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KOREA BUSINESS EVENTS

2008

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BUSINESS, FINANCE AND LABOR EVENTS

January 2008

South Korea nets US$1.23 billion trade surplus with U.S. in November 2007 (Jan 2008) South Korea netted a US$1.23 billion trade surplus with the United States in November 2007, up from $786 million the previous month, according to a monthly tally released Friday by the U.S. Commerce Department. The latest figure raises South Korea's cumulative surplus to $12.45 billion as of November last year.

South Korea's exports to the U.S. that month were valued at $4.17 billion and imports $2.94 billion. The Asian country ranked 15th in terms of U.S. trade volume with a foreign nation, seventh in both import and export volumes. The surplus in advanced technology products widened to $307 million, up from $239 million in October.

South Korea continued to do well in the auto sector. It sold $934 million worth of motor vehicles and parts while importing $85 million worth, resulting in a $849 million surplus. The year-to-date surplus amounted to $9.51 billion.

U.S. trade with North Korea in November was not enough to go on the record, which requires a minimum of $50,000. (Source: Yonhap News.)


China passes Korea as the No. 1 shipbuilder (Jan 2008) China surpassed Korea to become the world’s biggest shipbuilder by new orders in 2007, according to data compiled by Clarkson Plc, the world’s largest shipbroker. Chinese shipbuilders booked orders for 103.6 million deadweight tons of ships, compared with Korea’s 94.8 million, according to data from London-based Clarksons.

Shipyards in China booked orders at historically high prices last year, more than tripling order backlogs at the nation’s shipyards. Demand for vessels to carry Chinese imports of raw materials and exports of consumer goods is fueling earnings growth at shipbuilders, including China State Shipbuilding, the nation’s biggest.

China remained behind Korea in new orders measured by compensated gross tons. Deadweight tonnage measures a finished ship’s carrying capacity and doesn’t reflect the cost of building a vessel or its sale price. Compensated gross tonnage is a measure that accounts for ship size and the time required and materials used for production.

China booked 29.2 million gross compensated tons of new orders last year, compared with Korea’s 32 million, Clarkson said. Surging orders helped China’s order backlog more than triple to 51 million compensated gross tons as Korea’s backlog doubled to 64.5 million compensated gross tons, according to Clarkson.

Japan booked about 20 percent as many new orders as China and Korea, Clarkson said. IHI Corp., Japan’s third-biggest heavy-machinery maker, said it’s in talks with JFE Holdings to create the biggest Japanese shipbuilder to compete against Asian rivals. (Source: Joongang Ilbo: Bloomberg.)


EU replaces U.S. as the No. 1 investor in S. Korea in 2006 (Jan 2008) The European Union increased its investment in South Korea 24 percent year-on-year to US$204 billion in 2006, replacing the United States as the largest foreign investor in South Korea. The EU was trailed by the U.S., which invested $191.5 billion in South Korea, and Southeast Asia with $97.4 billion, the Bank of Korea bank said. Aggregate foreign investments in South Korea reached $652.3 billion in 2006, up 21 percent from the previous year. The EU had ranked second in 2005 with $163.9 billion invested in South Korea, trailing the U.S. with $184.7 billion. Meanwhile, South Korea's overseas investment stood at $212.4 billion as of the end of 2006, up 42 percent from a year earlier, the central bank said. Asia's third-largest economy invested the most in the U.S. with $55.5 billion. The EU was the second-largest investment destination with $48.9 billion, the bank said. South Korea's bond investments in the United States stood at $25.6 billion in 2006, up 39 percent from the previous year mainly on institutional investors' appetite for safer assets, it added. (Source: Hankyoreh News: Yonhap.)


S. Korea, EU Spar Over `Rules of Origin’ (Jan 2008)South Korea and the European Union began a new round of talks for a free trade agreement (FTA) at the Shilla Hotel in Seoul on 28 Jan, this time focusing largely on the ``rules of origin,’’ which has been one of the sticking points in the past negotiations. The ongoing round is the sixth of its kind since the two sides launched the negotiations amid much fanfare in May 2007, right after the conclusion of the South Korea-U.S. FTA. But the talks have been deadlocked by what the Europeans see as Seoul's protective stance toward some industries (such as automotive) and what the South Koreans described as the EU’s high standards.

Under EU-suggested rules, a product would be considered as coming from a trading partner only when at least 60 percent of the value of the finished item is added in that country. South Korean negotiators want the ratio to be lowered to 40 percent, as a number of manufacturers in the country outsource many components from neighboring countries such as China to cut costs. (SITE NOTE: Supposedly this was smoothed over previously, but it appears it hasn't. The focus before was that items from the Kaesong Industrial Zone was to be accepted as "made in Korea." The US rejected this. The accepted standard is the 60 percent rule -- but the ROK wants it lowered especially since China has become its main source of auto parts outsourcing -- and with Kaesong parts listed as outsourced, the ROK end products would become hard pressed to meet the 60 percent rule.)

However, officials say a major breakthrough is unlikely for the free trade talks in this round since two of the hottest points in previous rounds -- tariff concessions on goods and auto standards for South Korean car imports -- have been taken off the table. With regard to cars, for example, the EU has offered to eliminate its 10 percent tariff within seven years. In return, the EU wants South Korea to ease regulations on European cars by applying less restrictive international technical standards. The EU is South Korea's second-biggest trading partner after China and is the biggest foreign investor in South Korea. (SITE NOTE: Korean auto exports to Europe has surged in recent months causing EU automakers to cry foul. This is getting to be a sticking point especially now that Korean automakers are opening plants in the former Soviet-bloc nations to take advantage of tax incentives and lower labor costs -- along with entry into the EU markets. The EU is pushing for 50 to 75 percent of the value of a finished item to be added within that country. Korea is saying that is too strict and is suggesting 30 to 45 percent because it outsources many components to other Asian countries. An item-by-item resolution has not been made, but the chief negotiatiors say a general outline has been drawn. South Korea and the EU are major trading partners. In 2006, their bilateral trade topped $80 billion (roughly 75.9 trillion won).

An FTA with the EU would be the biggest-ever for South Korea, surpassing the deal signed last June with the U.S., which now awaits ratification by legislatures in both countries. Dozens of protesters -- mostly farmers -- braved the cold weather outside the hilltop hotel to blast the ongoing negotiations. A sign held by one farmer read, ``Stop South Korea-EU FTA that kills all Korean pig farmers.’’ (SITE NOTE: Tongil News showed a photo of the protest where the cardboard effigy showed an American flag meaning it was pointed to the US-ROK FTA despite this being a EU-ROK FTA negotiation.) (Source: Korea Times.)

Progress Made, but EU FTA Battle Goes On (Jan 2008) Joongang Ilbo on 31 Jan reported that as the sixth round of ROK-EU free trade talks come to a close, intellectual property rights and place-of-origin issues are nearly resolved, according to Kim Han-soo, the ROK's chief negotiator, during a briefing 30 Jan at The Shilla Hotel. "We are moving smoothly as far as intellectual property rights are concerned," he said. An agreement has also been reached on safeguards on agricultural products. But the two key issues of auto industrial standards and tariff concessions have not been discussed in this round.


February 2008

Samsung Ordered to Pay W3 Trillion to Creditors (Feb 2008) A Seoul court on 31 Jan ruled in favor of creditors of the now-defunct Samsung Motors, ordering Samsung Group chairman Lee Kun-hee and 28 Samsung affiliates to repay W3.15 trillion in overdue debt to creditors in the nation’s biggest civil lawsuit ever. Samsung will have to repay about W2.3 trillion given that creditors have already converted about W800 billion worth of shares in Samsung Life Insurance they had received into cash.

When the Seoul Central District Court delivered the ruling regarding its now-defunct affiliate, Samsung Motors, on 31 Jan, there was a distinct atmosphere of disappointment at Samsung Group. The court acknowledged the validity of the "agreement," which was the biggest issue in the case, and ruled in favor of the creditors in the largest civil lawsuit in the nation's history. Officially, Samsung has announced that it will decide whether to appeal after review of the ruling; internally, it thinks that it has been completely defeated by its creditors. One Samsung Group executive expressed his disappointment about the court's decision, saying that Samsung would now be branded as a company with overdue debts, when the group is already in a predicament due to the ongoing investigation being conducted into allegations that it maintained slush funds to bribe public officials and the aftershock following the nation's largest oil spill on the western coast. (Source: Hankyoreh.)
The Seoul Central District Court on 31 Jan ruled in favor of the creditors -- 14 financial institutions including Seoul Guarantee Insurance Company. The court ruled an agreement Samsung signed with its creditors to repay the debt in listed shares is valid, rejecting claims by the conglomerate that it entered the agreement under duress.

