Samsung: Why Corruption Works?

♠ Posted by Emmanuel in , at 11/07/2007 04:01:00 PM
It goes without saying that East Asian countries have a more relaxed view of corporate governance. However, this latest round of accusations by a former chief lawyer working at Samsung of widespread corruption at the firm is making waves even in South Korea and may have criminal implications. Given the emphasis of institutions like the World Bank on tackling corruption, it makes me wonder if fighting corruption should be as high as it is on the priority list. Samsung has been and continues to be highly successful. China's inseparable mix of state and market players likewise demonstrates that corruption may not always have debilitating but possibly facilitating effects. 'Tis very puzzling indeed from a development perspective--there may be good and tolerable forms of corruption as there are bad and intolerable ones. I remember reading an article which suggests so but I just can't put my finger on it at the moment. UPDATE: I have just "rediscovered" the journal article on it...

The Comparative Politics of Corruption: Accounting for the East Asian Paradox in Empirical Studies of Corruption, Growth and Investment

World Development, Volume 32, Issue 6, June 2004, Pages 999-1017
Michael T. Rock and Heidi Bonnett

Numerous empirical studies demonstrate that corruption reduces investment and/or
slows growth. But how robust are these relationships? This question is answered by conducting a series of crosscountry regression tests using four different corruption datasets. We find that corruption slows growth and/or reduces investment in most developing countries, particularly small developing countries, but increases growth in the large East Asian newly industrializing economies. The latter finding provides solid empirical support to a country case literature that explains the East Asian paradox––the combination of high corruption and high growth––in terms of stable and mutually beneficial exchanges of government promotional privileges for bribes and kickbacks.

Meanwhile, here is the International Herald Tribune on the unfolding story:
A corruption scandal at Samsung Group, the South Korean conglomerate, snowballed Tuesday as prosecutors opened a formal investigation into allegations that its chairman masterminded a massive scheme of bribery and illegal transactions.

Prosecutors are investigating three major allegations of criminal behavior: the creation of a slush fund; bribing prosecutors and government officials; and an effort by the chairman, Lee Kun Hee, and his aide to illegally help his son take over control of Samsung.

"We are ready to unveil the truth through a stern, fair and thorough probe," said Kim Kyong Soo, a prosecution spokesman. He said prosecutors would also investigate colleagues who allegedly received bribes from Samsung.

In previous scandals that have plagued Samsung, several executives have been convicted of illegally trying to help Lee's son, Jae Yong, take control of management, and of bribing politicians.

But Lee's family has escaped largely unscathed. This has lead critics to charge that Samsung runs a vast network of bribery and influence-peddling through the government, the judicial branch, and the media, making the Lee family "untouchable" - a claim vehemently rejected by Samsung.

This time, the group is facing a potent whistle-blower: its former chief lawyer, who said he was personally involved in bribing, and fabricating court evidence, on behalf of Lee and Samsung.

"I have no intention of avoiding punishment for what I had done," said Kim Yong Chul, a former prosecutor who worked as an in-house lawyer for Samsung for seven years until 2004. "My only intention is to help rectify the illegalities of Samsung, which wields omnipotent influence throughout our society."

Samsung on Tuesday denied all of Kim's allegations, saying that he was turning against Samsung out of "personal grudges."

"We will sincerely cooperate with prosecutors' investigation," the group said in a statement. "We regret that we will have to divert our resources into an unproductive dispute at a time when our group has to focus all our resources on overcoming a difficult business environment caused by high oil prices and the falling value of the Korean currency."

Kim's allegations stunned South Koreans. People are proud of Samsung, which has surpassed Japanese rivals to become one of the world's most recognized brands in computer chips, cellphones and flat-panel screens. But in recent years, recurring scandals have led Koreans to fear a lack of transparency at the country's top conglomerate.

In a legal complaint filed with prosecutors Tuesday, Kim said that Lee and his top aides illegally ordered transactions that allowed his son to acquire Samsung shares at unfairly low prices from Samsung affiliates.

When prosecutors investigated one of the transactions in 2003, Kim said that lawyers of his legal division at Samsung trained Samsung executives to serve as scapegoats in a "fabricated scenario" to protect Lee, even though those executives were not involved.

Two of the executives were found guilty in a court ruling in October 2005, and Samsung is appealing. In interviews with South Korean media over the past few days, Kim said he was "sidelined" by Samsung after he refused to pay 3 billion won, or $3.3 million, in a bribe to the judge presiding over the case.

