Mixing of politics and business plunges South Korea into scandal
Big business payouts triggered by the magic words: ‘The president is interested in this’
A lawyer for South Korea’s president, Park Geun-hye, prays before the opening of her impeachment trial at the Constitutional Court in Seoul, South Korea, on Tuesday. Photograph: Kim Hong-Ji/AFP/Getty Images
People in Seoul watch a screen showing a news report on the arrest in Denmark on Sunday of Chung Yoo-ra, the 20-year-old daughter Choi Soon-sil, who is at the centre of corruption allegations in South Korea. Photograph: Jung Yeon-Je/AFP/Getty Images
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 Lee’s deal.
A week later, President Park Geun-hye invited 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 (€16.7 million) to two foundations controlled by the president’s confidante, Choi Soon-sil, and $6.2 million for the training of Korean equestrians, including 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 Park. The nation’s Constitutional Court was due to 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 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 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 Choi conspired with Park to force 53 companies to donate more than $69 million to the two foundations under Choi’s control.
The National Assembly went further in its impeachment motion, describing the donations as bribes personally benefiting Choi and paid in return for favours for the companies, ranging from lucrative licenses to presidential pardons.
Park has denied the charges. At an extraordinary parliamentary hearing, 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. Lee called Samsung’s contribution “not voluntary” but “inevitable”.
A history of favours
The meeting with Lee was one of eight that Park held with top chaebol executives in July 2015. Her lawyers have acknowledged that she asked for contributions to the two foundations in these meetings but deny that she promised any favours. Little is known about what else was discussed in these one-on-one sessions.
The impeachment motion alleges that 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. 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 favours such as tax benefits, cheap electricity, a buy-Korea policy and the suppression of organised labor.
These companies eventually grew into industrial conglomerates, fuelling 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, such as 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 Chung-hee and many of his successors as president expected the chaebol to contribute to government projects. And the chaebol did more than that, sometimes channelling money to the presidents’ personal coffers or those of their relatives and associates.
South Koreans are increasingly sceptical 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, such as 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 startups 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, 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”.
Few South Koreans believe the chaebol are innocent victims in the unfolding case. But while Choi and Ahn, the president’s economic adviser, have been arrested, 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 per cent of gross domestic product, are led by men with criminal records.
Since taking office in 2013, Park Geun-hye 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 Park in 2015. And both the SK Group and the CJ Group made donations to Choi’s foundations at the president’s request, prosecutors said. The impeachment motion cites the pardons in accusing Park of selling favours.
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 Choi’s daughter, Chung Yoo-ra, who trained in Germany using a thoroughbred purchased for $830,000.
Chung (20) has been living in hiding in Europe, ignoring repeated calls from South Korean investigators to return home to face criminal charges. Acting on a tip, the Danish police found her in the northern city of Aalborg and detained her on Sunday evening.
The prosecutor is investigating reports that Choi used funds donated by Samsung to buy a house and motel in Germany, as well as to cover her daughter’s personal expenses, including accessories for her pet dogs.
The magic words
Some of the payments made by the chaebol occurred while the government was weighing important decisions concerning the companies. For example, the SK Group and the retail conglomerate Lotte had lost valuable licences to run duty-free shops in 2015 and lobbied to regain them last year. Lotte won back its licence 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 Shin was under investigation, prosecutors say, Park and Ahn pressured Lotte into donating $6 million for a sports complex to be built and managed by a company founded by Choi. The money was later returned.
Prosecutors say other chaebol, including Hyundai, directed millions of dollars’ worth of contracts at Ahn’s request to companies owned by Choi and her associates. The chaebol all wrote cheques, prosecutors say, usually after 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 Park. “We must sternly punish politics-business collusion, a legacy of the dictatorial era, and take this as an opportunity to reform chaebol.”
This is a recurring promise among presidential aspirants in South Korea. Almost every candidate in recent elections – including 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 Choi suffered a vicious official backlash. As early as 2014, the Segye Ilbo newspaper reported on an intelligence document alleging influence-peddling by Choi’s family. 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”.
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 Choi, whose family befriended her after the assassination of her mother in 1974. Prosecutors did not aggressively investigate the allegations against Choi until after Park delivered her first televised apology in October, a day after a local cable channel reported that 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 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.”
New York Times service