The court ruled Samsung is liable to repay the entire principal of W2.45 trillion and must sell Samsung Life Insurance shares worth about W1.63 trillion aside from about W800 billion worth of shares that creditors have already converted into cash themselves to repay part of the debt. Samsung is also liable for overdue interest of about W700 billion that has accrued since 2001. The court also ruled if Samsung affiliates lack the money to repay their debt, Lee must make up for the shortfall from his own holding in Samsung Life Insurance shares.

The court’s ruling also clarifies the legal responsibility of Samsung Chairman Lee Kun-hee with regard to Samsung Motors’ insolvency. When the affiliate applied for bankruptcy in 1999, Lee contributed his own shares of Samsung Life Insurance as collateral for the debt, and a deal was signed. Samsung insists that Lee contributed the stocks out of moral responsibility and denied that Lee should be held legally responsible.

According to the ruling, Samsung subsidiaries must repay a minimum of 2.3 trillion won to its creditors. The original agreement stated that the subsidiaries share the debt among themselves, depending on the assets of each. Because of this, some observers note that the Samsung chairman, who as the leader of the corporation is the person primarily responsible for the debt default, has in effect been exonerated. The court did not demand any additional responsibility of Lee other than ordering him to remit 4 million of his own shares in Samsung Life Insurance. But the amount of stock Lee must remit falls short of the amount of the principal and overdue interest on the overdue debt. The Samsung affiliates will have to make up the difference in the amount, thereby releasing Lee from responsibility for the failure of Samsung Motors.

It is not clear how and when Samsung affiliates will pay the debt, and the court did not set a deadline. Considering the price of Samsung Life shares, the principal could be preserved by selling the stocks contributed by Lee. As of now, it is highly possible that Samsung subsidiaries will repurchase the stocks depending on the size of their assets and repay the overdue interest. In this case, however, the listed companies will now face massive lawsuits from small shareholders.

The problem could be resolved if shares of Samsung Life were listed, but this will not be easy. In this case, Samsung Everland, Samsung Life’s largest shareholder, would become the financial holding company and Samsung Life would sell shares in other subsidiaries, including Samsung Electronics, owned by the company. It will be impossible for Samsung to maintain its governance structure through cross-shareholding, and then the plan to transfer management rights to Lee Jae-yong, Chairman Lee Kun-hee’s only son, will be shattered. Samsung Group is in no rush to list shares of Samsung Life, however, because it would be difficult for it to list the company as it tries to maintain the group’s control over both the manufacturing and financial industries. (Source: Hankyoreh.)
The court dismissed Samsung's argument that the agreement was the outcome of undue pressure from the government and was therefore null and void. Samsung said it has yet to decide whether to appeal after reviewing the ruling carefully. In June 1999 when losses were incurred in the wake of Samsung Motors' application for court receivership, the creditors received a total of 3.5 million shares of Samsung Life Insurance from the group chairman, worth W700,000 apiece. Unable to sell the shares because Samsung Life Insurance was not, as promised, listed, the creditors in 2005 sued for about W5 trillion -- W2.45 trillion in debt, W2.28 trillion in overdue interest, and an indemnity. The court reduced the interest claimed. (Source: Chosun Ilbo.)


U.S. industrial standards hurt fair trade??? (Feb 2008) Korean companies spend about 900 billion won ($950 million) every year in additional costs in conducting quality and safety tests to meet U.S. industrial standards, according to a government study. The KSO (Korean Standards Association) reported on 3 Feb that it received 1,069 complaints from firms, laboratories and institutions last year about unreasonable and arbitrary industrial standards of the United States. The Korean Agency for Technology and Standards (ATS) said a survey conducted on 930 local exporters and certified industrial testing laboratories revealed that they pay an average of 890 billion won (US$942.5 million) every year to meet U.S. industrial standards. The total translates into 950 million won per each company and laboratory, with businesses also voicing discontent over requests for long, drawn-out tests that delay sales.

The ATS, under the Ministry of Commerce, Industry and Energy, said it counted 1,069 individual cases in which South Korean businesses and institutes believed that strict industrial standards were unfair. Of the total, 504 cases involved U.S. agencies requesting the use of specific U.S.-made testing equipment and materials in quality and safety experiments. This was followed by 179 instances of long, drawn-out tests. Other complaints that were voiced were lack of consideration for South Korean environmental conditions and climate, and generally poor or outdated technology used in tests. (SITE NOTE: The United States is the largest export market of South Korea, and goods exported to the country are often required to meet the standards and guidelines set up by private associations or interest groups of its industries, rather than official guidelines of international organizations such as the ISO (International Organization for Standardization). The answer is if you want to sell in an advanced nation that is subjecting its manufacturers to the same tests, you need to upgrade your tests to meet these standards. It is simply evening the playing field. The days that Korea can claim that they are a poor country are long past. This is the same game Korea plays in its protectionist policies -- but when its applied to them, they cry foul. Many countries take advantage of local industrial standards as a non-tariff barrier to protect local industries from foreign goods and services. Korea does the same. Moreover, many U.S industrial standards are considered as de facto global standards because of the size of the country's market and its influence on the global economy.)

"In the case of the American Association of Textile Chemists and Colorists (AATCC), the agency insists that all tests to check for shrinkage of clothes be conducted using U.S.-made detergent," said a government official. The report insisted that the price of standard U.S. detergent is 100 won per gram, which is 20 times more expensive than Korean detergent. So Korean firms are spending 10 billion won in buying the U.S. detergent to conduct 1 million fabric tests every year, it estimated. (SITE NOTE: This seems fair as the fabrics are going to be used in the American market with consumers using American detergents.)

He added that others, like the organization that regulates auto imports, call for the exclusive use of U.S. testing equipment to evaluate safety. "In the past, Seoul did not make an issue of this even though these rules were not internationally accepted standards set by the International Standards Organization and the International Electrotechnical Commission," the official said. He added that South Korea will ask for changes in very unfair cases. (SITE NOTE: International standards don't seem to bother the ROK especially when it comes to the issue of boneless beef and their inspection criteria.)

Related to this, the ATS said it found at least 10 testing standards that were arbitrary or ineffective that need to be changed. These include tension testing of metallic materials regulated by the American Society for Testing and Materials, carbon monoxide alarm tests conducted by Underwriters Laboratories Inc., and the pH of water extracted from wet-processed textiles carried out by the AATCC. Other agencies cited for maintaining unfair standards were the American Society for Mechanical Engineers and the Institute of Electrical and Electronics Engineers Inc. (SITE NOTE: We wonder if all this horse-manure was brought up in the US-ROK FTA talks...which we doubt.) (Source: Yonhap News.)


Agriculture deficit hits record high in 2007 (Feb 2008) South Korea's agriculture deficit reached a record high last year fueled by a sharp rise in global grain and feed prices, a state-run corporation said on 4 Feb. The country's agricultural trade deficit reached US$10.92 billion last year, up from $8.68 billion in 2006, the state-run Agro-Fisheries Trade Corp. said. Exports gained 10.2 percent to $2.40 billion, while imports jumped 22.6 percent to $13.32 billion. (Source: Yonhap News and Korea Times.)


RIDICULOUS: KERI deems exploding laptop safe because it can't find why it exploded (Feb 2008) The LG Electronics laptop model that exploded into flames on Jan. 8 turns out, after a month-long investigation, to pose no safety problems, LG Electronics and LG Chem said on 12 Feb in a release. The two companies said they received a final note from Korea Electrotechnology Research Institute (KERI), which took charge of the explosion case, saying the incident was triggered by external factors such as high temperature and shock, not by defects in the laptop or its battery pack. (SITE NOTE: Unfortunately, the laptop was NOT being subjected to high temperatures NOR shock -- it was sitting around.)

The explosion happened when a reporter was covering the hospitalized victims of a deadly fire in Icheon last month. The reporter noticed white smoke leaking out of his laptop, so he ran to the rooftop of the Bestian Medical Center in Gangnam, where the computer burst into flames. According to the release, KERI conducted over 100 tests but failed to find the cause of the problem. “According to the global standard, a laptop battery should resist 130 degrees Celsius for 10 minutes. LG’s laptop battery was okay at that high temperature during our test,” said Eom Seung-wook, a KERI researcher. “Since the laptop and its battery have no problems, we’re not considering any kind of recall,” said an official from LG Electronics. (Source: Joongang Ilbo.) (SITE NOTE: The bottomline is that the reasoning is that since KERI said it can't find the problem, there must not be a problem so LG Electronics then tries to sweep it under the carpet. This comes after problems with cell phone batteries exploding still in the minds of consumers. Unfortunately, two more incidents occurred.)

UPDATE: LG to Replace Battery Free (Mar 2008) LG Electronics Co., South Korea's No. 2 electronics maker, said on 26 Feb it will offer free battery replacements for one of its laptop models following recent battery explosions. LG Electronics halted sales of its Z1-AE007 laptop model after two cases of battery meltdowns were reported. The company has yet to determine the exact cause of the meltdowns.



