Bribery in Subcontracting
The National Tax Service (NTS) on Dec. 10 launched a tax audit probe into the state-run Korea Gas Corp., or KOGAS, committing 80 personnel both to the KOGAS’s headquarters in Daegu and the KOGAS Seoul Office. The NTS confiscated documents, computer files, and hard disks. The NTS said that the investigation would continue for three months. The incident prompts suspicions that the NTS investigation relates to recent bribery and embezzlement scandal.
In September last year KOGAS came under fire due to a belatedly launched audit on the heels of the public exposure of KOGAS’s involvement in illegal collusion among contractors. Namely, KOGAS tried to keep under wraps that it paid contractors inflated service fees and overlooked collusion after taking bribes from contractors.
A KOGAS staff member involved in the case was arrested for taking 260 million won (US$215,324) in bribes from contractors. Also, it turned out that the belated audit caused KOGAS an additional 1 billion won.
According to Cheon Soon-ok, a lawmaker and member of the committee under the Ministry of Trade, Industry and Energy (MOTIE), the audit conducted by KOGAS reveals that contractors incorrectly reported about dispatched personnel and the costs for their services. For instance, KOGAS’s report notes that contractors deceived KOGAS by saying that dispatched personnel were highly skilled technicians and subsequently charged inflated service fees, which cost KOGAS an additional 1 billion won.
KOGAS hurriedly launched an audit only after the company came under public pressure. Then, KOGAS provided excuses like it couldn’t claim damages because the company lost all the necessary evidence, records of inflated service fees and office attendance for the external personnel of the outsourced project.
The first spark of the incident was the police arrest of a deputy head at KOGAS on Nov. 27, 2014. Leading a department that specializes in outsourcing information service projects at KOGAS, a deputy head with the last name of Kim oversaw Enterprise Resource Planning (ERP). ERP changes the way in which KOGAS calculates the cost for outsourced projects from one that is based on volume to that on calories. The record showed that the ERP project cost KOGAS 3.09 billion won.
It turned out that the entire scandal was in fact orchestrated by a Daewoo Information System staff member by the last name of Yang. Upon hearing about the bidding opportunity, he formed a consortium with Accenture, a multinational software company, and Zalesia, another small and medium company. Yang made Zalesiz and Accenture join in with Daewoo Information Systems to increase the chances for winning the bid for KOGAS’s project.
The record showed that the equity structure for the consortium was as follows: Accenture represented 5, Zalesia 3 and Daewoo Information System 2. However, it turned out that, in reality, Zalesia only nominally participated but claimed 5 percent of the commission. And it also turned out the equity for Accenture was, in fact, 7.5, not 5.
According to Lawmaker Cheon, thanks to a bogus broker company named Geobase, which was set up by a staff member of Daewoo Information System, these three entities could pocket the inflated service fees, while Daewoo Information System embezzled project placement fees via Geobase. Namely, Yang fabricated contracts where Geobase charged Zalesia arrangement fees on five separate occasions, which amounted to approximately 440 million won.
Meanwhile, during the internal audit conducted on this case, a KOGAS representative noted, “KOGAS had a third party that carried out the evaluation of the task at the time. However, the actual work was implemented by different personnel.” He also noted, “Out of 43 technical personnel noted on the contract, only 3 technicians were deployed in the work location.” Additionally, he noted as additional personnel were managed separately and were not included in the calculation, KOGAS had to pay an amount that was different from the one on paper.
Moreover, the contract with Accenture also reveals KOGAS’s mishandling of the outsourced project and its cost. For instance, the contract shows that service fees paid to Accenture were calculated based on the assumption that the Accenture country manager would carry out on-site supervision for a year. However, when asked to show the evidence for on-site supervision, a representative for KOGAS reportedly said the company had lost the records.
Subcontractors charging inflated fees for outsourced system development services is a widely practiced custom in the energy field in Korea. What is more outrageous about the recent incidence is that KOGAS seized on the irrational aspect of outsourcing and subcontracting in order to take bribes.