Corruption and conglomerates in South Korea

July 13, 2014 Julien Maillot

The commercial implications of South Korea’s standing on the CPI were demonstrated in July 2013, when Hong Kong–based firm Political and Economic Risk Consultancy published the results of a survey that found that Asian businesspeople consider South Korea to be the most corrupt developed nation in Asia. According to Kim Tae, a public administration ethics specialist at South Korea’s Jungwon University, the results of the survey are unsurprising. Kim Tae suggests that corruption is perceived as “a time-honoured tradition without which social success would be almost impossible”. As such, business in South Korea is often neither straightforward nor transparent, with notable economic consequences – according to the head of the Korea Corruption Commission, Yoon Eun-ki, for each unit increase in CPI, the GDP per capita rises by 2.64 percent.

Corruption in South Korea has brought about dangers beyond the financial world. In 2012, it emerged that the government-controlled Korean nuclear-energy sector had been chasing personal gains at the expense of safety when faked safety certificates for critical nuclear reactor parts and equipment were discovered. Fourteen of the country’s 23 nuclear power plants were affected as a result of the revelation, with three being shut down temporarily. Officials who took bribes from the testing companies were indicted and the offices of over 30 suppliers were raided. However, the lasting effect of the scandal was the reputational damage to the Korean nuclear sector – the same sector whose credentials went unquestioned when it announced its ambitions to build nuclear reactors overseas in light of slowing growth in the country.

Corruption is not isolated to industries where the government has a high degree of participation (such as the aforementioned nuclear-energy sector). Compliance has been an on-going issue with the biggest companies in South Korea and, unlike the way the nuclear scandal played out, regulatory bodies have been less than enthusiastic in their attempts to address corruption.

Compounding the issue is the lenient treatment of corrupt officials and businessmen in Korea. This leniency is aptly demonstrated by a series of scandals involving Lee Kun-hee, chairman of family-run Samsung Electronics. On 27 August 1996, Lee was one of nine South Korean tycoons who received prison sentences for bribing former president Roh Tae-woo. Lee, who claimed that the money involved in the bribes was actually a gift, received a suspended sentence before receiving a presidential pardon.

In 2008, special prosecutors indicted Lee after a three-month probe against him and Samsung, prompted by allegations by a former chief legal counsel that Samsung had created a large slush fund to bribe influential figures such as prosecutors and officials. Lee hid US$4.5 billion in personal assets under borrowed names and evaded taxes of US$112 million. He resigned from his position after being charged with criminal tax evasion. Although it was heralded as ‘the end of the heads of the Korean conglomerates’ (or chaebol), when Lee’s case went to trial the court ruled that ‘his crime [was] not serious enough to sentence him to prison’ and fined him just US$109 million for tax evasion. This was in sharp contrast to the seven-year sentence and US$347 million fine sought by the prosecution. Lee Kun-hee received another presidential pardon, this time by President Lee Myung-bak, allowing him to go back to work eight months after his case concluded, on 29 December 2009.

The observation that certain individuals are evidently ‘too important to prosecute’ in the eyes of the South Korean government has been a recurring theme regarding corrupt practices by the chaebol. According to Kim Sang-jo, an economist at Hansung University and executive director of the civic group Solidarity for Economic Reform, the pardons accorded to Lee Kun-hee reconfirmed a common saying in Korea that Samsung is above the law and the government. However, chaebol lobbyists backing lax laws are quick to argue that harsher punishment of corrupt businessmen (as is done in Singapore) has its own economic disadvantages. The South Korean economy is, after all, largely propped up by the same family-run chaebol whose influence the country is seeking to reduce – some estimates identifying that Samsung alone is responsible for contributing up to 20 percent of South Korea’s US$1.1 trillion economy. It is for this reason that South Korea is sometimes referred to as ‘The Republic of Samsung’.

The above alarming statistic succinctly summarises South Korea’s love–hate, cyclical relationship with its conglomerates. South Korea needs the chaebol to keep its economy afloat, but the reality is one of slow growth, stagnating wages, increasing costs of housing and education, and a series of worrying jumps in household debt since mid-2008. At the same time, reliance on the chaebol is problematic. In 2012, 82 percent of South Korea’s exports were attributable to the top 30 chaebol (compared to 53 percent in 2002), and collectively they hire 80 percent of new university graduates. These factors work together in strangling competition, and stopping innovative start-ups before they can even be conceived. And yet, to the Korean public, while in theory it seems fair to strictly enforce and punish wrongdoers, in practice the possibility of financial collapse is very real; an economic and regulatory gambit not worth the gamble.

