Can Korea Inc. Investigate the Republic of Samsung?
|Nov 28, 2007|
The extraordinary delicacy with which Korea’s government and media are handling what could be one of the biggest corruption scandals in the country’s history is all down to one factor: what might be described as the Republic of Samsung.
The outside world may think of the Samsung Group as a big computer chip maker or gadget provider, but a Korean resident could spend virtually an entire lifetime using nothing but Samsung-related products. From restaurants and clothing, to cars, apartments, security services and amusement parks, it’s Samsung’s world, Koreans just live in it.
The revelations that have come out since October 29 from an extraordinary whistle-blower about the way the company allegedly uses its bare-knuckle financial clout to get what it wants, have resulted in a special prosecution probe and an independent counsel mandated by the National Assembly, but few people expect either legal proceeding to get to the bottom of Samsung’s hold on Korean society, much less punish the owners of the economic behemoth.
Samsung is reportedly responsible for 20 percent of Korea’s gross domestic product and it had sales last year of nearly $152 billion, according to the Chosun Ilbo newspaper, with a market capitalization among 14 of its listed operation companies of 12.5 trillion won (US$134.16 billion) . It is by far the biggest of the old-line chaebol, the huge, family-owned business and industrial complexes that still dominate Korea’s economy, giants left over from the country’s breakneck industrialization of the 1960s onward. Korea’s judicial, social and governmental systems have always given the chaebol a pass when rectitude threatens.
To start with, the independent prosecutor passed by the National Assembly. The move was spurred by stunning charges, so far unproven, from Samsung’s former chief attorney, Kim Yong-cheol, that the company uses dummy bank accounts to maintain slush funds to bribe officials, prosecutors and journalists. The current prosecutor-general of Korea, the country’s senior investigator, was named as a recipient of Samsung largesse.
Those charges have mushroomed into allegations from Kim that Samsung Chairman Lee Kun-hee used the funds to manipulate the system so that he could transfer ownership of vast amounts of Samsung stock to his son. Kim also says the funds were used to acquire a private art collection for Lee’s wife.
Samsung has denied everything and warned that the investigation could damage the company and the country’s overall economy, a tactic frequently used by huge corporations in Korea to try and deflect legal action by cloaking themselves in the mantle of the nation.
The independent prosecutor’s probe, which at first looks like a dramatic move by the National Assembly, seems certain to become a political football. Charges were ladled onto the bill by conservatives that outgoing President Roh Moo-hyun received payoffs from the company in 2002 and that current independent presidential candidate Lee Hoi-chang, who has broken with the right-wing Grand National Party, received illegal funds from Samsung during the 2002 presidential race.
Look for the bold investigation to dissolve into just another messy Korean political scandal. This is not Enron.
The sheer size and reach of the company might give some picture of why it is treated so gingerly. It is one of the country’s largest engineering and construction concerns as well as the nation’s largest trading company. Its apartments are the most widely recognized in Korea’s residential real estate business. A schematic of the chaebol’s operations looks like a diagram of a complicated oil refinery, with a long series of companies at the very head of their sectors, including Samsung Electronics, with 130,000 employees a global leader in telecommunications, semiconductors and digital media with US$80 billion in annual sales. Samsung SDI, with 25,000 employees, had U$7.8 billion in sales. Samsung Heavy, as it is known, with nearly 9,000 employees, is the world’s (and Korea’s) second biggest shipbuilder.
Overall, Samsung employs roughly 200,000 people in at least 19 major divisions, although the pretzel palace of ownership makes it difficult to discern just how many companies and divisions there are. The group holding structure is a spider web of companies, with Samsung Everland, an amusement park company, at the core. It is Samsung Everland, in fact, that appears to be at the center of the spreading 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 Chairman Lee to his son Jae-yong, using Everland as a holding company. Several Samsung executive are still appealing an earlier conviction over the messy Everland stock deals.
As an example of Samsung’s clout in the economy, on Tuesday, when Roh announced he would reluctantly sign the independent prosecutor bill, the Kospi index fell by 6.14 percent led down by various Samsung components, which represent about 10 percent of Korea’s total big-board market. The news added downward pressure on the stocks. Samsung Electronics shares closed down W24,000, or 4.26 percent, at W539,000, Samsung Corp. fell 2.05 percent to W62,000 and Samsung Heavy fell to 40,650. Samsung Securities shed 2.88 percent, to W87,500
To be sure, the scandal has been juicy stuff, as Kim, a media savvy former government prosecutor who retired from the company in 2004 began naming names and giving dates, places and detailed information on a slush fund that he alleged contained as much as 200 billion won (US$216.8 million) to be distributed to the very core of Korea’s government. His act has been seen as a betrayal by many Koreans, who value loyalty and note that he became a wealthy man as a result of his work for Samsung. Little seems to be known of his motives for stepping forward, although the rumor mill is churning with speculation that he may be nursing a personal grudge.
Kim charged that the money was held in private bank accounts under the names of top executives, including his own, and that accounting reports were manipulated to cover the illegalities. On Monday, he added that accounting records were altered to hide the funds, which were “window-dressed” by affiliates.
He even charged that one of the country’s leading newspapers, the JoongAng Ilbo, which was founded by Samsung, was still secretly owned by the company despite an elaborate transfer of ownership that seemed to take the paper out of the Samsung family in 1999. The newspaper (and Samsung) denied the charge vigorously and has threatened to pursue legal action against Kim.
(At virtually every Korean media outlet, sources say that sensitivity to the Samsung story is extraordinary. With the giant accounting for an estimated 30 percent of advertising revenues, it is almost unheard of for reporters to snoop into Samsung beyond the scope of press releases and public pronouncements. It is an open secret that despite the admirable progress made toward a free press in Korea in the last 20 years, the chaebol are still treated with kid gloves.)
Samsung issued a 25-page denunciation of all the charges, saying it had never raised funds through its affiliates or executives and later also threatened legal action against the former legal services chief.
(click on the image below for a larger view)
It is not the first time Samsung has been in trouble with the law, but if the prosecutors nail the conglomerate for wrongdoing, it will be a rare achievement indeed. In 2002, prosecutors alleged that Samsung had maintained a massive slush fund containing tens of billions of won in bearer bonds, but dropped the investigation because the money was actually part of Chairman Lee’s personal funds. Samsung pleaded guilty in 2005 to participating in price-fixing over DRAM chips from 1999 to 2002 in a stratagem 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 jail. In 2006, there were also allegations of secret funds but the investigation was dropped on the basis that the evidence consisted of an illegal tape recording.
Despite the continuing allegations about the conglomerate’s questionable dealings, one investment banking house says the construction and trading divisions expect serious margin expansion, including through other major projects including a W300bn skyscraper in Dubai. Samsung last year sold holdings in the group's transport operation HTH as well as Samsung Plaza and its 5 percent of Samsung Tesco, leaving it cash-rich.
So with Korea’s export sector churning along in the face of a US downturn, and US retail sales appearing to bolster the confidence of investors, Korea’s unusually permissible legal system means a lot of sensational headlines from Kim and a coalition of civic groups formed to publicly campaign to clean up Samsung, and not much serious action, if the country’s past experience is any guide.
In September, for instance, a court suspended the 18-month prison term for assault laid again 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. That same 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.