(2nd LD) State audit agency asks for probe over duty-free licensing

All Headlines 18:38 July 11, 2017

(ATTN: UPDATES with prosecution's expected approach in the case and more info in paras 2-3, 5 and 10-11; TRIMS)

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) announced the result of its special inspection of the bidding process in connection with a massive corruption scandal involving former President Park Geun-hye and her close friend Choi Soon-sil.

The audit found that the Korea Customs Service (KCS) arbitrarily applied rules to drop Hotel Lotte Co. out of the competition for a duty-free store in Seoul in its July and November biddings, in obstruction of business and recording false documents.

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.

The state auditor launched the inspection early this year at the request of the parliament which claimed that Park and Choi interfered with the bidding.

The customs service grants licenses for city duty-free shops, which are subject to renewal every five years through competitive bidding.

The BAI said the customs authorities lowered grades for Lotte, the country's largest duty-free operator, 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.

Nine months after the November bidding, the KCS unexpectedly announced four extra placements for new duty-frees in Seoul, which the BAI suspects was to help Lotte win back its licensing for a key branch in eastern Seoul, after Park had a meeting with chiefs of the conglomerates.

The prosecution is expected to dig into the case to find out why Lotte was eliminated and later given a second chance. They are likely to question officials from the customs service and the finance ministry involved in the bidding process, over the possibility that someone with a higher rank could have ordered them to exclude the retail giant on purpose.

Park stands accused of colluding with Choi to have top conglomerates including Lotte and Samsung make contributions to two foundations allegedly controlled by Choi in return for business favors. The prosecution claims that Lotte funded at least 7 billion won (US$6.07 million).

The BAI 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.

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.