A scandal of land speculation by the officials from state developers has been rocking Korean society. The current and former employees of Korea Land and Housing Corporation (LH) are suspected of using insider information and inappropriately purchasing farmland near where a national housing development project was to be planned. The revealed speculative method was a sophisticated and professional technique that tried to evade the regulations of the law. The scandal has prompted President Moon Jae-in to apologize, and Land Minister Byeon Chang-heum –who served as head of LH until December last year- has offered to resign. But it seems not enough to calm the public outrage toward the public sector who is supposed to work to guarantee the people’s housing rights. The scandal also revealed various lax laws and LH’s own problems that made this incident possible. Let’s find out what happened in this huge state-owned company.
What Happened in LH?
LH Shocked Korean Society
The allegations emerged after two civic groups - the ‘People's Solidarity for Participatory Democracy’ and ‘Lawyers for a Democratic Society’ accused 13 LH employees on March 2nd of purchasing land in Gwangmyeong-Siheung, Gyeonggi, beginning in 2018 ahead of an announcement by the Ministry of Land, Infrastructure, and Transport (MOLIT) that the site would be developed into the latest New Town. President Moon Jae-in on March 3rd ordered a total inspection. The next day, a special joint government investigative task force was established to examine allegations of LH employees and related parties. Ordering the establishment of the task force, Prime Minister Chung Sye-kyun said, "The government will punish public officials who committed illegal activities so that this will not happen again." According to the first investigation of the special joint investigative task force toward officials at LH and the MOLIT, a total of 20 suspected speculators were revealed, including 13 accused by the civic groups. They were all LH employees. On March 12th and 13th, two executives at LH were found dead in what could be apparent suicides, with allegations of the employees’ speculation in the new town. LH employees purchased land between April 2018 and June last year. It partly overlaps with the time when Land Minister Byun Chang-heum headed LH. In that regard, many people called for Byun to take responsibility, claiming that he failed to properly manage the organization at that time. As the public outrage has gradually worsened, Byun finally offered his resignation on March 12th to President Moon, who accepted the request. On March 19th, the second investigation of officials, including local government officials and employees of public corporations, found 28 more people who made land transactions in the new town and its neighboring areas. However, there are still concerns that the complete investigation may be difficult as the scope of the investigation is so vast, such as hiding one's name and trading under the name of a family or a third party.
The Meticulous and Professional Speculators
LH officials engaged in speculative transactions using a wide variety of methods that watched for loopholes in the regulations. Large-scale housing development, such as the development of the new town, is usually done on landlocked land or farmland. In the case of farmland, it can be acquired only by submitting an agricultural management plan to the local government under the tillers principle (only actual farmers can have farmland) in the Farmland Act. LH employees reported that they would grow rice, sweet potatoes, corn, etc., and bought farmland. After securing the land, they began to ‘divide’ and ‘combine’ the land shares to maximize land compensation. Land compensation is a system in which a state or public institution compensates for losses arising from the acquisition of civilian land when they use the land for public utilities. The landowners can choose between cash compensation or land compensation. ‘Dividing land’ refers to the act of separating shares of land and receiving a lot of land compensation by registering them separately. Also, ‘combining land’ means registering different parcels of land as one. Some LH employees split the purchased land into 1000m2 parcels, which is the lowest standard of compensation, or combined lands less than 1000m2 to meet the standard. After setting the size of the land, they increased the value of land through additional investment. This is because the compensation is higher as the value of the land increases. The employees said they would grow sweet potatoes or rice in their farmland management plans but they actually planted seedlings such as Red Leaf Willows. Seedlings are much more valuable than crops such as rice, because their unit price is set very high, and the landowners can receive transplant costs. In an interview with JoongAng Ilbo on March 11th, officials at the landscaping company said, "The Red Leaf Willows are a rare species with few people looking for it, so the market price is even not formed," adding that “it must be aimed at land compensation.”
What Helped Them Speculate Easily?
Poor Agricultural Land Act
Only farmers can own farmland according to the principles of the Farmland Act. But the Farmland Act has many loopholes, making speculative transactions easy. First, speculators dig into the exception clause of the Farmland Act, which states that "non-farmers can own farmland when the area is less than 1000m2.” Anyone can purchase farmland without obtaining an acquisition certificate of farmland if the purpose of purchase is to run a weekend farm or agricultural tourism. According to the information obtained by Hankyoreh on March 8th, an employee at LH acquired 992m2 of farmland in Noonsa-dong, Gwangmyeong, Gyeonggi, for weekend farming in February 2018. However, the land has been cultivated on a lease until recently, and it is estimated that it has been closed this year. In the interview, a nearby farmer said that “I have never seen the landowner.” If the area is more than 1000m2, it is necessary to submit an agricultural management plan and get an acquisition certificate of farmland, but as mentioned above, this regulation is virtually nominal. The plan they submitted when purchasing the farmland was falsified in many parts, such as claiming to cultivate crops or farming experience, but the local government failed to filter it out in time. This is because even if an applicant for the acquisition of farmland falsely prepares an agricultural management plan, the local government cannot find it out until a forced investigation, and there was no legal basis to punish the bogus reports. The reason why the Farmland Act stipulated the tillers principle is that farmland, the basis for national supplying food, should not be subject to speculation. However, it is common that speculative demands flow in when the news that development will be carried out, like Gwangmyeong-Siheung new town, making farmland prices soar. "Probably 30 to 50 percent of domestic farmland is owned by investors… The problem is that the area of farmland owned by domestic farmers, which is important in terms of food security and food sovereignty, is gradually decreasing due to speculative demand," said Yun Seok-won, the Emeritus professor of economics at Chung-Ang University.
