A leading conglomerate has been given a hefty fine for illegal intra-group trading at a time when political parties are moving to rein in chaebol, or family-controlled business groups. This does not bode well for corporations.
On Sunday, the Fair Trade Commission said seven companies affiliated with SK Group breached the fair trade act when they awarded another affiliate, SK C&C, a systems integrator, with no-bid contracts amounting to 1.77 trillion won during the period from 2008 to June this year. The state regulator fined the seven affiliates 34.6 billion won.
It should not come as a surprise if other business groups are charged with illegal intra-group trading, given that huge amounts of trading are conducted under no-bid contracts among affiliates at each of the 10 largest business groups. According to one estimate, no-bid contract trading at the 10 largest business groups amounted to 133 trillion won last year. The amount accounted for 90 percent of all intra-group trading.
True, it is not illegal to enter into a no-bid contract unless it is intended to benefit one party at the expense of others, as in the case involving SK affiliates. But other business conglomerates will be tempted to follow the footsteps of SK if the fair trade act is not strictly enforced against those engaging in illegal intra-group trading.
The seven SK affiliates were accused of overpaying SK C&C for goods and services. The systems integrator was paid up to 72 percent more for personnel expenses by affiliates than by non-affiliates, the state regulator said. Another finding showed that SK Telecom paid SK C&C 20 percent more for the maintenance and repair of its computer systems than the other SK affiliates. In other words, fair competition was nowhere to be found when no-bid, long-term contracts, lasting five to 10 years, were concluded between SK C&C and other SK affiliates. The group chairman, together with his family, owns a 55 percent share of the systems integrator’s stock.
The SK affiliates paid SK C&C more at their own expense when they purchased goods and services from the systems integrator, simply because illegal intra-group trading benefited the SK group chairman and his family. Nothing else explains the illegal trading.
The SK Group claims no illegal trading was conducted between SK C&C and its other affiliates. It says it will appeal the case to the court.
SK C&C says it charged the other affiliates more because it provided better goods and services for them. Its explanation is far from persuasive, given that it was accused of making false statements to FTC investigators and destroying evidence when the Fair Trade Commission was about to conduct an on-site investigation. Why did it attempt to interfere with law enforcement if its intra-group trading was legitimate?
SK C&C was the first systems integrator to be fined for illegal intra-group trading. But the state regulator has long suspected systems integrators are susceptible to illegal transactions, given that intra-group trading accounts for a large portion of their turnover. According to one estimate, systems integrators affiliated with eight large business groups, including Samsung, LG and SK, had 4.48 trillion won in intra-group trading in 2010, or 64 percent of their total turnover.
The state regulator will have to keep close watch on systems integrators and enforce rules strictly if it is to prevent them from being used as a vehicle for channeling illicit gains into the coffers of the families who control large business groups.
For their part, business groups will have to make good on their promise to open their contracts up more to outside bidders if they wish to improve their public image. As they promised earlier in the year, they will have to encourage small and medium-sized enterprises to make bids for contracts in logistics, advertisements and construction as well as systems integration.
They need to refurbish their public image if they wish to help fend off an offensive the political parties are planning to launch during the run-up to the December presidential election. Aren’t they already vowing to tighten regulations on investments by one affiliate of a business group into another affiliate and take other anti-chaebol measures?
