Act breeds reckless indictments

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Act breeds reckless indictments

A number of chairmen of household-name corporates were sent off to jail in recent years. Their offense was committing malfeasance, the act of incurring losses for the company or oneself by breaching trust in his or her line of duty to gain property profit or have another party make the investment under local law. There are many businessmen in Korea who are punished by the law. They are not restricted to corporate heads.

Senior executives must review if any business decisions violate the act. The decisions that have been approved by the board or shareholders could also be subject to infringement of the act. If the chief executive acts upon a board decision that falls in the category of malfeasance, the executive who proposed the idea must leave the company.

He or she would have to accept liability for making the chief executive commit a crime. Who would dare make a bold proposal when there is a risk of it turning into a criminal offense? The law is one reason why Korean entrepreneurs cannot be adventurous anymore.

The act was previously applied mostly on executives of financial institutions for illegal and irregular lending practices.

It was stretched to corporate executives to punish the debt-financed expansion of large companies following the 1997 financial crisis. It is now popularly used on large company heads. In court, the ratio of non-guilty verdict in malfeasance charges is much higher than for most other crimes. This deals badly to prosecutors who would have devoted a lot to prepare for the cases. To the prosecutors, too, malfeasance cases are hot potatoes.

But the court remains intransigent. The tort law is applicable when the individual has caused loss upon oneself and sought profit for oneself or the third party. But courts sentenced guilty verdicts when there was a risk of loss-making. When a company extends loan to a sister company or offers payment guarantee, the odds of the company losing the money or facing liability of debt default would be low unless the entire group is in financial trouble.

But the group head was punished for committing malfeasance because he caused a company potential damage by ordering it to guarantee payment for the loan that another affiliate sought. The fine was tantamount to the entire debt the company guaranteed because losses could not be calculated since the liabilities have not actually taken place.

The defendant’s argument that the company could have afforded the payment only helped reduce the sentence. How fair is the legal judgment?

The local malfeasance act was directly borrowed from the 1907 Japanese law, which was based on the Constitutio Criminalis Carolina - the first set of German criminal law of 1532. It was the book of judgment of capital crimes during the feudal days to help the ruler dominate over his subordinates. It was honored in feudal societies of Germany, Switzerland, Austria, France and Belgium. It now exists in Japan and Korea for modern-day social discipline.

The core of the crime is breach of trust. Breach of trust should be solved in civil law context. The civil law bans irregular activities and the corporate law regulates activities by board members such as inside trading, abuse of opportunities and multiple job-holding. Various damage lawsuits can be taken if these regulations are violated. If they are not sufficient, protections for investors could be strengthened through supplementing the civil law.

Malfeasance is an excess in criminal law. Prosecutors are reducing the indictment ratio. Still many businessmen fear of making aggressive decisions because of the act. To breed entrepreneurship, the act must go.

Translation by the Korea JoongAng Daily staff.

The author is a professor at Sungkyunkwan University Law School.

by Choi June-sun

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