Hanon Systems Manipulated Data to Conceal 8.05 Billion Won Underpayment in Subcontract Payments

Fair Trade Commission imposes 13.3 billion KRW payment order and 11.5 billion KRW fine... Corporate prosecution filed

Unfair Reduction of Subcontract Payments by 8.05 Billion KRW
Submission of 14 False Documents to Illegally Conceal During Investigation

[Sejong=Asia Economy Reporter Joo Sang-don] Hanon Systems, a specialized company in automotive air conditioning products, has been found to have systematically reduced payments to subcontractors without justifiable reasons to achieve company-wide cost reduction targets and submitted false documents to the Fair Trade Commission to conceal this.

On the 24th, the Fair Trade Commission announced that it decided to impose corrective orders including a payment order of 13.3 billion KRW and a fine of 11.5 billion KRW on Hanon Systems for unfairly reducing payments totaling 8.05 billion KRW to 45 subcontractors. The corporation will also be reported to the prosecution. Additionally, a fine of 20 million KRW will be imposed for submitting 14 false documents during the investigation process.

According to the Fair Trade Commission, Hanon Systems reduced the payments of 8.05 billion KRW to 45 subcontractors supplying automotive air conditioning system parts 106 times between June 2015 and August 2017 without justifiable reasons.

The reductions were made by deducting from already decided delivery payments through retrospective negotiations. Hanon Systems set annual company-wide cost reduction targets and specifically managed reduction goals and achievements for each subcontractor. Particularly, in the second half of 2015, an additional reduction target called the "challenge goal" was set, demanding a 10% additional reduction from all partners.

The negotiation for payment reductions to achieve cost reduction targets was conducted coercively by exploiting Hanon Systems’ dominant position in transactions. Based on last year's sales (7.1 trillion KRW), Hanon Systems is the number one domestic and second worldwide automotive parts company in the automotive air conditioning system sector.

Hanon Systems identified the dependency on transactions and operating profit margins of subcontractors it dealt with and used this information to demand payment reductions. If subcontractors did not comply, threats such as reducing order volumes or switching to other suppliers were used as key negotiation strategies. Ultimately, subcontractors had no choice but to agree to the payment reductions.

After concluding the reduction negotiations, Hanon Systems drafted "reduction agreements" with subcontractors to conceal the legal violations. The agreements were fabricated to appear as if subcontractors voluntarily requested the reductions to share the cost-saving effects resulting from productivity improvements contributed by Hanon Systems.

Article 11 of the Subcontracting Act generally prohibits reductions in subcontract payments. Exceptions allow reductions only if the principal business operator proves justifiable reasons for the reduction. During the investigation, Hanon Systems claimed that reasonable grounds such as new orders, increased volume, and productivity improvements existed to justify the reductions. However, the investigation revealed that Hanon Systems’ claims differed from the actual reduction circumstances documented in internal materials such as meeting minutes and emails.

Moreover, it was confirmed that many of the evidentiary documents submitted by Hanon Systems were fabricated false documents created after the investigation began. When requested to submit evidence proving justifiable reasons for the reductions during the Fair Trade Commission’s investigation, Hanon Systems fabricated and submitted 14 false documents to conceal the legal violations. They newly created or inserted phrases into estimates, contracts, and meeting minutes that did not exist in the originals to support their claims regarding the reduction reasons. The Fair Trade Commission confirmed through multifaceted investigations including digital forensic analysis that the submitted documents were falsified after the investigation started.

A Fair Trade Commission official stated, "This action is significant in putting a stop to the unfair practice of 'payment squeezing,' which has been conventionally carried out in dominant-subordinate relationships. It serves as a warning against the practice of reducing subcontract payments for various reasons and is expected to contribute to subcontractors receiving fair compensation in the future."