Lee is free – and South Korean reform is dead

We’ve been writing about Samsung since September 2016, when we explained the distinctively South Korean type of family-run corporate conglomerate known as the chaebol. “The simple fact,” we noted, “is that pretty much everybody in the South Korean government is on the chaebols’ payrolls – or wants to be. And the growing popular resentment of this grand corruption is an extremely good sign.”

Park Geun-hye

A couple of months later we reported on charges that South Korea’s then President, Park Geun-hye, had helped a friend, Choi Soon-sil, extort huge sums of money from several of the chaebols. The largest chaebol, Samsung, which accounts for some 17% of South Korea’s economy, gave Choi over $15 million. By December 2016, the official probe into this corruption uncovered that the sum extracted from Samsung was closer to $20 million. In return, President Park allowed the merger of two Samsung entities.

Lee Jae-yong (aka Jay Y. Lee)

In January of last year came the news that prosecutors had barred Lee Jae-yong – the de facto head of Samsung, grandson of its founder, Lee Byung-chul, son of its official chairman, Lee Kun-Hee (who stepped down from day-to-day management, but did not relinquish his title, after a 2014 heart attack), and arguably the most powerful man in South Korea – from leaving the country. In February Lee (who in the West goes by the name Jay Y. Lee) was arrested; in March, Park was removed from office.

Her replacement, Moon Jae-in, promised to curb the power of the chaebols, whose domination of the nation’s economy has thwarted new business development, whose cozy ties to government leaders have caused widespread suspicion and resentment, and whose leaders’ ability to escape punishment for large-scale corruption has made them seem to be above the law.

Moon Jae-in

Lee’s trial began in March. Dubbed “the trial of the century” in South Korea, it involved five charges: bribery (maximum possible sentence: five years), embezzlement (eight years) perjury (ten years), concealing criminal proceeds (five years), and hiding assets abroad (life). Prosecutors asked for a sentence of twelve years. In August, after five months of testimony, Lee was found guilty of all five charges and sentenced to five years in prison. He was thereupon “sent to a prison for white collar criminals in Uijeongbu.”

Then, last month, came a startling development. Lee, who had appealed his sentence, was taken from his prison cell and transported to the Seoul High Court. There, presiding senior judge Cheong Hyung-sik informed him that he was to be released immediately and would be on probation for four years.

Lee in handcuffs

Cheong – who, technically speaking, had not reversed or commuted Lee’s sentence but cut it in half and then suspended it – maintained that Lee’s only real offense was to have succumbed understandably to inordinate pressure exerted on him by Park Geun-hye while she was serving as President. “Park threatened Samsung Electronics executives,” claimed the judge. “The defendant provided a bribe, knowing it was bribery…but was unable to refuse.” Not a small number of South Koreans regarded this as a thoroughly absurd argument. 

More on Thursday.

Will Samsung’s Lee be in handcuffs tomorrow?

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Samsung headquarters in Seoul

When we last left our South Korean friends in the Blue House and the chaebol boardrooms, the probe into Samsung’s cash transfers to foundations linked to presidential chum Choi Soon-sil – apparently in exchange for support for a merger between two Samsung subsidiaries – had entered a new phase. Documents had been confiscated at several locations, including the homes of several Samsung executives; the independent counsel had issued an arrest warrant for Choi’s daughter; and Samsung vice-chairman Lee Jae-yong, who is the firm’s de facto top dog and the son of its founder and chairman, Lee Kung-hee, had been barred from leaving the country.

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Lee Jae-yong

The latest update came on Monday in the Wall Street Journal. The special prosecutors, reported Eun-Young Jeong, Jonathan Cheng, and Timothy W. Martin, were seeking an arrest warrant for Lee on charges of bribery, embezzlement, and perjury. In order to be able to issue the warrant, they need to solicit approval from a South Korean court, which is scheduled to hold a hearing tomorrow to entertain that request. If approval is granted, Lee – who spent 22 hours last week being interrogated – will be taken into custody while the prosecutors continue to pursue their investigation. Samsung was quick to reply to the prosecutors’ request for an arrest warrant, repeating previous denials that it had made contributions in exchange for favors or made any “improper requests related to the merger of Samsung affiliates or the leadership transition.”