The source of chaebol power and influence can be partially explained by recognising the role they played in the resurgence of the South Korean economy following the Japanese occupation and the Korean War. The chaebol can be traced back to the 1950s, when they obtained the assets of Japanese firms that departed the peninsula in 1945. With Park Chung-hee’s seizure of power in 1961, the agriculture-focused South Korean economy began promoting large businesses to realise rapid industrialisation under Park’s first Five-Year Plan. The government chose select family businesses to confer strong financial incentives (such as imported raw materials, bank loans and the guarantee of repayment) if they were unable to repay foreign creditors. Regulating market entry and protecting infant industries by preventing foreign companies from entering allowed these family businesses to grow into the chaebol we know today. The chaebol in return collaborated to realise government plans for industrial expansion and reverse dependence on imports. Protected from foreign competition, the chaebol were able to grow and develop the infant industries in Korea.

Corruption in Korea appears to be more of an issue at the top than it is at the bottom. While multimillion-dollar tenders between the government and the chaebol are risky on the compliance front, the issue is less pronounced – or, at least, less visible – at the small- and medium-sized end of the business spectrum. Still, as established earlier, the perception that corruption is necessary for success means that an uncompromising compliance programme may not be productive; drastic measures to combat corruption will be at odds with a culture that is accustomed to closing business deals with dinners, gifts, and other forms of entertainment. While larger businesses are aware of the significance of corruption and its impact – with many such companies proudly displaying their codes of conduct on their websites – their greater size and scale means that their dealings are higher in profile and more susceptible to corrupt behaviour by those individuals unable to shake free the alluring prospect of making big bucks in an instant.

The risk of a company as a whole being undermined by the actions of individuals acting in their own interests is therefore significant. Due diligence can be valuable when a company is held liable for violations of the law because of the actions of an employee, an agent, a representative or equivalent. For instance, article 4 of the Act on Preventing Bribery of Foreign Public Officials in International Business Transactions does not enforce strict liability if the company ‘has paid due attention or exercised proper supervision to prevent the offence’. Such measures could include regularly training staff on anti-bribery, implementing a company-wide code of conduct, and conducting due diligence investigations on potential clients and partners. Where a company finds itself liable for corrupt practices committed by an employee, agent, representative or equivalent, that company may be eligible for exemption if it can prove that it took measures to try and prevent such violations by its representatives, agents or employees.

South Korea’s attitude towards corruption has been changing for the better in recent years. President Park Geun-hye’s new administration promises ‘economic democratisation’. Although past attempts to rein in the chaebol have failed, the expectation remains that the president will issue stern treatment to the tycoons that her father, Park Chung-hee, helped to create after the Korean War. However, President Park herself has admitted the central role played by the chaebol in stimulating economic growth in the South Korean economy.

To a limited extent, President Park has already enjoyed success in her first year, with the arrest of Lee Jay-hyun, chairman of CJ Group and oldest grandson of Samsung founder Lee Byung-chul, on charges of tax evasion, breach of trust and embezzlement. The revisions to South Korean corporate laws, which were supported by the president and passed by the National Assembly on 2 July 2013, make it harder for subsidiaries owned by a chaebol chairman’s family to monopolise supply orders, provide protections to convenience store operations, and reduce the chaebol’s influence over banks.

The pressing need for President Park to reverse her father’s work to improve the economic prospects of South Korea has not been lost on the South Korean public, but the country’s elected officials have yet to achieve significant success in this area. While the immense power afforded to the country’s largest conglomerates brought South Korea back from the brink, the concept that they and the affluent families that own them are above the law is disconcerting in its financial and moral implications.

It is a difficult problem with no easy answers, and despite the growing recognition by the government of the necessity to diminish corruption at the workplace, significant headway has yet to be made in the area. Until then, it is up to compliance departments to recognise the culture of corruption in South Korea and create and implement relevant, robust corporate governance standards, conduct due diligence and strive for transparency in business deals.



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