Manufacturing industry losing jobs (Feb 2008) Employment in Koreas manufacturing sector is declining by the year, as the trend of jobless growth seeps deeper into the economy due to an advancing market and increasing number of companies expanding overseas investments, according to a state-run think tank. This phenomenon has been most apparent in the manufacturing sector, the pillar of the nations economy, the Korea Institute for Industrial Economics and Trade said in a report.

In 1993, it took an average of 11.08 workers to produce 1 billion won worth of goods, but the figure dropped more than two-fold to 3.92 people by 2005, according to the study on the impact of macroeconomics on industries released yesterday. In 2006, the figure dropped further to 3.66 workers, showing an overall decline of 67 percent since 1993. Asias fourth-largest economy has been struggling with uncertain job prospects as manufacturing companies seek to build factories in markets with cheaper labor like China, India, and Vietnam. The lack of government incentives and high taxes have also prompted companies to look offshore or to hold back investments at home.

By manufacturers, according to the report, information-technology firms, such as electronics parts makers, and audio and telecommunications equipment makers, saw the steepest decline to 1.69 workers in 2006, down 85 percent from the 11.31 recorded in 1993. Computer and office equipment manufacturers suffered the biggest drop, of 2.45 workers, an 86 percent plunge from an average of 16.96 recorded 13 years ago. However, the metal industry, most representative of the smokestack industry, felt the least impact, as it employed an average of 11.25 workers in 2006, down 20 percent from 13.99 workers registered in 1993.

The service industry also experienced the smallest impact compared to manufacturers, as it employed 17.56 people per firm on average, down 27 percent from 23.94 during the same period. Machinery equipment rental companies and supplies rental firms hired more people, with employees averaging 29.9, up 19 percent from 24.55. The property market also saw a rise, with 5.42 workers per firm, a 40 percent jump from 3.87.

The KIET report attributed the growth to development of the information-technology industry and the advance of technologies. The think tank projects the gap in employment between the manufacturing and service industries to widen because of the accelerating pace of job cuts by manufacturing firms. Between 1995 and 2006, the labor productivity rate of manufacturing companies grew an average of 8.8 percent annually, while the service industry in general recorded an average of 1.8 percent. Within the service sector, only telecommunications firms saw a higher increase, with 11.8 percent. The employment rate in the manufacturing sector has been falling rapidly since the 1990s and into the following decade, the KIET report stated. On the other hand, jobs are growing in the service sector, while our productivity is declining. This shows a different pattern from advanced economies where job growth is accompanied by productivity growth. (Source: Korea Herald.)


2007 exports to U.S. hit $47 billion (Feb 2008) Korea netted a $12.9 billion trade surplus with the United States for 2007, slightly down from $13.4 billion in 2006, the U.S. Commerce Department said on 14 Feb. Korea exported $47.6 billion worth of goods and services last year and imported $34.7 billion worth. In 2006, exports totaled $45.8 billion, while imports came to $32.44 billion. Korea fell into the red in the trade of advanced technology products, recording a $2.5 billion deficit. But it tallied a $10.3 billion surplus in auto trades for 2007.

On a monthly basis, Korea recorded a $415 million deficit in December trade, with $3.1 billion in imports and $3.5 billion in exports. It also fell $200 million into the red in advanced technology trade for the month. In the auto sector, Korea tallied a $778 million surplus for the month. The Commerce Department said the '07 U.S. trade deficit dropped 6.2 percent to $711.6 billion, the first decline in six years. The deficit for December fell to $58.8 billion on-month from $63.1 billion. U.S. trade with North Korea totaled $1.7 million for 2007. (Source: Joongang Ilbo.)


Korean Products' Market Share Decline in U.S. (Feb 2008) Made-in-Korea products are increasingly losing ground in the American market. In contrast, market shares of seven other countries including Mexico, whose free trade agreements with the U.S. came into force, are rising steadily. According to a report titled "Declines in Korean Products' Market Shares in the U.S. and its Reasons," released Sunday by the Institute for International Trade at the Korean International Trade Association, Korean-made products' shares in the U.S. import market rose to 3.14 percent in 2004 from 2.94 percent in 2003.

But it declined for three consecutive years: 2.62 percent in 2005, 2.47 in 2006, and 2.43 in 2007. The items that recorded the largest margins of decline between years 2004 and 2007 were electrical and electronics goods and clothes with 3.98 percent and 3.78 percent, respectively. Electrical and electronics goods particularly suffered a big loss. Though the overall size of the U.S. import market expanded 0.16 percentage point compared to 2004, the shares of Korean goods have dropped.

The institute attributed the reasons for the setbacks of the Korean goods to the rising price competitiveness of emerging Asian nations such as China, India and Vietnam, and increasing market shares of the nations who sealed FTAs with the U.S. In case of Mexico, whose FTA with the U.S. took effect last year, its market share in the U.S. edged up by 0.60 percentage point compared to 2005. Singapore, Chile, Morocco, Bahrain, Oman and Israel also saw their market shares rose by small margins over the same period.

"To raise market shares, we should develop value-added technologies to differentiate ourselves from the newly emerging economies. But more importantly, we should ratify the KORUS FTA that is now pending in the National Assembly as soon as possible to make the most of tariff-free trade with the U.S.," said Kim Byeong-yu, a deputy director of the institute. (Source: Donga Ilbo.)


Samsung Caught Off Guard by Sony Move (Feb 2008) Sony’s announcement on 26 Feb that it has agreed to set up a joint venture with Sharp for the manufacture of next-generation liquid-crystal display panels has put Samsung Electronics, Sony's long-time partner in LCDs, on red alert. Huge losses, tangible or intangible, seem inevitable for the Korean conglomerate, which is already battered by a corruption scandal.

Since establishing LCD panel joint venture S-LCD in 2003, Samsung and Sony have maintained a close relationship, bearing an equal share of expenses in the construction of new factories. When new plants were built in 2004 and 2006, Sony invested some W1 trillion to W1.3 trillion each time (US$1=W947). But Sony's latest decision leaves Samsung alone to invest in S-LCD's 10th-generation production line and it will cost an estimated W5 trillion to build.

Above all, Samsung stands to lose its biggest buyer in the 10th-generation LCD market. S-LCD's new line, when put into operation, was expected to bring annual sales of W4 trillion, of which Sony was expected to buy half. For the past four years, Sony bought around W2-3 trillion worth of LCD panels annually from S-LCD.

Samsung also worries about possible damage to its brand image. When S-LCD was established in 2003, the Korean electronics giant consolidated its high-tech image by supplying LCD panels to Sony, then the world's largest digital TV maker. This eventually helped Samsung take the top spot in the global LCD TV market. Although Samsung ranks first in the global LCD panel and TV markets, its breakup with Sony is unlikely to help its image, especially when competition is growing ever fiercer among the big players. S-LCD means a lot to Samsung: Lee Jae-yong, the only son of Samsung Group chairman Lee Kun-hee, is the official director of S-LCD.

The new alliances among the Japanese rivals has prompted calls for closer cooperation among Korean enterprises. Several companies led by the Korea Display Industry Association have laid out plans to work together in the development of display panels, equipment, parts and materials.

Samsung, for its part, faces criticism over its slow response. There have been plenty of signs indicating shifting alliances in the global LCD market. For instance, Sony refused to invest in S-LCD's new line late last year and instead increased procurement from Taiwan. Meanwhile, Sharp, Japan's largest LCD maker, had been looking for a new partner since it announced last year it is building the 10th-generation line. But Samsung ignored the signs and allowed itself to be caught off guard, critics say. (Source: Chosun Ilbo.)

Conflicting Story: Samsung and Sony Still in Negotiations (Feb 2008) On 27 Feb it was reported that Samsung Electronics Co Ltd was in the final stages of talks with Sony Corp to jointly build a new LCD panel production line and the two may cooperate on another, bigger line, a Samsung source said on 27 Feb. (SITE NOTE: Samsung Electronics Co Ltd and Sony Corp are likely to invest about $1.9 billion jointly in a new flat screen production line, a source at Samsung said on 4 Mar. The comment was the latest in a series of announcements from panel makers and sellers, underlining the robust outlook for liquid crystal displays (LCDs) as demand for sleek, stylish and increasingly inexpensive television sets rises. The Samsung source declined to give an estimated timing of production and the output size. "It shouldn't be too late, but first we'll have to see the market conditions." However, Sony is diversifying its panel suppliers in a bid to surpass Samsung, the world's top maker of LCD TVs in 2007.)

Sony, which runs a joint venture to produce liquid crystal display (LCD) panels with Samsung, said on 26 Feb it would take a one-third stake in Sharp Corp's $3.5 billion LCD panel plant in Japan to meet rising demand for flat-screen TVs. Sony's LCD production and procurement strategy had been eagerly awaited as other major TV makers including Sharp Corp T , Panasonic maker Matsushita Electric Industrial Co Ltd and Samsung have made public their investment plans.The move announced on 26 Feb had raised concerns in the Korean market that Sony might not cooperate with Samsung in future projects, although Sony President Ryoji Chubachi pledged to continue running S-LCD, its joint venture with Samsung.