Breakfast with Korean Business Leaders President Park Geun-hye clapping at a breakfast meeting with the Korean business leaders traveling with her at the Hay-Adams Hotel in Washington D.C. on May 8. 2013.05.08.(U.S. Estern Time) Cheong Wa Dae -------------------------------------- ¼öÇà°æÁ¦ÀΰúÀÇ Á¶Âù ¹Ú±ÙÇý ´ëÅë·ÉÀÌ 8ÀÏÇöÁö½Ã°££© ¿ö½ÌÅÏ D.C. ÇØÀ̾ƴ㽺ȣÅÚ¿¡¼­ ¿­¸° ¼öÇà °æÁ¦Àεé°úÀÇ Á¶ÂùÀ» ÇÔ²² ÇÏ°í ÀÖ´Ù. û¿Í´ë
Lee Kun-hee

The Journal noted that if Lee is indeed incarcerated for any length of time, the conglomerate “could face a leadership vacuum while smartphone maker Samsung Electronics Co. is also reeling from a massive recall of its Galaxy Note 7 device. It could also put on hold any further attempts to reorganize one of the world’s most complex business empires.” Indeed, it would almost certainly have a significant impact on the South Korean economy, given that Samsung alone, as the Journal pointed out, “accounts for nearly one-third of South Korea’s stock-market value.”

Meanwhile President Park Geun-hye’s fate also lies in the balance. Last month the National Assembly voted to impeach her, and the Constitutional Court is debating whether to unseat her from the office she has held since February 2013. If the evidence proves that Lee is guilty of the charges leveled against him, it is more likely that the same evidence will help convict Park as well.

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Park Geun-hye

It should be underscored that the current Samsung probe is far from the first to target one of the chaebol – the massive, family-run conglomerates that have formed the foundation of the postwar South Korean economy. Over the years, other chaebol executives – including Lee’s father, who reportedly pocketed $8.9 billion in Samsung funds – have been indicted and convicted on corruption charges. But almost all of them have received presidential pardons that kept them out of jail. The history of brazen, high-level corruption at the conglomerates has underscored the special privileges enjoyed by the clans that own and run them as well as the intimate, one-hand-washes-the-other relationship that has long existed between them and the office of the president.

This time, however, the story may take a fresh turn: the #1 man at the nation’s #1 company may end up going down for good, and when he does, he may very well take the president down with him. Stay tuned.

Corruption at the chaebols

Yesterday we began looking at the chaebols, the family-controlled conglomerates that dominate the South Korean business world. Here’s a quick overview of three of the very largest chaebols. See if you notice any running themes:

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    Lee Kun-hee

    Samsung – the largest of all the chaebols, making up no less than 17% of the South Korean economy – is chaired by Lee Kun-hee, son of the firm’s founder. Lee resigned in 2008 after being caught with a secret slush fund that he used to bribe government officials, but was pardoned by President Lee Myung-bak and promptly resumed his chairmanship. He continues to stay in office despite a book, published in 2010, that describes in detail how he stole about $9 billion of Samsung’s money.

Hyundai Motor Chairman Chung Mong-koo attends the company's opening ceremony for the year in Seoul in this January 2, 2012 file photo. South Korea's smartphones and cars may have won global acceptance, but back home Koreans are increasingly disturbed by the influence the chaebol have over their lives. That very public anxiety is coming at a sensitive time for the conglomerates as they prepare the transtion to a third generation of family owners and face a strong, unwelcome, focus of attention in the run-up to 2012's parliamentary election. Hyundai Motor's Chung Mong-koo was sentenced to a three year jail term in 2007 for fraud which was suspended in exchange for community service and a $1 billion charity donation as he was deemed too important to the economy to be jailed. To match Insight KOREA-CHAEBOL/ REUTERS/Kim Hong-Ji/Files
Chung Mong-koo
  • Hyundai is another of the so-called “Big Four” chaebols. Its chairman, Chung Mong-koo, son of the firm’s founder, was convicted in 2007 of embezzling $100 million to bribe government officials, but he was pardoned by Lee Myung-bak and remained in office.

