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Korean Government Points Its Sword at Samsung Group
Beleaguered Samsung Faces Pressures from All Directions
Korean Government Points Its Sword at Samsung Group
  • By Jung Suk-yee
  • November 16, 2018, 19:05
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Samsung Group is facing an ever-growing list of prosecution investigations and lawsuits.

The incumbent Korean government appears to have no intention of withdrawing its sword pointed at Samsung Group. Rather it seems to be stepping up its siege of Korea’s largest business group in the name of cleaning up some of its deep-rooted abuses.

The latest example of the government’s pressures on Samsung Group is the ruling of the Securities and Futures Commission (SFC) that Samsung BioLogics intentionally committed accounting fraud in 2015.

Samsung Group regards the verdict as a bad rap. Samsung BioLogics changed its accounting standard in 2015, but before doing so, it sought the opinion of the Financial Supervisory Service (FSS) and received a nod from it.

But the FSS reversed its stance following the change of government in 2016 and accused the company of changing its accounting standard for no justifiable reason. The regulator’s change of stance illustrated the determination of the incumbent government to rectify what it sees as the powerful business group’s unethical business practices.

The ruling has far-reaching repercussions. In the first place, the prosecution will launch an investigation into the accounting fraud allegations, expanding the list of investigations underway against Samsung Group affiliates.

If prosecutors confirm that Samsung BioLogics did fabricate its accounting books, it could affect, among other things, the appeal trial on Lee Jae-yong, vice chairman of Samsung Electronics who was indicted on charges of bribing former President Park Geun-hye.

Lee was convicted of the charges and sent to prison for five years. Yet he was unexpectedly released from prison in February this year as Seoul High Court decided to suspend the jail term after halving the sentence.

The FSS is not the only state agency that has drawn its sword against Samsung. On Nov. 14, the day the SFC handed down its verdict on Samsung BioLogics, the Fair Trade Commission (FTC) announced that it has decided to refer Lee Kun-hee, the hospitalized chairman of Samsung Electronics, to the prosecution for violating the fair trade law.

According to the FTC, Samsung Group deliberately omitted two firms effectively under its wings from the list of its affiliates submitted to the corporate watchdog in 2014.

The FTC has been strengthening regulations on intra-group transactions among companies affiliated with chaebol groups as corporate owners use some affiliates as a means of misappropriating corporate funds.

The FTC said the two firms -- Samoo Architecture & Engineer and its sister firm Seoyoung -- have been effectively controlled by Samsung Group and have had deals with the group's affiliates, but they were not included in the group's list of affiliates.

The FTC suspects that the group did not include the two firms in its list of affiliates because listed subsidiaries come under the FTC’s scrutiny, which means it becomes more difficult for the group’s owner family to misappropriate their funds.

The FTC has also been stepping up pressure on Samsung Group firms to eliminate cross shareholding arrangements, which are used to strengthen the owner family’s managerial control of the sprawling business empire.

The problem with Samsung’s owner family members is that they do not have enough money to increase their stakes in Samsung units and cement their grip on them.

But the FTC has been pushing Lee Jae-yong hard to find a solution to this matter. For Lee, the central issue is how to raise the funds needed to take over Samsung Life Insurance’s stake in Samsung Electronics.

Samsung Electronics and other group units also face investigations with regard to their alleged attempts to prevent employees from setting up labor unions or participating in union activities. Samsung Electronics Services has been investigated since April this year, with a total of 32 people having been indicted.

The prosecution is also investigating the allegations that Samsung Group manipulated the prices of the land lots owned by Everland, South Korea's largest theme park which is operated by Samsung C&T Corp. The investigation was launched at the request of the Ministry of Land, Infrastructure and Transport in April.

These are only a part of the ever-growing list of investigations and lawsuits directed at Samsung Group, the undisputedly most important conglomerate in corporate Korea. The government’s campaign to abolish long existing business malpractices is well-intended. But the road to hell is paved with good intentions. The most urgent task for the government is to stimulate corporate investment in new technologies and industries to reverse the downtrend in the growth potential of the Korean economy. For this, it needs to undertake sweeping regulatory reforms and boost the morale of Korean industrialists.