"We've almost wrapped up discussions with Sony for the 8-2 (eighth generation/line 2) production line and it's been going well," said the Samsung source, who asked not be named. The new plant would be located at the company's LCD production complex south of Seoul. Sony and Samsung, the world's biggest maker of large-sized LCDs, are already operating the 8-1 line, an eighth-generation line in the S-LCD complex.

The investment size for the new line has not yet been set but will likely be similar to the 8-1 line, the source said. Asked on the sidelines of a news conference on Tuesday if Sony is talking with Samsung on another eighth-generation line, Chubachi declined to comment, and a Sony spokesman on 27 Feb said the company still has no comment on the matter.

Samsung and Sony spent a combined 1.8 trillion won ($1.9 billion) in the initial stage of the existing line. Samsung is currently ramping up the 8-1 line on its own, spending another 2 trillion won. Samsung believes it is still possible to work with Sony on a bigger 10th generation LCD production line, the source said. The comment comes after Sony's Chubachi said on 26 Feb that if Samsung proposes that they jointly build and operate a 10th generation plant, Sony is willing to consider it.

Sharp's new factory in which Sony is investing will be the world's first using the 10th-generation glass substrates, which yield more panels than earlier lines. Samsung benefited from Sony's brand power and steady demand for its screens, while the alliance provided Sony with a partner to shoulder heavy investment needs in the flat-panel industry. But the two are rivals in the LCD TV market, with Samsung ranked the world's biggest LCD TV producer for 2007, followed by Sony and Sharp. Sony aims to sell 15-20 million LCD TVs in the year starting on April 1, up from 10 million this business year, and urgently needs to secure enough panels.

Shares in Samsung were up 1.2 percent at 578,000 won while Sony rose 2.7 percent to 5,340 yen by mid-afternoon, both outperforming the respective market's benchmark index. (Source: Boston.com.)


Signs of Stagflation Looming (Feb 2008) Korea is seeing signs of stagnant economic growth amid high inflation -- known as stagflation -- and a widening trade deficit due to rising prices of crude oil and other raw materials, as well as the U.S. subprime crisis. The Bank of Korea (BOK) reported on 28 Feb the deficit in the current account -- the broadest measure of trade, services and investment -- flowing into and out of the country, widened to an 11-year high in January amid soaring oil prices.

Growing downside risks may prompt the central bank to lower its growth target for this year from its earlier projection of 4.7 percent. The market regards the Lee Myung-bak government's ambitious goal of achieving a 6 percent growth through stimulus packages as unrealistic. Korea is expected to see its highest inflation in a decade this year. The current account shortfall reached $2.6 billion in January, compared with a revised $813.8 million deficit in December. The January shortfall was the largest since January 1997 when it amounted to $3.13 billion.

``Exports continued robust growth in January, but the surging prices of oil and other raw materials raised import costs for firms,'' said Yang Jae-ryong, an official of the central bank. Last month, the trade balance posted a shortfall for the first time since March 2003. Customs-cleared imports surged 31.1 percent from a year ago to $36.1 billion, while exports rose 15.4 percent to $32.4 billion. Rising raw materials prices are casting a shadow over the country's economic recovery, fueling concerns that South Korea, a chief importer of oil, metal and grain, will suffer inflation and a significant drop in earnings from exports.

The price of Dubai crude, South Korea's benchmark, jumped 69 percent from a year ago in January, taking a toll on the world's fifth-largest oil buyer. ``The average import price of oil surged to $89 per barrel in January from $33 the previous year. As a result, oil imports grew to $7.3 billion in January from $4.1 billion a year ago,'' Yang said. Surging oil costs have sharply increased the prices of goods and services here over the past few months, dampening consumer spending. Consumer prices rose above the BOK's target range of 2.5 to 3.5 percent from a year ago for the second straight month in January.

``Global raw materials prices are likely to go up further on a continued rise in global demand,'' the Korea Center for International Finance said in a recent report. ``A weak dollar and inflation risks will also put more upward pressure on global prices.'' In addition, the country's outbound shipments are expected to fall amid a U.S. economic recession. The BOK earlier said that the current account will likely swing to a shortfall of about $3 billion this year, the first deficit since 1997. ``If oil prices remain high this year, the annual current account shortfall may shoot above the BOK's initial forecast,'' Yang of the BOK said. (Source: Korea Times.)


Conglomerates Lose Ground (Feb 2008) The dominance of the top 30 conglomerates in Korea has significantly declined, the Korea Economic Research Institute said yesterday in its report dubbed, “Reducing economic dominance of conglomerates as percentage of the national economy.”

According to a survey of 18,000 companies subject to external audit, the nation’s 30 largest business groups’ sales accounted for 35.6 percent of the national economy in 2005, compared to 59.7 percent in 1995, though the number of affiliates remained almost unchanged: 206 in 1995 and 218 in 2005. Their share of total assets to the economy also dropped from 34.1 percent to 19.2 percent and the rate of employment declined from 40.3 percent to 25.6 percent during the same period. Financial companies were excluded from the survey.

By size, the top four groups suffered the biggest sales drop from 40.5 percent to 22 percent. Those ranking fifth to 10th saw their sales proportion decrease from 14 percent to 10.1 percent. But those ranking below 10th experienced no major changes.

“Korea now badly needs to foster global companies, but various regulations get in the way of their development, hampering national competitiveness and further growth,” the report pointed out. “In 1987, when a system designating conglomerates’ groups was adopted, regulations were necessary to prevent companies’ reckless expansion through loans. However, those risks have largely gone. If anything, excessive regulations undercut the global competitiveness of domestic companies,” said Lee Ju-seon, director in charge of corporate research in the institute. He added, “The system and other regulations, such as the restriction that caps shareholding by big conglomerates in other firms, must be abolished.” (Source: Donga Ilbo.)


China, S. Korea probe factory closures (Feb 2008) China and South Korea are investigating complaints that hundreds of Korean-invested factories have closed down, leaving workers without pay. Although surging manufacturing costs are hurting foreign manufacturers in many areas, especially southern China, the Korean factory closures are mainly concentrated in eastern China's Shandong province, a region with many ethnic Koreans that is closest to the Korean peninsula.

"We heard that some South Korean companies closed their operations in Qingdao due to rising costs," Liu Xiaojiang, deputy director of Shandong's Department of Foreign Trade and Economic Cooperation said in a phone interview on 27 Feb. "We are now investigating. We don't know yet how many there are," he said. Surging wages and costs for fuel and other raw materials, combined with the loss of tax rebates on exports - previously used to promote investment in export production - have put the squeeze on many manufacturers already enduring a potentially onerous tightening of labor and environmental standards.

Some low-tech manufacturers are closing, while others are moving to lower-cost regions of inland China or to neighboring countries such as Vietnam. Both sides appear to be taking pains to ensure the problem does not sour their otherwise very close, thriving business and political relations. Officials in Seoul said a task force set up by the South Korean government traveled to Shandong, Shanghai and Dongguan in southern China's Guangdong province a month ago to study the situation. The task force, based in Qingdao, a city in Shandong, will help companies legally liquidate their businesses if necessary, the South Korean government said in a statement.

In Qingdao alone, about 200 mostly small and medium-size factories closed down without paying wages and taxes, said Kim Oh-ryong, deputy director of the China division at South Korea's Ministry of Commerce, Industry and Energy. The companies are legally required to reimburse the Chinese government for any tax breaks or other benefits if they shut down in less than 10 years, he said. Not all the companies affected are small ones. In Yantai, another city in Shandong, the Yantai Shigang Fiber Co., a textile factory, suddenly shut down in early January, leaving some 3,000 workers without jobs or compensation, the Shanghai Oriental Morning Post reported on 26 Feb. Calls to the company found its number out of service.

There were 19,529 South Korean-invested businesses in China as of September, almost all of them small and medium-size companies. (Source: Fresno Bee.) (SITE NOTE: The answer of the probe is self-evident. The Koreans rushed to China for cheap labor -- but instead found massive problems with corruption, farm mentality workers, and other problems that worked against them making a profit. They simply cut their losses and went home -- without paying for the lost wages. All Korea has to do to investigate how the Korean companies reacted is simply to look at how Korean companies in Korea act. They simply close shop -- clean out the bank accounts -- leave nothing except shells of buildings that the banks own as bad debts and disappear.)


March 2008

Seoul Ranked Outside Top 50 Financial Hubs (Mar 2008) South Korea has grown into the world's 13th largest economy and the 11th largest trading nation over the past 60 years, rising from the ashes of the 1950-53 Korea War. But the country still has a long way to go to achieve its goal of becoming an international financial center as it has even failed to make it into the top 50 in the latest international financial hub ranking.

