LIG D&A will be barred from bidding on domestic defense projects for the next two years, a sanction that halts its weapons-system business for as long as two years and brings about the feared cutoff in military procurement orders. The restriction takes effect on Oct. 29.
The immediate casualty is a 1.9 trillion won ($1.3 billion) program to develop a long-range air-to-air missile for the KF-21 fighter jet, in which LIG D&A ranked first last month in evaluations of key areas including systems integration and the seeker. The final contract had been set for December, but the sanction takes effect on the 29th, making it impossible to sign.
An official at the Defense Acquisition Program Administration said the agency reviewed the illegality of the misconduct along with the impact a sanction would have on future defense programs, after hearing explanations and statements from the company with a number of civilian members of the committee present. "We decided to impose a 24-month restriction on bidding eligibility, the highest level of sanction stipulated under Article 27 of the Act on Contracts to Which the State Is a Party," the official said.
The agency's tough line had been signaled well in advance. At an Oct. 13 parliamentary audit of the agency by the National Assembly's National Defense Committee, Lee Yong-chul, the agency's commissioner, was asked about criticism that the case was the largest bribery scandal involving an agency employee since the body was founded. "Judging by the amount of bribes in the indictment, that would be so," he said. "Our thinking is that we must respond very sternly so that something like this does not happen again."
All 27 sanctions handed down for bribery since the agency was established have taken the form of restrictions on bidding eligibility. Not one was replaced by a fine. The latest review was conducted under the state contracts law, which allows a fine to substitute for a bidding restriction, yet the existing approach was maintained — a sign, in one reading, of the agency's resolve to take a firm line.
The sanction covers two of the six projects investigated by prosecutors: allegations of bribery and cost fraud tied to contracted programs. Whether to impose sanctions over the remaining five projects, which were carried out under agreements with the Defense Technology Promotion Research Institute, will be reviewed separately.
Enforcement rules under the state contracts law set a two-year bidding restriction for bribes of 200 million won or more. When multiple violations are sanctioned together, the longest applicable standard applies.
According to findings released by the Suwon District Prosecutors' Office on Aug. 20, a grade-five official at the agency, identified as A, took part in proposal evaluations for six defense projects worth a combined 91.5 billion won from 2021 through the end of 2025. In an October 2021 evaluation of an "intelligent signal detection technology" project, the official gave LIG D&A the highest score in 16 of 20 categories and a competitor the lowest score in every category.
In the process, the official received 460 million won in cash — 320 million won in cash and 140 million won in referral fees for selecting subcontractors — along with a separate benefit, the right to recommend subcontracting service deals worth 2.2 billion won. At the first hearing at the Suwon District Court on Sept. 29, the official and three other defendants admitted to all the charges.
Kim Il-dong, deputy commissioner of the Defense Acquisition Program Administration and head of its contract review committee, said no illegal act that undermines transparency and fairness, including bribery and cost fraud, can ever be tolerated in defense programs that underpin national security. "Through this highest-level sanction we aim to raise awareness across the defense industry, and we will continue to apply a zero-tolerance principle to corruption in defense acquisition," he said.
The bidding ban is expected to weigh heavily on LIG D&A. About 80% of the company's revenue last year came from the domestic market. Domestic sales again accounted for a large share this year, at 65.3% in the first quarter and 74.6% in the second.
The company has won major domestic contracts including mass production of the long-range surface-to-air missile (L-SAM) and systems development for the medium-range surface-to-air missile (M-SAM Block-III).
With domestic projects underpinning revenue, the company stands to lose chances to compete if the sanction period overlaps with bidding schedules for new programs. "If a bidding restriction is imposed, a blow to LIG D&A is unavoidable," an industry official said. "If it overlaps with the timing of orders for major projects, the opportunities will go to competitors."
The defense industry is watching the severity of the agency's sanction closely. Hanwha Aerospace, which lost five employees in an explosion at its Daejeon plant, is seen as likely to face an equally tough penalty for the sake of consistency if the Serious Accidents Punishment Act is applied to it.