Kim said Lee and his aides had raised huge sums of secret funds, using bank accounts illegally opened under the names of up to 1,000 Samsung executives. He said that under his own name, four bank accounts were opened to manage 5 billion won.

Samsung regularly provided politicians, government officials, tax collectors, prosecutors, judges, journalists and scholars with cash bribes and expensive gifts, Kim said. The cash bribes were handed over in packages disguised as CDs or monthly magazines, or in briefcases or suitcases, depending on the sums, Kim has said in interviews with South Korean media.

Kim said he himself doled out bribes to scores of senior prosecutors, giving each of them between 5 million won and 20 million won three times a year. He said sums for prosecutors were far smaller than those given to senior officials of the Ministry of Finance and the National Tax Service.

Kim over the past few days has quoted Lee as saying in 2003 that if some were reluctant to receive cash, they should instead be offered expensive wine or gift certificates. Lee even urged his executives to emulate the practices of an unnamed Japanese firm that he said looked after the "concubine of the chief prosecutor in Tokyo," Kim said.

Kim began coming out with these statements last week, but they took on a new drama on Monday, when he gave a nationally televised news conference in a Catholic church in Seoul.

"Samsung instructed me to commit crimes," he said at the event. "A basic responsibility for all Samsung executives is to do illegal lobbying, buying people with money."

Samsung on Monday issued a 25-page rebuttal denying all major accounts of Kim's allegations. It noted that Kim did not provide evidence to support his claims.

During his Monday news conference, Kim did not keep promises he made last week to reveal internal Samsung documents, including lists of prosecutors he said received bribes, and Samsung executives under whose names bank accounts were illegally opened. He said that he would do so on a later date.

Two influential civic groups - People's Solidarity for Participatory Democracy and Lawyers for a Democratic Society - on Tuesday filed a legal complaint on behalf of Kim, thus triggering the official opening of investigation by prosecutors.

The two groups - well known for their role as watchdogs of big businesses - feared the prosecution might not get to the bottom of the case because their own ranks are among those accused. Prosecutors urged Kim to reveal the list of colleagues involved so that they could be excluded from the investigation team.

Last week, Kim won a powerful backer: the Catholic Priests Association for Justice, which holds extensive moral authority over South Korean society because it had spearheaded pro-democracy movements during past military rule.

Recently, the priests have called for a "second pro-democracy campaign" in South Korea. They said that the vast tentacles of influence and corruption from the family-controlled conglomerates, known as chaebols, have emerged as a serious threat to "economic justice."

The priests association - acting as a spokesman for Kim - did not respond to a request for an interview with Kim.

President Roh Moo Hyun's office said it was "closely watching" the case. Meanwhile, two media organizations - the Journalists Association of Korea and the National Union of Media Workers - said that many of the country's major newspapers and TV stations had "become a puppy with its tails between its legs when they face Samsung."

Samsung's affiliates reportedly control as much as 30 percent of advertisements carried by news media.

Meanwhile, the Korea Times has more on the action of the civic groups against Lee:
Civic and lawyers' groups filed a complaint against executives of the Samsung Group including Chairman Lee Kun-hee, demanding the prosecution investigate allegations of embezzlement, bribery and other irregularities...

The People's Solidarity for Participatory Democracy (PSPD) and Lawyers for a Democratic Society (LDS) filed the complaint with the prosecution Tuesday, designating chairman Lee, Vice Chairman Lee Hak-soo and President Kim In-joo as principal offenders.

The groups sought an investigation into Kim Yong-chul's claim that Samsung raised a slush fund by placing money into bank accounts opened in its executives' names. They also filed a complaint against officials at Woori Bank and Goodmorning Shinhan Securities, which were allegedly involved in helping the group open the borrowed-name accounts...

The groups said Lee and the officials should be charged with breach of trust, the instigation of evidence destruction, embezzlement, bribery, and the manipulation of accounting books.

``Samsung's illegal political donations and Lee's illicit wealth transfer to his son have been under suspicion numerous times, but the truth has never been disclosed and key figures of the irregularities have never been punished,'' they said.

``The prosecution has been reluctant to investigate illegalities whenever Samsung was involved. We urge an independent counsel to probe the case for fairness as ordinary prosecutors are likely to be influenced or lobbied by the group,'' they added.