Korea’s Samsung Scandal Deepens

In an episode that shows how deeply one giant corporation’s tentacles extend into Korea’s legal, advertising and industrial sinews, accusations are snowballing over a slush fund of as much as US$1 billion-plus, allegedly controlled by Lee Kun-hee, the chairman of Samsung Group, and used to bribe scores of prosecutors and to attempt to influence the course of the 2002 presidential election.

Kim Yong-chul, the retired head of the chaebol’s legal division, and members of an organization called the Catholic Priests Association for Justice went on live television Monday to charge that the bribes went well beyond prosecutors and included officials of the Ministry of Finance and the National Tax Service. According to Reuters, Kim added that Samsung affiliates held slush funds worth billions of won, and that most high-ranking executives had their accounts stuffed with cash to be used for regular bribes.

"Samsung offered bribes up to three times a year, in amounts of 5 to 20 million won," Kim was quoted as saying.

Samsung issued a 25-page rebuttal seeking to reject all of Kim’s accusations. "Everything Attorney Kim has said is untrue," Samsung quoted a high-ranking official as saying.

Kim, who made documents available to television stations late last week, went back on a promise to deliver more at the packed press conference at a Seoul Catholic church. But, he said, top Samsung corporate executives took it as an honor to have their names chosen for so-called “borrowed name” accounts because it meant they had earned Samsung’s trust.

The story first surfaced on October 29 when the Catholic Priests organization aired allegations of a US$5.5 million fund maintained by Samsung. That has now grown to 1 trillion won, according to Kim and the association. In an interview with the partly state-owned Korean television station MBC, Kim said 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.

The whistleblower alleges that Samsung regularly bribed as many as 40 Korean prosecutors and manipulated evidence and testimony in connection with the illegal transfer of wealth from the Samsung chairman to his children. That involved Samsung Everland, which controls the group itself through links that include 19.3 percent of Samsung Life Insurance and holdings in other group affiliates. Samsung Everland, an amusement park and entertainment company, allegedly was involved in helping Lee pass on control of the business empire to his son, Lee Jae-yong. Lee Jae-yong is alleged to have bought 1.25 million Samsung Everland shares at W7,700 (US$7.90) per share – a pittance compared to the trading price of W85,000 at the time.

The story has been getting scant attention in Korea’s mainstream press, where Samsung, the country’s biggest company and the fifth largest in the world, controls as much as 30 percent of the advertising dollars and where newspapers are wary of reporting derogatory news. The international wire services have been reluctant to run the story as well without independent confirmation. However, the growing legions of Korea’s bloggers are having a field day with it.

“All I can say is that hearing all this from a former insider is mind-blowing to say the least,” wrote a blogger on the well-regarded Marmot’s Hole. “What is also mind-blowing is that this doesn't look like a simple bribe-for-favors case. Instead, it looks like a systematic effort by one corporation to control the government, the judicial branch, and the media, pretty much the entire nation. ‘Samsung Republic’ indeed.”

Prosecutors seem equally wary although if Kim presents solid evidence to back up his claims, they will have little alternative but to investigate.

In the October 29 press conference, at which Kim Yong-chul did not appear, 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 secret bank accounts that were opened in executives’ names.

Allegations of Samsung’s use of bribes are hardly new. In 2006, Lee Kun-hee left the country for five months before returning to Seoul in a wheelchair to apologize over allegations of illegally funding politicians. Lee was able to avoid prosecution after what was characterized as an illegal wiretap by the country's main spy agency showed that Lee's top Samsung aide and brother-in-law had discussed illicit funding for the 1997 presidential election. The five-year statute of limitations kept Lee from being prosecuted for providing up to US$5 million illegally to losing presidential candidate Lee Hoi-chang of the Grand National Party.

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 President Roh Moo-hyun, 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.

The priests’ group also has made public what are alleged to be internal bribery guidelines from chairman Lee that suggest giving hotel gift certificates to those who refused to take cash bribes. Kim told reporters he himself had manipulated evidence and testimony in the trial of Samsung Everland executives.

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 has been in repeated trouble with the law, pleading 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 the recent past, however, South Korea has displayed a notoriously lenient attitude towards its top industrialists. 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 a part of the chairman’s personal funds. 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.

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.

In an unrelated development, prosecutors Monday were seeking a warrent for the arrest of Jeon Goon-pyo, head of the National Tax Service, over bribery charges in exchange for promotions. It is the first warrant that prosecutors have sought for the arrest of an incumbent tax chief since the office was established 41 years ago.