  • choi
    Choi Tae-won

    Yet another one of the “Big Four,” SK Group, is chaired by Choi Tae-won, son of the group’s founder. In 2013, Choi was found guilty of embezzling over $40 million and sentenced to four years behind bars, but was pardoned by President Park Geun-hye and still runs the company.

South Koreans have – to put it mildly – mixed feelings about the families that run the chaebols. They still respect the firms’ very elderly or (mostly) deceased founders who made South Korea rich; but they increasingly resent the outrageous sense of privilege enjoyed by those founders’ children and (especially) grandchildren – who are widely resented for their unearned wealth, their princely airs, their thoroughgoing corruption, and the impunity they enjoy no matter how massive their crimes.

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Koo Bon-moo, CEO of LG

The simple fact is that pretty much everybody in the South Korean government is on the chaebols’ payrolls – or wants to be. And the growing popular resentment of this grand corruption is an extremely good sign. It tells us that a people who, not so long ago, were comfortable with a degree of authoritarianism are now impatient for more democracy. People who were accustomed to class division want more equal opportunity. Though grateful to the chaebols for their contribution to South Korea’s development, they’re not happy that those chaebols have developed into arrogant aristocratic dynasties, that they use their wealth to buy off public officials, and that their domination of the economy is impeding further development.

South Korean President Lee Myung-bak speaks to the nation during a news conference at the presidential house in Seoul November 29, 2010. Lee on Monday labelled North Korea's artillery attack on a southern island a crime against humanity and said Pyongyang will pay the price for any further provocation. REUTERS/Ahn Young-joon/Pool (SOUTH KOREA - Tags: POLITICS CIVIL UNREST)
South Korean President Lee Myung-bak

How do they impede development? Well, for one thing, they make it extremely tough for aspiring entrepreneurs to make a go of it. “It’s almost impossible for a small Korean business to take on a chaebol subsidiary – and everything is a chaebol subsidiary,” wrote one observer in 2013. The chaebols’ dominance, reported the Toronto Globe and Mail last year, “is now suffocating the country’s attempt to shift gears and foster a more innovative services-oriented economy powered by small businesses.”

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Former South Korean president Roh Tae-woo

Note well: what we’re talking about here isn’t ordinary crony capitalism or the kind of revolving-door system whereby state officials often go on to become corporate execs. And vice-versa. No, it’s more as if the chaebols are a separate, permanent branch of government, whose political sway is founded partly on decades-long personal ties (Choi Tae-won’s wife is the daughter of former President Roh Tae-woo), partly on those vast slush funds that they use to grease officials’ palms, and partly on everyone’s keen awareness that the country’s fate is inextricably tied to that of the chaebols, the top ten of which account for fully 80% of South Korea’s GDP.

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Entrepreneur Ahn Cheol-soo

Simply put: at times it can be hard to know where the elected South Korean government ends and the unelected government of the chaebols begins. Not only do the chaebol kings hold sway over elected officials; they also wield extraordinary power over their mid- to lower-level employees – who have little leverage at contract time, because there’s not really anyplace else for them to go. (Chaebols, according to software start-up founder Ahn Cheol-soo, treat workers like “caged animals in a zoo”.) Operating in a mind-boggling range of sectors – Samsung has its fingers in everything from financial services to shipbuilding – they have the reach and resources to effortlessly crush fledgling would-be competitors in any of them.

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A graph showing Samsung’s shareholder structure

Last but not least – and this is one bizarre detail that must certainly be unique to South Korea – not even the chaebols’ boards of directors can stand up to the hegemony of the family dynasties, even if the directors hold large stakes in the firms and the latter own almost no stock at all. Indeed, a 2012 study found that eight chaebol chairmen weren’t even on their firms’ boards, meaning that they exercised enormous power without shouldering a concomitant amount of responsibility.

