As Scandal Roils South Korea, Fingers Point to Mixing of Politics and Business

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SEOUL, South Korea — Jay Y. Lee, the heir apparent to the Samsung empire, was trying to push through a corporate merger seen as critical to his plans to succeed his father as chairman.

For months, key shareholders fought the move. Then, suddenly, the standoff broke as South Korea’s government-controlled pension fund, which held the shares to cast the deciding vote, endorsed Mr. Lee’s deal.

A week later, President Park Geun-hye invited Mr. Lee to her office and asked for Samsung’s help with a campaign to promote South Korean culture and sports. Within months, Samsung had donated $17.4 million to two foundations controlled by the president’s confidante, Choi Soon-sil, and $6.2 million for the training of Korean equestrians, including Ms. Choi’s daughter.

Those donations — and whether they were part of a quid pro quo — are now at the heart of the impeachment case against Ms. Park. The nation’s full Constitutional Court will begin formal hearings on Tuesday into the case, the biggest influence-peddling scandal in South Korea’s history.

The court has never before ousted a president, though seven of the last eight have left office tainted by allegations of corruption. Whatever the court decides, the Park scandal has already put recurring collusion between big business and government in South Korea under intense scrutiny and could reshape the nation’s flawed, young democracy.

“We created a miracle on the streets,” said You Jong-il, a professor of macroeconomics and development policy in Sejong City, referring to huge, peaceful street protests demanding Ms. Park’s resignation. “But we are still very worried about whether we will really be able to change Korean society and Korean politics.”

Public outrage — initially aimed at the influence that Ms. Choi, the daughter of a religious sect leader, appeared to exercise over the Park administration — has turned to broader concerns about the political system: the power of the presidency, and its symbiotic relationship with the chaebol, the family-controlled conglomerates like Samsung that dominate the economy.

“Chaebol are accomplices!” protesters have chanted, carrying effigies of their leaders dressed in blue prison uniforms. Damning new details emerge with every week.

Prosecutors allege that Ms. Choi conspired with Ms. Park to force 53 companies to donate more than $69 million to the two foundations under Ms. Choi’s control. The National Assembly went further in its impeachment motion, describing the donations as bribes personally benefitting Ms. Choi and paid in return for favors for the companies, ranging from lucrative licenses to presidential pardons.

Ms. Park has denied the charges. At an extraordinary parliamentary hearing, Mr. Lee and eight other chaebol leaders also denied receiving or seeking special treatment for the donations. But they appeared to acknowledge that the payments were not entirely voluntary.

“It was difficult to go against the government’s wishes,” testified Koo Bon-moo, the chairman of LG, the multinational electronics company.

Mr. Lee called Samsung’s contribution “not voluntary” but “inevitable.”

A History of Favors

The meeting with Mr. Lee was one of eight that Ms. Park held with top chaebol executives in July 2015. Her lawyers have acknowledged that she asked for contributions to the two foundations in each of these meetings but deny that she promised any favors. Little is known about what else was discussed in these one-on-one sessions.

The impeachment motion alleges that Ms. Park prepared for the meetings by asking her chief economic adviser, Ahn Chong-bum, for a memo outlining the issues that the chaebol needed help with.

But there is no doubt the chaebol have benefited from government support for decades.

Ms. Park’s father, Park Chung-hee, the country’s first military dictator, pioneered the economic model before his assassination in 1979. He showered a handful of businesses with favors such as tax benefits, cheap electricity, a buy-Korea policy and the suppression of organized labor.

These companies eventually grew into industrial conglomerates, fueling the export-driven growth that lifted South Korea out of postwar poverty and made it one of the world’s most dynamic economies.

Some of the firms, like Samsung, Hyundai and LG, are now global brands with publicly listed shares. But the founding families still dominate almost all the conglomerates, in part, critics say, because of lax enforcement of corporate governance and tax laws.

In return for their support, Park and many of his successors as president expected the chaebol to contribute to government projects. And the chaebol did more than that, sometimes channeling money to the presidents’ personal coffers or those of their relatives and associates.

South Koreans are increasingly skeptical of the chaebol and the economic model they represent. The country’s largest shipping line, Hanjin, recently filed for bankruptcy. Samsung, the icon of South Korean technological prowess, suffered global humiliation with its recent recall of exploding Galaxy Note 7 smartphones.

The chaebol also face competition from China, which has begun producing many of the same goods, like petrochemicals, more cheaply. Some have angered the public by shifting manufacturing abroad even as their tentacle-like grip on the economy at home is blamed for squeezing start-ups and stifling innovation.

Yet the conglomerates still enjoy some of the benefits that Park Chung-hee conferred on them more than four decades ago. They are taxed at lower effective rates than most companies or individuals, and receive more tax breaks. Businesses also pay lower electricity rates than individual consumers in South Korea.

The benefits of such policies, Professor You said, “is a very different order of magnitude compared to the sums of money that were donated to the foundations.”

“All decisions are made with the interests of the chaebol in mind,” he added of policy-making in recent decades. Politicians and the chaebol, he said, “have been relying on each other to maintain their power.”

‘The President Is Interested in This’

Few South Koreans believe the chaebol are innocent victims in the unfolding case. But while Ms. Choi and Mr. Ahn, the president’s economic adviser, have been arrested, the authorities have not taken action against executives at any of the businesses.

