A Crackdown on Corporate Corruption: South Korea’s Transformation

South Korean police raided the headquarters of Samsung’s construction arm on Wednesday, October 18th, signaling an unprecedented commitment to investigating the white-collar crimes of one of the country’s massive conglomerates. The raid is part of an investigation into suspected embezzlement by the company’s chairman, Lee Kun-hee. In 2008, he was convicted of tax evasion through the use of financial accounts opened in other people’s names, but received a suspended sentence and retained his leadership position within Samsung. The renewed investigation is searching for documents that would prove that Lee Kun-hee continued to create accounts under borrowed names after his conviction, and that he used those accounts to avoid paying taxes and to finance work done on his residences.

Samsung Offices in Bibliothek, Korea / https://commons.wikimedia.org/wiki/File:RAICO_Samsung_Bibliothek_Korea.jpg

Kun-hee’s father, Lee Byung-chul, founded Samsung and used his connections with powerful Korean politicians and military leaders to build it into a business empire, and the family still controls the company. Wednesday’s raid comes a few months after Lee Jae-yong, the son of Lee Kun-hee, heir to the empire, and de-facto head of Samsung since Lee Kun-hee’s heart attack in 2014, was convicted of corruption charges for bribing the South Korean president and was sentenced to five years in prison. The raid also came less than a week after the chairman of Samsung’s electronics arm, who has been the company’s steward during Lee Jae-yong’s incarceration, announced his resignation.

This intense legal pressure marks a sharp departure from standard practice in South Korea. A handful of massive, family-owned conglomerates called the “chaebol” (a combination of the characters meaning “rich” and “clan”) dominate the South Korean economy; the largest dozen or so chaebol comprise about 80% of the country’s GDP. They have historically gotten special treatment from the government, enjoying a symbiotic relationship in which they have helped build a modern, developed South Korea, and in return have received extensive tax benefits, suppression of labor rights, and lax regulation, at the expense of workers and small businesses. The chaebol formed after the Korean War, when family-owned companies used connections and bribes to receive funding and preferential treatment first from authoritarian President Syngman Rhee and then from the military dictator Park Chung-hee. Even after protests led to the formation of the current democratic government in 1987, the chaebol have retained their favored status.

This system has led to many egregious pardons and suspended sentences for the leaders of the chaebol. In 2007, the head of the chaebol Hanwha, Kim Seung-youn, had eight workers kidnapped at an upscale Seoul bar and taken to a construction site, where he assaulted them with steel pipes and electric shock devices as revenge for their role in a brawl in which his son was injured. He then instructed a former chief of police, who was employed by Hanwha, to call the regional police department and suppress the investigation. Eventually Kim was given a suspended sentence, and the company’s board kept him on. Five years later Kim, who was worth $850 million at the time, was convicted of embezzlement and once again received a suspended sentence. This high-level subversion of justice has been par for the course in the Korea, where seven of the past eight presidents were involved in corruption scandals and convictions have never stuck for the leaders of the chaebol. Some recent examples include the 2015 presidential pardon for the head of the SK Group and the 2016 presidential pardon for the head of the CJ Group.

So what has changed? Lee Jae-yong, unlike his father and his grandfather, was unable to get away with corruption because a wave of public anger has swept reformers into power. A study published in 2016 found that 40% of South Koreans believed that the government didn’t faithfully observe the law. The South Korean government has always been this way, but material conditions have changed, leading to a national re-evaluation of the special position of the chaebol. Growth is slowing, unemployment has spiked, and household incomes have stagnated or declined even as the chaebol’s profits hit record highs. Last year, protests attracting approximately 10 million Koreans voiced public outrage with the government’s latest corruption scandal. President Park Geun-hye, the daughter of dictator Park Chung-hee, rewarded bribes from the chaebol with preferential treatment. The backlash this sparked led to her impeachment, removal, and conviction. The winner of the special election held to replace her, Moon Jae-in, is a former labor lawyer who ran on a left-wing reform platform and won by a 17 point margin.

A rally being held in Gwanghwamun Square urging the arrest of Lee jae-yong / https://commons.wikimedia.org/wiki/File:The_13rd_Candlelight_rally_20170121_02.jpg

Although Moon stated in his inaugural address that he’ll “take the lead in chaebol reform” and end “politics-business collusion”, he faces significant economic and legislative obstacles. Pro-corporate conservatives hold more than 40% of the seats in Korea’s National Assembly, making drastic measures hard to codify into law. Some economists on the right have argued that at a time when the Korean economy’s growth is slowing and debt is high, heavily taxing and regulating the chaebol could endanger the economy, because the success of the economy is currently too closely tied to the success of the chaebol. These political and economic factors make it impossible for Moon to fully dismantle the chaebol system.

But it’s clear from the far-reaching probes, tough regulations, and the end of the practice of presidential pardons that South Korea is entering a new and hopeful era. The individual President Moon appointed to be the head of Korea’s Fair Trade Commission, Kim Sang-jo, is known as the chaebol sniper, and has announced several new regulations that are expected to curb tax evasion and monopoly behavior by the chaebol. Kim points to the conviction of Samsung’s Lee Jae-yong as a strong sign of progress. He also announced that if the chaebol don’t comply with the new regulations by December of this year, the Fair Trade Commission will “have no choice but to impose structural prescriptions,” and chaebol Lotte has already altered its structure to adhere to the new government’s demands for transparency. Another sharp contrast with prior administrations is the Moon administration’s push for corporate leaders to be summoned for questioning by the National Assembly. All of this indicates a new South Korea, where the chaebol are not above the law. Thanks to an angry and watchful public and the leadership of committed reformers like President Moon, Kim Sang-jo, and Park Yong-jin, a labor activist and legislator from Moon’s party who has spearheaded the Samsung embezzlement investigation, the domination of the chaebol looks to be coming to an end.

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