CONTENTS
- 1. Government Strengthens Enforcement Against Wrongful Receipt of Subsidies: A Comprehensive Review of the Management System
- - Main Directions of the Policy
- - The Background Behind the Government's Move to Strengthen Subsidy Management
- 2. Main Causes of the Wrongful Receipt of Subsidies
- - Increased Management Burden Following the Expansion of Subsidy Programs
- - Submission of False Documents and Wrongful Use of Project Funds
- 3. Main Statutes Applicable to the Wrongful Receipt of Subsidies
- - Administrative Sanctions
- - Criminal Punishment
- 4. The Subsidy Management Strengthening Policy Pursued by the Government
- - Expansion of the Scope of Subsidy Reviews
- - Operation of an Internal Reporting System
- - Strengthening of the Management System
- 5. The Need for Companies to Review Their Management Systems Amid Strengthened Subsidy Enforcement
- - Matters Companies Should Review
- - Daeryun, Assistance in Responding to Subsidy Investigations
1. Government Strengthens Enforcement Against Wrongful Receipt of Subsidies: A Comprehensive Review of the Management System
The government has recently been strengthening its management system in order to prevent the wrongful receipt of subsidies and to enhance the transparency of fiscal execution.
Subsidies are public funds that the state or a local government provides to companies, organizations, and individuals in order to achieve policy objectives. When they are used wrongfully, not only does a loss of national finances occur, but the order of fair competition can also be undermined.
In recent years, as the scale of subsidy support has increased across various fields such as startup support programs, research and development (R&D) programs, and regional industry support programs, the need for management has grown accordingly.
Accordingly, the government is expanding its review of the entire process of subsidy execution.
The main directions of the policy to strengthen subsidy management are as follows.
Main Directions of the Policy
Direction of Strengthened Management | Details |
Expanded Review | Strengthened review of subsidized projects of central ministries and local governments |
Improvement of the Management System | Expanded computerized management of subsidized-project execution information |
Activation of Internal Reporting | Operation of a system for reporting wrongful receipt |
Strengthened Sanctions | Recovery of subsidies and imposition of an additional sanction surcharge |
This policy has the character of an institutional improvement aimed at securing the transparency of national finances.
The Background Behind the Government's Move to Strengthen Subsidy Management
Behind the government's pursuit of a policy to strengthen subsidy management lies the fact that, along with the expansion in the scale of subsidized projects, cases of wrongful receipt have continued to occur.
In recent years, the government has expanded subsidized projects in order to achieve various policy objectives, such as startup support, research and development support, and support for small and medium-sized enterprises.
As the scale of subsidized projects grows, the importance of management increases as well. Because subsidies are formed from public finances, transparency and accountability are required in the execution process.
However, as cases of inadequate project-fund management or violations of regulations have been reported in some projects, the need to strengthen management has been raised.
In particular, there is a growing concern that, when the wrongful receipt of subsidies occurs, not only may a loss of national finances result, but the policy objective itself may also be undermined.
For these reasons, the government is pursuing a policy of reorganizing the management system for the entire subsidy-execution process and expanding its reviews.
2. Main Causes of the Wrongful Receipt of Subsidies
The wrongful receipt of subsidies can occur in various forms.
Some cases involve intentional fraudulent conduct, but there are also cases that arise from inadequate project management.
Increased Management Burden Following the Expansion of Subsidy Programs
In recent years, the government has been expanding various support programs in order to promote startups and to strengthen industrial competitiveness.
The representative areas of support are as follows.
• Research and development (R&D) support programs
• Regional industry development programs
• Support for public-interest projects of private organizations
As subsidized projects expand, the scale of support and the number of projects are increasing, and the importance of the management system is growing accordingly.
Submission of False Documents and Wrongful Use of Project Funds
The representative types of the wrongful receipt of subsidies are as follows.
Type | Description |
Submission of a False Project Plan | Applying for a project that there is no actual intention to carry out |
False Accounting of Labor Costs | Registering personnel who do not actually work as project participants |
Use of Project Funds for Purposes Other Than Intended | Expenditures unrelated to the approved project purpose |
Application for Duplicate Support | Receiving support funds from multiple institutions for the same project |
Such conduct may be deemed a violation of the subsidy management regulations, and criminal liability may arise in addition to administrative sanctions.
3. Main Statutes Applicable to the Wrongful Receipt of Subsidies
The wrongful receipt of subsidies may result in administrative sanctions or criminal punishment under several statutes.
Most notably, the "Subsidy Management Act" serves as the basic legal basis.
The "Subsidy Management Act" is a statute that prescribes the basic matters concerning the grant, execution, and management of subsidies.
Subsidy Management Act, Article 30 (Revocation of a Grant Decision Due to Violation of Statutes, etc.)
(1) The head of a central government agency may revoke all or part of a decision to grant a subsidy where a subsidized-project operator falls under any of the following subparagraphs.