Lack of Regulations and Penalties
Korean criminal law currently does not recognize 'the crime of real estate speculation.’ So the speculators are punished on other charges, and legal grounds to punish them include the Corruption Prevention Act, the Special Act on Public Housing, and the Korea Land and Housing Corporation Act. However, the problem is that no matter which law is applied, it can be punished only when ‘duty relations’ are recognized. In other words, it is recognized as corruption only if the speculators benefited from the business secrets they found while working. However, as the MOLIT and LH's investigation confirmed that most of the employees who bought land were not staff of the new city-related departments, it was judged that their use of information was not related to duty relations. This means that if they don’t do work related to the new town, there is no problem with taking advantage of the professional knowledge they gained while working. Another problem is that there is no provision for confiscation of land and profits from speculative transactions. Unlike the Capital Market Act, which imposes fines up to five times the profits earned from illegal activities, there is no provision in the Anti-Corruption Act, or the Special Public Housing Act, to confiscate profits from speculative activities using housing development information. Accordingly, even if they are disciplined or dismissed, they can still reap speculative profits.
Indiscipline of LH
LH was established in 2009 when the Korea Housing Corporation and the Korea Land Corporation merged. LH, which performs both housing supply and urban development tasks, is currently a huge public corporation with assets of 184 trillion won and 9,500 employees. As it is responsible for a large part of the national land development project, professional and confidential information will inevitably be available to executives and employees. As a company with considerable responsibility for the public interest, the management of the board of directors also had to be transparent, but it was revealed that LH's board of directors was not. The government obliges state-owned companies and quasi-governmental organizations to prepare minutes that record the participants' remarks and the results of the conference. However, a total of 35 conference discussed at the LH’s board of directors last year did not contain details such as the discussion process or remarks made by the directors. Also, five out of a total of 10 board meetings last year were replaced by written meetings. Following the guidelines for state-owned company management, the conference of directors shall be face-to-face meetings (including video conferences), and written meetings shall be operated to a minimum only if inevitable. Many point out that replacing half of the board of directors in writing is not a transparent operation.
Government’s Counter Plans
To respond to this speculation scandal, the government has come up with various measures. First, to eradicate real estate speculation and prevent the recurrence of speculation by public servants, the subject of mandatory property registration for public servants will be expanded from fourth grade official to seventh grade or higher. In addition, all executives and employees of the public institution will not receive bonuses in the event of serious deviations like this incident. This is to prevent such situations by punishing not only the individual, but also all members of the organization. The performance-based bonuses are paid differently depending on the results of the public organizations performance evaluation. However, the government will change the public organizations performance evaluation to increase the allocation of ethical management. The distribution of marks of the ethical management, which is related to this speculation scandal, is currently only 3 out of 100. Thus, it does not have much impact on the results of the evaluation. In fact, LH received a D grade in ethical management but still received an A grade overall last year. Meanwhile, the level of punishment will also increase significantly. Revision of the Real Estate Transaction Reporting Act will impose punitive damages, which is a system that imposes far more in penalties than the actual damages for malicious and antisocial acts. The Farmland Act will also be revised to prevent illegal speculation caused by poor regulations. The government will strengthen the regulations on farmland ownership by non-farmers and agricultural corporations. It also strengthens crackdowns and penalties on farmland that is illegally owned and used. A nationwide total inspection of farmland will also be carried out. There were also many voices calling for the separation of LH into the Land Corporation and the Housing Corporation, pointing out that this incident happened as the company was extremely bloated. However, the government has decided to strengthen the transparency and efficiency of the organization instead.
The LH scandal has destroyed the people’s trust in the public sector. While the younger generation, including the homeless, is suffering in a society where the average housing price of Seoul exceed 1 billion won. Those who set themselves to be devoted to the public good easily pocketed billions of won using information that the public could not have. No one would be unaware that real estate speculation is a paying business. But ordinary people cannot easily access real estate speculation that requires large amounts of money and information. People in public offices should have far greater responsibility for speculation than the general public, and even if there is a temptation to speculate, they should not give into it. It is very important to punish those who have caused frustration and deprivation to many people. In doing so, the government should show the people social justice and prevent similar incidents from happening again. And ultimately, a structure should be made in which land speculation is fundamentally impossible. The LH left us with a question: Is it possible to become a society where people become rich if they live honestly, rather than a society where they become rich only by cheating?