[La Deok-yeon Gate] La Deok-yeon Gang Profits from Card Kkang Fees... Difficult to Detect if Store Owners and Members Collude

Identified as collecting 132 billion KRW in fees from investors
Prosecutors suspect golf courses and galleries as major corporate tax evasion channels
Previously, illegal loan companies exploited card cashing to exploit citizens in urgent need of funds

Ra Deok-yeon, CEO of Hoan, who was arrested on charges of stock price manipulation related to the Soci?t? G?n?rale (SG) Securities-induced crash, mobilized various corporations to receive commissions from investors. Prosecutors have identified that Ra and his associates pocketed 132 billion KRW under the guise of commissions.

It is known that more than 20 corporations were established under the names of Ra and his acquaintances. Among these, corporations unrelated to investments, such as Double-U (restaurant), Signature Golf (golf practice range), and Ashfeld Ange Equestrian & Resort (equestrian club), were used as fronts to disguise commission payments as proceeds from membership sales, advertising, and management consulting services. Sometimes, they used the 'card kkang' method to make payments and then fabricated them as legitimate sales.

According to the prosecution's arrest warrant application, Ra and his group made investors pay 63.61 million KRW at a restaurant using the 'card kkang' method, then fabricated it as legitimate sales. As the investigation progresses, the scale of card kkang is expected to increase significantly.

Card kkang refers to the act of disguising goods or service transactions to generate credit card sales and then converting them into cash. When dining at a restaurant and paying by card, the card company transfers the cash to the restaurant's account after 2-3 business days, deducting a merchant fee. This fee varies depending on the industry and sales volume. For small businesses, the fee is about 0.8%, while the average merchant fee is 1.5%. Hair salons and golf practice ranges often incur fees above the average.

The golf academy in Gangnam-gu, Seoul, operated by Ahn, a member of Ra Deok-yeon's group, is believed to have been used as a channel to collect fees from investors. Photo by Yonhap News

Until now, card kkang detected by regulatory authorities was mostly exploited by illegal lending companies. They approached people promising low-interest loans, obtained credit card information, and made payments on internet shopping malls, then deposited about 60-70% of the payment amount in cash. This was effectively a usurious loan practice targeting low-income individuals in urgent need of funds.

Regulatory Authorities' Fraud Detection Systems Rendered Ineffective

Due to the emergence of credit delinquents and tax evasion cases caused by card kkang, regulatory authorities strengthened the operation of Fraud Detection Systems (FDS). A representative from Hyundai Card explained, "We identify suspicious transactions based on average merchant sales volume and average payment amounts," adding, "We contact card members and merchants to verify actual card usage." They also noted, "Members sometimes admit to card kkang out of embarrassment," and "Cases of card kkang are reported to the Financial Supervisory Service."

However, card kkang methods used by Ra and his group were likely difficult to detect through the Fraud Detection System. If investors paying by card and merchants such as restaurants or golf practice ranges collude, detection becomes challenging. A Lotte Card representative said, "When high-value payments are made at restaurants, employees sometimes claim it was for company dinners or monthly payments," adding, "If the statements of the merchant and card member match, there are few means for further verification."

On the 18th of last month, Ra established a new furniture company called Spatedic. The business purpose includes manufacturing and wholesale/retail of wooden and other furniture. It is unclear whether the corporation was genuinely established for the furniture business or intended as a new channel to receive commissions. However, Ra may have considered tax reduction during the commission receipt process via card kkang. If a large amount of commission is received from a single restaurant or corporation, the taxable income bracket rises. Also, if the average card payment per transaction at a restaurant is large, it may raise suspicion of abnormal transactions. Since furniture stores typically have large average transaction amounts, splitting payments multiple times can be avoided.

Until just before the SG Securities-induced crash, the stock prices related to Ra steadily rose, suggesting that the commission amounts he could receive were substantial. Accordingly, it is understood that Ra and his group continuously established various corporations to secretly pocket commissions.

The financial investment industry believes that dispersing corporations to receive commissions or using card kkang can have tax reduction effects. It is rare to receive 50% of profits as commissions in discretionary investment. Typically, a target return is set, and about 20% of the excess over the target is taken as performance fees. Receiving over 100 billion KRW in commissions through a single corporation would likely result in huge taxes even after deducting expenses. Splitting corporations can lower the taxable income bracket, meaning a lower tax rate applies. Moreover, given the nature of Ra and his acquaintances' corporations, costs and expenses can be inflated. This is why prosecutors are also investigating Ra for tax evasion charges.

※This SG Securities-induced stock price crash has sounded an alarm for the capital market order. Readers' tips will be a great help in uncovering the truth. We welcome any reports regarding investment damage cases, suspicions of stock manipulation and asset concealment by Ra Deok-yeon’s group, insider details on large-scale sales by major shareholders of Dow Data and Seoul Gas, or any other related information (jebo1@asiae.co.kr). Asia Economy is committed to establishing a transparent capital market order.