The Roh Moo-hyun administration championed the financial hub plan and unveiled a series of ambitious measures, including providing tax breaks over the past five years to turn the country into an international financial powerhouse. But the Roh government apparently failed due to anti-foreign sentiment, inconsistent policies and militant labor unions. Foreign analysts have pointed out that Korea's anti-foreign sentiment is the biggest obstacle to the hub plan, adding the country should deregulate the financial market, lower taxes, and create a more foreign-friendly residential and educational environment.

Citing its Global Financial Centers Index (GFCI), the City of London Corp. on 28 Feb announced a list of the top 50 financial centers in the world. London topped the list, followed by New York, Hong Kong and Singapore. The index is based on a number of existing rankings in combination with a regular survey of 1,200 senior industry figures. Among Asian cities, Tokyo came in ninth, followed by Dubai at 24th. Even Shanghai and Beijing put their names on the list, ranking 31st and 46th, respectively.

Foreign analysts here said it is no surprise that Korea is lagging far behind its Asian rivals in the race to become a regional financial hub. ``Seoul did not make it to the list because it is not an international financial center. I do not think Korea wants to be one,'' said Michael Breen, president of Insight Communications Consultants in Seoul. He said what it means to be a financial hub is different to the Korean government and people from international communities. ``Being a financial center in Seoul means a strong local financial industry, whereas to international communities, it means a regulation-free environment where all types of financial activities are allowed,'' Breen said. He said Korea's public sentiment opposes foreign companies and investors, well illustrated by the Lone Star case, adding it is the mentality of the people who don't want Seoul to be a global financial center. ``Reforming the taxation system and building more international schools and hospitals will definitely help Korea attract more foreign investment. But above all, the government should first decide whether or not it wants to become a place like Singapore or Dubai,'' Breen suggested. (SITE NOTE: It is so insightful to see how people are saying the things that an insignificant expat teacher has been saying for four years -- and the term I use is "xenophobic." The ROK continues to pursue the Lone Star Affair as proof that the attitude dies hard. Then there is the SK Global affair that rankles every foreign investor and the latest is how a convicted embezzler Hyundai CEO sentenced to jail is released by President Roh because of his "service to the country." Then there is the Samsung Group who is in a tight spot lately because of its shenanigans. Yep, Korea really doesn't want to be a hub.)

Meanwhile, Seoul Financial Forum made a number of policy suggestions to the Lee Myung-bak government early last month. It said the new government should act in a more coordinated manner than the previous administration, adding it should set up a presidential-level program management office that will effectively coordinate all facets of the government's efforts for the financial hub plan. It also stressed the government should implement policy changes and reforms in a coherent manner, which is the key to creating a business-friendly environment. The forum also suggested that the government should strengthen professional capabilities of regulators, reform the tax system and administration, improve management-labor relations and ease anti-foreigner sentiment. (Source: Korea Times.) (SITE NOTE: First Lee Myeong-bak needs to clean up the NTS which was used as a punishment tool by the Roh administration -- along with the FTC. The ROK is not anti-business. It has only been anti-FOREIGN business.)


Forecast for S. Korean economy downgraded: SERI (Mar 2008) A major private think tank Sunday downgraded its projection for the South Korean economy's growth this year, reflecting concerns over a possible U.S. slowdown and financial woes in global markets. South Korea's economy will grow 4.7 percent for this year from the 5 percent advance previously forecast, the Samsung Economic Research Institute (SERI) said in a report. Asia's fourth-largest economy is projected to expand 4.9 percent in the first half and gain 4.4 percent in the next six months. (Source: Yonhap News.) (SITE NOTE: Korea grew by 5 percent in 2007. This indicates a projection for a slowdown.)


U.S. Slowdown Hits Korean Economy (Mar 2008) The U.S. economic downturn is growing more serious than expected. The global economy is also struggling, with heavier inflationary pressures caused by skyrocketing prices of raw materials, such as crude oil and grains. In the same vein, the Korean economy is also facing difficulties. Korea's current account balance has deteriorated and prices have risen amid soaring oil prices. Exports and investments are also showing signs of slowing down. Local and foreign think-tanks have begun cutting their forecasts for Korea's economic growth this year from 5 percent to the 4 percent range.

Far from a temporary slowdown, indicators show that the U.S. economy, which began reeling in the fourth quarter of 2007 after being hit by the subprime mortgage crisis, is sinking into a deep mire. The U.S. Institute of Supply Management said its survey of manufacturing activity in February fell to 48.3 percent from 50.7 percent in January. This figure is the lowest since April 2003 when the Iraq War began. A number below 50 percent signals declining activity. UBS, a global investment bank, predicted that the world's financial firms will face at least US$600 billion in subprime mortgage losses -- three times as much as previous estimates. With middle-class consumption remaining sluggish because of the worsening financial crisis and falling housing prices, the prevailing view holds that the U.S. economic slowdown grow even worse.

The U.S. slump has also weakened the dollar. The greenback scraped a new low of $1.5275 per euro on the New York Foreign Exchange on Monday, the weakest level since the euro's debut in 1999. International investors rushed to sell U.S. dollars and buy oil, a safe-haven asset. At the New York Mercantile Exchange (NYMEX) on Monday, the price of the West Texas Intermediate crude for April delivery hit a record high of $103.95 per barrel. In addition, the prices of gold, corn, rice, soybeans and copper are also sky high, prompting worldwide fears of serious inflation.

According to a report on industrial activities in January released by the National Statistical Office on 4 Mar, facility investment dwindled by 9.6 percent from the previous month, the first fall in four months, partly due to sluggish investment in semiconductor manufacturing equipment. The so-called "MB effect" -- the prediction that corporate investment would grow after President Lee Myung-bak's inauguration -- has apparently been losing some luster amid the U.S. slowdown. The index of leading economic indicators dropped 0.4 percent in January, the first decline in 22 months since March 2006. The consumption growth rate, which has remained below zero for three consecutive months, rose 2.5 percent in January. But it is unclear whether the upward trend will continue, since consumption rose thanks to a business boom during the Lunar New Year holidays and a rollout of new car models. (SITE NOTE: LMB demanded that his cabinet make bringing inflation under control a priority. Rising costs of raw materials and foods coupled with rising gas prices have started to impact the lower income families.)

A warning light has already begun to flash for the country's exports. The current account recorded a second consecutive monthly shortfall with a deficit of $2.6 billion in January, a result of soaring prices of imports, including crude oil. Tentative statistics show that exports also recorded a deficit of about $800 million in February, with exports to the U.S. falling nearly 20 percent year-on-year due to the U.S. slowdown. In particular, shipments of semiconductors and cars, key export items, plunged by around 39-51 percent year-on-year.

With investments and exports moribund, economic think-tanks are lowering their forecasts for Korea's economic growth rate for 2008. The Samsung Economic Research Institute (SERI) cut its growth forecast by 0.3 percentage points to 4.7 percent on 2 Mar. Lehman Brothers, a global investment bank, cut its forecast from 4.6 percent to 4.3 percent. Fitch Ratings, a British ratings agency, cut its forecast from 4.9 percent to 4.1 percent, and UBS cut its forecast from 4.1 percent to 3.6 percent. Hong Sun-young, a managing director at SERI, said, "The U.S. economic slowdown may lead to sluggish exports, rising prices and worsening purchasing power in Korea. This year our economy's survival will depend on how we cope with the external environment," including soaring oil prices and the weakening dollar. (Source: Chosun Ilbo.)


Construction shut down as concrete strike goes on (Mar 2008) Amid mass strikes by ready-mixed concrete makers who want to raise their prices by at least 12 percent, the first official meeting between concrete makers and builders failed to reach a resolution after a six-hour meeting on 20 Mar. Four representatives from the Korea Federation of Ready-mixed Concrete Industry Cooperatives, which accounts for 60 percent of Korea's concrete market, met with five officials in charge of buying building materials. As reported in the Korean media, concrete makers asked builders to pay 12.5 percent more for their products. Builders maintained that their commitment was for a raise of only 4 percent. With no compromise in sight, industry experts predict that mass strikes by concrete makers are likely to be prolonged.

About 680 concrete makers went on strike on March 19 and halted production. As a result, most nationwide construction projects have stopped. "Last year, concrete makers and builders went through seven rounds of negotiations," said Choi Min-soo, a researcher at the Construction and Economy Research Institute of Korea. "Only cement prices went up last year. But this year gravel, oil prices and cement prices all increased. It seems like it will take longer to settle the dispute than last year," Choi added. Asked about a plan to solve longstanding problems between concrete makers and builders, Choi said, "The builders should develop their own technologies, or consumers and builders should shoulder rising raw material prices, along with concrete makers. Currently, all the burden falls on concrete makers."

