The Financial Services Commission (FSC) and the Fair Trade Commission (FTC) said on Monday that they will strengthen monitoring and review processes to crack down on improper business practices and other irregularities. They added that companies found engaging in these practices will be banned from receiving such funds.
The move comes after Myeongnyundang, which runs restaurant chain Myeongnyun Jinsa Galbi, allegedly diverted state-supported low-interest funds by lending them to its franchisees at much higher interest rates.
According to a joint investigation by the FSC and FTC, Myeongnyundang obtained funds at annual interest rates of 3 to 6 perent from institutions including the state-run Korea Development Bank (KDB), the Industrial Bank of Korea (IBK), and the Korea Credit Guarantee Fund (KODIT).
It then lent about 900 billion won (US$613.92 million) to 14 affiliated lenders linked to its major shareholders. These lenders were found to have charged franchisees and prospective small business owners of Myeongnyun Jinsa Galbi annual interest rates of 12 to 18 percent on loans used for expenses such as interior renovations.
Authorities also found that some businesses had deliberately split their operations into smaller entities to keep their assets below 10 billion won to avoid regulatory oversight. They also discovered that some franchisees were required to repay loan principal and interest through payments for meat supplies.
The FTC has already launched formal procedures against Myeongnyundang for allegedly violating franchise regulations along with a corrective order. Investigators found the restaurant chain pressured franchisees to use certain contractors for interior work and equipment, while omitting or falsely stating key financial details in its documents.
It also urged financial institutions including the KDB, IBK, and KODIT to tighten their monitoring and screening of loans made to franchisees and other borrowers.
"Desperate small-business owners should never be exploited for someone else's gain," said FSC chairman Lee Eog-weon on social media, vowing to crack down on predatory lending practices targeting franchisees.
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