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SOUTH KOREA: Indicted Samsung Chairman Resigns

by Blaine HardenWashington Post Foreign Service
April 22nd, 2008

SEOUL, April 22 -- It's been an awful week for the family that for two generations has controlled the largest business conglomerate in South Korea.

Samsung Group Chairman Lee Kun-hee was indicted last Thursday for tax evasion and breach of trust. He resigned in disgrace Tuesday, after apologizing to South Koreans for causing "much grief."

His wife is also resigning as head of a Samsung art gallery and cultural foundation. And his son -- long regarded as heir-apparent to the Samsung throne -- was pushed out of his senior management position and will be sent into exile as a manager in a yet-to-be-named emerging market.

But don't count the Lee family out just yet.

A peculiar tick of the South Korean legal system is that judges here -- not wanting to upset the economic apple cart -- rarely sentence corporate titans to long prison terms and seldom strip them of their empires.

The Lee family, for all its public-relations woes and legal entanglements, remains the dominant shareholder in Samsung, the jewel in South Korea's conglomerate crown.

The highly profitable cluster of 59 companies makes everything from memory chips to ships, employs a quarter-million people around the world and accounts for a fifth of South Korea's exports. About 55 percent of the company is owned by foreign investors.

History suggests that Lee Kun-hee's chances of going to jail -- on charges that include evading about $120 million in taxes -- are slim.

A recent study of white-collar prosecutions found that South Korean judges in 82 percent of cases released convicted executives without requiring that they serve time in prison.

This pattern of leniency derives, in most cases, from a judge's determination that a corporate defendant has contributed to the growth of South Korea's economy.

And while Lee Jae-yong, the son of the longtime chairman, is to be sent abroad by Samsung for an unspecified period of corporate penance, his long-term ability to shape the company's future seems likely to endure, owing to his family's complex web of stock cross-ownership throughout the conglomerate.

"I do not expect to see substantial change in who runs Samsung," said Kim Sang-jo, an economics professor at Seoul's Hansung University.

"The power of the Lee family over succession at Samsung will remain," said Kim, who is also the executive director of Solidarity for Economic Reform, a group that for 18 years has been lobbying for corporate and legal reform.

Still, the shakeup announced Tuesday at Samsung headquarters -- and broadcast live across South Korea -- went further than many here had expected.

As part of its self-imposed reforms, Samsung said it would abolish its much-criticized strategic planning office, a legally nebulous unit of top managers that overseas all company operations and has periodically run afoul of the law.

In 2006, in the denouement to an earlier Samsung scandal, that office voluntarily gave $800 million to the government to be distributed in scholarships to deserving South Koreans.

The vice chairman and president of the strategic planning office are also resigning, as are the presidents of two other major Samsung companies implicated in the tax evasion charges.

In what he described as his "sincere apology" to the nation, Lee, 66, said he accepted "all legal and ethical responsibility" for "mistakes" made in the past.

According to an indictment last week, the largest of those mistakes was hiding about $4.5 billion worth of Samsung stock in accounts that used "borrowed names."

Lee hid the money from the government in order to preserve his management control over Samsung's various companies, the company acknowledged Tuesday.

Lee was charged with evading about $120 million in taxes on those hidden accounts.

Samsung officials said Lee would pay the back taxes and donate an additional $2 billion to "good causes" in South Korea.

Lee, who took control of Samsung after the death of his father in 1987, was also indicted for breach of public trust. Those charges focus on Lee's apparent efforts to keep the company in the family for a third generation. He allegedly arranged sweetheart stock purchases so that his son could control Samsung Group.

The scandal that forced Lee out of corporate management began last fall -- with sensational accusations of corporate bribery of leading figures in the South Korean power structure.

A former chief legal counsel for the company went public in October with claims that Samsung had a huge slush fund that it used to pay off politicians, prosecutors and other officials.

The lawyer, Kim Yong-chul, said he personally delivered some of those bribes and named senior officials and prosecutors who allegedly took them.

Parliament appointed a special prosecutor, Cho Joon-woong, and gave him three months to investigate. Authorities soon raided Samsung offices and found $4.5 billion worth of hidden stock.

Cho said last week, however, that his investigators did not find sufficient evidence of bribery or of the alleged slush fund.

The prosecutor also declined to arrest Lee -- or any of nine indicted Samsung executives -- on the grounds that they had admitted to the charges against them and because their arrest could harm the South Korean economy.

The betting among some longtime students of this country's criminal justice system is that Lee and other Samsung executives will remain out of jail, even if they are found guilty in the trial that is scheduled to start within two months.

"In order for South Korea's legal system to really establish its authority, I believe Lee should go to jail," said Kim, the economist who advocates for good corporate governance. "But I don't think he will. It is highly likely he will get a suspended sentence and a pardon."

Special correspondent Stella Kim contributed to this report.

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