Members of the Korea Foundry Cooperative Association have shown no signs of resuming work. They called for a rise in cast-iron product prices earlier this month and announced that they will stop supplies indefinitely. Meanwhile, the Korea Federation of Small and Medium Business met with the Federation of Korean Industries yesterday to discuss ways to deal with increasing raw material prices. (Source: Joongang Ilbo.) (SITE NOTE: This is not a simple strike, but the root problem of how to pass the increasing costs onto the consumer without getting into price-gouging schemes. Currently the remocon companies bear the costs of increased sand and components -- and in order to cut corners have been known to substitute inferior sand that leads to crumbling buildings. The reason is that the mechanics for passing price increases on has not been established.)


'Top Chaebol Must Be Subject to Investment Cap' (Mar 2008) The country should continue to restrict inter-subsidiary equity investments by the top five conglomerates to help increase corporate investment and create more jobs, a Seoul economist claimed, directly contradicting the Lee Myung-bak government's plan to ease the regulation. Another economist argued that the government should not relax the rules on conglomerates' ownership of banks, saying such a move will increase risks to financial market stability.

At a seminar organized by the Korean Economic Association on 21 Mar, Konkuk University professor Choi Jeong-pyo said if the government abolishes the inter-subsidiary equity investment ceiling on Korea's top five business groups, they will use most of their funds not to expand investment, but to acquire stakes in affiliated companies. ``Conglomerates will also focus more on taking over a number of soon-to-be privatized public firms than on strengthening core businesses through expansion of investment. Scrapping the equity investment cap will not lead to an increase in corporate investment, but to widen the gap further between large and mid-tier business groups,'' Choi said. President Lee has said his government will lift the law that prevents a chaebol unit with assets of 2 trillion won or more from making equity investments in an affiliated firm to help increase corporate investment and create jobs for higher growth. (SITE NOTE: We fear that the chaebols will use the banks to further their goals of consolidating their power. With banks to fund their risk ventures under their control, there are great risks if there are collapses. The problem has been in the past is that the government has picked up the bills -- and now the chaebols are at it again. Instead of cross-assurances on loans, they will now simply have their banks guarantee their loans through borrowed capital from other banks. In other words, the cross-assurance scheme now gets broader and involves the national financial markets.)

Meanwhile, Hallym University professor Yoon Suk-heun called on the government to maintain the law banning non-financial companies from owning banks. ``There are pros and cons of easing rules on conglomerates' ownership of banks. But risks outweigh benefits. Most of all, if business groups control banks, it will increase financial market risks in times of emergency under the current regulatory regime,'' Yoon said. The government has said it will relax rules on conglomerates' ownership of banks in a bid to strengthen competitiveness of the financial sector. Under the current law, non-financial companies are banned from owning more than a 4 percent stake in a bank. President Lee has also said easing the rules would create synergy by combining manufacturing and financial businesses, and help strengthen the competitiveness of local financial companies amid intensifying global competition. (Source: Korea Times.)


May 2008

Foreign Investors Turn Away From Korea (May 2008) Despite all the slogans and gestures by the government to attract foreign investment, foreigners have turned their backs on Korea as the world's 13th largest economy has become increasingly less friendly to foreign investment. The view, which has long been denied by ranking government officials, has been backed by the latest report on foreign direct investment (FDI) into Korea. The volume of net FDI -- FDI inflow minus outflow -- in the first quarter fell to minus $670 million for the first time since the third quarter of 2006, according to the Bank of Korea. This figure compares with net FDI of $1.58 billion in 2007 and $3.59 billion in 2006.

Despite the government's denial, the view that Korea has become less attractive to foreign investment has been widely shared among global investors. ``Korea has become less friendly to foreign investment in the past five years as it recovered from the financial crisis,'' Andy Xie, an analyst of the Shenzen Development Bank (SDB) in China, who is the former Morgan Stanley chief economist overseeing the Korean economy and financial markets, told The Korea Times. ``Koreans may disagree but this view is widely shared in the international community,'' he added. (SITE NOTE: Though LMB mouthes pro-business phrases, the courts are still prosecuting the Lone Star fiasco just sentencing another in stock manipulation in Apr 2008. The message is clear. Korea is still a xenophobic business environment.)

``Korea's development model is based on developing indigenous firms to conquer foreign markets, very similar to the Japanese model,'' he added. ``The opening to FDI during and after the crisis was out of necessity. Korea was down and needed the money. When Korea recovered, it reverted.'' Inbound investment had increased sharply since 1998 when the currency crisis hit the nation, with net FDI soaring to $9.33 billion in 1999 and $9.28 billion in 2000 from $5.41 billion in 1998. However, after recording $9.25 billion in 2004, the net FDI steadily decreased to $6.31 billion in 2005, $3.59 billion in 2006 and $1.58 billion in 2007, turning negative in the first quarter of this year.

The nation's inconsistent and heavy-handed rules have become a major bottleneck, scaring away foreign capital and businesses, according to an analysis by the central bank. ``Excess regulations and complex administrative procedures here have deterred investment inflow over the past few years,'' BOK senior economist Lee Weon-joon said. ``In particular, the entry barrier for foreign businesses is set too high,'' he added. ``The government has introduced a number of projects to attract foreign investment, including `Invest Korea' in 2003, but most of them have turned out to be no more than slogan-oriented projects.''

In the category of startup administrative procedures, Korea ranked 95th out of 131 countries surveyed, according to the 2007-2008 global competitiveness report by the World Economic Forum (WEF). The nation is also lagging far behind in such categories as control over foreign business ownership and protection of investors, ranking 61st and 53rd, respectively. (SITE NOTE: The chaebols still control flaunting stock holder management rights. The old system is still being maintained despite all the fancy talk.)

``The government always says that it is trying its best to deregulate the market, but they only make a few changes in the micro sectors and leave the big picture unchanged,'' Lee said. The central bank also cited lack of foreign capital inducements, sluggish domestic investment, an unfavorable business climate and withdrawals of existing investment for the sluggish FDI. Excess regulations and anti-business sentiment have made the nation one of the least attractive investment destinations among rich countries, far behind its Asian rivals such as Singapore and Hong Kong, as well as developed countries.

The nation ranked 25th out of 82 countries in a survey on business environment conditions conducted by the Economist Intelligence Unit (EIU), far behind Singapore (3rd), Hong Kong (6th), the U.S. (7th) and Taiwan (19th). The EIU expects chances to be slim that Korea will improve its business environment in the short term. ``I don't think Korea can change in the near future to reverse the poor FDI trend,'' Xie said. ``Korea may be unwilling to make the changes to attract FDI,'' he added. ``Korea may never become a truly open economy. The mere fact that people always talk about foreign versus local means that the economy cannot be truly open.''

The central bank said that for investment promotion, the government needs to relax more regulations. ``Reforming regulations is the most urgent task for Korea to attract more foreign investment,'' Lee said ``If Korea is to become a major FDI destination, it should create a more foreign-friendly business environment by removing red tape and tackling its key competitive disadvantages, such as labor market rigidity,'' he added. (Source: Korea Times.)

SAMSUNG SLUSH FUND SCANDAL

November 2007

Samsung chairman implicated in slush fund scandal (Nov 2007) Samsung Chairman Lee Kun-hee, chairman of Samsung Group, was found to be directly involved in the company's practice of regularly giving bribes to politicians and prosecutors, following allegations against the nation's largest conglomerate that emerged earlier in the week. The group's internal documents, recently obtained by The Hankyoreh, show that Lee had also directed officials to consider cutting back on ads by media outlets that were critical of the conglomerate, or chaebol, and to devise a way to provide indirect support to civic organizations critical of Samsung.

According to documents obtained by The Hankyoreh on November 2, Chairman Lee, speaking on December 12, 2003 at Phoenix Park, a resort complex owned by Lee's brother-in-law in Pyeongchang, Gangwon Province, said, "It is unreasonable to give cash to people working in finance and the government and lawyers, prosecutors and judges. However, hotel discount coupons will be fine for them."

Since then, Samsung affiliates have purchased vouchers from the Shilla Hotel and given them to people outside of the company who are on the list of people to be "managed" by the group. The documents, which contain instructions from Lee to top executives made at official meetings or his residence, were prepared by Samsung's corporate restructuring office (now called the strategic planning office).

"After pasting articles from The Hankyoreh that give a negative impression of Samsung into a scrapbook, show it to them and have them to compare what they see with other newspapers," Lee said on October 18, 2003, in Tokyo. Lee then ordered Samsung to consider adjusting their ad contracts against The Hankyoreh, according to the documents.

Lee also suggested that the conglomerate give indirect support to civic organizations critical of Samsung Group. "Let's consider donating several billions of won to non-governmental organizations like the People's Solidarity for Participatory Democracy, but such donations should not go to projects that could hurt us," Lee said on October 22, 2003, in Tokyo.

