If the law changes and a long-standing practice is suddenly disallowed, would the practice simply go away, or is it more likely to continue surreptitiously? Case in point: In late 2007, an allegation surfaced of a secret slush fund maintained by the Samsung Group totaling more than $200 million. The whistle-blower claimed the purpose of these funds was to bribe public officials, but the prosecutor did not pursue the case, citing insufficient evidence.

Still, corruption cases do make it to the courts. But there is a peculiarity about the South Korean judicial system that makes objective prosecutions all but impossible. According to the 2007 paper "The Judiciary's Role in Good Governance in Korea" by Joongi Kim, an inordinately large number of judges had high school and university ties to the very legal representatives that appeared in their courts. Until recently, 90% of the judiciary came from only five universities, and 64% mostly from just one. This is partly due to the fact the South Korean educational system offers just a handful of elite universities and its graduates fill the most prestigious posts, in both the public and private sectors. Given the importance placed on school ties, this arrangement certainly does not project a convincing appearance of objectivity in the courts. Another mitigating factor undermining the judicial enforcement in corruption cases is the long history of granting presidential pardons and reinstatements (of eligibility to hold positions that were stripped as terms of convictions). More presidential pardons are granted in South Korea than in any other major economy. "On a regular basis, without fail, Korean presidents issue special pardons when they first gain office," the paper noted. The recently elected President Lee Myung-bak lived up to expectations when he pardoned some 2.3 million (mostly) traffic offenders to mark his 100th day in office, a move criticized as an attempt to buoy his sagging popularity. Unlike his predecessors, however, Lee vowed that he would not pardon business executives convicted of serious financial crimes. He failed to make good on this promise when, on Aug. 15, 2008, to mark Korean Independence Day, he pardoned more than 340,000 convicts including three prominent former, now reinstated, business leaders.

Will South Korea ever attain a level of transparency on par with the standards of other advanced economies? Perhaps, given enough time, it will. The "Korean way," for better or for worse, has worked in transforming an agricultural backwater into a leading economic powerhouse in less than two generations -- arguably the greatest economic success story of the modern era. Certainly there is a segment of the public clamoring for true transparency in government and business. Others cling to the notion that the system, unfairly labeled by outsiders as corrupt, has worked and continues to work just fine. These divided views notwithstanding, any effort to bring sweeping change to an incumbent system is likely to face myriad challenges. Real change can only come through sustained cooperation of all the actors. "The competition does it, so we must too," is often cited as the reason in internal communications proposing such cash payments.

It's a simple formula of human behavior -- unless everyone stops, no one will stop. To achieve this, corporations, both local and foreign, must take compliance with applicable laws seriously, institute policies and enforce them internally with vigor. Training subsidiary managers to understand and appreciate the exposure to the enterprise should be part of this process. Without serious enforcement, the best designed compliance policies are merely window dressing. Individuals must adopt a radically fresh and bold mindset, even if dissension conflicts with their Confucian values; some boats must be rocked. And, most crucially, judicial enforcement must be carried out consistently, be appropriately harsh and not diluted by excessive presidential pardons.

Absent all of the above, we can expect the status quo, and the ever-creative minds will devise improved ways of secreting "slush funds."

John Kim is a director in FTI Consulting Inc.'s forensic and litigation consulting practice and is based in New York. Annette S. Kim is a senior consultant with FTI Consulting and provided research and analysis for this article.