Fair Trade Commission files prosecution against Asiana's owner and corporation... 32 billion won in fines

Asiana Airlines In-flight Meal Business Used for Indirect Support... Unfair Profit Generated
"Correction of Family Control Expansion... Kumho Express Indirect Support Concealment Detected"

Former Chairman Park Sam-gu of Kumho Asiana Group. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Moon Chaeseok] The Korea Fair Trade Commission (KFTC) announced that it has decided to file charges with the prosecution against the head of Kumho Asiana Group, its management, and affiliated corporations, imposing a fine of 32 billion KRW along with corrective orders (including future conduct prohibition orders). The commission judged that the group’s organized support of Kumho Express, which sits at the top of the governance structure centered on the head of the group, through the acquisition of affiliates to normalize management, constituted illegal activity.

Source=Korea Fair Trade Commission

On the 27th, the KFTC stated that it will file charges against Kumho Industrial and Asiana Airlines (both corporations), former Chairman Park Sam-gu, Vice President Park Hong-seok, and Chief Financial Officer (CFO) Yoon Byung-chul (all individuals), who are the same-person entities of the Kumho Asiana Group. It will impose a total fine of 32 billion KRW on Kumho Industrial (15.2 billion KRW), Kumho Express (8.5 billion KRW), and Asiana Airlines (8.2 billion KRW).

Source=Korea Fair Trade Commission

According to the KFTC, the group’s Strategic Management Office within Kumho Industrial’s holding business division devised and executed a plan from 2015 to utilize Asiana Airlines’ exclusive in-flight meal business rights to finance Kumho Express at the group level.

Source=Korea Fair Trade Commission

As a result, in December 2016, Asiana Airlines granted a 30-year exclusive supply right to a new in-flight meal supplier, which facilitated a bundled transaction where the overseas group to which the supplier belongs, Swiss Gate Group, acquired Kumho Express’s new convertible bonds (BW) worth 160 billion KRW under favorable conditions of '0% interest rate and a maximum maturity of 20 years.'

In other words, the KFTC judged that the process by which Kumho Express procured 160 billion KRW from Swiss Gate Group violated the law.

Source=Korea Fair Trade Commission

Furthermore, when negotiations for the bundled transaction were delayed, causing Kumho Express to face difficulties in fund management, nine affiliates of Kumho Asiana Group, under the direction of the Strategic Management Office, provided short-term loans totaling 130.6 billion KRW to Kumho Express at favorable interest rates ranging from 1.5% to 4.5% between August 2016 and April 2017.

This was because NH Investment & Securities requested early repayment of a 530 billion KRW loan to Kumho Express around May 2016. At that time, the normal interest rate was between 3.49% and 5.75%, so Kumho Express effectively received an economic benefit worth approximately 720 million KRW due to the low-interest loans, according to the KFTC.

The KFTC explained that during the 45 instances of low-interest credit lending totaling 130.6 billion KRW directed by the Strategic Management Office, Kumho Industrial and Asiana Airlines even mobilized non-affiliated partner companies to conduct indirect lending.

Source=Korea Fair Trade Commission

In particular, it was discovered that Kumho Industrial and Asiana Airlines provided funds under the name of advance payments to small and medium-sized partner companies that lacked the capacity to lend funds, and these partner companies then lent the money directly to Kumho Express. The partner companies merely followed the conditions set by Kumho Industrial and Asiana Airlines without consulting Kumho Express, and some partner companies did not even sign or seal contracts themselves.

The KFTC viewed the provision of unfair benefits to Kumho Express and its special related parties as problematic. Kumho Express gained approximately 16.9 billion KRW in interest margin. Benefits equivalent to at least 7.7 billion KRW, corresponding to the special related parties’ shareholding ratio, and 250 million KRW in settlement dividends were directly attributed to the head family.

Source=Korea Fair Trade Commission

Most notably, the KFTC focused on the fact that the head family’s control strengthened and the foundation for succession of management to the second generation of the head was established. Due to these transactions, Kumho Express, which has a high special related party shareholding ratio (41.1% in August 2016 → 50.9% last year), was able to acquire key affiliates such as Kumho Industrial and Kumho Terminal from creditors, according to the KFTC. Consequently, the head family’s control over the group was maintained and strengthened, and fair trade order in the market was undermined.

Source=Korea Fair Trade Commission

The KFTC judged that the acts of Kumho Asiana Group’s affiliates supporting Kumho Express violated Article 23-2 (Acts of Providing Unfair Benefits to Special Related Parties) and Article 23(1)7 (Unfair Support Acts) of the Monopoly Regulation and Fair Trade Act (Fair Trade Act). Accordingly, it imposed a fine of 32 billion KRW and corrective orders.

Kim Geun-sung, head of the KFTC’s Internal Transaction Monitoring Division, explained, "This action corrects a case where the company at the top of the governance structure, with a high shareholding ratio of the head family, forcibly expanded its control by raising funds of a scale difficult to bear on its own through the available resources of affiliates to rebuild the group and recover management rights."

He added, "In particular, although the group tried to conceal the fact that Kumho Express was indirectly supported through a third party related to Asiana Airlines’ in-flight meal transactions, we approached the substance through overseas witness investigations and digital forensic analysis and took action. We expect this measure to serve as a warning against acts where internal transactions within corporate groups are indirectly conducted through third-party companies or groups to strengthen the head family’s control."