Too Big To Indict? The Samsung Case

Stephan Haggard (PIIE) and Inbok Rhee (UCSD)



We argued in our past posts on Park’s unraveling that the most serious charges were those surrounding the foundations (those posts are linked below). The foundations were clearly not transparently governed, with money finding its way to Choi Soon-Sil. Either undue pressure—in effect extortion—or quid pro quos certainly seemed possible. Although the political focus has been on Park’s political problems, corporate behavior is just the other side of any bribery case. The Special Prosecutor’s office will now need to unwind each of these donations and make decisions about possible private sector indictments.

None have focused public attention like the January 16th press conference announcing the intent to issue an arrest warrant against Lee Jae-yong, the heir apparent to the Samsung dynasty, on charges of bribery, embezzlement, and perjury. At the center of the charges was the suspicion that Samsung funneled money to foundations controlled by Choi Soon-sil in turn for government support in the transfer of power within the group from Lee Kun-hee to his son Lee Jae-yong. That decision was turned back by the courts, raising the question of whether top chaebol leaders are too big to indict, regardless of their behavior. (In the interests of full disclosure, both Samsung Electronics and Elliott Capital, Paul Singer’s firm, are corporate supporters of the Institute).  

Are chaebol leaders too big to indict, regardless of their behavior?

The backstory rests both on recent transactions and a longer history. The Special Prosecutor specified a number of dubious transactions, including:

  • The 22 billion won contract between Samsung and Widec Sports GmbH (a shell corporation in Germany co-owned by Choi Soon-sil and Chung Yoo-ra, Choi’s daughter);
  • 1.6 billion won donation to Korea Winter Sport Elite Center (a foundation owned by Choi’s niece, Chang Si-ho);
  • And a 20.4 billion won donation given to Mir-K (12.5 bn) and K-Sports (7.9 bn), purportedly as bribes provided to Choi Soon-sil and her family.
  • The Special Prosecutor further stated that Choi and President Park “share common economic and practical interests,” with the perjury charge based on Lee’s denial of these relationships during questioning.
  • A graphic from Yonhap (see here) shows the flow of funds. The purple box at the top is Samsung (삼성), the second to the bottom is Choi Soon-sil’s family (최순실 일가), and the one at the bottom is President Park (박 대통령). The three boxes in the middle are Widec Sports, Korea Winter Sports Center, and the Foundations. 

Yet the recent case has a longer history. At the center of the transition within Samsung was a complex merger between Samsung C&T and Cheil Industries (formerly merged with Samsung SDI and then with Samsung Everland) which strengthened Lee Jr’s hold over the group. Questionable inter-group transactions that stiff minority shareholders are the stuff of family successions in the major chaebol. In 1996, Lee Jae-yong used money given to him by his father to buy 4.83 billion won of convertible bonds from Everland that were subsequently converted to equity and valued at 5.7 trillion won. (Eleven years later, a court convicted two Everland executives of breach of trust over the transactions, finding they were executed below fair value; the ruling was subsequently overturned).

In 2015, Paul Singer—an American hedge fund manager and activist investor—bought 7.1% of Samsung C&T. Cheil subsequently wanted to purchase it in a $9.4 billion all-stock offer that Singer believed undervalued the company (as he believed the group flagship, Samsung Electronics, was; see his presentation on the issue here for a sense of the issues). Moreover, Singer’s move would have unwound or made transparent the web of pyramidal and cross-shareholding relationships that allow the Lee family to effectively control about 70 companies in the group with 2% of their total equity. Shareholders narrowly defeated Singer’s proposal allowing Lee to consolidate his grip.

At issue now: did the National Pension Service—a half-trillion dollar public entity and significant Samsung C&T shareholder—agree to the merger with the help of Choi Soon-sil?

Lee Jae-yong’s strategy appears to be to plead to a lesser charge. He denied any involvement in trying to influence the National Pension Service’s vote to approve the merger, but did admit that he had been pressured by Park to support Choi Soon-sil’s daughter’s horse-riding. Lee testified that "President Park expressed anger for the lack of Samsung’s support for horseback riding” during his secret one-on-one meeting with the President on July 25, 2015, and that he had little choice but to support Choi Soon-sil and her family but without the linkage to the Cheil merger case. (Sources: No Cut News, Chosun Ilbo, Yonhap)

What is striking about the case is that both the prosecutors themselves and conservative critics have focused not on the malfeasance but on the possible economic consequences of an indictment. The spokesperson for the prosecutor’s office felt obliged to argue that “while considering the impact on the national economy is surely essential, we ultimately believe that safeguarding justice is much more important.” Why is “considering the impact on the national economy” an argument for allowing blatant corruption to occur?