What this means, in practice, is that however criminal or incompetent the head of a chaebol may be, he enjoys invulnerability and unaccountability on a scale unheard of in any other developed democracy. As one South Korean business journal has put it: “At companies in advanced countries, a faulty CEO is replaced. But at South Korean conglomerates, the head of a conglomerate wields absolute authority and is not replaced no matter how grievous his mistakes are.” Or how horrendous his crimes.

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A family tree showing the descendants of Samsung founder Lee Byung Chul, color-coding their involvement in different subsidiaries and their intermarriage with members of other chaebol families

No, the situation south of the DMZ isn’t remotely comparable to that in Kim Jong-un’s Hermit Kingdom. But, thanks to the chaebols, South Korea’s business community is characterized by a thuggishness, a creepiness, a crookedness, of which the outside world is almost entirely unaware. And those who continue to prop all this up – either out of some misguided sense of loyalty to dead or dying national idols, or out of sheer personal self-interest – are, quite simply, stooges, aiding and abetting a corrupt system that’s actively preventing the emergence of an even freer, more equitable, and more prosperous South Korea.

What are the chaebols?

Corruption takes a variety of forms. In Brazil, as we’ve seen, innumerable politicians have grown rich by ripping off the state-owned oil firm, Petrobras. In neighboring Argentina, a gang of Kirchner cronies diverted billions from infrastructure projects into private offshore accounts. In Gabon, President Bongo plays it simple: he treats the national treasury as his own piggy bank and buys himself mansions, yachts, limos, and planes while the average Gabonese citizen scrapes by on $12 a day.

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Seoul

Then there’s Korea. Not Kim Jong-un’s Hermit Kingdom, which is undoubtedly the most totalitarian corner of the planet. No, today we’re talking about South Korea.

“South Korea?” you ask. “Benign, prosperous, democratic, free-market South Korea, America’s steadfast ally and Ground Zero for the East Asian economic miracle? How corrupt can South Korea be?

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Samsung headquarters

This corrupt. In South Korea, as it happens, the power structure consists of two intimately interlocking parts: on the one hand, the president and other duly elected government leaders; on the other hand, a small number of huge family-run conglomerates that are uniquely South Korean in their origins, configuration, and societal significance, that have not been elected to anything by anybody, and that are, in effect, themselves the corporate equivalent of dictatorships.

These companies – among them such world-famous enterprises as Samsung, Hyundai, and LP – are known as chaebols, from the Korean words for wealth (chae) and clan (bol). They function like no other companies in the world.

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Samsung chairman Lee Kun-hee was Fortune Korea’s CEO of the Decade

In English-speaking countries,” explains a Seoul professor of public administration, “there really are no business groups, but singular companies that own [their] subsidiaries 100 percent. In Europe, conglomerates are never as big as the chaebols and ownership and management [are] usually strictly divided.” A chaebol, by contrast, consists of “multiple companies with robust internal transactions, all controlled by a single, near all-powerful chairman that act[s] as both manager and the de facto owner of the entire enterprise.”

It’s no exaggeration to say that the chaebols made South Korea. Over the last half century, they led the way in turning a poor agricultural backwater into an international technology center and economic powerhouse. In the process, they assumed a role in South Korean society that can be hard to explain to outsiders. The members of the families that run the chaebols are national celebrities; the companies themselves are mighty, majestic, nearly mythical colossi, looming above the everyday world of ordinary citizens in such a way that their very names almost carry a touch of magic.

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SK Group headquarters

Look at it this way: elected officials are mere mortals who come and go; the chaebol clans, like so many royal families, stay on forever, never yielding power or stepping down from Olympus.

As Iain Marlow wrote last year in the Toronto Globe and Mail, “all South Korean mothers dream of their children working at chaebol companies.” And yet even those mothers realize that the chaebols – which a generation ago were universally revered for having effected South Korea’s miraculous transformation – now pose a threat to their country’s continued growth, to its people’s economic and political freedom, and to its attempts to achieve full legitimacy and recognition on the world stage.

They realize, indeed, that these conglomerates that liberated them from poverty now – in a very real sense – are enshackling them.

How so? We’ll get around to the fascinating details tomorrow.