How Deep Will Korea’s Samsung Scandal Go?

New president said to have
hired bribe-takers for his team

The fact that Korea’s
behemoth Samsung Group is embroiled in one of the biggest slush fund scandals
in the country’s history hasn’t deterred new President Lee Myung-bak from
appointing people to his administration who are alleged to have received bribes
from the company, according to the activist group that blew the whistle on the
scandal in the first place.

Kim Yong-cheol, the former
head of Samsung’s legal affairs team, and the Catholic Priests Association for
Justice late last week told a Seoul radio station that “The list of
bribe-takers includes not just top prosecutors and ministers in the Roh
Moo-hyun government, but also people recently nominated or mentioned as
possible candidates of the cabinet or high-ranking officials of the Blue House."

Kim said he would reveal
the names of the bribe-takers later at a press conference, saying he was
concerned that it not appear that he was playing politics. The Catholic reform
organization also declined to make the list public, saying it would decide
later when to release it.  Three veteran
prosecutors have been named by the whistleblower, including Lim Chai-jin, Korea’s
prosecutor-general, as recipients of the slush funds, which are alleged to
amount to as much as US$200 million. 

Korea’s most powerful
businessman, Samsung Group Chairman Lee Kun-hee, and his wife, Hong Ra-hee are
expected to be summoned by prosecutors this week in a scandal that continues to
grow despite public skepticism that the Samsung empire could ever be truly
dented by the law. The term of the independent prosecutor’s investigation,
which was established January 10 by the National Assembly, is mandated to last
up to 105 days before it is either ended or renewed. It now looks almost
certain to be renewed.  Samsung has
denied all of the allegations.

Jay Y Lee, Lee Kun-hee’s
son, was questioned for 14 hours on February 28 and the independent
prosecutor’s office summoned more high-ranking officials the next day. Among
them were Lee Hak-soo, vice chairman of Samsung Electronics and the
second-highest ranking executive of the conglomerate, who answered questions
for a second time. Kim In-joo, president of the group’s strategy office, also
submitted to questioning. Prosecutors have raided Samsung Life Insurance’s Seoul headquarters in downtown Seoul and a number of other places, including
the office of Chairman Lee.

Despite the explosive
nature of the case, however, the Korean media have tended to play the story
down, carrying it on the inside pages of many mainstream newspapers, with top
management often ordering where to play the story.  That is because Samsung, Korea’s largest
conglomerate and the fifth-biggest company in the world, dominates the
country’s economy so thoroughly. It reportedly provides 20 percent of the
country’s gross domestic product and is responsible for 30 percent of all the
advertising money paid to Korea’s
media.  Samsung’s interests include the
world’s largest electronics company, one of the world’s biggest shipbuilders
and one of the world’s biggest construction companies. It owns hospitals,
textile factories, apartment buildings and even clothing stores.

Kim Yong-cheol, who
retired from Samsung after heading the legal services team from 1997 to 2004, claimed
in late October that he had been involved in helping the chaebol maintain the
vast network of slush funds to be used to bribe scores of politicians,
prosecutors and journalists and allegedly to attempt to influence the course of
the 2002 presidential election. The accounts, Kim said, were maintained in his
name and the names of other top executives.

At least one newspaper
executive, Hong Seok-hyun, chairman and publisher of the JoongAng Ilbo, one of
the country’s biggest newspapers, reportedly has been ordered to present
himself for questioning by early next week as well. Hong, the brother of
Samsung chairman Lee's wife Hong Ra-hee, is suspected of being involved in the
illicit wealth transfer, according to other local media. Earlier reports
indicated that Samsung, which founded the company, may have maintained a hidden
ownership agreement in the newspaper company despite having publicly divested
its stake.

At various times, Kim and
members of the Catholic reform organization have said that individual
prosecutors received US$5,000 to US$20,000 during a single payment session,
depending on rank and position, adding that some prosecutors had come to him to
ask why they hadn’t received cash payments.  In October, bolstering Kim’s charges, the
priests’ association made public account numbers and transactions involving
three “borrowed name” accounts and alleged that Samsung might have created as
many as 1,000 such secret accounts in executives’ names. 

In the meantime, Samsung
Heavy Industries, one of the group’s biggest subsidiaries, said it would donate
US$106 million to help residents of the Taean
Peninsula on the Yellow
Sea recover from another public relations disaster, an oil spill
caused on December 7 when a Samsung-owned barge slammed into a Hong Kong-owned
oil tanker. 

“I am glad that the
company is trying to show its concern, although the action was belated,” Kim
Sang-moon, a village leader in Geunheung, Taean, told a Korean newspaper. “I
hope not only Samsung Heavy Industries but the Samsung Group as a whole show
more support for the recovery of the region.”

Lee Myung-bak, a former
CEO of a Hyundai subsidiary, who was inaugurated last Monday as Korea’s 10th
president, has made no secret of his warm feeling toward business
conglomerates, and has already vowed to clear away some of the restrictions on
lending that were put in place after 1997, when many of the chaebol ran into
serious trouble by being overextended when the Asian economies turned down.  Many critics fear that allowing the chaebol
to return to unfettered expansion could spell more trouble.

Even without the new chief
executive, who describes himself as “Korea’s CEO,” the country’s major
conglomerates, particularly Samsung, have received a remarkable pass from law
enforcement for major violations of the law.  Samsung pleaded guilty in 2005 to
participating in price-fixing over DRAM chips from 1999 to 2002 in a strategy
that prosecutors said drove up personal computer prices and throttled
competition. The company and its US subsidiary, Samsung
Semiconductor, agreed to a settlement in which it paid US$300 million in fines.
Five executives, including the president of Samsung Semiconductor, went to

Lee Kun-hee himself fled Korea for five months
in 2006 before returning in a wheelchair to apologize over allegations of
illegally funding politicians. He later avoided prosecution after a wiretap by
the country’s main spy agency was declared illegal. He also escaped prosecution
when the statute of limitations ran out on a charged that he had provided up to
US$5 million illegally to Lee Hoi-chang, the presidential candidate of the
Grand National Party in 2002.

Some of the money in the
current scandal allegedly was used to make illegal contributions to
presidential candidates in the 2002 election, which was won by former President
Roh Moo-hyun, who stepped down last Monday, the Catholic group said. Samsung
reported donating W32.47 billion (US$36 million) to Lee Hoi-chang. Samsung
recorded giving only W3.6 billion to Roh, who headed the liberal Millennium
Democratic Party. 

There are other notorious
recent cases as well. In September, a court suspended the 18-month prison term
for criminal assault of Kim Seung-youn, the chairman of chemical and insurance
giant Hanwha Group, the country’s ninth largest conglomerate, after he appeared
in court wearing a hospital gown and saying he was the victim of deteriorating
health.  Earlier that week, the three-year prison sentence of Chung
Mong-koo, the chairman of Hyundai Motor Group, for embezzlement and fraud was
suspended on appeal after the company offered to donate nearly US$1 billion to
charity. The court took Chung up on the offer, saying his value to the Korean
economy was such that he should not serve any time in jail.

At the heart of Samsung’s troubles
are longstanding allegations over the chaebol’s ownership structure and the
possible transfer of corporate control from the elder Lee to his son Jae-yong.
The group holding structure is a spiderweb of companies, with Samsung Everland,
an amusement park company, at the center of the scandal over accusations that
the conglomerate manipulated evidence and witnesses in a court case over
purported shady deals that critics say were aimed at transferring corporate
control from the chairman to Jae-yong. Several Samsung executive are still
appealing an earlier conviction over messy Everland stock deals.

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