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(LEAD) State audit agency asks for probe over duty-free licensing

All Headlines 15:57 July 11, 2017

(ATTN: UPDATES with response from duty-free industry, more info in paras 11, 13-15)

SEOUL, July 11 (Yonhap) -- South Korea's state audit agency on Tuesday requested that the prosecution probe the customs service over a suspected illicit selection of duty-free operators in 2015.

The Board of Audit and Inspection (BAI) raised suspicions that the Korea Customs Service (KCS) arbitrarily applied rules to eliminate Hotel Lotte Co. from receiving a license to run a duty-free store in Seoul in its July and November biddings.

It also accused the KCS of later creating additional slots in breach of regulations to help the duty-free operator regain its license after being pressured by the presidential office.

According to the inspection result, the KCS lowered grades for Lotte by some 190 points while marking up that of a bidder from the duty-free operating unit of Hanwha Group by as many as 240 points in the July bidding.

A similar malpractice was carried out for the subsequent November bidding in favor of a midsized duty-free operator affiliated with Doosan Group, it said, leading to a consecutive blow for Lotte, the country's largest duty-free operator.

In Korea, the customs service has the full authority to grant licenses for city duty-free shops, which is subject to renewal every five years through a competitive bidding.

The KCS is also suspected of making four extra placements only nine months after the November bidding to mainly help Lotte win back its licensing for a key branch in eastern Seoul. The BAI believes that such a rash decision came at the behest of now-ousted President Park Geun-hye, after she had a meeting with chiefs of top conglomerates, including Lotte.

Such an accusation is included in the prosecutions' charges laid against Park, who's been detained and standing trial on bribery and other charges since her removal from office March 10. The BAI, however, stopped short of making a conclusion over whether the resumed bidding was a favor from Park in return for their suspected contributions to two foundations linked to the scandal.

Based on the conclusion, the BAI asked the prosecution to investigate the KCS over the possible irregularities in violation of obstruction of business and recording false documents.

It also requested a probe on the incumbent head of the customs service and officials who were in charge of the bidding and nullification of the licensing on Hanwha and Doosan stores if they are found to be true.

The companies embroiled in the case declined to comment on the issue, saying they followed all due procedures.

The South Korean duty-free business is already taking the brunt of a steep drop in Chinese tourists, their main profit source, stemming from a diplomatic row with China over the deployment of a U.S. anti-missile defense system. With a total of 13 players vying for an upper hand, the oversupply is expected to further put a damper on the cutthroat market.

Earlier this month, Hanwha Galleria said it will pull out of Jeju Airport next month, citing an early lease termination with the airport operator due to a deficit. Its duty-free business license at the airport was originally valid till April 2019.

Dozens of officials at Lotte Duty Free also said they will return 10 percent of their salaries as part of an effort to overcome the crisis.

Industry watchers say the probe result will likely trigger a restructuring of the local duty-free industry, including the current licensing system, though more details should be revealed through the prosecution's investigation.

This file photo captures a Lotte Duty Free store in central Seoul on July 11, 2017. (Yonhap)

elly@yna.co.kr

scaaet@yna.co.kr
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