Agenda to be Resubmitted to the Securities and Futures Commission on November 6
Some Opinions Suggest It Is Difficult to Accept Heavy Disciplinary Actions by the Financial Supervisory Service
The final sanctions regarding Kakao Mobility's accounting violation charges are expected to be decided in early November. Previously, Kakao Mobility received the 'highest level' of disciplinary action from the Financial Supervisory Service's Audit Committee for allegedly 'intentionally' inflating its sales. The final sanctions will be determined by the Securities and Futures Commission (SFC).
The Securities and Futures Commission under the Financial Services Commission plans to reintroduce the accounting violation agenda and decide on the final level of sanctions at its regular meeting scheduled for November 6. This comes five months after the SFC first submitted the related agenda on June 5. Considering that it usually takes about a year from audit to SFC decision, this case is relatively fast in reaching a conclusion.
At the National Assembly's Finance and Economy Committee hearing on the 24th, Yoon Han-hong, a member of the ruling People Power Party, pointed out, "The issue of Kakao Mobility inflating sales through double contracts in its franchise taxi business was brought to the Financial Services Commission's SFC in June," adding, "Since the conclusion is not coming quickly, there are stories in the market and media that the Financial Services Commission is trying to overlook it."
Earlier, the Financial Supervisory Service sent a preliminary notice of measures to the company regarding Kakao Mobility's accounting fraud allegations, which included recommendations for the CEO's dismissal and referral to the prosecution. In the proposed measures, the Financial Supervisory Service applied the highest penalty standard, 'Intentional Level 1.' The penalty standards are divided by motive (intentional, gross negligence, negligence) and severity (levels 1 to 5). The Financial Supervisory Service decided on the highest sanctions for both motive and severity.
This is because Kakao Mobility was judged to have illegally inflated franchise taxi business sales since 2020. Kakao Mobility's subsidiary, KM Solution, signs contracts with taxi companies and receives about 20% of the fare as a commission when a call occurs. In return, Kakao Mobility returns 16-17% of the fare to the taxi companies under the pretext of fees for advertising and data usage.
This was the point of contention. The Financial Supervisory Service's position is that the net method should have been applied, recognizing only 3-4% of the fare as sales. In contrast, Kakao Mobility has applied the gross method, recognizing the entire 20% as its sales. Kakao Mobility argues that the franchise contract between KM Solution and the taxi companies and the business partnership contract for returning fees for data usage are separate contracts.
An accounting industry insider said, "From Kakao's perspective, it is difficult to answer whether the value of driving data is worth returning 16% of the fare commission," adding, "Because the data can be known simply by confirming the location where the taxi that signed the franchise contract with Kakao headquarters receives calls and the location where the trip ends." He continued, "There is also controversy over whether each contract can be considered separate," and pointed out, "No taxi company would sign only the franchise contract (20% commission) and give up the business partnership contract (the contract to return 16%)." In other words, the logic is that there is an allegation of accounting fraud because sales were inflated to raise the public offering price ahead of the initial public offering (IPO).
The opposing argument is also strong. It is explained that the franchise contract receiving a 20% call commission is charged at a fixed rate, but the business partnership contract for driving data and marketing is calculated on a fixed amount per trip, so they are not linked contracts.
Attention is also focused on whether the large-scale investment by global private equity (PE) firms in Kakao Mobility will influence the SFC's decision. If the heavy sanctions are confirmed according to the Financial Supervisory Service's opinion, Kakao Mobility could become embroiled in international legal disputes. This is because global private equity firms Texas Pacific Group (TPG) and The Carlyle Group have made large investments.
The funds invested by these firms are known to amount to approximately 700 billion to 900 billion KRW. In particular, TPG is currently the second-largest shareholder of Kakao Mobility with a 29.04% stake. It is known that TPG considered an IPO plan within five years when it invested in 2017. Yoon Shin-won, TPG Asia Managing Director, and Lee Seo-kyung, TPG Associate, serve as non-executive directors and outside directors at Kakao Mobility, respectively.
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