KT&G, the world’s fifth-largest tobacco company and the leading domestic brand, is currently under investigation by the U.S. Department of Justice and the Food and Drug Administration (FDA) due to a significant managerial error. The company is facing allegations of violating regulations set by U.S. health authorities concerning tobacco, including the submission of inaccurate data during the approval and review process of tobacco products. This situation raises concerns about the potential inability of KT&G to recover the 1.54 trillion won long-term deposit it submitted to the U.S. state government.
Long-term deposits are funds set aside by companies selling tobacco in the United States to address potential health or physical damages to smokers resulting from the company’s negligence. Companies contribute a portion of their tobacco sales revenue, and if no major issues arise, they can reclaim the entire amount after a 25-year period from the payment date. According to KT&G’s business report, the long-term deposit reached 1.5412 trillion won as of the third quarter of 2023. Despite initially planning to retrieve the funds within 1-2 years of entering the U.S. market in the early 2000s, an unforeseen variable has now emerged.
According to internal documents obtained by Chosunilbo on Jan. 16, KT&G USA released tobacco products ‘Carnival’ and ‘Time’ in the United States in 2007 and 2011. However, the documents reveal that the submissions to the FDA omitted harmful substances such as diacetyl and levulinic acid found in these tobacco products. The documents indicate that the ingredients present in the actual tobacco were intentionally omitted from the paperwork citing safety and social concerns as the reasons for the deletions.
KT&G is also under suspicion for violating the core principle of U.S. tobacco regulation known as ‘Substantial Equivalence (SE).’ SE dictates that the ingredients of a new tobacco product must closely match those of previously released products. According to the documents, KT&G breached this principle when introducing ‘This’ in 2017. Furthermore, there are allegations that the company manipulated data to suggest that the materials used in Carnival and Time in 2011 had been in use since the 2007 Carnival. The documents also highlight that, when registering with state governments, including Nebraska in 2018, KT&G failed to disclose that the reference product for This in 2017 was the 2007 Carnival.
This document, prepared by the major domestic law firm A at the request of KT&G, aims to address the U.S. government’s investigation and document submission requirements. In responding to the U.S. government’s document submission orders, law firm A reported to the board, stating, “During the process of complying with the U.S. government’s orders, we came across emails, meeting minutes, and other materials that necessitated factual verification for the 2011 Carnival, Time, and 2017 This products.” The investigation conducted by law firm A targeted 18 individuals from departments such as R&D (Research and Development), SCM (Supply Chain Management), and the Global Headquarters, spanning from September 2021 to early December 2021. The report from law firm A indicated, “Discussions and actions related to inaccurate document submissions to the FDA, arbitrary changes to actual products, and violations of substantial equivalence were primarily led by the R&D Technical Cooperation Team.”
On Dec. 14, 2021, following the submission of the report to the board by the law firm, KT&G unexpectedly issued a public notice of ‘business suspension’ in the United States. The company attributed this decision to the necessity of reassessing its U.S. operations due to heightened regulatory measures and increased competition in the market. Subsequent to this announcement, through periodic disclosures and other channels, KT&G informed stakeholders that it was undergoing an investigation, having received comprehensive document submission orders regarding the regulatory compliance status of tobacco products currently sold in the United States. The company further noted, “We are undergoing an investigation, and the final results, along with their implications, cannot be currently predicted.”
