Corruption on an Unimaginable Scale

Corruption on an Unimaginable Scale

Fresh claims about massive corruption at Samsung made Monday by Kim Yong-cheol, the former head of the conglomerate’s legal team from 1997-2004, had the impact of a sledgehammer. Kim said the conglomerate created a slush fund on the orders of the corporate restructuring headquarters (formerly the office of strategic planning) with subsidiaries contributing money by paying over the odds for supplies. Kim presented documents as evidence and explained how this process took place at Samsung Corp., its trade and investment arm, that served as the main conduit for the creation and management of the slush funds. In conjunction with another subsidiary, Samsung SDI, Samsung Corp. forged overseas acquisition contracts to make it appear as if Samsung Corp. purchased a product for W100 and turned it over to Samsung SDI for W120. Samsung would divert W19 of the W20 difference and used that method to amass a W200 billion (US$1=W929) slush fund, according to Kim. With this slush fund, Samsung chairman Lee Kun-hee’s wife and others purchased some W60 billion worth of art works from overseas between 2002 and 2003 alone. Kim said that in 2000, Samsung Heavy Industries, Samsung Corp., Samsung Techwin, Samsung Engineering and other units each committed between W1 trillion to W2 trillion in accounting fraud. They used Samsung Electronics’ funds to reduce the size of the fraud and lavishly entertained outside auditors to hide this fact. Kim claimed the family of chairman Lee dispersed a majority of their assets in the names of previous vice chairmen of corporate restructuring, presidents and incumbent and former executives of affiliates, while a large law firm was deeply implicated in Samsung’s illicit transfer of wealth and other illegal acts. Kim said one lawyer left this law firm and, before joining Samsung, spent six months using his connections to minimize the impact of an investigation into the conglomerate’s alleged bribery of presidential candidates. Kim also said that during the bankruptcy proceedings of Samsung Motor, the conglomerate bribed an administrative official at a bankruptcy court and destroyed fraudulent accounting records under cover of night while creating a list of high-ranking officials in politics, the media, government circles as well as civic groups, who could be bribed in cases of emergency. Kim said the Joongang Ilbo newspaper on several occasions announced publicly that it had been spun off from the Samsung Group to become independent, but that was just a disguise. He said the truth could be discovered easily by tracking the source of the money that purchased the newspaper’s shares. Hong Seok-hyun, then chairman of the Joongang Ilbo and Lee Kun-hee’s brother-in-law, did not have the money to purchase a controlling stake in the newspaper, Kim said. He added that in 1999, Hong owned the shares in name only but had relinquished voting rights by signing a stock-ownership-transfer contract with Lee. Kim said he personally prepared the contract. He added Joongang never saw itself as independent from Samsung, so constantly came to the conglomerate’s corporate restructuring office to ask for money, for instance demanding money to fix a flooded basement parking lot. In a scandal over illegal wiretaps by the intelligence services, a former spy who had the tapes came to the Joongang offering to sell them for W2 billion, and Joongang demanded W10 billion from Samsung to pay for the tapes, Kim said. Every one of Kim’s revelations is shocking. Many suspected there would have been a few irregularities in the process of growth of Korean conglomerates. But never have those blemishes been so clearly exposed. Samsung may have to face not only the ethical and moral responsibilities but the legal consequences as well. That’s why people are concerned about the situation at Samsung. Samsung is an important business representing Korea’s economy on the global stage. Foreign investors may end up thinking that if Samsung is this corrupt, then other Korean businesses must be much the same. If Samsung’s flagship electronics unit is impacted by this incident, then Korea’s economy could be harmed. Samsung has threatened to take legal action against Kim’s claims, calling them false, distorted and exaggerated. The accounting firm that Kim said had intentionally overlooked accounting fraud at Samsung has vowed to sue him for libel. It is impossible to resolve this problem with both sides simply voicing their own claims. First, state prosecutors need to separate fact from fiction, and quickly. And if that is not enough, then an independent counsel must handle the matter. But quite aside from the investigation, Samsung needs to demonstrate its resolve to reform and innovate, by making a clean break with its past. This is how Samsung can be reborn.