Samsung are embroiled in a political corruption scandal in South Korea unparalleled in the country’s history, which could culminate in the removal from office of the Korean president and a prison sentence for Samsung’s chief.
Samsung de facto boss Jay Y. Lee and four senior executives have been indicted on charges including bribery, embezzlement and hiding assets overseas. Three of the five arrested have resigned, but not Lee, whose official position is vice-chairman of the flagship Samsung Electronics.
The scandal has led to the extensive restructuring of Samsung’s business structure, and prompted calls for reform of South Korea’s chaebol business structures, family-owned business conglomerates unique to Korea.
South Korea’s President Park has already been impeached by the country’s parliament with the constitutional court in the process of deciding whether to uphold the impeachment; in the meantime Park has been stripped of her powers and duties.
The investigation is centred on Park’s close friendship with Choi Soon-Sil, the daughter of a now deceased influential evangelical group leader. Choi’s access to governmental documents – despite holding no public office – and the allegation that she was, with the help of Park, extorting Korean businesses for money for her foundations, led to her arrest.
After Park acknowledged her close relationship with Choi she offered to resign, but was denied her request by the Korean parliament. Instead they voted to impeach her.
One of the companies that has admitted giving money to Choi’s foundation is Samsung. It has denied doing so in exchange for political favours.
This is the crux of the case against Samsung: that they gave money to Choi’s foundations in exchange for support for a contentious merger of two affiliate companies. The estimated amount allegedly given is US$35 million.
Samsung chief Jay Y. Lee also admitted giving money and a horse to Choi’s daughter (a professional equestrian), something he says he now regrets.
Now he will stand trial in a case that has already dented the reputation of the country’s largest and most prominent company.
Jay Y. Lee is the de facto head of Samsung after his father Lee Kun-Hee, the Samsung CEO, suffered a heart attack in 2014. Kun-Hee has twice been convicted of bribery, in 1996 and 2008, but never jailed.
The money donated to Choi’s foundations was allegedly given to ensure the rubber stamping of a merger in 2015 worth US$8 billion, which consolidated Lee’s control of Samsung. Critics said the move smacked of cronyism.
A court in January blocked the arrest of Lee, citing not enough evidence, but in February he was brought back in for questioning that lasted 15 hours’ straight. On February 28 he was arrested and his trial will begin on Thursday 9 March.
Lee’s arrest and the subsequent upheaval and uncertainty surrounding the case has hindered Samsung’s restructuring plans and triggered a debate on whether Korea’s business conglomerates, known as chaebol, are too cosy with Korean politicians.
Several leaders of prominent Korean chaebols appeared at a parliamentary hearing in December in unprecedented public scenes where they admitted that they had been asked by politicians, including the Korean president, to provide “support” for initiatives and schemes, but denied money was requested or that they donated in return for special treatment.
The chaebol systems have been dubbed an ‘anachronistic corporate governance style’. Samsung has vowed to dismantle its current structure, breaking up departments into smaller, independent units. Greater transparency is also included in the proposed changes, along with an end to the top-down style of leadership, though critics remain sceptical.
If Lee is convicted it would be the latest in a string of financial misconduct scandals in the Asia-Pacific region, where there is a chequered history when it comes to financial misconduct.
Take Olympus, the Japanese firm that was found to be concealing its losses, which resulted in the loss of nearly 3,000 jobs, or the profit inflation that occurred at Toshiba in 2015, where US$8 billion was removed from Toshiba’s stock market valuation.
The Samsung story carries extra weight, both for the company and for Korea: it could result in the first ever removal of a sitting Korean president from office, further undermining public trust in the country’s institutions (the offices of the antitrust agency and financial regulator have been searched by prosecutors).
For Samsung, it has disrupted their future business operations, created uncertainty regarding the company’s leadership and damaged the reputation of the brand. Whatever the outcome of the trial, a change in the way businesses are operated in Korea looks inevitable.
Anti-corruption is becoming a critical field of required knowledge and the ICA Certificate in Anti-Corruption will offer specialist knowledge that sets you apart from your peers and positions you to contribute positively in an area of significant global concern.
Find out more about the ICA Certificate in Anti-Corruption >
The aim of corporate governance is to balance the interests of all company stakeholders. The ICA Certificate in Corporate Governance provides you with an opportunity to understand corporate governance requirements and benefits by demystifying a subject often misunderstood.
Find out more about the ICA Certificate in Corporate Governance >
By following us on LinkedIn, Facebook and Twitter you’ll stay up to date with the latest developments in governance, risk, anti-money laundering and financial crime prevention, and the professional qualifications we offer.