South Korean Politics: The Scandals within the Scandals (Part 2)



In a post earlier in the week, I outlined the basics of the current South Korean scandals and argued that they could be traced at least in part to restrictive campaign and campaign finance laws. But the real problems run deeper still: to ongoing features of business-government relations and continuing tolerance for weak corporate governance. So far, an inordinate amount of attention has focused on the politicians who have taken bribes, rather than on the broader issue of private sector malfeasance. But to an outsider what has not received adequate attention is the vast amounts of money that have flowed from the government to private firms with little or no oversight. The payoffs to politicians barely reach into the millions of won; the loans extended to Keangnam Enterprises—and many others—run into the billions and constitute losses to both Korean taxpayers and shareholders.

Both sides of the aisle are furiously trying to point fingers at the other, but the sad tale involves failure to do due diligence by both the Roh and Lee administrations. This is not the first time that Sung Wang-jong’s name has surfaced in the context of a corruption scandal. Sung was convicted of a political funding law violation in 2002 when he was serving as a special adviser to Kim Jong-pil, then head of the Chungcheong-based United Liberal Democrats; in effect, he embezzled money from his company (the corporate governance part of the scandal) and provided it illegally to the party (the bribery/corruption part of the scandal). He was convicted, but was pardoned in May 2005. Guess who as a presidential secretary at the time? None other than Moon Jae-in.

But that was not the end of the story. In November 2007, Sung was convicted again, this time for breach of trust for lending 12 billion won of Keangnam Enterprises funds to a developer (the corporate governance side of the scandal). Only one month later, he was pardoned. Guess who was presidential chief of staff, and took this action over strong opposition from the Ministry of Justice? None other than Moon Jae-in. I can perfectly well understand Moon’s frustration at the ability of the Park administration to point the finger at the NAPD on this second pardon. But reverting to legalisms about the statute of limitations is hardly very convincing. Why, pray tell, was he pardoned?

But wait: it gets worse. Despite two convictions—convictions—for malfeasance under Roh Moo Hyun, Keangnam was nonetheless able to secure government support for foreign investments under Lee Myung-bak’s ill-conceived “natural resource diplomacy.” If you want excellent coverage of this fiasco, don’t count on the mainstream Korean papers; as far as I can tell, only Hankyoreh has done the job (read ‘em and weep here [November 2014],  here [January 2015] and here [April 2015]).

“Resource diplomacy” was an aspect of Lee Myung Bak’s broader effort to untether South Korean diplomacy from its preoccupation with North-South relations and included some genuine successes such as the country’s higher profile with respect to foreign aid and multilateral diplomacy (Scott Snyder has a nice essay on the first 250 days of Lee Myung Bak’s foreign policy here). But the natural resource diplomacy effort was more dubious, involving government backing—both through loan guarantees and the activities of state-owned enterprises—in securing access to natural resources in high-risk environments.

We can do no better than summarize from a great piece of investigative journalism by Sergei Strokan and Yury Barsukov for Kommersant posted on Russia Beyond the Headlines. In 2003 (during the Roh presidency) Keangnam, the Korean National Oil Company and five other South Korean companies entered into a contract with Rosneft to undertake exploration of oil and gas on the Western Kamchatka shelf. Rosneft owned 60 percent of the project, the South Korean consortium the remaining 40 percent. Through 2008 only one exploratory well was drilled with no success despite expenditures of $300 million. In the grand struggle over oil property rights in Russia, Rosneft's exploration license for the territory was revoked in 2009 and handed over to Gazprom. For a year the South Korean companies held talks with Gazprom trying to salvage the project before giving up in 2010. The immediate trigger of Sung’s suicide appears to have been a search on the part of the South Korean prosecutor's office about possible corruption involving exaggerated claims regarding the expected returns from the Kamchatka project. But the Keangnam case was hardly alone. Through partnerships with three major state-owned enterprises—in addition to KNOC, the Korea Gas Corporation and the Korea Resources Corporation (KORES)—as well as soft loans, private firms were effectively shielded from the risks of these ventures (again, Hankyoreh from April of this year cited above is particularly good on this). Even if you think criticism of such projects is 20-20 hindsight, the larger question is not just why Korean taxpayers are financing such ventures, but why they are financing them for firms like Keangnam with proven track records of corporate malfeasance and corruption?

Next time; the broader picture: an improving record on corruption but ongoing issues with corporate governance.

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