How Deep Will Korea’s Samsung Scandal Go?

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 jail.

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.