Construction Firms Under Investigation for Alleged Housing Bid Irregularities
Several major construction companies are facing legal and investigative scrutiny over their bidding practices for public housing projects. While some firms have seen investigations conclude with acquittals, others are still embroiled in complex legal battles, highlighting a significant divergence in how these cases are being handled.
The core issue in these investigations revolves around the practice known as ‘swarm bidding,’ where a single construction firm mobilizes multiple affiliated companies or subsidiaries to submit bids. This strategy aims to increase the likelihood of winning a contract by artificially inflating the number of bids submitted.
Divergent Outcomes in Legal Battles
Daebang Construction and Hoban Construction have reportedly found some relief as their cases, which centered on allegations of transferring public land to affiliated companies at cost price, have seen favorable rulings. This approach, where land was transferred without immediate profit, has been distinguished from subsequent development gains.
In contrast, Woomie Construction is currently under investigation for allegedly fabricating construction track records for affiliated companies that lacked the necessary experience. This tactic is suspected to have been used to qualify these affiliates for public housing bids.
Legal experts note that the nature of the alleged supportive actions is crucial in determining the legal ramifications. Baek Gwang-hyun, a lawyer specializing in fair trade law, explained, “Improper support activities can be categorized into transactions under significantly favorable conditions, bulk order allocation, or collusion. For Daebang and Hoban, the key question is whether the transactions were made under highly advantageous terms. For Woomie, the concern lies in the alleged allocation of construction volume.”
Daebang and Hoban: Court Rulings Offer Reprieve
On March 2nd, the Seoul Central District Court’s Criminal Division 18, presided over by Judge Yoon Young-soo, acquitted Daebang Construction and its executives of charges related to violating the Fair Trade Act. The prosecution had alleged that Daebang Construction improperly supported its affiliated companies by transferring public land for six projects, valued at approximately 206.9 billion won, between November 2014 and March 2020.
Daebang had previously won an administrative litigation case against the Fair Trade Commission (FTC) regarding the matter. The FTC had imposed a penalty of 20.56 billion won on Daebang Construction Group’s seven affiliated companies in February of the previous year and reported the company to the prosecution. However, the Seoul Administrative Court overturned the FTC’s decision and the penalty in January of this year. The FTC did not appeal this ruling, leading to Daebang’s victory.
A key point of contention in the Daebang case for the FTC and the prosecution was the subsequent development profits realized by the affiliated companies after acquiring the land. The FTC believed that companies like Daebang Industry Development had generated profits of 1.6136 trillion won in sales and 250.1 billion won in net income from developing the transferred public land.
However, the court ruled that the mere fact that a company later profited from development does not necessarily imply economic gain at the time of the transfer. Factors such as Daebang Construction not being a public housing management company at the time of the transfer and the transfer price being at the public offering level were also considered.
Lawyer Baek Gwang-hyun commented, “It is essential to analyze whether the conditions were significantly advantageous by comparing the price with what could be obtained through sales to a third party, or the actual land acquisition costs for affiliated companies and development expenses. Without sufficient economic analysis to support such claims, it is difficult for the FTC’s findings to be accepted by the courts.”
Hoban Construction received a similar ruling regarding the transfer of public land at cost and the provision of bid deposit funds without interest. The FTC had previously determined in June 2023 that Hoban Construction had transferred 23 public land parcels acquired through swarm bidding to two second-tier subsidiaries as public offerings. Furthermore, it was alleged that the company provided 1.5753 trillion won in interest-free bid deposit funds to 19 affiliated companies, along with 2.6393 trillion won in unguaranteed project financing loans and 93.6 billion won in construction subcontracting fees.
The Supreme Court, on November 20th of last year, overturned the FTC’s decision to impose a penalty of 36.5 billion won related to the transfer of public land and the provision of interest-free bid deposit funds. However, the FTC’s penalties concerning project financing loan guarantees and construction subcontracting fees were upheld.
Following the Supreme Court’s ruling, Hoban Construction stated that the core issue of providing support to second-tier subsidiaries through land transfers had been resolved with the court’s decision to overturn the penalty. However, the company expressed regret that aspects concerning project financing loan guarantees and construction subcontracting fees did not fully reflect industry practices or the actual distribution of profits, considering them separate issues from the ‘swarm bidding’ allegations.
Woomie Construction: Investigation Centers on Fabricated Track Records
The case involving Woomie Construction differs significantly from those of Daebang and Hoban. The primary focus is not on the transfer of public land at cost, but rather on allegations that construction volume was allocated to affiliated companies lacking prior residential construction experience, thereby creating eligibility for public housing bids.
The FTC has alleged that the Woomie Group included five affiliated companies without residential construction experience as non-guaranteed subcontractors on 12 apartment construction sites from 2017 onwards. This is believed to have provided approximately 499.7 billion won in construction volume, enabling these affiliates to secure eligibility for public housing bids.
A particular focus of the investigation is Woomie Estate, a second-tier subsidiary. The FTC claims that Woomie Estate, established just four months prior, received construction volume worth 88 billion won, thereby securing eligibility for its first public housing bid. Subsequently, Woomie’s second-tier companies allegedly generated profits of 11.7 billion won through the sale of these properties.
The FTC imposed a penalty of 48.379 billion won on Woomie Construction and other Woomie Group entities and reported Woomie Construction to the prosecution. The prosecution reportedly conducted additional searches of Woomie Construction’s headquarters in Gangnam-gu, Seoul, on January 27th, following an initial search on the 21st.
Lawyer Baek Gwang-hyun noted, “The primary issue for Woomie could be the substantial volume of work provided to its affiliates. Questions regarding the rationality of affiliate selection, the intent behind the support, and whether it caused disadvantages to competing businesses will be central to determining impropriety.”
While the courts have taken a strict stance on the link between subsequent development profits and the initial economic benefit in the cases of Daebang and Hoban, the Woomie investigation centers on the allocation of construction volume itself, rather than the transfer price. Observers suggest that given these distinct legal grounds, the rulings in the Daebang and Hoban cases may not directly set a precedent for the Woomie investigation.
