Transactions within South Korean conglomerates up in 2016
Companies help owner families take profit with little competition
KIM JAEWON, Nikkei staff writer
SEOUL -- Family-owned conglomerates increased internal transactions by 23% in 2016 from two years ago, ruling out external competition and making maximum profit for themselves, industry data showed Wednesday.
CEO Score, a corporate information provider, said that internal trading between 91 companies controlled by owner families and their affiliates reached 7.9 trillion won ($7 billion) in 2016. The online corporate tracker collected the data from the conglomerates' public disclosures.
Internal trading refers to transactions between affiliates within a conglomerate. It is legal but the Korea Fair Trade Commission, the regulator, forbids companies from awarding contracts solely to affiliates as this contravenes anti-competitive rules.
"The data show that the Fair Trade Commission's regulations on owner family-run companies have not worked effectively," said Park Ju-gun, head of CEO Score. "The agency has no exclusive team dealing with the cases."
Since 2014, the government has restricted internal trading to ensure that owner families do not siphon off illegal wealth. If an owner-family holds 30% or more of a listed unit, or 20% or more of an unlisted unit, business between the parties will come under greater scrutiny and can be banned by the FTC.
But Park said that only four conglomerates -- CJ Group, Hyundai Group, Hanjin Group and Hyundai Department Store -- had come under investigation by the anti-trust agency, raising questions about authorities' will to crack down on illegal practices by chaebol, or family-controlled conglomerates.
The new government under President Moon Jae-in is moving to rein in the power of family-run conglomerates. The ruling Democratic Party said that it would strengthen regulations and penalties on illegal business practices, such as awarding contracts exclusively to affiliates, illegal internal trading, cutting payments to contractors and stealing technology from small- and medium-sized enterprises.
The Samsung group topped the list for internal trading, with 3 trillion won of business transactions recorded within companies owned by the Lee family last year, up 284.2% from a year ago. Vice-chairman and de facto leader of the group Lee Jae-yong is in jail for his alleged role in a corruption scandal involving the former President Park Geun-hye.
SK group's Chey family also enjoyed 1.3 trillion won of internal trading between companies it controls and the group's affiliates. That marked an increase of 29.8% over the last two years.
With Moon now at the helm, the FTC is expected to tighten the screws on chaebol with the appointment of Kim Sang-jo, an economics professor at Hansung University in Seoul. Kim is awaiting the green light from parliament for his nomination as chief of the agency. The 54-year-old scholar and activist, dubbed "chaebol sniper," has led movements to protect minor shareholders' rights and to control chaebol's dominance in the market over the last two decades.
Kim said that he would cut the ownership limit of family-controlled companies to 20% in listed entities from 30%, as well as raise fines on their unfair trading with affiliates. He also promised to set up an exclusive organization in charge of such matters in the FTC.