Will Samsung’s Lee be in handcuffs tomorrow?

samsung-headquarters
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.”

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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.

Gangnam steal

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Park Geun-hye

Things are moving fast in South Korea. Early last week we caught up with developments in that country, where a massive scandal is roiling the chaebols (i.e. Samsung, Hyundai, and the other conglomerates that are the cornerstones of the economy) and is threatening to bring down President Park Geun-hye – who stands accused of helping her longtime chum Choi Soon-sil shake the chaebols down to the tune of some $69 million.

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Samsung headquarters, Seoul

Since we ran those pieces, there’s been a major new development. Last Wednesday, prosecutors raided Samsung’s headquarters in the Gangnam district of Seoul, the offices of the national pension service, and the office of Hong Wan-sun, who until earlier this year was chief investment officer at the pension service. Last year, as Jonathan Cheng and Eun-Young Jeong wrote in the Wall Street Journal, the pension fund “cast a decisive vote in favor of a merger of two Samsung affiliates” – namely, Cheil Industries and Samsung C&T – “that strengthened the grip of vice chairman and third-generation heir Lee Jae-yong on smartphone maker Samsung Electronics Co., the crown jewel of the business empire.” The raids were reportedly part of a probe of that merger. One detail overlooked by the Journal, but emphasized by one South Korean news source, was that this was the third raid on Samsung in a month – an indication that prosecutors had “already made significant progress in their investigation.” The same source indicated that this time around the raid focused largely on the office of Choi Ji-sung, Samsung’s Future Strategy czar.

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Lee Jae-yong

As the Journal‘s reporters noted, all this comes at a tough time for Samsung, which alone accounts for 17% of the South Korean economy. The discovery that Samsung’s Galaxy Note 7 smartphone could overheat and explode in a life-threatening conflagration led to two full recalls, cost over $5 billion, and caused the firm enormous embarrassment, leading to what may be long-lasting brand damage.

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Galaxy Note 7

The ultimate impact of this scandal, however, may be even more explosive than the Galaxy Note 7. As Bloomberg News observed in the wake of the Wednesday raids, it’s “raising fresh questions about decades of cozy ties between the nation’s big conglomerates and those in power.” While one president after another (including Park) has promised to limit the chaebols’ influence, each of those presidents has continued to play the same old game, exchanging favors, breaks, perks, etc., for cash on the barrel head. So far, it’s mostly been Park’s reputation that has suffered: once a popular leader, she’s now got an approval rating in the single digits. But as the South Korean public watches the country’s most powerful businessmen being paraded into police interrogation rooms like small-time crooks, and sees prosecutors raiding the offices of the nation’s largest and most prestigious company as if it were a Mafia operation, the chaebols – whose reputations have already been on the skids for years – are bound to lose even more of their luster. 

The only thing that’s sure here is that this story is just beginning to get underway. As the details of chaebol corruption continue to be investigated, uncovered, analyzed, and publicized, we’ll continue to monitor developments.