[The World of Kickback Schemes]⑤The Pitfalls of Exclusive Contracts...Time to Reform Closed Trading Practices

Repeated Sanctions by Fair Trade Commission Against NongHyup Distribution

Time to Overhaul Supplier Transaction Practices

Public Disclosure of Exclusive Contracts—Evaluation and Sanctions Essential

Private contracts with specific companies and inflated construction payments.

These are among the corruption reports submitted to the anonymous tip-off center related to the National Agricultural Cooperative Federation (Nonghyup), operated by the Ministry of Agriculture, Food and Rural Affairs since November of last year. There have also been reports of people supplying agricultural products to cooperatives under family members' names or delivering subpar goods, leading to a sharp drop in demand. More than 1,000 reports have been submitted over just 10 months. The authority to procure goods for Hanaro Mart stores nationwide, including agricultural products, is so powerful that it effectively determines the survival of suppliers, resulting in repeated abusive practices and raising suspicions of kickbacks.

Experts have pointed out that the first step toward preventing recurring allegations of unfair transactions in procurement, supply, and construction orders at Nonghyup is to reform its closed trading practices as part of its broader organizational reform.

Customers are shopping on the 22nd at Yangjae Hanaro Mart in Seocho-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Establishing a Competitive System

According to the distribution industry on October 2, Nonghyup Distribution procures agricultural products from Nonghyup Economic Holdings and supplies them to Hanaro Mart, but it has independent purchasing authority over livestock and marine products. In the case of Korean beef (hanwoo), there are three main distribution channels. Apart from sets of beef purchased via livestock auction (a full set of all cuts from one animal), the remaining distribution structures present opportunities for vested interests to intervene.

For direct slaughter (non-auction), the quantity and slaughter facility are decided in advance through consultation between Nonghyup Distribution’s buyers and store managers. For cut meat, Nonghyup Distribution purchases beef at auction and then has it processed through contracted partners before supplying it back to itself. For seafood, live fish are sourced after collecting bids from numerous suppliers, while processed fish are procured from companies with direct supply contracts.

Because both the president of Nonghyup Federation and each cooperative chief are selected through elections, allegations of corruption related to post-election rewards and cost compensation keep recurring. In fact, according to information received by Assemblyman Lee Jaegwan of the Democratic Party of Korea from the Ministry of Agriculture, some reports to the anonymous tip-off center accused cooperative chiefs of making expensive purchases or pushing risky business projects for personal gain or in return for election support. Further tips indicated issues such as offering valuables in connection with elections, privatizing personnel and budget decisions, and incurring losses for the cooperative through new investments or the construction of new economic business sites, including Hanaro Mart branches.

Opaque private contracts have also been identified through audits. At one regional cooperative, a private contract was issued for a crematorium construction project estimated at 2.35 billion won—exceeding the 2 billion won threshold for private contracts. No quotations were even obtained for a 10 million won external accounting audit contract. Even Nonghyup Economic Holdings was found to have handled purchases through private contracts in cases where such justifications did not exist.

For this reason, industry advice is that Nonghyup’s distribution organization should first establish a structure in which market competition principles can function properly during product and supplier selection. Choi Byeong-ok, a research fellow at the Korea Rural Economic Institute (KREI), observed, “Rather than managing suppliers based on competitiveness, the current structure is more susceptible to prioritizing the largest regional cooperatives, which is a bigger problem.” He added, “Rather than focusing solely on who has purchasing authority, it is more important to build a system driven by competition.” Choi also emphasized, “Simply shifting purchasing authority without reforming the closed system will not enhance competitiveness unless a market-based competitive structure is established.” 

Public Disclosure of Private Contracts... From Verification to Sanctions

There have also been calls for a system to compare external quotations and transaction conditions when entering into private contracts, and to identify why contracts are repeatedly signed with the same supplier. Professor Cho Chunhan of Gyeonggi College of Science and Technology stated, “Disclosure of reasons for contracts should not be the end point.” He continued, “Transparency can only be ensured by checking the price, quality, and frequency of repeated contracts after the fact, and by moving to restrict contracts when issues are found.” Instead of mere paperwork like a written rationale, he stressed the importance of evaluating the supply and construction outcomes and reflecting these in subsequent contracts.

The improvement measures for private contracts recently recommended by the Anti-Corruption and Civil Rights Commission (ACRC) for public institutions are also worth referencing. In December last year, the commission advised 331 public agencies to disclose reasons for private contracts in advance, expand the public release of contract information, and limit repeated private contracts with the same supplier. The recommendations included capping the number and cumulative value of contracts with each supplier and requiring documentation of reasons when exceptions are unavoidable. Nonghyup should also review the number and value of contracts per supplier to check whether work is being concentrated with particular companies.

Establishing an Independent Audit Organization

Given the repeated abuse of suppliers, some voices are calling for an independent organization to monitor such practices. Last August, the Fair Trade Commission imposed a fine of 462 million won on Nonghyup Hanaro Distribution for using supplier sales staff without prior agreement and treating 187 products released more than six months prior as 'new products' to receive incentives for listing.

Previously, in 2020, the Fair Trade Commission also fined Nonghyup Distribution and Nonghyup Hanaro Distribution a total of 780 million won. Nonghyup Distribution failed to follow procedures for delivering contracts and using supplier employees. Nonghyup Hanaro Distribution collected about 2.212 billion won in “performance incentives” from 77 suppliers. In 2019, Nonghyup Distribution was caught returning frozen marine products worth about 120.65 million won from 18 suppliers without legitimate reason. At the Yangjae branch, it generated false sales of about 323.4 million won and took approximately 3.23 million won (1%) from suppliers as a result. Despite promises of improvement, repeated violations have continued, including not issuing contracts or improperly using supplier employees.

Assemblyman Lee Jaegwan commented, “The more than 1,000 reports we have received in less than a year demonstrate the severity of corruption in Nonghyup’s organization. It is time to establish an independent audit board and transform this organization to truly serve farmers.”

Utilizing Local Production Strengths and Store-Specific Strategies

Alongside changes to transaction practices, there have also been calls to adjust store operations and product assortment. Rather than operating every store the same way, investment and marketing should be tailored to each business area and store environment. Professor Seo Sangyun of Kyungnam University explained, “Since factors like store size, parking, and marketing have different impacts on performance depending on individual store characteristics, strategies should fit local market and store characteristics instead of relying on a one-size-fits-all model.”

The core of product strategy is centered on fresh foods. Analyses suggest that Nonghyup should focus on leveraging its nationwide network of agricultural organizations, rather than simply matching the product mix of general distribution companies, to strengthen its unique competitiveness. Professor Lee Sangyul of Nonghyup University said, “Groups that succeeded in competing with super supermarkets (SSMs) and Hanaro Mart had a higher proportion of sales from agricultural, livestock, or seafood products. This is where Hanaro Mart's differentiated competitiveness truly lies.”

In order to convert local production competitiveness into actual sales, logistics and online sales structures must also be improved. Beyond simply securing quality goods, Nonghyup should reorganize its channels so that customers can purchase and receive goods more conveniently. Kim Seongwoo, a research fellow at KREI, noted, “The structure needs to be transformed and supplemented to support the growing online distribution channels.” Researcher Choi added, “Failing businesses should be reorganized, and Nonghyup must refocus on what it does best—particularly fresh agricultural products—by rebuilding its distribution, logistics, and sales system around these goods.” He emphasized the need to establish a system specializing in fresh agricultural products, linking small packaging and logistics centers at production sites to retail outlets serving customers.

This content was produced with the assistance of AI translation services.