Supplier Companies and Small Manufacturers Referred for Investigation Over Fraudulent Subsidy Claims in 'Smart Manufacturing Support Project for Small Manufacturers'

Fraudulent Subsidy Claims Found in 112 Companies Supported in 2024
Investigations Requested for 17 Supplier Companies and 9 Small Manufacturers
Illegal Activities Such as Paybacks and Side Agreements Detected, Subsidy Recovery Underway
Comprehensive Overhaul of Support Project and Tougher Qualification Standards to Be Announced at End of Month

The Ministry of SMEs and Startups has identified fraudulent receipt of subsidies in its "2024 Smart Manufacturing Support Project for Small Manufacturers," and will request investigations into 26 supplier companies and small manufacturers while pursuing recovery of the subsidies. The ministry will also undertake a comprehensive overhaul of the project to fundamentally block fraudulent claims.

On April 28, the Ministry announced that, as a result of a joint inspection with related ministries in November last year to review the overall status and management system of the project, it found fraudulent receipt of subsidies in 112 out of 1,887 companies supported in 2024 (approximately 6%). Numerous cases were detected in which some supplier companies led the entire project and induced fraudulent activities. The ministry has requested criminal investigations into cases where crimes such as fraud and obstruction of business under the Criminal Act were recognized.

The Smart Manufacturing Support Project for Small Manufacturers is an initiative that began in 2020 to increase productivity by introducing smart equipment and software into the manufacturing processes of small manufacturers. The project is considered highly necessary and effective by stakeholders, as demonstrated by the growing number of annual applications. For this year, the support scale was expanded significantly to 98 billion won from 88.2 billion won in the previous year, prompting the ministry to conduct a joint inspection with other government departments.

Supplier Companies Inflated Equipment Prices and Disguised Purchases as Leasing

The main types of fraudulent activities identified include: ▲price inflation and paybacks, ▲disguised purchases as leasing (side agreements), and ▲transmitting false data such as equipment operation. Among the supplier companies reported for investigation, 17 were found to be involved in two or more types of fraudulent practices.

Some supplier companies took the lead in the project by preparing applications, formulating business plans, signing contracts, and conducting settlements on behalf of the small manufacturers. In this process, they inflated the prices of equipment and software above actual costs, then returned part of the difference to the small manufacturers in cash as a "payback," thereby making illicit gains. The ministry has requested criminal investigations into 17 supplier companies for violations of the Subsidy Act and criminal fraud.

The project officially supports only the leasing of equipment. However, it was found that some supplier companies and small manufacturers colluded to purchase equipment outright and disguise the transaction as a lease contract. In some cases, a separate purchase contract was drawn up to buy equipment with subsidies, or equipment was purchased before project selection and then a new lease agreement was created afterward to apply for subsidies. The ministry has requested investigations into four supplier companies and nine small manufacturers involved in such cases.

There were also multiple cases where supplier companies transmitted false information to the project’s dedicated agency regarding whether equipment and software were operational and about production data. In some instances, information was falsely transmitted to make it appear that equipment installed in already closed factories was operating normally. The ministry has requested investigations into 16 supplier companies for obstruction of business under the Criminal Act.

Zero Tolerance Policy... Administrative Sanctions Initiated for 112 Companies

The Ministry has initiated administrative sanctions, including recovery of subsidies and restriction of participation in government support projects, against the 112 companies found to have committed fraudulent acts. A thorough investigation is also underway, in cooperation with the budgeting authorities, into the 1,530 companies supported in 2025, and the ministry plans to respond strictly according to the same standards once the investigation is complete.

The ministry plans to immediately restrict violators from participating in its support projects for up to five years and will notify all relevant ministries about the companies involved in fraudulent claims, the nature of their violations, and the circumstances of their misconduct.

The full amount of the fraudulently obtained subsidies will be recovered, and penalty surcharges of up to five times the fraudulent amount will be imposed to recover more than the illicit gains. In particular, 17 supplier companies and nine small manufacturers found to be involved in serious criminal violations will be criminally prosecuted for fraud and violations of the Subsidy Act, and the ministry will fully cooperate with future investigations by prosecutors and police.

Strengthening Oversight of Supplier Companies... Tougher Qualification Requirements for Small Manufacturers

The ministry will make it mandatory to assess the capabilities of supplier companies to prevent fraudulent claims. Only companies that have proven technical and operational competence will be allowed to participate, and a supplier company pool will be established and managed. The ministry will comprehensively evaluate participation history and level of post-project management to distinguish between outstanding suppliers and those with records of sanctions, and will disclose this information in the dedicated agency’s project management system.

Participation requirements for small manufacturers will be raised to break their dependence on supplier companies. Only small manufacturers with an average annual sales of at least 200 million won over the past three years will be eligible to apply, and the self-funding ratio will be increased from the current 30% to 40%. This is to strengthen the accountability of small manufacturers and ensure the continued use and operation of the supported equipment through minimum financial criteria.

The ministry will revamp the existing paperwork-based evaluation system and introduce an on-site evaluation system based on videos and interviews. Small manufacturers will be required to submit videos filmed directly at their production sites, and their implementation intent will be verified through interviews and presentations. AI-based analysis of business plan similarity will be introduced, and the ministry will detect multiple applications from the same IP address to verify whether applications are being submitted by supplier companies or external agencies. In the post-management phase, an Internet of Things (IoT)-based data collection system will be introduced to monitor equipment operation in real time. Quarterly data submission will be mandatory, and unannounced on-site inspections will be conducted to cross-verify data integrity and actual operation.

The equipment support method will also be changed from the current lease approach, which was vulnerable to fraud, to outright purchase. Purchased equipment will be registered as important assets under the Subsidy Act, and the post-management period will be extended from the current two years to five years. Applicants will be required to submit cost estimation materials during the application stage, and private cost assessment agencies will verify price appropriateness. At the stage before project funds are executed, accounting oversight agencies will pre-review supporting documents to prevent price inflation.

To address low digital literacy and lack of information among small manufacturers and to reduce their dependence on supplier companies, dedicated coordinators will be assigned throughout the project. These coordinators will propose suitable technologies and equipment for small manufacturers and assist in business planning and performance management. Approximately 300 members of the "Manufacturing DX Mentor Group" operated by the Korea Technology and Information Promotion Agency for SMEs, the dedicated agency for smart factory support projects, will be mobilized for this role.

The ministry plans to announce the revised project plan on April 30.

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