The Fair Trade Commission announced on April 2 that it has decided to report Daelim Group chairman Lee Hae-wook to the prosecution for enriching himself through sweetheart deals between a privately owned company and the group’s affiliates.
The commission also imposed fines of 1.3 billion won (US$1.1 million) on APD, a company owned by Lee and his eldest son, Daelim Industrial Co., the group’s flagship company, and Global Hotel & Resort, the group’s tourism affiliate. These companies were also reported to the prosecution for investigation.
Lee is the first chaebol owner to be punished for personal profit-taking since the FTC began in 2014 to crack down on chaebol owner family members for enriching themselves through one-sided deals between privately owned companies and group affiliates.
Lee was fined in 2016 when he was the group’s vice chairman for mistreating his driver.
According to the FTC, Daelim Industrial Co. developed its own hotel brand, GLAD, in 2013 as it sought to enter the hotel business. Lee handed over the hotel brand trademark rights to APD, which was established in 2010 by Lee and his eldest son Lee Dong-hoon, who was then an elementary school student.
Daelim Industrial developed its Yeouido office into GLAD Hotel Yeouido in 2014, and Ora Tour, which was renamed Global Hotel & Resort, signed a contract with APD to use the brand. Ora Tour is a 100 percent subsidiary of Daelim Industrial and operates a tourism hotel and golf course. In 2016, the Maison GLAD Hotel in Jeju and the GLAD Live Gangnam Hotel also signed a deal to use the brand.
As such, the commission paid by Ora Tour to the APD amounted to 3.1 billion won between January 2016 and July last year, according to the FTC. APD was supposed to receive a brand fee amounting to 25.3 billion won for about 10 years until 2026.
Under the contract with APD, Ora Tour had to pay 1 percent to 1.5 percent of its sales to APD in brand fees, and again give 1 percent to 1.4 percent of its sales in the name of marketing cost sharing. Although APD owns a hotel brand, it has no experience in hotel operation and has no ability to provide brand-related services. Yet it has been collecting the same level of fees as that charged by famous foreign franchise hotel operators such as Marriott, Hilton and Hyatt.
Lee and his son transferred their entire stake in APD to Ora Tour for free in July last year, when the FTC began its probe into the sweetheart deals between the two firms.
While the group's chairman was engrossed in private profit-taking, Daelim Industrial went into emergency mode due to deteriorating performance, with its plant business division alone recording an operating loss of 86 billion won last year.