S. Korea moves to crack down on policy fund brokers with new legislation

The Ministry of SMEs and Startups is moving to stamp out the problem of "policy fund brokers" — intermediaries who charge fees to help businesses apply for government-backed loans — by codifying prohibited conduct and establishing a legal basis for sanctions. The initiative targets illegal consulting practices such as offering to arrange loans in exchange for insurance sign-ups or preparing falsified business plans on behalf of applicants.

According to briefing materials the Ministry of SMEs and Startups submitted to the National Assembly ahead of its Wednesday work report, the ministry plans to codify a ban on third-party interference in the policy loan application process for businesses and small merchants. Amendments to the Small and Medium Enterprises Promotion Act and the Small Business Protection Act were introduced in June and last month, respectively.

Under the proposed amendment to the Small and Medium Enterprises Promotion Act, a ceiling on fees that consultants may charge for advice or document preparation related to policy fund applications will be set by presidential decree. Accepting or demanding compensation above that ceiling — or any other financial benefit — would constitute illicit interference. The measure is intended to rein in brokers who demand excessive contingency fees by exploiting applicants' need for policy funding support.

The bill defines four types of illicit interference: falsifying or submitting fraudulent documents or materials required for a policy loan application; inducing or facilitating an applicant to prepare or submit false documents; making false, exaggerated or deceptive representations or advertisements that could mislead applicants into believing the broker can influence the outcome of their application; and accepting or demanding fees or other financial benefits exceeding the ceiling set by presidential decree in exchange for assistance.

Cases of consulting firms crossing the line from legitimate advisory services have been recurring — conditioning loan referrals on the purchase of insurance products or preparing falsified documents on behalf of applicants. In response, the Ministry of SMEs and Startups has designated the issue a national normalization task and is actively working to resolve it.

The legislation goes beyond simply listing prohibited acts: it also grants the ministry investigative authority. Under the bill, the minister of SMEs and Startups may require suspects and others to appear, give statements or submit materials to verify whether illicit interference has occurred. Those who refuse to cooperate without justifiable cause face a fine of up to 3 million won ($2,200).

If an investigation concludes that illicit interference occurred, or if a subject refuses to cooperate with the probe, the ministry may refer the case for criminal investigation. The amendment also requires police and other relevant agencies to notify the minister of SMEs and Startups when they open or close a related investigation.

The bill also includes measures to encourage reporting. The ministry plans to establish and operate a reporting center for illicit interference and to pay whistleblower rewards within its budget. Whistleblowers will be protected from dismissal, disciplinary action, reassignment or discriminatory performance evaluations by their employers, with violations subject to a fine of up to 3 million won. The bill also mandates confidentiality for the identities of reporters and informants.

The ministry said it plans to make a thorough case to the National Assembly for the necessity and urgency of the amendments in order to secure their passage.

Beyond the legislative amendments, the Ministry of SMEs and Startups is also putting preventive safeguards in place. The ministry plans to introduce an AI-based service that generates draft business plans for applicants and build a system to detect similar or duplicate submissions, blocking proxy applications and document copying. It also intends to cut the volume of required application documents by more than half, addressing the structural problem of applicants turning to brokers because of overly complex procedures.

On-the-ground enforcement is also being stepped up. The ministry is operating a reporting center and a whistleblower reward program for illegal brokers, while the Korean National Police Agency has been conducting a special crackdown from March through October this year. The Financial Supervisory Service has also taken a firm stance against violations of the Insurance Business Act.