[비즈한국] Companies sometimes make decisions that are difficult to explain by money alone. Understanding the laws or systems hidden behind these decisions can provide deeper insight into the inner workings. ‘Useful Business Tips (Alssul-Bibeop)’ introduces clues to help understand business trends.
The area between Yeoksam Station and Seolleung Station on Seoul Subway Line 2 is known as the "Mecca of Multi-Level Marketing." If you sit in a café near Seolleung Station and look around, you can easily see groups of middle-aged men and women huddled in corners, having heated discussions about investment. If you overhear their conversations, while the focus used to be on daily necessities like bottled water or cosmetics, the trend has shifted toward investments via cryptocurrencies or financial firms.
While there is no need to interfere with their investments, it is frankly unsettling from a lawyer's perspective. This is because South Korea strictly prohibits and severely punishes member recruitment using speculative methods or the operation of private financial services. The main regulatory provisions are as follows.
First, Article 24, Paragraph 1 of the Act on Door-to-Door Sales, etc. prohibits "any person from using a multi-level marketing organization or a similarly structured organization of members recruited in stages to engage in monetary transactions without the exchange of goods, or to engage in transactions that are essentially only monetary transactions disguised as the exchange of goods" as a form of speculative sales force expansion.
Article 58, Paragraph 1, Subparagraph 1 of the same Act stipulates that any person who violates this shall be punished by imprisonment for up to 7 years, a fine of up to 200 million won, or a fine not exceeding three times the total transaction amount.
The core of this provision is to forbid "playing with money" without actual product transactions while operating a sales organization. Because the absence of product transactions is highly likely to be judged as illegal multi-level marketing, most domestic multi-level businesses operate through product sales rather than providing services.
Logically, if a service can be provided reliably, there is no reason to exclude it from the scope of multi-level sales. However, since services are difficult to use as collateral, they are hard to use as a source of compensation for victims of multi-level fraud. Furthermore, because the operation of a service is effectively left to the discretion of the operator, the continuity of its operations is difficult to predict. Thus, from a practical standpoint, the Door-to-Door Sales Act takes a negative stance on transactions without tangible goods.
Second, Article 2 (subparagraphs) and Article 3 of the Act on the Regulation of Similar Financial Business (Similar Financial Business Act) prohibit the business of raising funds from an unspecified number of people without authorization, permission, registration, or reporting under other laws, and receiving investment funds with a promise to pay the full amount or an amount exceeding the investment in the future. Article 6, Paragraph 1 of the same Act stipulates that those who engage in similar financial business shall be subject to imprisonment for up to 6 years or a fine of up to 50 million won.
If someone suffers a loss in a monetary (financial) transaction, the first thing to review is whether the crime of fraud has been committed, but proving fraud is actually not easy for the following reasons.
First, monetary transactions are inherently speculative, so investment risks are accepted. It is difficult to assume criminal responsibility just because money was not returned. Second, market forecasts or value judgments are in the realm of investor assessment and are not objects of deception. Third, it is difficult to prove the intent to deceive because it is hard to determine whether the suspension of principal and interest payments was due to external factors.
While this may be frustrating for those who have lost money in financial transactions, the points above are widely used as logic to evade responsibility for fraud. Should we then give up on regulating "money games" just because they do not meet the components of fraud? Of course not.
Those who are sufficiently solvent can use institutional financial institutions. Those who use private finance are mainly ordinary citizens, and because these businesses exploit the desperate situations of these individuals, incidents in private finance often cause social instability. Additionally, private financial firms often use "corporate finance" or "real estate consulting" as a front, and problems arising from these firms can undermine public trust in the very fields they claim to be in.
Therefore, the Similar Financial Business Act was enacted in 2001 to block illegal fundraising activities at an early stage, banning the act of managing funds while promising the return of principal and payment of profits without legal authorization.
As mentioned earlier, while it is difficult to prove fraud based on monetary transactions alone, in reality, there are many cases where monetary transactions are combined with illegal acts. This is why it is often said that "the Similar Financial Business Act is a stepping stone to proving fraud."
A variety of businesses are mobilized for similar financial activities. Examples include real estate businesses such as non-performing loans, tourism/leisure development, real estate auctions, charnel house sales, and shopping mall leasing/management. Financial investment businesses such as stock investment, crowdfunding, FX margin, comprehensive financial consulting, and P2P product investment are also frequently used.
There are even cases where similar financial businesses acquire institutional financial firms, disguise their operations as legitimate, recruit investors, and mobilize professionals like insurance planners. In such cases, it is difficult for the average person to distinguish whether it is a fake business or a normal financial transaction.
To determine if a business is an illegal multi-level scheme or a similar financial scam, consumers should check the following: △ Does it guarantee high returns far exceeding those offered by financial institutions? △ Is the business model unclear or unrealistic? △ Does it encourage the recruitment of others? △ Is it authorized by financial authorities? △ Are documents such as contracts provided?
Illegal multi-level marketing and similar financial activities must be dealt with strictly. In fact, if such crimes are established, the level of punishment is by no means light. However, on the other hand, companies attempting to conduct progressive and creative businesses could inadvertently face massive criminal liability. Therefore, if you are planning to conduct a new type of business that has not existed before, attract external investment, or operate a sales organization to save on operating costs, you must seek legal review in advance.