Conservative media were quick to attack. Some choice headlines: “Special Prosecutor Bends to Mob Justice and Ignores Economic Impact” (Korea Economic Daily), “Corporations Forced to the Cliff: How Much More Do They Have to Suffer” (Seoul Economy Daily), and “Stray Bullet from the Impeachment: Hard to Do Business in Korea” (Maeil Business News). We particularly like the last one, as if efforts to investigate blatant malfeasance made it hard to do business; isn’t the opposite the case? The Chosun Ilbo suggested that arresting Lee would send a signal to the US that Samsung actually was corrupt, thus harming Korean exports, and result in a loss of market share to Apple. Moreover, the newspaper underlined the possible domino effect on Samsung’s 4,300 sub-contractors.

The banner of good governance was seized by an unlikely coalition of the leftwing Hankyoreh, “Korean Economy Will Flourish Only If We Can Tackle the Chaebol Problem,” and the rightwing Wall Street Journal, “A Warrant for Chaebol Reform.” (Sources: YTN, Media Today, Hankyoreh: here and here, Wall Street Journal)

On Jan 19th, however, the court dismissed the request for an arrest warrant, stating that it was difficult to determine the merit or necessity of the action. Uncertainties cited by the court ruling boil down to the difficulty of proving quid pro quos and the largely—although not wholly—circumstantial nature of the case. (Source: Newsis)

Given the charged political environment, the issue is likely to emerge as a significant one in the presidential contest if Park’s impeachment is upheld. The leading figures in the opposition immediately made statements criticizing the court. Moon Jae-in was critical but presidential, while Lee Jae-myung and Ahn Chul-soo issued stronger denunciations. A sampling:

  • Moon Jae-in: “I am surprised by the outcome, which is regretful. However, the Special Prosecutor should not be discouraged by this temporary setback.”
  • Lee Jae-myung: “This again proves that Korea is owned by the Chaebols. The law has once again ignored justice and succumbed to the power of the Chaebols."
  • Ahn Chul-soo: “If it was anyone else, would the court have turned down the arrest? How do we seek justice if we are not treated as equals before the law?”
  • Park Won-soon and Kim Boo-kyum similarly raised pointed criticisms against the court.
  • Among the opposition candidates, Ahn Hee-chung was the only one being cautious: “The people are extremely disappointed by the court. However, I believe the road to protect the rule of law and justice is to always respect the decisions made by the court."

On the conservative side of the aisle; deafening silence. None of the potential candidates from the conservative parties—Ban Ki Moon, Yoo Seung-min, Nam Kyung-pil—made any public statements on the question. The spokesperson for the Saenuri Party commented blandly that “[the Saenuri] urges the Special Prosecutors’ Office to work hard to unravel all the details of any wrongdoing to ensure that we do not face any similar problems in the future,” while the spokesperson for the Barun Party stated that “we trust that the court’s decision was based solely on the law and principles upheld by the court." (Sources: Hanyoreh, Yonhap, TV Chosun, Seoul Economy Daily, and YTN)

Following the rejection of the arrest warrant the Special Prosecutors’ Office held a press conference stating that they are open to all possibilities including:

  • Conducting further investigations to back up the bribery charges against Lee Jae-yong in order resubmit the request for a warrant.
  • Issuing a request for a new arrest warrant for the Vice CEO, Choi Ji-sung, for whom there are evidence and testimony to back up the claim that he was directly involved in providing support for Choi Soon-sil.
  • Reissuing indictment without an arrest for Lee Jae-yong, and tacking back to the investigation of the bribery charges against President Park. Despite the setback on the Samsung front, the Special Prosecutor did manage to secure arrests warrants for Kim Ki-chun, former chief of staff to President Park, and Cho Yun-sun, the current Minister of Culture, Sports and Tourism. (See sources Seoul Economy Daily, Hankyoreh: here, here, No Cut News, and Donga)

Serious allegations require serious scrutiny, and we do not mean to prejudge the legal outcome. But Korean prosecutors believe they have a case, and the case should be pursued. What we take away is the extraordinary difficulty Korea has in cleaning up its middle-of-the-pack corporate governance. The debate is a near-perfect replay of too-big-to-fail arguments and the blackmail power that groups can wield when they get too large.

Previous posts on the Park-Choi scandal:

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