Chaebol families fraudulently pocket profits through work funneling

Posted on : 2019-03-10 16:39 KST Modified on : 2019-03-10 16:39 KST
Report reveals chaebol behavior that impede fair competition in market
Increases in personal gains of chaebol chairmen’s families through work funneling
Increases in personal gains of chaebol chairmen’s families through work funneling

According to a new report, the families that control South Korea’s large conglomerates, known as the chaebol, have pocketed 35.8 trillion won (US$31.72 billion) through methods such as hogging corporate opportunities and channeling group projects to group affiliates. This amounts to these families exploiting their unique position for fraudulent personal gain, which is considered behavior that impedes fair competition in the market.

The information in question appeared in a report titled “How the Families of Controlling Stockholders Have Accumulated Wealth Through Fraudulent Companies Serving Their Personal Interests,” which was published by the Economic Reform Research Institute (ERRI) on Mar. 5. According to the report, the families that control 24 Korean chaebol groups possess 35.8 trillion won worth of assets that they’ve acquired through inappropriate means, such as funneling work to 39 companies controlled by those groups. This figure represents a 4.8 trillion won (US$4.25 billion) increase from the 2016 report, when it was calculated to be 31 trillion won (US$27.46 billion). The latest report found that there are 141 people in the families running the chaebol who had pocketed wealth in this manner, with the top three spots filled by Samsung Electronics Vice Chairman Lee Jae-yong, SK Group Chairman Chey Tae-won and Celltrion Chairman Seo Jung-jin. The assets gained by these three individuals alone are worth 16 trillion won (US$14.18 billion).

Lee Jae-yong is estimated to have fraudulently acquired 5.07 trillion won (US$4.5 billion). Chey Tae-won’s improper gains were made through the systems integration firm SK C&C, which was the forerunner of today’s SK. The stock in SK C&C that Chey purchased in 1994 for 400 won a share – despite a face value of 10,000 won (US$1=1.13 won) – paved the way for him to gain control of the group’s management. Today, this stock is worth 280,000 won (US$248.05) a share. Considering that the company’s stock was split into 20 shares for each original share, the actual value is 5.6 million won (US$4,960). As a consequence, the value of Chey’s illicitly obtained assets have steadily increased, from 2 trillion won (US$1.77 billion) in 2011 to 4 trillion won (US$3.54 billion) in 2016 and 5 trillion won (US$4.43 billion) this year.

This is the first time that Seo Jung-jin has appeared in the report about fraudulent personal gains. As a group founder, Seo makes an unusual appearance amid the ranks of second- and third-generation chaebol owners whose illicit gains were more typically achieved through inheritance or the transfer of management rights. Seo controls his group through Celltrion Healthcare and Celltrion Holdings without holding a single share in Celltrion itself, but 99% of Celltrion Healthcare’s revenue is derived from Celltrion.

“Since the majority of Celltrion’s revenue occurs through sales managed by Celltrion Healthcare, the wealth of Celltrion stockholders is effectively being transferred to Celltrion Healthcare stockholders,” ERRI explained. The increasing value of stock in Celltrion Healthcare represents the appropriation of corporate opportunity, the report said. Seo has a 35% stake in Celltrion Healthcare, which is reportedly run as a private company. Seo’s fraudulent profits amount to about 4.5 trillion won (US$3.99 billion).

Chung Eui-sun, executive vice chairman of Hyundai Motor Company, has siphoned off 2.5 trillion won (US$2.21 billion) in personal proceeds from Hyundai Glovis. Since its establishment in 2001, Hyundai Glovis’ growth has been fueled by business from Hyundai Motor, making it a prime example of chaebol work funneling.

Other beneficiaries of fraudulent earnings include Lee Boo-jin, president of the Hotel Shilla, and Lee Seo-hyun, former president of Samsung C&T (the younger sisters of Lee Jae-yong), who each pocketed 2 trillion won (US$1.77 billion); and Chey Ki-won, younger brother of Chey Tae-won and head of the board of directors for SK’s Happiness Foundation; Chung Mong-koo, chairman of the Hyundai Motor Group; and Lee Jay-hyun, chairman of the CJ Group, each of whom are calculated to have taken home over 1 trillion won (US$885.73 million).

Privitization of corporate opportunities

ERRI’s criterion for identifying an instance of work funneling is when the chaebol owner and family members’ direct and indirect stake in the group and in-group transactions both exceeded 20%. When a company in which the chaebol owner or family members’ share exceeds 20% monopolizes the business opportunities of other group affiliates, ERRI identified this as an example of the appropriation of corporate opportunity. According to South Korea’s Fair Trade Act, work funneling can be regulated when the controlling family has a share of at least 30% in a listed company and at least 20% in an unlisted company.

This study covered the period from when the illicit private gains occurred until the present. In the case of Lee Jae-yong, this goes back to 1994, when he purchased stock in S1. The value of dividends and liquidated stock was calculated according to the price of the group’s stock on a designated day in 2018 and then subtracted from the preliminary total.

“Since the Fair Trade Commission’s regulations about fraudulent personal gain went into effect, we’ve seen attempts to get around them by decreasing shares in companies and spinning them off as affiliates. The regulations need to be implemented from a no-nonsense perspective that factors in indirect shares,” ERRI said.

By Choi Hyun-june, staff reporter

Please direct comments or questions to [english@hani.co.kr]

button that move to original korean article (클릭시 원문으로 이동하는 버튼)

Related stories