Korea’s Samsung: Too Big to Jail

As Samsung's hereditary boss Jay Y. Lee, looking dapper in a coal-black business suit, entered the criminal court in Seoul on Jan. 18, any notion that he might emerge in pale green prison garb seemed far-fetched. Indeed, the Seoul South Central District Court rejected an arrest warrant.

Much as critics of the power of Korean chaebol, the conglomerates that dominate the economy, might like to see the comeuppance of the heir to Korea's largest fortune, there was no way it could happen.

Lee can be reasonably certain, with a phalanx of highly paid lawyers, to get off lightly. That would be in accordance with family tradition. His father has been found guilty twice of massive corruption charges for which he never went to jail and finally got presidential pardon – most recently in 2009 by Park’s predecessor, Lee Myung-bak, a former top executive of another chaebol, the Hyundai group.

Indeed,as Seoul's news networks eagerly waited a judge’s ruling on the prosecutor's request for his arrest, a conservative politician told me, "Koreans would be outraged if he goes to jail."

Going back decades, courts have refused to indict Samsung executives on the shaky legal proposition that the conglomerate is too important a component of the Korean economy to be hampered by jail time, no matter how egregious the offence.

Conservatives see Samsung, which accounts for 20 percent of Korea's GDP, as a pillar of strength against much larger capitalist rivals including the US, Japan and China and a bulwark against North Korea. Liberals and leftists decry the octopus-like grip of Samsung and other chaebol over a society in which thousands of companies serve them as suppliers and buyers and small and medium-sized entities have little chance of competing successfully.

The refusal of the court to place Lee, 48, in custody like a dozen others caught up in Korea's biggest political scandal seemed to many as further evidence of the union of government and business – the reason why President Park Geun-hye and those around her got in such trouble in the first place.

“The fact that these conglomerates, and thereby the national economy, are at risk should one of these top executives cool their heels in jail illustrates the fundamental weakness of the Korean economy,” said Tom Coyner, a long-time business consultant here. “Perhaps real jail time for these chairmen might force their companies to upgrade their management practices.”

Lee still faces charges of bribery, embezzlement and perjury in an elaborate plot whose ultimate goal was absolute control over Samsung Electronics, the flagship company of the 80 companies in the Samsung empire. Lee already rules Samsung Electronics as vice chairman while his father, Lee Kun-hee, Samsung Electronics chairman, remains comatose two years after suffering a heart attack. Before the father gives up the ghost, the son figured he should solidify his grip over enough shares to be sure no one could challenge him.

The failure of prosecutors to secure Lee's arrest, as they have a cast of characters ranging from Park's close friend and confidante to former aides and ministers, raises doubts as to whether they will ever manage to haul Park into court as a witness. As long as she is president, Park remains legally immune from prosecution even though her impeachment by the national assembly means she was suspended from her post while Prime Minister Hwang Kyo-ahn serves as acting president

In the end, Park herself is the prize – the one whom prosecutors would like most to put in jail – but they cannot do so until the constitutional court rules on her impeachment. If the court upholds the impeachment motion, she would immediately lose the post to which she was elected for a five-year term in December 2012. No longer president, she too could be arrested.

Before Park is out of a job, however, prosecutors want her on the stand as a witness. That will be difficult. The ruling on Lee fortifies the view that the court is not unsympathetic to her alibi that she had nothing to do with ordering Samsung and other chaebol to make huge donations to win her favor. If she does testify, she might be somewhat more forthcoming under intense questioning but would maintain her cover of ignorance with the confidence that the court might not be as hostile as the prosecutors, whom her sympathizers believe are eager to identify with the populist movement against her.

But why and how did Samsung get involved? The motivation was obvious – and goes to the heart of the means by which chaebol typically survive with hereditary blood ties intact. Now the question is whether the ongoing scandal threatens not only the conservative governing structure but also the chaebol system.

It may be a measure of Lee’s own lack of confidence that Samsung was more generous as a donor than any of the other chaebol. It was to shore up Lee’s leadership, prosecutors charge, that Lee at Park’s behest got Samsung companies to pour about US$36 million into two foundations in Korea and a company in Germany. Those entities were under the thumb of the woman at the heart of the scandal, Choi Soon-sil, Park’s friend ever since her evangelical father had won the confidence of Park’s dictatorial father, Park Chung-hee, during his 18 years and five months as president.

But how, exactly, did such generosity elevate Samsung’s fortunes? The answer typifies the kind of influence-peddling that holds the chaebol system together. Lee wanted the National Pension Service, an enormous government fund with tentacles throughout Korean business, to provide the pivotal support needed to bring about the merger of two Samsung entities, Samsung C&T and Cheil Industries into one holding company in which he would have the “owning” stake. That company holds 5 percent of the shares in Samsung Electronics in which Lee, his father, two sisters and other Samsung companies own around 20 percent – plenty to be sure of undisputed control before having to shell out millions in inheritance taxes after Lee Kun-hee passes on.

To make the merger possible, the National Pension Service had to agree to greatly devaluing the share price. Despite protests from Elliott Management in New York, outraged that its own shares would also go down precipitously in value, National Pension Service agreed. Why? Park, say prosecutors, in the deal for the donations, got one of her top officials, also NPS head, to order NPS to approve the sale.

It was all so simple in outline but the evidence lies in records of thousands of emails, telephone conversations, notes scribbled on paper and a raft of other evidence. “The case is very complicated,” one of the defense attorneys told me after a court session. “It will take until July.”

In the end, Choi Soon-sil and a few officials, faithful servants of Park, may go to jail – scapegoats for the real power-movers, the chaebol chieftains and their friends at the height of political power.

“To date, the top echelon has operated on a ‘Masters of the Universe’ basis, assuming the laws of the nation do not really apply to them,” said Coyner, the business consultant. “Sure, they may be arrested and convicted. but they are normally given suspended sentences or quickly pardoned."