Tax evasion, bribery and price-fixing: How Samsung became the giant that ate Korea

It was seen by many as a showdown between politics and power, a bid to bring one of the world’s largest conglomerates to heel. Eight years ago politician Roh Hoe-chan lobbed a grenade into South Korea’s business world when, with the help of two journalists, he published secret recordings of an aide to Samsung chairman Lee Kun-Hee discussing what appeared to be payments to prosecutors and a corporate slush fund to channel illegal funds to presidential candidates. The case triggered a toxic legal battle that ended this month with a Supreme Court conviction for Mr Roh and the humiliating forfeiture of his parliamentary seat. While parliamentary privilege protects what South Korean politicians say in the National Assembly, the court ruled that the same does not apply in cyberspace.

The power of South Korea’s chaebols – huge, family-owned conglomerates that have helped transform one of the world’s poorest countries into Asia’s fourth-largest economy in just a couple of generations – became an issue in the recent national elections. The left-wing candidate Moon Jae-in threatened to curtail the ability of South Korea’s business dynasties to control empires such as Samsung, LG and Hyundai via complex shareholdings that accelerate the transfer of corporate wealth to their own pockets. The eventual winner, Park Geun-Hye, began her campaign in similar vein but as polling day drew near appeared to step back from concrete proposals to tackle the chaebol. Yesterday she was sworn in to office, and for South Korea’s elite many now believe it is business as usual.

The big daddy of the chaebols is the Samsung Group which, riding high on the success of its iPhone and iPad rivals the Galaxy and the Galaxy Note, has a turnover almost twice that of its closest rival, LG. The company’s clout is apparent in the drive from the airport west of Seoul into the capital, where a dense grey lattice of concrete and glass stretches across the Han river. Samsung’s apartments and buildings dot the landscape; Samsung Town dominates the business district. The company runs the Samsung Everland Theme Park, one of the world’s biggest, the Samsung Museum of Art and many other cultural attractions. Millions of citizens own Samsung’s smartphones and electronic products.

So important is Samsung to South Korea’s economy that it has literally become too big to fail. Its subsidiaries build a large share of the country’s infrastructure, from bridges to apartment blocks. The company accounts for 13 per cent of the country’s entire exports and a fifth of its GDP, according to analysts.

For years critics have looked nervously on this growing empire, saying its money and vast influence was helping to corrode the nation’s hard-won democratic institutions. A series of scandals in the last decade led to the conviction of several Samsung executives for bribing politicians. In 2008 Lee Kun-Hee – Korea’s richest man – was forced to quit as group chairman and fined $100m after being convicted of tax evasion and breach of trust following an investigation sparked by the wiretaps. But a year later the country’s pro-business president Lee Myung-bak controversially pardoned him. Samsung’s leader took full responsibility for the shame caused by the investigation, but denied wrongdoing. “I didn’t do it. I never thought it [Samsung Group] was a criminal organisation, and I think it is [the media’s] fault to define it that way,” said Mr Lee, who has since returned to Samsung Electronics as chairman.

For many, the scandals and their denouement seemed to confirm their worst suspicions: that influence peddling and bribery had helped make the empire founded by Mr Lee’s father, the late Lee Byung-chul, almost untouchable since its early days as a textile firm in the 1930s. The family’s business clout is vast: Lee’s daughter runs a luxury hotel chain; his son is chief operating officer of Samsung Electronics; his brother runs a food and entertainment empire; his nephew runs a franchise that includes Starbucks; his sister married into the LG Group. Mr Lee himself transformed the empire he took over from his father a quarter of a century ago, taking it global and multiplying revenues by a factor of 40. Famously telling his employees to “change everything but your wife and kids”, Lee Kun-Hee returned from disgrace to become chairman of Samsung Electronics, the biggest money-maker in the group whose activities range from construction to shipbuilding and finance. From his post he engineered its spectacular digital strategy which left its Japanese rivals in the dust.

According to The Economist, The “Samsung group”, has no legal identity: its 83 firms shelter under an umbrella company in which the Lee family has a controlling 46 per cent stake. Whistleblower Kim Yong-chul, a former chief lawyer for the group, claimed that the company established a $200m slush fund to buy off politicians and prosecutors. He claims his tell-all book, Thinking of Samsung, documenting widespread corruption, price-fixing and bribery inside the Samsung empire, has been effectively blacklisted by the Korean media.

Mr Roh, a politician with the Progressive Justice Party and long-time foe of Samsung, appeared to uncover a legal smoking gun with the publication in 2005 of the wiretaps. But the Supreme Court last week concluded that he had in fact violated the “Protection of Communication Secrets Act” by putting the transcripts on his website. Mr Roh claimed the court ignored the profound wider implications of the tape and the left-leaning Hankyoreh newspaper called the ruling “comical”.

“Samsung definitely controls the careers of prosecutors in Korea, destroying the careers of those that take any action against the company,” says Michael Kim, a former senior manager with Samsung. “Most prosecutors simply opt for the cash (golf bags full of it) and leave Samsung alone.” Mr Kim says officials with a government anti-corruption agency once flatly told him “that they have no jurisdiction over Samsung”.

The gilded power of the 10 largest chaebols was the key issue in the December presidential election, topping even concerns about Seoul’s troublesome neighbour. President Lee was accused of being soft on big business, fuelling corruption and a widening apartheid between the country’s mega-corporations and its struggling smaller businesses. Park Geun-hye promised to pursue what she called “economic democratisation”, which in practice, she said, meant tackling cross-shareholdings in the chaebols; increasing anti-competition fines and forcing prosecutors to get tough. “We haven’t paid enough attention to fairness,” she said during her campaign. “[Big companies] concentrate their business among their own groups, they snatch technology from small companies, and they enforce prices.”

But many observers are sceptical about these pledges. “Chaebol-bashing” has become part of electoral language in South Korea, but rarely are politicians willing to follow up with hard policies. Recent court battles over copyright infringements with Apple and its battles to shake the corruption allegations have dented its reputation at home, but its success abroad has been stunning and helps to insulate it from political attacks. The company holds double Apple’s 17 per cent share of the global market for smartphones, for example.

The wiretaps resulted in no one from Samsung being indicted, although they did spark the investigation that eventually saw Mr Lee fined and jailed. The recordings were from 1997 but were not published until eight years later, falling foul of South Korea’s statute of limitations. Hwang Kyo-ahn, the senior prosecutor, said that there was no evidence the money belonged to Samsung rather than Mr Lee himself, who claimed the money was a donation and not a bribe. Mr Hwang said in 2005: “The prosecution has conducted a thorough investigation of the spy agency’s illegal wiretapping operations… However, with the statute of limitations … expiring and the spy agency already having destroyed a significant part of the related evidence, there had been difficulties in pushing ahead with the investigation.” By contrast Mr Roh has lost his seat, and the two journalists who helped break the story were themselves indicted. But Mr Roh’s zeal remains undimmed. “If I go back to eight years ago, I would still do the same thing,” he said.