South Korea

KFTC Enhances the Predictability and Clarity of Decisions but Potentially Increase the Overall Administrative Fine Levels

Facing continued criticisms that the existing rules allowed overly broad discretion to the Korea Fair Trade Commission (the “KFTC”) in setting the amount of administrative fine, the KFTC amended the Notification on Detailed Standards for Imposition of Administrative Fine (the “Notification”). The amendments (the “Amendments”) were passed by the KFTC’s full Committee of Commissioners on December 21, 2016, and came into effect on December 30, 2016.

It is viewed that the KFTC is attempting to enhance the predictability and clarity of its decisions through the Amendments. More specifically, the Amendments seek to (i) further clarify the standards applied in determining the seriousness of the violations, (ii) eliminate or revise several aggravating/mitigating factors utilized in the adjustment processes and the applicable fine reduction rates, and (iii) specify the elements involved in determining the violating company’s ability to pay the fine, as well as further specifying the fine reduction ratios applied according to the violating company’s financial affordability.

The expected results of the Amendments is that they would likely increase the overall amount of administrative fines for most cases, when compared to the fines that would have been levied under the old rules, largely due to the eliminating of several existing mitigating factors and the reduction of the KFTC’s exercise of discretion.

1. Amendments in standards for determining the seriousness of the violations

The procedure for determining the applicable administrative fine is as follows: First, the “basic administrative fine” is calculated by multiplying the penalty ratio to the related sales. Second, the first upward adjustment to the basic administrative fine is made based on the violation period and the frequency of violations. Third, the second upward or downward adjustments are made depending on additional mitigating or aggravating factors. Finally, a final downward adjustment is made depending on various factors including the violating company’s ability to pay the fine, and market and industry situation. The resulting amount upon completion of all the adjustments is the final administrative fine levied on the violating company.

The Notification applies a tiered penalty ratio based on the whether the violation is deemed “very serious”, “serious” or “less serious”. For judging the seriousness of the violation, the KFTC utilizes the standards as detailed in the Annex “Detailed Evaluation Standards by Violation Type” of the Notification (the “Standards”). The pertinent behavior is given a score based on its situation according to the Standards, which is then used by the KFTC to determine the seriousness of the behavior. Higher score given to a pertinent behavior will accordingly increase its seriousness and the applicable penalty ratio. However, there had been concerns that an objective evaluation is difficult under the old Standards because it includes a number of qualitative indicators defined in abstractive terms, which contributed to most violations becoming evaluated as “very serious” violation, especially in collusion cases. The Amendments seek to improve the Standards to be clear and specific, to enable more objective evaluations.

In scoring the pertinent behavior, the Standards takes in to account various factors relating to the behavior, such as anti-competitiveness, related sales, scope of harm and affected geographical area. The Amendments relax the Standards for related sales and affected geographical area, especially for bid-rigging.

Furthermore, the Amendments add specific details to the qualitative factors involved in scoring, such as anti-competitiveness and scope of harm. For example, the most serious violation included in the index for the collusion relating to anti-competitiveness was a “violation which has only anti-competitive effect or is unlikely to have effect of increasing efficiency”. However, the Amendments changed such definition to “collusive acts that mostly have anti-competitive effect only such as decision or change of price or output, limitation or allocation of transaction region or counterparty, and decision of bid price and potential successful bidder, etc.”

In addition, the old Notification calculated basic administrative fines in bid-rigging cases by considering the entire contract amount to be the related sales, regardless of whether the violating company was part of a consortium at the time of bid participation, and multiplying the penalty ratio to such related sales amount. The KFTC faced certain criticisms that such calculation method was excessively harsh, including a court precedent which required the KFTC to reduce the fine at the final downward adjustment stage if the foregoing situation is applied. The Amendment now allow the KFTC to reduce the related sales amount based on the violating company’s stake in the consortium, if one existed at the time of bid participation.

