"Is Innovation in Financial Business Hindered by 'Fair Trade Commission Accusation'?…Naver's Rebuttal"

"Even Combined, Missing Affiliates Fall Far Short of 5 Trillion Won"

Lee Hae-jin, Naver Global Investment Officer (GIO)

[Asia Economy Reporter Jin-gyu Lee] The Korea Fair Trade Commission (KFTC) has filed a complaint with the prosecution against Lee Hae-jin, Naver's Global Investment Officer (GIO), for allegedly omitting affiliate data, drawing attention to Naver's future management strategy. Although the omission was not intentional and even if the charge is acknowledged, it is a relatively minor issue that would only result in a fine of 100 million KRW, the prosecution's complaint raises concerns that Naver's financial business could be affected.

According to industry sources on the 17th, if the prosecution indicts GIO Lee following the KFTC's complaint, he could face a maximum fine of 100 million KRW. Under the Fair Trade Act revised in 2017, submitting false data for designation of large business groups is punishable by imprisonment of up to two years or a fine of up to 150 million KRW. However, since the data omission by Naver occurred in 2015 before the law was amended, the previous provisions apply.

◆ Naver: "Even including omissions, far below the 5 trillion KRW threshold" = Regarding the KFTC's complaint filed with the prosecution against GIO Lee for omitting data from 20 affiliates including his own company and family companies, Naver insists it was a "simple mistake." A Naver official stated, "Although some affiliate data were omitted, even including the omitted data, there was no possibility of designation as a business group, and sufficient data necessary for the KFTC's review were submitted, so legally there is no need to be concerned." The official expressed frustration, saying, "Even if the omitted companies were included, the total assets would not exceed 5 trillion KRW from 3 trillion KRW, and if it had been a close call with the 5 trillion KRW standard, the staff would have thoroughly checked."

When Naver submitted data to the KFTC in 2015, its total assets were 5.6 trillion KRW, but immediately after submission, NHN Entertainment separated from the group, reducing total assets to 3.4 trillion KRW. Among the omitted affiliates, the management consulting firm 'Jieum,' wholly owned by GIO Lee, had assets of 64.2 billion KRW as of September 2017, and the family company restaurant 'Hwaeum' had assets of 3.3 billion KRW. YTN Plus, in which Naver directly invested and holds a 50% stake, had assets of 8.7 billion KRW, and Line Friends, wholly owned by Line, had assets of 57.4 billion KRW. Even combining the assets of these affiliates, Naver's total assets at the time were only about 3.53 to 3.6 trillion KRW. A Naver official explained, "Line Friends was established in January 2015, and the data submitted to the KFTC that year were based on the previous year (2014), so it was omitted. Excluding Line Friends, the total omitted assets are even smaller."

◆ Concerns over disruption to Naver's financial business = In the market, there is analysis that this decision could hinder Naver's management strategy, as it has long-term interest in internet-only banks. According to the current Internet-Only Bank Act, to be approved as a major shareholder of an internet-only bank by financial authorities, one must not have received criminal penalties such as fines or imprisonment for violations of financial laws, the Fair Trade Act, the Tax Offenses Punishment Act, or the Act on Aggravated Punishment of Specific Economic Crimes within the past five years.

Kim Beom-su, chairman of Kakao, also nearly faced a blockade to entering the internet-only banking business due to affiliate omissions during the designation process of publicly disclosed business groups. However, after being acquitted in the first and second trials, the obstacle to his internet-only bank business was removed. An industry insider said, "A simple omission cannot be considered serious enough to disrupt management strategy." In this regard, a bill to amend the Internet-Only Bank Act to exclude violations of the Fair Trade Act from disqualification criteria for major shareholders is currently pending in the National Assembly.

Given that Naver has repeatedly expressed its intention to become a comprehensive financial platform, the possibility of exploring entry into internet banking cannot be ruled out. Han Seong-sook, CEO of Naver, stated at a conference call held last October, "With the launch of Naver Financial, we are expanding the foundation of our financial business through increased payment volume and accelerating the development of competitive financial products in collaboration with Mirae Asset."

Some argue that filing a prosecution complaint, rather than just issuing a warning, is an excessive measure. A Naver official said, "There has never been a case where a prosecution complaint was filed for a reporting omission that did not affect business group designation, so we feel deeply disappointed."