This article is a contribution by Attorney Hye-rin Kim of Choi & Lee Law Firm. If you would like to share quality content for startups in the form of a contribution, please contact the Venture Square editorial team at editor@venturesquare.net.
The debate over abolishing the crime of breach of trust under the Criminal Act is a hot topic these days. The government and the ruling party formalized their plan to abolish the crime at a meeting on September 30, 2025, declaring their intention to abolish it after 72 years and prepare replacement legislation. While the pros and cons of this plan continue to be debated across various sectors, the venture and startup industries generally welcome the move. However, the abolition of the crime of breach of trust under the Criminal Act does not completely eliminate the risk of breach of trust in corporate management. Today, we will examine the types of embezzlement and breach of trust that frequently occur in startups and SMEs, as well as practical countermeasures, starting with the current debate on the abolition of the crime of breach of trust.
- Common types of embezzlement and breach of trust in startups and small and medium-sized enterprises (SMEs) and how to deal with them.
While embezzlement and breach of trust risks are not uncommon in many companies, startups and small and medium-sized enterprises (SMEs) face even greater vulnerabilities in their management environments, where resources and control systems are relatively limited. The following types of situations frequently arise in practice.
A. Personal use of corporate cards
A typical example is when a CEO or executive uses a corporate card for personal expenses, such as purchasing personal items, paying for family meals or travel expenses, or paying personal insurance premiums or communication fees. Our courts have determined that even if a corporate card is used for personal expenses and then reimbursed later, there is no problem in establishing the crime of breach of trust in business (Supreme Court Decision 86do584, August 19, 1986). Furthermore, since a company has a separate legal personality from its shareholders, who are its owners, even if the company's losses ultimately result in losses for its shareholders, it should be noted that if the CEO of a one-person company uses company property for personal purposes, he or she is guilty of breach of trust (Supreme Court Decision 2004do7585, June 16, 2006).
The larger a company or the more externally invested it is, the more meticulous management becomes necessary when using corporate cards for personal purposes. However, in reality, it's often difficult to clearly distinguish between personal and business purposes. While it's clear that a CEO uses the corporate card to pay for personal legal fees, home maintenance, or family meals, business-related expenses like vehicle maintenance or weekday meal expenses are considered personal, the distinction can be more difficult to discern. Therefore, it's recommended to establish clear guidelines and procedures for corporate card use within the company. If the distinction between business and personal purposes is unclear, it's recommended to create a business-related expense approval document.
B. Deposit and withdrawal of singer funds
When running a business, there are times when the company urgently needs funds without the luxury of waiting for loans or investment, and the CEO deposits his or her personal funds into the company. This money is called "accrued funds." Under the principle of separation of ownership and management in a corporation, the company and its major shareholders or managers are separate legal entities. Therefore, once the accrued funds are transferred to the company, they become the company's money. Therefore, depositing accrued funds without any legal procedures and then withdrawing them without further procedures could be considered embezzlement.
However, simply withdrawing the deposit does not immediately constitute embezzlement. Under criminal law, embezzlement is established only when there is an intent to obtain illegal gain. In the context of embezzlement, intent to obtain illegal gain is defined as "the intent of a person in charge of another's property to dispose of the property, de facto or legally, as if it were his own, without authority, for the benefit of himself or a third party, contrary to the intent of the entrustment (Supreme Court Decision 2013do14777, February 15, 2017)." Here, "another person" refers to the company. Therefore, if the deposit was withdrawn for the company through due process, the intent to obtain illegal gain in the form of embezzlement will not be an issue. Therefore, 1) resolve to return (repay) the deposit at the board of directors' meeting and record the minutes of the meeting, and 2) enter into a "Money Loan Agreement" with the company regarding the deposit of the deposit. Furthermore, withdrawing more than the initially deposited deposit can be considered an advance payment, so it is important to follow due process and retain written evidence in this case as well.
D. Misuse of investment funds
You've likely heard of disputes between venture capitalists and startups arising from misuse of investment funds, such as purchasing real estate without investor consent or investing in Bitcoin. Embezzlement and breach of trust can occur if investment funds are used for purposes other than those outlined in the business plan, used to repay personal debt, or diverted to other businesses.
Investment contracts commonly used both domestically and internationally always include provisions for "use and restrictions on the investment funds." For example, lending investment funds to a third party or acquiring another company could very well constitute breach of trust. Therefore, it's crucial to carefully review the provisions for use and restrictions on investment funds in the investment contract. If you need to use the funds for purposes other than those stated, you must obtain prior written consent from the investor.
Leakage of trade secrets or important business assets
The most common form of trade secret leakage involves a company employee moving to a competitor or founding a new company after leaving the company. If a company employee leaks trade secrets or other key business assets to a competitor, takes out data without authorization for personal gain, or fails to return or destroy trade secrets or other assets upon leaving the company, this constitutes breach of trust and breach of trust (Supreme Court Decision 2006do9089, April 24, 2008).
Since most startups grow primarily through intangible assets like ideas, technology, and data, managing their trade secrets is crucial. To prevent the leakage of trade secrets or other key business assets, companies must establish institutional safeguards in advance. Examples include signing nondisclosure agreements upon hiring employees and using noncompete/non-compete agreements to prevent former employees from moving to competitors or founding competing companies. However, ensuring the validity of these agreements is paramount. Therefore, when determining specific requirements, such as the noncompete period, we recommend consulting with an expert to clearly understand relevant laws and precedents and draft the agreement.
- finish
If the abolition of the criminal law on breach of trust becomes a reality, the legal risk landscape for startups and SMEs is expected to change to some extent. It is expected that greater autonomy in management decision-making will be achieved, and with the reduction of the criminal law on breach of trust, which has played a key role in punishing corporate crimes, civil liability will likely be given greater weight. However, the specific legislative content and schedule to address the legislative gap left by the abolition of the criminal law on breach of trust have not yet been finalized, and the special criminal law on breach of trust under the Commercial Act will remain in place. Furthermore, as the government has announced plans to enact a separate special law that will specify the requirements for breach of trust and reduce the scope of punishment, it is important to note that the inherent risks of breach of trust, inherent to the business environment, will not completely disappear.
While it's impossible to preemptively anticipate all the embezzlement and breach of trust issues that arise in the startup and SME management environment, as we've explored in today's column, there are significant areas where they can be prevented. Simply by carefully reviewing contracts in advance, clarifying relevant provisions, and adhering to procedural due process, you can reduce unnecessary risks.
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