Breach of Trust Prosecutions Surge, Legal Reform Urged

Over the past decade, South Korea has prosecuted 31 times more people for breach of trust than Japan. Given that Japan’s population is 2.4 times larger, this indicates that breach of trust prosecutions are far easier and more frequent in South Korea. Moreover, with the Democratic Party-led revision of the Commercial Act broadening directors’ fiduciary duties to include “the company and all shareholders,” lawsuits related to breach of trust by activist funds and individual investors are expected to rise sharply.

A Sept. 2 report by the Korea Employers Federation on improving breach of trust prosecutions showed that over the past decade, the annual average number of people prosecuted was 31 in Japan compared with 965 in South Korea. Among those accused or reported for breach of trust in South Korea, only 14.8% were actually prosecuted, well below the overall criminal prosecution rate of 39.1%. This suggests that many complaints were filed indiscriminately for matters that did not warrant prosecution.

In South Korea, breach of trust is defined under several laws, including the Criminal Code, the Act on Aggravated Punishment of Specific Economic Crimes, and the Commercial Act. Offenders are broadly defined as “those who handle the affairs of others,” making both executives and ordinary employees liable. Individuals are often penalized for risks that do not result in actual damage or under “dolus eventualis,” a form of conditional intent. By contrast, in Japan, whose legal system is similar to South Korea’s, breach of trust is prosecuted only when intent is clearly established, while in Germany, corporate decisions based on business judgment can exempt officials from liability.

Under the Act on Aggravated Punishment of Specific Economic Crimes, anyone who gains more than 5 billion won from a breach of trust faces life imprisonment or a minimum of five years in prison. This penalty is seen as excessive compared with Japan and the United Kingdom, where the maximum punishment is 10 years in prison or a fine, and Germany, where it is five years in prison or a fine. In common law countries without a breach of trust statute, such cases are generally treated as civil matters, with criminal charges like fraud applied only when absolutely necessary.

President Lee Jae-myung has repeatedly stressed the need to ease breach of trust penalties. Kim Byung-ki, floor leader of the Democratic Party, said Tuesday that discussions on breach of trust should take priority over the “third Commercial Act revision,” but the ruling party has yet to present concrete amendments. Business and legal circles generally agree that breach of trust provisions under the Commercial Act and the Act on Aggravated Punishment of Specific Economic Crimes should be abolished, while the Criminal Code’s breach of trust statute should be revised to clarify intent, actual damage, and exemptions for legitimate business judgment. Laws on breach of trust, which hinder bold investment and creative management and thereby weaken economic growth, must be corrected during this regular session of the National Assembly.