The documents also showed that Lee was directly involved in the management of group affiliates, despite Samsung's repeated assertions to the contrary. "Consider selling Bundang Plaza or operating it under another management," Lee said on Sept. 5, 2003, in his home in Hannam-dong, Seoul. Samsung Corp.'s Bundang Plaza was sold to Aekyung last year. In response to the documents, a senior executive at Samsung Group's strategy planning division said, "At this stage, I have never seen the documents and don't know where they were released." He added, "We are now in the process of confirming whether the documents are true or false,"

The allegations against Samsung were first brought to light earlier this week when Kim Yong-cheol, who was once the director of a legal department attached to the secretarial office of the group's chairman, stated that in addition to having given cash bribes to over 1,000 of its top tier executives in amounts of 5-10 million won (US$5,500-11,000) according to their positions, Samsung had also given hotel vouchers or gift certificates when cash was not acceptable. Kim's statements against the company, which were released by the civic organization Catholic Priests' Association for Justice, also included the allegation that the conglomerate was keeping an account in the amount of 5 billion won (US$5.5 million) under his name without his knowledge. Kim also revealed that some 40 prosecutors had been bribed by the conglomerate, along with government officials and members of the press. Samsung has denied the allegations and says that the account held under Kim's name is now being managed by the third party, after Kim handed it over to a fellow colleague and someone outside of the company. According to Kim, Samsung pays approximately 1 billion won (US$1.1 million) per year to manage slush funds such as these. (Source: Hankyoreh News.)

Samsung Bribes for Prosecutors 'Tip of the Iceberg' (Nov 2007) Kim Yong-cheol, the former director of Samsung Group's legal department said 5 Oct some of the currently most senior public prosecutors have taken money from Samsung. Kim Yong-chul has sprung a string of allegations capable of embarrassing Korea's biggest conglomerate and judicial authorities. He claimed he delivered between W5 million (US$1=W908) and tens of millions of won every Lunar New Year's Day, Chuseok and during summer vacation.

He named no names but said, "I hope that a public opportunity will come" when he would. But he added, "Public prosecutors are a small group managed by Samsung. The Ministry of Finance and Economy and the National Tax Service, with which Samsung shares interests, are much bigger groups managed by Samsung." That suggests the company delivered still more money to senior officials at the ministry and the NTS than to senior prosecutors.

He said that the source of the bribes were slush funds raised by Samsung's affiliates. "Samsung holds many accounts in the borrowed names of executives and staff that contain slush funds. I still have a list of some Samsung executives who hold such accounts," he added. A former prosecutor himself, Kim left Samsung after working there as an executive for financial affairs and head of legal department at Samsung Restructuring Office from 1997 until 2004. He first came clean about the alleged slush funds through the Catholic organization on Oct. 29. Samsung denied the allegations, saying it neither bribed prosecutors or judges nor ordered Kim to do such a thing. (Source: Chosun Ilbo.)

The corruption scandal at Samsung Group snowballed 6 Nov 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.

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."

In a legal complaint filed with prosecutors, Kim Yong-cheol 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.

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.

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. (Source: International Herald Tribune .)

The prosecution is caught in a quandary. The civic group People's Solidarity for Participatory Democracy (PSPD) and Lawyers for a Democratic Society have filed a criminal complaint with the Supreme Prosecutor's Office against Samsung Group chairman Lee Kun-hee on suspicion of embezzlement, bribery and malfeasance. But prosecutors say they want a list of the prosecutors who were allegedly taking bribes first. It has to investigate a case against Samsung where there are accusations that prosecutors are on the "payroll" of Samsung. The prosecution has demanded the list of all prosecutors accused and stated that they would be "sidelined" in the investigation -- and not take any part in the investigation. However, once the lists are released, the second problem will arise for the prosecution as to how to investigate the accusations of corruption -- especially as accusations are against senior prosecutors. Kim Yong-cheol had stated that he would reveal them at an "appropriate" time.

However, the bombshell still ticking was further revelations into Samsung's control of Ministry of Finance and Economy and the National Tax Service senior personnel through payoffs.

Bar Association Could Censure Samsung Whistleblower (Nov 2007) The Korean Bar Association on 7 Oct said it is considering disciplining the former head of Samsung's legal team Kim Yong-chul because Kim's revelations violate confidentiality clauses. When a lawyer violates client confidentiality, the KBA is obliged to take disciplinary action. That includes disbarring, suspension of duty and imposing fines. A senior figure in the association said the KBA "will decide whether to discipline Kim after watching the result of prosecutor's investigation." (SITE NOTE: Notice that the KBA lawyers are closing ranks -- as the accusations against fellow lawyers in the prosecutors office are involved. This is the start of the mud-slinging attempts to discredit Kim.)

Regarding Kim's allegations that the Samsung Group opened a bank account in his name to deposit secret funds, The Financial Supervisory Commission said an investigation will have to wait. Woori Bank, where the accounts were allegedly opened, is carrying out an internal investigation. Only after the investigation is complete, will the FSC take action.

Head of Samsung Legal Department Resigns claiming Kim's Statements "Lies" (Nov 2007) Lee Jong-wang, who had advised Samsung on legal affairs and led its legal division, resigned on 9 Oct. In his e-mail sent to the Samsung planning division staff prior to the announcement, he criticized former Samsung legal division chief Kim Yong-cheol, 49, and branded Kim's allegations as total lies. Kim recently made allegations about Samsung's slush funds. Lee was a star prosecutor who held major posts in the prosecutor's office. In 1999, when a bribery scandal engulfed the attorney general, he also resigned in protest.

"Kim was a former prosecutor and had worked for our company for seven years as a senior in-house lawyer. Those facts embellish his allegations with persuasiveness and truthfulness. But they are not true. Kim and I are practicing lawyers. I am ashamed my fellow lawyer would tell such a blatant lie," criticized Lee.

Lee explained, "Last August and September, Kim's wife sent threatening letters to our company. I suggested that we should not respond to the blackmail attempts. I believed in integrity and the rule of law. Contrary to my belief, Samsung now faces a difficult time. I think I have to take responsibility. That's why I'm resigning." Samsung confirmed that Kim's wife sent threatening letters over three occasions to Samsung, which could reasonably be interpreted as "demanding money." (SITE NOTE: Notice that start of the mud-slinging attempts to discredit Kim.) (Source: Donga Ilbo.)

Prosecutor General-Designate 'on Samsung Bribery List' (Nov 2007) Prosecutor-general nominee Lim Chai-jin, the head of the Central Investigation Department of the Supreme Prosecutor's Office Lee Kwi-nam, and Lee Jong-baek, a former chief of the Seoul Central District Prosecutors' Office, were regularly bribed by Samsung, the Catholic Priests' Association for Justice alleged on 12 Nov. The three high-profile figures are said to be on a list of some 40 alleged recipients of regular Samsung bribes. The Seoul Central District Prosecutors' Office the same day started an investigation of allegations about Samsung slush funds and bribery of public prosecutors raised by the conglomerate's former top attorney Kim Yong-chul. (SITE NOTE: The parliamentary judiciary committee approved Lim Chai-jin as the next prosecutor-general at a nomination hearing on 14 Oct, despite allegations that Lim was one of some 40 senior prosecutors who took regular bribes from Samsung. The committee approved Lim's nomination, saying he had sufficient experience and shown outstanding capabilities while serving in the prosecution for 25 years. It added Lim is qualified for the post since he is "committed to the fair management of the 2007 presidential election and respect for human rights" and believed in justice. On the corruption allegation, the committee said some members opposed the decision but did not block approval since Lim denies the allegations and vowed to uncover the truth if he is appointed. A bill was tabled by the UNDP and GNP to appoint an independent counsel to investigate the matter. The Grand National Party (GNP) decided to submit a bill today for appointing a special prosecutor to investigate both the election funds in 2002 and a "congratulatory fund", which set up for Roh Moo-hyun, the president-elect in 2002. Cheong Wa Dae's view is that the GNP's bill will include probes into President Roh's alleged illegal election and congratulatory funds, saying, "It is a malicious attempt to include groundless accusations in the bill." (Source: Donga Ilbo.)

The Catholic organization disclosed part of the list to spur the prosecution, which had unusually demanded the list before launching a probe. The CPAJ cited a memo by Kim, who headed the legal department of Samsung's Restructuring Office from 1997 to 2004, as saying the former personnel chief at the Restructuring Office, Lee Woo-hee, took charge of looking after Lim, while Je Jin-hoon, CEO of Samsung subsidiary Cheil Industries, looked after Lee Jong-baek, who is now chairman of the Korea Independent Commission Against Corruption.

Lim denied the allegations through Kim Kyung-soo, the public affairs officer at the Supreme Prosecutor's Office. The spokesman quoted Lim as saying he was not acquainted with Kim Yong-chul or had any recollection of bumping into him when he met with others. Lim said he never received any request from Samsung for any favors or was lobbied by the conglomerate. The others also denied the charge. (Source: Chosun Ilbo.)

