Korea: School for Scandal

South Korea goes into its presidential election Wednesday, and leading candidate Lee Myung-bak of the Grand National Party should already be celebrating. Ahead in the polls by as much as 30 percentage points, Lee’s popularity has never been seriously challenged since he won the conservative party’s nomination in August.

One small problem: a major scandal that allegedly implicates Lee, a wealthy former businessman, in a massive financial fraud just won’t go away.

On Sunday, his opponents released a videotape of the onetime CEO of Hyundai Engineering and Construction saying he had established BBK, an investment company that collapsed in 2001 amid charges of stock manipulation and fraud. Lee has consistently denied involvement in the complicated scandal, for which his former business partner faces fraud charges. The matter seemed settled on Dec. 5, when Lee was exonerated by prosecutors of involvement in the fraud, but as a result of the video President Roh Moo-hyun has asked prosecutors to reopen the investigation while anti-Lee lawmakers are also clamouring for an urgent new probe.

A blackmail attempt gone awry by the producers of the video, which was shot during a university lecture by Lee in 2000, resulted in Lee’s liberal foes getting the video and playing it on a giant screen in the National Assembly. The move added an air of uncertainty to Lee’s seemingly inexorable rise to the Blue House.

“Everyone is frantically trying to stop Lee from becoming president,” Park Hyeong-joon, Lee’s spokesman, said in Seoul.

Although Lee still seems poised to win the presidency on Wednesday, there are concerns that he could be indicted before he is inaugurated. A tacit pact to make as much trouble for Lee as possible has emerged between right-wing independent Lee Hoi-chan and the liberal United New Democratic Party candidate Chung Dong-young. Unable to dent the momentum of the man nicknamed the “bulldozer” for his relentless management style while at Hyundai, the video has breathed new life, or at least a frantic burst of activity, into Lee’s opponents.

What makes it even messier is that the three men who reportedly made the video were arrested Saturday night, allegedly after they had approached Lee’s party to demand 3 billion won (US$3.2 million) in exchange for the video. The producers earlier tried to sell the video to the liberals and Lee Hoi-chang separately for 10 billion won, police said, but no one paid.

Instead, the United New Democratic Party rushed off to the police station early Sunday morning after a sting orchestrated by Lee’s Grand National Party and the police entrapped the video peddlers, who then arranged for a copy to be given to the UNDP, according to the party.

However it happened, the spectacle of Lee Myung-bak, larger than life on the big screen, saying, “I established an investment advisory firm called BBK in January [2000] and now I am preparing to establish a cyber securities firm to do what is needed to keep the investment firm going” certainly made for great political theatre, even by South Korea’s rather heady standards.

On the video Lee was introduced as the founder of an Internet-based financial company called eBank, a firm he created as a high-tech investment platform with former business partner, Kim Kyung-joon around the same time that BBK was put together. The clip was played and replayed on TV, radio and the Internet all day, calling into question the prosecutors’ earlier determination that Kim acted without Lee in committing fraud. The fraud cost BBK’s shareholders millions of dollars and sent Kim into hiding in the United States for several years. He was extradited to Korea last month after being arrested in the U.S. Kim insists Lee secretly owned BBK.

Outgoing President Roh, who leaves office in February and is deeply unpopular, urged the prosecution to reopen the investigation. "Prosecutors worked hard in investigating the case, but you must consider exercising your authority to reopen the case in order to dissipate public suspicion and restore trust in the prosecution,” he said in a statement to prosecutors. "Take the most efficient measures that the people can trust."

Through it all, the electorate has seemed relatively unenthusiastic about any of the candidates. Voters appear to be less preoccupied than in the past over ideological splits. With North Korea having agreed to dismantle its nuclear program, and Kim Jong-il in the middle of a charm campaign, the South is grappling with economic issues.

Employment growth has been slowing since the second quarter as a strong won cuts into exports. Korean companies are slowing hiring, mortgage borrowing is falling slightly, which means consumer spending will probably weaken somewhat before a rebound expected towards the end of 2009. Housing, now among the world’s most expensive, is an issue, along with education. There is fear over the future, especially given China’s rapid growth.

The other elephant in the room is the 200 billion won (US$216.7 million) Samsung slush fund, which could well live up to its advance billing as one of the messiest scandals in Korean history, although it is hard to tell from the outside given the Korean media’s seeming conspiracy of virtual silence on the issue.

In early December, Newsweek Magazine predicted that the scandal “is about to not only break up the "Republic of Samsung," but also "re-contour Korea Inc." But that seems to be a remarkable bit of hyperbole. The Republic of Samsung is expected to endure and prosper as Korean society pulls together to protect its biggest company from too much pain, despite the pending appointment of a special prosecutor mandated by the National Assembly.

That scandal got underway October 29, when Kim Yong-cheol, Samsung’s former chief attorney, went public with charges that the company was using dummy bank accounts, including at least four established in his name, to maintain vast slush funds to bribe officials, prosecutors, judges, politicians and journalists.

Kim alleged that Samsung had created as many as 1,000 such hidden bank accounts, and investigators have confirmed that at least 4 accounts were set up in Kim’s name, but so far the scandal has attracted precious little attention in the presidential race. Samsung has not been a topic of conversation despite — or perhaps because of — the fact that its tentacles are wrapped around the very sinews of Korean government.

Prosecutors have gone after Samsung numerous times in the past, and have largely been successful, only to have their quarry elude them. That is because Samsung is responsible for roughly 20 percent of Korea’s gross domestic product, with 2006 sales of nearly $152 billion. The market capitalization among 14 of its listed operation companies is 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 generally given the chaebol a pass. Samsung officials have repeatedly 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 next chapter? Lee will be investigated. Samsung will be investigated. But not very much is likely to change. “If the Koreans elect Lee president knowing he is a crook, they will have simply accelerated their normal process,” said one cynical observer in Seoul. “This way they can get right to investigating him while he is in office instead of waiting for the end of his term.”