Hello. This is Lee Young-kyung, a lawyer at Cheongchul Law Firm.

Today, we will look into the Supreme Court case 2022Do2278 regarding whether a company that participated in the startup internship program overseen by the Small and Medium Business Administration, despite having no actual intern hire, is subject to criminal prosecution for violating the laws on subsidy management after receiving funds for the startup intern support program.

[Question]

Is it a violation of the subsidy law if a business that participated in the Small and Medium Business Administration's 'Startup Internship Program' received 'startup intern support funds' despite having no actual interns hired?

[Answer]

If the internship activity funds in this case were provided from a 'contribution,' then they cannot be viewed as 'subsidies' as defined in Article 2, Item 1 of the Subsidy Law, and therefore, Article 40, Item 1 of the Subsidy Law cannot be applied to the act of receiving these funds through false applications!

I. Overview of the Case

1. Summary of Charges

The defendant, as the CEO of Company A, conspired with an inside director of Company B and participated in the 'Startup Internship Program' overseen by the Small and Medium Business Administration in 2016. However, despite not actually hiring interns, they falsely registered as if they had hired interns and applied for support funds from the Small and Medium Business Administration to receive funds for the startup intern program (hereinafter referred to as 'these internship activity funds'). Accordingly, the prosecution charged the defendant with violating the 'Subsidy Management Law' (hereinafter 'Subsidy Law').

2. Judgment of the Lower Court

The lower court (Suwon District Court, Judgment 2021No1567 of January 13, 2022) sentenced the defendant to guilty for the following reasons.

• The internship activity funds in this case are amounts granted by the state for providing financial support to promote small business startups, which fall under the 'subsidy' as defined by the Subsidy Law.

• Thus, the defendant's actions fall under the act of 'receiving subsidies through false applications or other dishonest methods' as defined in Article 40, Item 1 of the Subsidy Law, and was judged as guilty.

• Accordingly, the lower court maintained the fine of 5 million won imposed in the first instance and dismissed the appeal.

II. Judgment of the Supreme Court

The Supreme Court overturned the lower court's ruling and remanded the case, with the main reasons as follows.

1. Relevant Legal Principles

Article 2, Item 1 of the Subsidy Law defines 'subsidy' as funds that the state provides for the operations or projects carried out by entities other than the state (including those managing funds established under laws prescribed in the governmental finance law), for the purpose of forming or providing financial assistance, with exceptions for contributions (excluding contributions under international treaties), and other monetary benefits provided without receiving significant counter-benefits set forth by presidential decree. Additionally, Article 40, Item 1 of the Subsidy Law states that 'those who receive or have received subsidies through false applications or other dishonest methods' are subject to 'imprisonment for up to 5 years or a fine of up to 50 million won.'

Meanwhile, the National Financial Law distinguishes between subsidies and contributions. Article 12 of the National Financial Law states that 'the state can make contributions to a specific institution based on law to achieve specific objectives such as carrying out national research and development projects or operating public purpose agencies', and the main body of Article 14 of the Subsidy Law specifies that 'the state shall not allocate separate subsidies other than contributions to agencies that have contributed funds in the budget,' which is a provision prohibiting overlapping accounting of subsidies and contributions.

Therefore, when the state provides financial support for a specific project, the legal effect varies depending on whether the funds are classified as 'subsidies' or 'contributions.'

2. Specific Judgment

The Supreme Court concluded that since the budgeting and implementation of the Startup Internship Program bear the characteristics of 'contributions' under Article 12 of the National Financial Law, the internship activity funds in this case cannot be regarded as subsidies, based on the following reasoning.

a. Budgeting method of the Startup Internship Program

• The head of the Small and Medium Business Administration promoted startup projects following Article 4-2 of the former 'Small and Medium Business Promotion Act' (prior to the amendment on July 26, 2017), and operated the Startup Internship Program as part of it. According to the budget explanation document from the Small and Medium Business Administration for 2016, the budget for the Startup Internship Program was accounted for as 'contributions (350-1)', and this was conducted through direct contributions from the state to specific institutions. Therefore, the budget cannot be viewed as a subsidy.

• In addition, the guidelines for operating the Startup Internship Program (August 2016) define 'intern activity funds' as 'government support funds paid to hiring companies for operating internships,' and stipulate that the managing agency (the Venture Business Association) is responsible for the payment and management of government support funds.

b. Distinction between contributions and subsidies

• The Supreme Court explained that when the state contributes to a specific institution, that contribution is managed separately from subsidies and is not subject to the applications of the Subsidy Law.

• Since the funding of the Startup Internship Program was allocated as 'contributions,' the internship activity funds paid from it cannot be regarded as 'subsidies' under the Subsidy Law, and thus, the conclusion was reached that the defendant’s actions could not be punished under Article 40, Item 1 of the Subsidy Law.

3. Conclusion

The Supreme Court judged that the lower court confused the concepts of subsidy and contributions in its ruling, and overturned the ruling towards the defendant, remanding the case to the lower court.

III. Implications

This Supreme Court ruling demonstrates that the legal distinction between subsidies and contributions can be an important issue in criminal cases.

Firstly, whether the funds supporting a specific project by the state are classified as 'subsidies' or 'contributions' can influence the applicable laws and whether penalties apply. The Supreme Court found that since the budget for the Startup Internship Program was classified as 'contributions,' the application of the Subsidy Law was not feasible.

Therefore, in cases where related issues arise, it is necessary to carefully examine the strict legal interpretation of criminal liability. The Supreme Court clearly stated that to apply Article 40, Item 1 of the Subsidy Law, the legal nature of subsidies must be precisely distinguished, and that for funds classified as contributions, the Subsidy Law cannot be applied, thus highlighting that simply receiving state financial support does not automatically trigger the application of the Subsidy Law, requiring thorough examination of budget accounts and legal bases.

In this process, businesses and institutions applying for government support funds must clearly understand the legal nature of the funds and comply with relevant laws, as not understanding the differences between the Subsidy Law and the National Financial Law may expose them to criminal risks.

Cheongchul Law Firm provides advice on matters related to the Subsidy Law to various organizations and enterprises and holds expertise in subsidy law cases. Cheongchul's lawyers, comprising veterans from large law firms and major corporations, directly handle the clients' cases.

If you are considering matters or consultations regarding cases related to the Subsidy Law, please feel free to contact us at any time.