Seoul Refers Illegal Lending Franchise Head to Prosecution... 'First in the Nation'

Illegal Lending of 83.1 Billion Won by Well-Known Franchise Headquarters
Borrowed Operating and Facility Funds at Low Interest, Then Provided High-Interest Loans
Operated Lending Companies with Headquarters’ Funds and Collected Interest

The Seoul Metropolitan Government's Civil Affairs Police Bureau has referred the head of a franchise headquarters to the prosecution for attempting to provide high-interest loans to franchise owners.

According to the Seoul Metropolitan Government on November 23, the Civil Affairs Police Bureau launched an investigation into a well-known food service franchise headquarters at the end of September last year, following allegations of high-interest loans offered to franchise owners. After confirming specific illegal lending practices, the bureau referred the head of the franchise headquarters to the relevant prosecutor’s office on November 14 for violating the Lending Business Act. This is the first time in Korea that the head of a franchise headquarters has been referred to the prosecution on charges of illegal lending.

Between 2023 and the end of 2024, this franchise headquarters borrowed approximately 79 billion won in operating and facility funds from banks at low annual interest rates ranging from the upper 3% to the lower 4% range. The headquarters is suspected of providing funds to franchise owners who lacked start-up capital through a lending company effectively operated with headquarters’ funds.

These lending companies lent money to franchise owners at high annual interest rates of 12% to 15%. As a result, the franchise headquarters illicitly received a total of 15.5 billion won, including 9.9 billion won in loan repayments and 5.6 billion won in interest.

The illegal lending scheme involved the franchise headquarters lending 79.15 billion won to Company A (a meat wholesale and retail subsidiary with a special relationship to the headquarters) at an annual interest rate of 4.6%. Company A then lent an additional 80.11 billion won at the same rate to 12 other lending companies, all of which also had special ties to the headquarters. Subsequently, from November 2021 to the end of December 2023, these 12 lending companies provided loans totaling 83.136 billion won to prospective and existing franchise owners at annual interest rates of 12% to 15%, thereby gaining unjust profits.

The investigation revealed that the representatives of these 12 lending companies included former and current employees of the franchise headquarters, employees of partner companies, and the spouse of the head of the headquarters. Except for a few companies, the head of the franchise headquarters owned 100% of the shares in these lending companies. The source of the lending funds was also traced back to the franchise headquarters, and most of the loans were made to franchise owners of the same franchise brand.

The Seoul Metropolitan Government explained that if a franchise headquarters engages in unregistered illegal lending activities by using subsidiaries to obtain profits from lending, without registering as a lending business, it is subject to imprisonment for up to 10 years or a fine of up to 500 million won under the Act on Registration of Lending Businesses and Protection of Financial Users.

Illegal private lending activities can be reported through various channels, including smartphone apps, the Seoul Metropolitan Government website, and by phone. Whistleblowers who provide decisive evidence may receive rewards of up to 200 million won, subject to review by the Seoul Metropolitan Government. Kim Hyunjung, Director of the Civil Affairs Police Bureau, stated, "As illegal lending schemes are becoming increasingly sophisticated, we will respond strictly to economic crimes affecting vulnerable groups such as franchise owners through intensive investigations." He added, "We will strengthen focused investigations into illegal lending targeting self-employed individuals, low-credit and low-income groups, and university students, especially in light of recent amendments to the Lending Business Act."