2. Elimination of several factors of consideration in the second adjustment stage

The KFTC faced criticisms that the old Notification had a number of ambiguous aggravating and mitigating factors, which made the second adjustment processes complex and subjected the rules to possible abuse of discretion.

Through the Amendments, it appears the KFTC sought to minimize such issues by eliminating most of such ambiguous factors. “Leading or instigating violations”, “direct involvement by senior executives” and “obstruction of investigation” were removed from the listed aggravating factors. Furthermore, “simply following the lead of others” and “considerable caution was taken” were removed from the listed mitigating factors.

Under the old Notification, repeated violation of laws was included as an aggravating factor in both the first and the second adjustment stages. Due to what we believe to be the repetitiveness and the resulting additional complexities in the administrative fine calculation process, the KFTC removed repeated violation of laws as an aggravating factor in the second adjustment stage.
The Amendments also lowered the upper limit for the rate of reduction resulting from the mitigating factors “cooperation to investigation” and “voluntary correction”.

3. Reduction of KFTC’s discretion in the final adjustment stage

Under the old Notification, there were instances where the administrative fine may be adjusted by a reduction rate equal to or less than 50% or by a reduction rate higher than 50%, depending on the violating company’s ability to pay the levied fine.

However, the Amendments further subdivided such reduction criteria, so that reduction rates equal to or less than 30%, equal to or less than 50%, and greater than 50% may become applicable depending on the circumstances. Such circumstances for reduction also became stricter under the Amendments compared to the old rules, and are based on predetermined financial standards of the violating company, such as the debt ratio, net loss, retained earnings or its state of capital impairment. Therefore, it would seem that the rate of reduction applied during the final adjustment stage under the Amendments would decrease when compared to those applicable under the old rules.

However, the Amendments also enacted that an additional reduction of 10% may be granted depending on certain factors including the market and industry situation, the impact of the violation on the market and the scope of benefits to the violating company due to the violation. Furthermore, the Amendments also now allow the KFTC to exempt the entire administrative fine amount in exceptional cases where the violating company objectively does not have the ability to pay such fine, such as when the violating company is undergoing reorganization proceedings pursuant to the applicable bankruptcy laws.

4. Reflecting amendments to the Monopoly Regulation and Fair Trade Act and the related Enforcement Decree

Apart from reducing the KFTC’s discretion in determining the amount of the administrative fine, the KFTC reflected certain amendments to the Monopoly Regulation and Fair Trade Act (the “MRFTA”) and the Enforcement Decree of the MRFTA in the Notification. The MRFTA had been recently amended to raise the upper limit of administrative fines imposed on the companies involved in certain prohibited activities of business associations and to eliminate the executions of unfair international contracts. The Amendments also reflect such changes in the Notification.

Furthermore, the Enforcement Decree of the MRFTA had been recently amended to establish an upper limit on administrative fines imposed for retaliatory actions, and detailed provisions relating to the above amendments were included in the Notification also through the Amendments.

5. Potential impact

Through the Amendments, it is fair to expect that the basic administrative fine may potentially be reduced to some extent as the Standards have become more specific and relaxed, especially for bid-rigging cases. However, it is also expected that the Amendments would have an impact in increasing the overall administrative fines imposed, as the Amendments significantly eliminate or minimize the mitigating factors previously applied in the second adjustment stage. To date, the KFTC has mostly used the second adjustment stage to reduce the administrative fine rather than increasing it.

Furthermore, considering that the final adjustment stage has been often used to reduce the administrative fine, we expect that the level of reduction traditionally applied in the final adjustment state will also decrease, as the Amendments would reduce the discretion exercised by the KFTC during the final adjustment stage.

Therefore, we believe the overall effects of the Amendments would be that the final administrative fine levied for most cases would increase when compared to the fines that would have been levied under the old rules.

If you have any questions regarding this article, please contact below:

Jae Hoon Kim (jaehoon.kim@leeko.com)

Hwan Jeong (hwan.jeong@leeko.com)

Min-Ho Lee (minho.lee@leeko.com)