The Korea Fair Trade Commission said on the 20th it will impose 671 billion won in penalty surcharges on seven flour milling companies for alleged collusion on flour prices, the largest penalty surcharge ever in a domestic collusion case. It was found that one of the millers was hit with a penalty surcharge amounting to 39% of its annual sales. If finalized as is, the company will have to pay a penalty surcharge 12 times its net profit. Analysts said the policy intent to eradicate collusion, the biggest public enemy in a market economy, is taking effect.
◇ Company with 99.1 billion won in sales hit with 38 billion won penalty surcharge... Some say it is appropriate given the severity of the offense
According to the Korea Fair Trade Commission (FTC) on the 24th, CJ CheilJedang, Samyang Corporation, Sajo Dongaone, Daehan Flour Mills, Daesun Flour Mills, Hantop, and Samhwa Flour Mills are accused of violating the Fair Trade Act by colluding over about six years, from Nov. 2019 to Oct. last year, on the supply prices and volumes of flour to ramen makers including Nongshim and Samyang Foods, and confectionery companies including Lotte Confectionery and Haitai Crown.
These companies are said to account for 87.7% of the B2B (business-to-business) flour market by 2024 sales. The penalty surcharges are as follows: ▲ Sajo Dongaone 183.1 billion won ▲ Daehan Flour Mills 179.3 billion won ▲ CJ CheilJedang 131.7 billion won ▲ Samyang Corporation 94.8 billion won ▲ Daesun Flour Mills 38.4 billion won ▲ Hantop 24.3 billion won ▲ Samhwa Flour Mills 19.4 billion won.
Daesun Flour Mills, fifth in market share, faces a penalty surcharge equivalent to 39% of its sales (99.1 billion won). That is 12 times its net profit (3.1 billion won). This is because, when calculating penalty surcharges, the FTC applies a certain rate to the total sales related to the collusion, depending on the seriousness of the violation. As it determined the collusion lasted six years, the related sales grew and the penalty surcharge amount increased.
In cases over the past five years where the FTC indicated plans to impose at least 100 billion won in penalty surcharges on corporations for alleged collusion, the surcharges were single digits as a share of sales, or in the teens at most. In this case, however, not only Daesun Flour Mills but also Daehan Flour Mills and Hantop, ranked second and seventh in the industry, were hit with penalty surcharges amounting to 30% of sales. Sajo Dongaone and Samhwa Flour Mills, ranked first and sixth, are in the 20% range.
Some say tough penalty surcharges were appropriate given the impact of flour collusion on ordinary people's livelihoods. At a briefing, FTC Vice Chair Nam Dong-il said, "Compared to December 2019, when the millers began colluding, flour sales prices by company rose by at least about 38% to as much as 74% as of September 2022." These millers were also sanctioned for collusion in 2006. The commission also found that the millers continued collusion while receiving 47.1 billion won in government price stabilization subsidies during a period of rising wheat prices.
Some analysts also say this reflects the Lee Jae-myung administration's stance of strengthening sanctions on livelihood economic crimes. Since taking office, President Lee Jae-myung has ordered tough punishment for colluding corporations. At a Cabinet meeting on Mar. 10, he said, "Because collusion and the like are done in secret, they are hard to detect, but if wrongdoing is found, wouldn't we impose enormous penalty surcharges?" He added, "In the future, there could even be cases where a company actually goes under." Since then, the FTC has generally raised the baseline rates for imposing collusion penalty surcharges.
◇ Overseas, penalty surcharges are calculated by considering corporate size and business conditions
Some worry that penalty surcharges set high relative to a company's size or management conditions could lead to unintended side effects. At the FTC's full commission meeting that set the level of sanctions on the millers' collusion, a senior official at one company reportedly pleaded for a reduction in the penalty surcharge, saying in effect, "If a penalty surcharge of this magnitude is finalized, it will be difficult to continue operating the company." A lawyer specializing in fair trade said, "If the burden of penalty surcharges makes corporate management more difficult, it could end up strengthening monopolistic or oligopolistic structures."
Major countries overseas have mechanisms to differentiate penalty surcharges based on corporate size or company circumstances. In the United States, the larger the corporation, the higher the weighting applied when calculating the penalty surcharge. The European Union (EU) reduces penalty surcharges if it is objectively proven that a penalty surcharge would deprive a corporation of its economic ability to survive. Japan, for manufacturing, imposes a penalty surcharge equal to 4% of related sales on small and midsize corporations suspected of collusion, differentiating them from large corporations (10%).
However, there is also strong pushback that such concerns are excessive. The flour penalty surcharges could still be reduced going forward. During the FTC's process of drafting the final written decision, the amounts can change. And if a corporation files an administrative lawsuit, the amounts can be reduced in court or even canceled.