1. Where the subsidy was used for another purpose
2. Where the operator violated a statute, the contents of the subsidy grant decision, or a disposition of the head of a central government agency under a statute
3. Where the subsidy was granted through a false application or other wrongful means
(2) The head of a central government agency may revoke all or part of a subsidy grant decision related to an indirect subsidy with respect to the subsidized-project operator where an indirect subsidized-project operator falls under any of the following subparagraphs.
1. Where the indirect subsidy was used for another purpose
2. Where a statute was violated
3. Where the indirect subsidy was granted through a false application or other wrongful means
Administrative Sanctions
Where the wrongful receipt of a subsidy is confirmed, the following administrative sanctions may be imposed.
• Imposition of an additional sanction surcharge
• Restriction on participation in subsidized projects for a certain period
• Revocation of the designation as a project-performing institution
Administrative sanctions may be applied separately from criminal punishment.
Criminal Punishment
Type of Violation | Level of Punishment |
False Application or Wrongful Receipt | Imprisonment with labor for up to 10 years or a fine of up to 100 million won |
Wrongful Payment (Internal Approver) | |
Manipulation of Subsidy Management Information (Forgery, Alteration, or Damage) | |
Use of a Subsidy for Purposes Other Than Intended | Imprisonment with labor for up to 5 years or a fine of up to 50 million won |
Provision or Disclosure of Subsidy Management Information, Exceeding Authority, etc. | |
Unauthorized Disposal of Important Property | |
Change, Suspension, or Discontinuation of a Subsidized Project Without Approval | Imprisonment with labor for up to 2 years or a fine of up to 20 million won |
Violation of the Obligation to Retain Records | Imprisonment with labor for up to 1 year or a fine of up to 10 million won |
Because subsidized projects are, in most cases, carried out by a corporation or institution, a violation does not end with the liability of an individual alone.
Article 43 of the "Subsidy Management Act" provides for a joint penalty provision, under which, where an employee or agent has committed an unlawful act, a fine may be imposed not only on the actor but also on the relevant corporation or business owner.
However, where the corporation has exercised due care and supervision to prevent the violation, it may be exempted from liability.
4. The Subsidy Management Strengthening Policy Pursued by the Government
The government is strengthening its management system in stages in order to prevent the wrongful receipt of subsidies.
The policy direction can largely be summarized as the expansion of enforcement and the improvement of the management system.
Expansion of the Scope of Subsidy Reviews
The government is expanding its reviews of subsidized projects operated by central ministries and local governments.
Subsidized projects above a certain scale may become subject to regular reviews or on-site reviews.
During the review process, the following matters are checked.
• Accounting supporting documents
• Records of labor-cost payments
• Project performance results
Where a subsidy has been used in a manner different from the project purpose, it may become subject to administrative sanctions.
Operation of an Internal Reporting System
The government operates a system for reporting the wrongful receipt of subsidies, and where the content of a report is confirmed to be true, a reward may be paid.
Such a system plays a role in detecting wrongful receipt at an early stage through reports by internal parties.
Strengthening of the Management System
In order to secure the transparency of subsidized-project management, the method of management through computerized systems is also being expanded.
The main purpose is to reduce the possibility of wrongful use by managing records of project-fund execution and the status of project progress through computerized systems.
5. The Need for Companies to Review Their Management Systems Amid Strengthened Subsidy Enforcement
The government is continuously reorganizing its system in order to secure the transparency of subsidy management.
Because the wrongful receipt of subsidies is a matter directly connected to national finances, management and enforcement may continue to be strengthened going forward.
Accordingly, companies that participate in subsidized projects need to establish the following management systems.
Matters Companies Should Review
• Systematically managing accounting supporting documents
• Clarifying the standards for labor-cost payments
• Conducting regular internal reviews
Sufficiently checking the relevant statutes and guidelines and establishing a management system can be an important factor in reducing the legal risks that may arise in the future.
Daeryun, Assistance in Responding to Subsidy Investigations
As enforcement against the wrongful receipt of subsidies is strengthened, companies need to review in advance the legal risks that may arise during the course of carrying out their projects.
Because both administrative regulations and criminal statutes may apply to subsidized projects, a systematic response is important.
▶ Internal review of the subsidy-execution process and compliance advisory
▶ Establishment of strategies for responding to government-agency reviews and audits
▶ Administrative-response advisory related to subsidy recovery and additional sanction surcharges
▶ Response to criminal investigations related to suspicions of the wrongful receipt of subsidies
▶ Advisory on a company's internal accounting and supporting-document management system
Because whether regulations have been violated may become an issue during the execution of a subsidized project, conducting a legal review in advance can be helpful.
If you are in a situation that requires a response to a subsidy-related investigation or dispute, you can review specific response measures through 🔗a corporate legal consultation.