Historically, the chaebol titans have not been immune from prosecution. On the contrary, several have been convicted of bribery, tax evasion and embezzlement — yet remained at the helm of their businesses.

That is because they are often granted suspended sentences or presidential pardons. At least six of the nation’s top 10 chaebol, which generate revenue equivalent to more than 80 percent of gross domestic product, are led by men with criminal records.

Since taking office in 2013, Ms. Park has granted two such pardons. Choi Tae-won, chairman of the SK Group, which spans chemicals, petroleum, telecommunications and semiconductors, received one in the summer of 2015. The other went this past summer to Lee Jae-hyun, the chairman of the CJ Group, which comprises businesses in foods, pharmaceuticals, entertainment and media.

Both men had been imprisoned on corruption charges. Representatives of both men met with Ms. Park in 2015. And both the SK Group and the CJ Group made donations to Ms. Choi’s foundations at the president’s request, prosecutors said. The impeachment motion cites the pardons in accusing Ms. Park of selling favors.

Lawmakers have also noted that the money for the foundations was collected through the Federation of Korean Industries, which lobbies on behalf of the chaebol.

A special prosecutor is also examining the donation of $6.2 million by Samsung to support young equestrians, particularly Ms. Choi’s daughter, who trained in Germany using a thoroughbred purchased for $830,000. The prosecutor is investigating reports that Ms. Choi used the funds to buy a house and motel in Germany, as well as to cover her daughter’s personal expenses, including accessories for her pet dogs.

Some of the payments made by the chaebol occurred while the government was weighing important decisions for the companies. For example, the SK Group and the retail conglomerate Lotte had lost valuable licenses to run duty-free shops in 2015 and lobbied to regain them last year. Lotte won back its license in December.

At the same time, Lotte’s top executives were under investigation on tax evasion and embezzlement charges. In October, prosecutors indicted Lotte’s chairman, Shin Dong-bin, but did not arrest him, allowing him to continue running the business empire.

While Mr. Shin was under investigation, prosecutors say, Ms. Park and Mr. Ahn pressured Lotte into donating $6 million for a sports complex to be built and managed by a company founded by Ms. Choi. The money was later returned.

Prosecutors say other chaebol, including Hyundai, directed millions of dollars’ worth of contracts at Mr. Ahn’s request to companies owned by Ms. Choi and her associates.

The chaebol all wrote checks, prosecutors say, usually after Mr. Ahn uttered the magic words: “The president is interested in this.”

“What we need is a great national cleanup,” said Moon Jae-in, an opposition leader who is the leading candidate to succeed Ms. Park. “We must sternly punish politics-business collusion, a legacy of the dictatorial era, and take this as an opportunity to reform chaebol.”

Concentrated Power

This is a recurring promise among presidential aspirants in South Korea. Almost every candidate in recent elections — including Ms. Park — has vowed to end government collusion with the chaebol. But the culture remains entrenched.

The problem is exacerbated by how much power is concentrated in the presidency, relative to the legislature or to the judiciary. The president enjoys considerable influence over prosecutors, tax collectors and state security agents, whose careers are largely determined by political loyalty rather than merit.

Some lawmakers are calling for constitutional revisions to shift some of the president’s authority to the prime minister, or even to abolish the presidency and introduce a parliamentary government.

Another problem is the news media, which can be hesitant to confront the government and the chaebol, who are major advertisers. The president effectively handpicks the heads of the two biggest television stations, and the government can revoke the licenses of cable news channels.

Journalists who tried to investigate Ms. Choi suffered a vicious official backlash.

As early as 2014, the Segye Ilbo newspaper reported on an intelligence document alleging influence-peddling by Ms. Choi’s family. Ms. Park attacked the leak, and her office pressed the newspaper to fire its president, according to the impeachment motion.

Instead of investigating the allegations in the document, prosecutors interrogated Segye journalists on possible defamation charges, and reporters at the newspaper said the tax authorities had begun investigating businesses owned by the paper’s parent company.

A police officer accused of leaking the document killed himself. “Listen, journalists!” Lt. Choi Kyong-rak wrote in his suicide note. “The people’s right to know is what you live and exist for. Please do your job.”

Given the authority of the presidency, relatives and close friends often operate as rainmakers. In the past, the presidents’ siblings and sons, while holding no official titles, often wielded enormous power as “junior presidents.”

Ms. Park is unmarried, childless and estranged from her siblings, a status that she said would free her from nepotism and break the pattern. But she had Ms. Choi, whose family befriended her after the assassination of her mother in 1974.

Prosecutors did not aggressively investigate the allegations against Ms. Choi until after Ms. Park delivered her first televised apology in October, a day after a local cable channel reported that Ms. Choi had edited the president’s speeches.

The story emboldened the press, prompting a flood of other damaging disclosures and then the huge street protests that eventually led prosecutors to conclude it was no longer politically tenable to do nothing.

Cho Eung-cheon, a former prosecutor who is now an opposition lawmaker, said the authorities had moved too late.

“The prosecutors we see now,” he wrote on his Facebook page, “are nothing more or less than a pack of hyenas attacking a crippled lion.”

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