This article is a contribution by Attorney Sanghoon Kim of Choi & Lee Law Firm. If you would like to share quality content for startups in the form of a contribution, please contact the Venture Square editor team at editor@venturesquare.net.
Recently, we have often heard in the media that “If a CEO uses a corporate card for personal purposes, he or she will immediately be subject to criminal punishment.” In fact, Articles 355 and 356 of the Criminal Act stipulate that if a person who stores or manages another’s property or handles another’s business neglects his or her duties and causes property damage, he or she will be punished for embezzlement or breach of trust. If the amount is large, the Act on the Aggravated Punishment, etc. of Specific Economic Crimes may be applied, increasing the punishment. Today, we will examine case law on “when and how a CEO’s use of a corporate card for personal purposes leads to criminal liability,” and provide guidance on areas that should be checked in practice.
1. Legal structure of embezzlement and breach of trust in business
Embezzlement in the course of business is committed when “the property of another person in your custody is disposed of arbitrarily with the intention of illegally obtaining it,” and breach of trust in the course of business is committed when “a person who handles another person’s business violates his/her duty and acquires property benefits or causes a third party to acquire them, thereby causing damage to the person.” Since both crimes presuppose “the property or business of another person,” you should not forget that the company and the CEO are separate legal persons. In other words, the perception that “it’s my company, so it’s my card” does not apply in the realm of criminal law.
2. Why is it a problem if the CEO uses the corporate card for personal purposes?
The CEO is usually authorized to keep the corporate card for business-related expenses. If this card is used repeatedly for personal meals, family trips, private donations, etc., (1) it is considered a ‘breach of duty’ in that it uses company property for personal purposes, and (2) it is assessed that losses have occurred as the company’s funds have decreased.
In fact, case law has ruled that if a CEO continuously uses a corporate card issued for business purposes to pay for personal expenses, the crime of breach of trust is committed. In addition, even if the CEO claims that “he ultimately made a personal payment in the company’s ledger,” the court ruled that the intent to dereliction of duty is recognized regardless of whether or not a subsequent settlement was made (see Supreme Court Decision 2011do8870, February 21, 2014). In addition, the court stated that “even if the CEO returns or compensates for the embezzled property later, it will not affect the already established crime of embezzlement” (see Supreme Court Decision 2010do9871, June 14, 2012). This clearly states that the defense that “it was only borrowed for a short time” does not avoid criminal liability. The argument that “all the company stocks are mine, so how can this be considered breach of trust?” is also often raised. However, the Supreme Court established the position that “even if it is a one-person company, the company and its shareholders are independent persons, so if the representative uses the company’s property for personal purposes, the crime of breach of trust is committed” (refer to the Supreme Court decision of the full bench of 83do2330, dated December 13, 1983).
The above three cases show that the misuse of a corporate card by a CEO can lead to criminal punishment through three axes: repeated private use, the meaninglessness of post-mortem compensation, and the fact that one-person companies are no exception.
3. You can avoid liability by setting 'standards' for business purposes.
In practice, it is very important for CEOs and executives to establish several key matters in advance to prevent criminal liability related to the use of corporate cards.
It is most important to clearly set the criteria in advance for what constitutes 'personal use' and what constitutes 'business purposes.' In actual criminal cases, the issue is often whether the purpose of the corporate card use is related to business, rather than the details of the corporate card use itself. However, even if it is claimed to be for business purposes, if there are no specific circumstances or internal standards, there is a high risk that it will be judged as 'arbitrary use by the representative.'
In particular, items such as meal expenses, condolence expenses, vehicle maintenance expenses, lodging expenses, and meeting expenses can be vaguely mixed as business expenses and personal expenses on the surface. For example, even if it is a meal with an outside person, if the list of attendees, purpose of the meeting, payment time, etc. are not recorded, it can be seen as personal. In order to prevent such problems, it is necessary to establish a standard that specifically defines “what items can be recognized as business-use and within what scope,” and to have a system that allows users to prove that they meet the standard.
For example, in the case of meal expenses, it is recommended to set detailed regulations that are appropriate for the actual situation, such as “Limited to meal expenses incurred during official meetings with external partners or clients. Meals among in-house employees are not recognized in principle. The purpose of the meeting and the list of attendees must be recorded, and the limit per person is 15,000 won.” If expenditure details are managed according to standards set in advance like this, there is a greater chance that the CEO or executives will be protected when investigative agencies or external auditors determine later whether the use was “intentional” or “breach of duty.”
4. The CEO’s careful steps protect the company.
Although not all personal use of a corporate card by a CEO leads to criminal punishment, the moment it is recognized that there is “continuous and repeated personal use of a business card,” the court easily presumes intent to defraud. Furthermore, even if it is a one-person company, it is not much of a shield, and compensation by saying “I paid it back later” does not eliminate the crime that has already been committed. In the end, the most certain preventive measure is to establish a transparent accounting system and strict internal regulations. On the other hand, if there is already a suspicion, the starting point of defense is to prove the business connection of the circumstances of use as much as possible and immediately recover the loss, thereby reducing the intent and damage elements.
The credit of the company is directly linked to the credit of the CEO. If you check for yourself every time you use a corporate card, “Can you objectively prove that this payment is for business purposes?”, you will be able to prevent a significant amount of unnecessary criminal risk.
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