[Tracking Jeonse Fraud Reality]⑩ The Era of Eradicating Bad Landlords

[Asia Economy Reporter Seongpil Jo] It is truly the era of the "War Against Jeonse Fraud: Eradicating Bad Landlords." It began when President Yoon Seok-yeol instructed the police last July to "respond with zero tolerance to crimes threatening people's livelihoods, such as jeonse fraud," ordering the formation of a dedicated task force. The police immediately formed a special investigation team for jeonse fraud and launched a large-scale crackdown. Although the war is nearing its end, jeonse fraud remains a common disaster that can happen to anyone. The drawbacks of the jeonse system, which is rare worldwide, have long taken root in parts of our society.

◆ 78 Arrested for Embezzling Billions by Buying 628 Villas through 'Capital-Free Gap Speculation' = The Financial Crime Investigation Unit of the Seoul Metropolitan Police Agency recently arrested 78 individuals who embezzled tens of billions of won in jeonse deposits by buying multiple multi-family houses through 'capital-free gap speculation.' These 78 suspects are accused of fraud for purchasing 628 multi-family houses in the Seoul metropolitan area, including Gangseo-gu and Yangcheon-gu in Seoul and Incheon, from July 2017 to September 2020, using the capital-free gap speculation method, and deceiving 37 tenants out of 8 billion won in jeonse deposits. Capital-free gap speculation is a method where lease and sales contracts are conducted simultaneously, using the tenant's jeonse deposit to cover the purchase price of newly built villas without any personal capital.

According to police investigations, Mr. Shin established a real estate consulting company that connects buyers to building owners such as developers and conspired with Mr. Kim to purchase all 628 multi-family houses, including newly built villas, under Mr. Kim's name. The police analyzed the bank accounts of the two and arrested an additional 76 people involved in the process, including personnel from jeonse consulting firms and brokers.

They divided roles such as finding properties, recruiting tenants, and drafting contracts to conclude lease and sales agreements, sharing the commissions received from sellers as consulting fees. The illegal profits they earned under the name of commissions totaled 800 million won. Since the funds needed for the purchases were covered by the tenants' jeonse deposits, they could not return the deposits to the tenants. The victims were completely unaware that the suspects inflated the jeonse deposits, including consulting fees and rebates, and purchased multi-family houses solely with these deposits.

◆ 'Department Store-Style Shopping'... Indiscriminate Purchase of Hundreds of Houses through Rolling Payments = A lawyer from a real estate law firm said, "The fate of people who recklessly buy houses through gap speculation is very similar," adding, "It is not uncommon to see cases where they repeatedly roll over payments and eventually go bankrupt, standing trial in criminal court."

Most jeonse fraud cases reported to the police are in the form of gap speculation. Without any intention or ability to return deposits, they indiscriminately purchase dozens to hundreds of houses as if shopping. When they become unable to return deposits due to falling real estate prices, lack of subsequent tenants, or increased comprehensive real estate tax burdens from tax reforms, tenants reluctantly apply for deposit payments from the Housing and Urban Guarantee Corporation (HUG).

Gap investment jeonse fraud occurs not only in apartments where sales and jeonse prices are similar but more frequently in newly built villas. The so-called 'Villa King' case under investigation by the Seoul Metropolitan Police Agency and the 'Villa God' case handled by the Gyeonggi Nambu Police Agency are representative examples. A police official said, "Their methods and structures are generally similar."

According to the police, they purchase newly built villas and draft jeonse contracts with deposits at least 10-20% higher than the sales price. Then, under the condition that the price difference is shared as rebates among sales agencies, consulting firms, and landlords, they simultaneously conduct sales and lease contracts. For example, for a villa priced at 200 million won, they find a tenant willing to pay 220 million won, give 200 million won to the villa developer, and pocket 20 million won themselves. A police official explained, "Landlords, sales agencies, consulting firms, and real estate agents are well aware of this transaction method, but because their interests align in obtaining rebates, they divide functional roles and implicitly or sequentially conspire."

◆ Not Only Tenants Are Targeted... Financial Institutions Also Suffer = The most frequently detected type of fraud during the nationwide special crackdown on jeonse fraud since last July was fraud involving jeonse loan funds from financial institutions. This method involves embezzling jeonse loan funds provided by financial institutions at low interest rates, with the victim being the financial institution rather than the tenant. As of December 25 last year, the police uncovered 115 cases and arrested 487 suspects. The total damage to financial institutions amounted to 41.9 billion won.

Jeonse loan fraud targeting financial institutions exploits the fact that banks do not conduct on-site inspections. The structure involves submitting forged or falsified jeonse contracts to financial institutions and embezzling the loan funds. Organized crime groups often plan these crimes, and there are many cases where intellectually disabled individuals or runaway youths are threatened or confined and used as loan applicants. A police official said, "Fake tenants promised 'high-income part-time jobs' on social networking services (SNS) often participate in the fraud but receive no money at all."

In fact, in September last year in Busan, 48 suspects were arrested for forging lease contracts and embezzling about 5 billion won in jeonse loan funds from banks. The group, composed of financial institution employees and real estate agents, was investigated for receiving unsold rental buildings from developers and forging lease contracts as if there were no deposits to obtain loans over two years starting in 2020. The suspects managed intellectually disabled individuals and young adults in their early to mid-20s by having them live together in officetels and other places, using their names to obtain loans.

The police have selected seven key types of cases, including loan embezzlement, gap investment, and non-return of deposits, and are conducting crackdowns. As of the 1st of this month, they have arrested 884 people in 399 cases, with 83 detained. Currently, 378 cases involving 1,373 suspects are under investigation. A police official said, "We are conducting crackdowns and investigations on organized jeonse fraud with the principle of detention." This special crackdown will continue until the 24th.