Kakao Mobility Faces Severe Sanctions for 'Revenue Inflation'... Another Legal Risk Following Kim Beom-su

Expected Fallout from Prosecution Referral over 'Sales Inflation'
Kakao Mobility Plans to Accept FSC Decision

The financial authorities have concluded gross negligence in the case of Kakao Mobility, which was suspected of inflating its sales. Although they did not find intentional wrongdoing, the decision to impose fines and refer the case to the prosecution is expected to have repercussions not only for Kakao Mobility but also for Kakao.

On the 6th, the Financial Services Commission's Securities and Futures Commission decided to impose a fine of 3.46 billion KRW on Kakao Mobility for overstating its sales. They also imposed fines of 340 million KRW each on Ryu Geung-seon, CEO of Kakao Mobility, and the former Chief Financial Officer (CFO). For the former CFO, they additionally recommended dismissal (termination), a six-month suspension from duties, and the transfer of investigation information to the prosecution.

Initially, the Financial Supervisory Service applied the highest penalty standard, 'Intentional Level 1,' assuming intentional violation. However, the Securities and Futures Commission judged that it was difficult to conclude intentionality in overstating sales to maximize the public offering price ahead of the initial public offering (IPO).

Kakao Mobility, in its franchise taxi business, returned about 16-17% of the fare to the transportation companies as compensation for participating in advertising and marketing, while the transportation companies paid about 20% of the fare as commission. Kakao Mobility recognized the entire 20% of the fare as sales using the gross method, but the financial authorities viewed this accounting treatment as an attempt to inflate sales and stated that only 3-4% should be recognized as sales using the net method.

With the decision of gross negligence, a severe penalty, the impact is inevitable. Kakao Mobility's sales will continue to shrink. Before the final sanction by the Securities and Futures Commission, Kakao Mobility had voluntarily changed its accounting treatment from the gross method to the net method. With the disciplinary decision by the Securities and Futures Commission, the possibility of reverting to the previous method has become slim. Kakao Mobility's sales last year were expected to exceed 1 trillion KRW under the gross method, but the sales reported in last year's business report decreased to 601.8 billion KRW.

The judicial risk for Kakao Mobility has increased further. Although no measures such as prosecution have been included, the investigation and deliberation materials will be forwarded to the prosecution as 'business information transfer.' This is because there is a possibility that intentionality may be confirmed if additional facts are revealed through future judicial procedures. Therefore, it could lead to a prosecution investigation. Currently, Kakao Mobility is under prosecution investigation for allegations such as preferentially directing calls to its own franchise taxis and blocking calls to competing franchise taxis.

Dark clouds have also gathered over Kakao Mobility's IPO. Kakao holds 57.3% of the company's shares, while global private equity firms Texas Pacific Group (TPG) and Carlyle Group hold about 26%. It is known that TPG and Carlyle's investment exceeds 800 billion KRW, but due to this severe penalty and prosecution investigation, the IPO or sale schedule is effectively halted, and the investment recovery may be indefinitely delayed.

However, the recommendation for CEO Ryu's dismissal included in the Financial Supervisory Service's measures was removed and replaced with a fine of 340 million KRW, avoiding the worst-case scenario of CEO absence.

The impact is also expected to spread to the entire Kakao Group. Since Kakao is the largest shareholder holding a majority stake in Kakao Mobility, it consolidates the financial statements and recognizes the performance, but due to the change to the net method, Kakao's sales have also decreased.

Additionally, founder Kim Beom-su, chairman of Kakao's Management Innovation Committee, is currently on trial for allegations of market manipulation during the acquisition of SM Entertainment, and the judicial crisis of Kakao Mobility is expected to add to this.

Professor Jeong Do-jin of Chung-Ang University's Business Administration Department explained, "From a common-sense perspective, it will be difficult for a company that has been found grossly negligent in accounting treatment to go public in the near future," adding, "For Kakao as a whole, the judgment that there was no intentional wrongdoing means the direct impact will be limited, but how this will be linked with Chairman Kim Beom-su's judicial issues is an important factor for corporate value."

Kakao Mobility has expressed its intention to accept the Securities and Futures Commission's decision. The company stated, "Since the accounting standard change was already implemented in March, we understand that confusion and uncertainty among users of accounting information have been eliminated."