[Issue] 2013, Issue 3 – In Focus, Economy
Is it possible to regulate 
chaebol’s internal transactions in order to fulfill 
President Park’s economic democratization pledge?

                                                                                                                          Lee  Ki-Ung

Manager, Economic Policy Team

On July 2nd, the National Assembly passed a revision of the Monopoly Regulation and Fair Trade Act to fulfill president Park’s presidential pledge, economic democratization. With the revision, the discussion on the chaebol’s internal transaction to share the profits within the cheabol group  is settled for the time being, which is a significant step towards economic decentralization. But there remain problems in the revised act which allow chaebols’ evasion of regulation. 

The revised act contains a blind spot allowing for illegal transactions by insiders or persons with special interests.

One of the core problems is defining what, precisely, is an illegal insider transaction.  Per Article 11, Clause 2 and 4 of the Monopoly Regulation and Fair Trade Act, the Fair Trade Commission (FTC) collects information of insider transactions. The FTC also announced the internal transaction conditions for affiliates of chaebol groups, Samsung, Huyndai Motors, SK, LG, and Lotte, which are designated by the FTC as mutual investment regulated groups so that each group’s cross shareholding practices can be regulated. According to the announcement, the total amount of all internal transactions within each chaebol group is 35 trillion won at Samsung, 34 trillion won at SK, 32 trillion won at Hyundai Motors, and 15 trillion won at LG. 


However, the internal transaction information collected by the FTC is limited to only those chaebol groups that are designated as ‘mutual investment regulated group’. Thus, other groups that are not designated as ‘mutual investment regulated groups’, are outside the scope of the FTC’s watch, and thus are able to avoid regulation under the current law.

For example, SNS International, Inc. is a real estate leasing company and it is one of Lotte’s affiliates. SNS International is owned by Shin Yong-ja, the daughter of Lotte’s chairman, and she holds 55% of the company’s shares, and her family controls the company. According to FTC monitoring, the internal transaction among this affiliate is 0 won, meaning that there is no transaction with affiliate companies that are designated as a mutual investment regulated group. But, on the audit report of SNS International, the transaction cost with another company, B&F, is the same as the total sales of SNS, 1,200 million won. B&F is a retail apparel and wholesale company, and the major shareholder is Jang Jae-young, the son of Shin Young-ja, with 100% of the shares. However, B&F is not designated as a Lotte affiliate; therefore, the FTC is unable to determine the internal transactions between SNS and B&F. In the case of Hundai Glovis, Inc., which belongs to the Hyundai Motor Group, the total amount that can be traced to internal transactions with the chairman’s family is almost 60 trillion won. Since the amount of the transaction cost is so large, there is more risk that illegal internal transactions are taking place, but it is difficult to figure out due to undisclosed details. Exposing illegal internal transaction is much more difficult. 

CCEJ has compiled data on internal transactions among persons of special interest from the top 5 chaebols based on data analysis from the retrieval and transfer system of the financial supervisory service ( According to the data, Samsung’s internal transactions within the family were 55%, which is 42.2pp (percentage point) higher than the announcement of the FTC which was 12.8%. The gaps between CCEJ’s findings and the announcement of the FTC are 23.9pp at Hyundai, 21.6pp at SK, 35.6pp at LG, and 1.8pp at Lotte. 

< Internal transactions among persons of special interest from the top 5 chaebols>
(Unit: Unit, 1 million won, %)

It does not mean that the total internal transactions with persons of special interests are illegal. But the significance of CCEJ’s announcement is that the government does not have initial information on chaebols’ internal transactions with persons of special interests which have a high possibility of defraudation. Chaebols are misusing the blind spots of an imperfect legal system and regulations. The revised act is amended by the limited information the FTC has, therefore, it is not believed that the revised act if fully capable of regulating the monopolized internal transactions of chaebols’ affiliates. 

The core of economic decentralization is suppressing centralized economic power.

Some people say that rectifying unfair transactions and recovering a market economy are at the core of economic decentralization. But rectifying unfair transactions is only the beginning of economic decentralization, not the core of it. Alleviating polarization is the key of economic decentralization. To alleviate polarization, repressing economic centralization of chaebol families should be considered a priority. The internal transactions among the chairman’s family members and the mutual investments are significant impediments to transparent ownership and operation of Korea’s chaebols. The internal transactions and cross-investments between chaebol family members are intended to control 100% of the company by owning 1% of the shares. Through these unfair cross shareholdings, it is much easier to defraud other shareholders and the public by pocketing the dividend and expediting inheritances in order to evade taxes. 

It is advisable to separate the chaebol family member’s affiliates and manage them separately. in order to stop defrauding the public. Accurate data regarding internal financial transactions among chaebol family members and their affiliates is necessary to build a comprehensive regulation system.