National Assembly Agree to Special Counsel (Nov 2007) The National Assembly's Legislation and Judiciary Committee on Thursday approved a bill charging a special counsel with investigating the Samsung corruption scandal. Both opposition and ruling-camp lawmakers on the subcommittee scrutinizing the bill gave the green light to a draft that could have wide-ranging repercussions for Korean society.

The law charges the special counsel with investigating all suspicions about the Samsung Group -- from the conglomerate's attempt to transfer group ownership to chairman Lee Kun-hee's son by underhand means to use of slush funds to lobby powerful public figures since 1997 including senior prosecutors, illegal setting up of bank accounts in executives' names to hide the slush funds, and alleged delivery of congratulatory money to President-elect Roh Moo-hyun in 2002.

The Grand National Party's demand for an investigation of the congratulatory money is reflected in the bill in the form of the special counsel's task to probe Samsung's suspected lobbying of the "senior-most government official." The parties did not discuss another pending bill that would establish an independent anti-corruption body, which Cheong Wa Dae has insisted must pass; therefore the president will likely veto the special counsel bill.

A presidential veto could delay passage, but the combined number of house seats of the three parties backing the bill -- the United New Democratic Party (140), the GNP (129) and the Democratic Labor Party (9) -- is at 278 far larger than the quorum of 200 or two-thirds of lawmakers required to re-approve a vetoed bill. In any case, it is unlikely that an investigation will start before the presidential election, considering that it will take more than a month to appoint a special counsel and prepare for the investigation. That means the issue is unlikely to become a major campaign issue in the last hectic weeks before the election, though it could encourage the broader ruling camp to up its offensive against corruption.

Under the bill, the Korean Bar Association would recommend three candidates for the president to choose a special counsel from. The counsel could appoint three assistants and would then be authorized to investigate for 60 days, in addition to 20 days for preparation. If necessary, that can be extended for another 45 days -- first 30 days and then another 15. The counsel could make just one announcement of interim results. (Source: Chosun Ilbo.)

In a related story, Cheong Wa Dae says that "the monetary gift" accusations are smear tactics orchestrated by the GNP and will likely to rebut their validity, saying, "An investigation target that is too broad undermines judicial order." Roh could possibly veto the bill. In the wake of the whistle blowing over the Samsung scandal by Lee Yong-cheol, the former Cheong Wa Dae secretary for legal affairs, the public is paying close attention to Cheong Wa Dae's reactions. Under these circumstances, if the president wields his veto power against the special counsel bill, suspicions will only increase.

More Allegations: Samsung Group Raised W200 Bil. Slush Fund' (Nov 2007) Samsung Group created a slush fund amounting to 200 billion won through improper deals among affiliates, according to the group's former insider on 26 Nov. He also said the group Chairman Lee Kun-hee's wife and other executives bought artwork with the family-owned conglomerate's slush fund. Kim Yong-chul, the former director of the legal department at Samsung Group, disclosed documents as evidence for his claim about the company's alleged slush fund creation at a media briefing in Seoul. It was the last of a series of his ``disclosures'' about Samsung's alleged slush fund creation, bribery and other irregularities. The prosecution banned several people involved from traveling overseas during the investigation but did not disclose who they were. The prosecution banned four to five people involved in the allegations from leaving the country, including Samsung executives, but did not disclose their names. It also demanded Kim present himself for questioning within the week. (NOTE: YTN reported that 8-9 executives, including Chairman Lee, were banned from travel.)

According to Kim, Samsung Corporation, one of the group affiliates, made contracts with another subsidiary Samsung SDI's offices in London, Taiwan and New York, to create the slush fund. For example, the London unit bought memory chips at 100 won overseas and resold them to Samsung SDI at 120 won, having one won as commission and diverting the remaining 19 won into the slush fund. He showed a memorandum with signatures of a Samsung Corporation executive and the company's London office head.

Kim said one Samsung SDI executive, who retired and went to the U.S., blackmailed Samsung with copies of documents related to the slush fund, demanding the company appoint him as resident executive there and provide living expenses. A former Samsung Display employee in charge of purchasing blackmailed his former employer by using the secret memoranda, Kim claimed. Kim In-soo, then president of the Samsung restructuring headquarters, the highest management body for the company, had consulted him about the extortion, he added.

Kim said parts of the fund were spent in purchasing artwork in 2002 and 2003 by the chairman's wife Hong Ra-hee, who is director of Leeum Samsung Museum of Art, and other Samsung-related figures including Shinsegae Group Chairwoman Lee Myung-hee. The price of the artwork totaled 60 billion won, and Kim disclosed a list of pieces, including Happy Tears by Roy Lichtenstein. Kim yesterday released a list of artwork he said the Lee family collected from February 2002 to September 2003. Kim said "Bethlehem's Hospital" by Frank Stella was purchased for $8 million and Roy Lichtenstein's "Happy Tears" cost $7.16 million. "I was told by Jay Y. Lee [Lee Kun-hee's son] that Happy Tears was hung on the wall of Chairman Lee's home," Kim said. The group said Lee's wife once put Happy Tears in her house but did not buy it. (NOTE: The Joongang Ilbo stated, "Samsung yesterday said the claim that the Lee family purchased art with slush fund money was absurd. Leeum and Ra Hee Hong Lee did not purchase Bethlehem's Hospital or Happy Tears, Samsung said.)

Kim also said several Samsung affiliates conducted accounting fraud in 2000, but Samil PricewaterhouseCoopers, an accounting firm, connived with this in return for entertainment. (NOTE: Naver reported that Kim also alleged that five Samsung companies cooked the books to the tune of 7 trillion Won(about 7 billion USD) and that Samil PriceWaterhouseCoopers helped in the effort.)

Kim & Chang, the nation's largest law firm, actively participated in fabricating facts for the trial of Lee on charges of illegally transferring his wealth to his son through an illicit convertible bonds deal. The former insider also said Samsung monitored civic groups and made a list of 110 lawyers working with the People's Solidarity for Participatory Democracy in order to bribe them.

He also claimed the JoongAng Ilbo's detachment from Samsung in 1999 was fake, saying that Lee secretly entrusted the newspaper's then publisher Hong Seok-hyun with his shares in the newspaper, but retained the voting rights. (NOTE: The Joongang Ilbo story stated "The separation of the JoongAng Ilbo, the JoongAng Daily's parent newspaper, from the Samsung Group in 1999 was a disguise, Kim also asserted. "The JoongAng Ilbo had made a number of public declarations that it would be spun off from the conglomerate, but its chairman, Hong Seok-hyun, had no money to buy the majority shares," Kim said. "In 1999, Kim In-soo asked me to write a secret agreement to put the shares in trust. According to the agreement, Hong will be the majority shareholder of the newspaper only in name, but he will have no voting rights, and Lee Kun-hee will exercise voting rights." Kim said only one copy of the secret agreement exists. The JoongAng Ilbo denied Kim's accusation, calling it "groundless." The newspaper said its separation from Samsung was legitimately carried out, adding that Hong spent his own money to purchase the shares, while Lee Kun-hee donated his stake to a nonprofit organization, the Yumin Cultural Foundation. "The Fair Trade Commission supervised and approved the entire process," the newspaper said. Samsung agreed. "The JoongAng-Ilbo was separated from the Samsung Group in April 1999, and Chairman Hong purchased his shares in the JoongAng Ilbo with his own money," Samsung said. "Kim's claim about a secret trust agreement is groundless." Both Samsung and JoongAng Ilbo criticized Kim for lying in public. "Kim claimed that JoongAng Ilbo sought money from Samsung whenever it needed, adding that it asked for money to repair an underground car park when it was damaged by a flood," the JoongAng Ilbo said. "In July 2001, the newspaper's printing facility, not the car park, was damaged by a flood. "The JoongAng Ilbo sought compensation from Samsung Life Insurance, which owned the building at the time. Samsung Life Insurance rejected the demand, so we even filed a lawsuit," the newspaper said. "We were later advised that the building owner is not responsible for damages incurred by a natural disaster, so we gave up the claim. "Because of Kim's accusations full of lies and distortion, the newspaper and its employees' pride and honor have been severely damaged. We will hold Kim legally accountable for his action," the newspaper said.)

Samsung said Kim's claims were exaggerated and faked. It said in a statement that there was no slush fund created through Samsung SDI's deals, although it cannot find related documents from 1994 as memorandums are usually kept for only five years. It also denied all other allegations, saying Kim defamed all related figures and firms. The JoongAng Ilbo, Samil and Kim & Chang said that Kim's claims were lies, with Samil planning to file a suit against him for defamation. (Source: Korea Times.)

December 2007

Samsung Slush Funds Confirmed and Independent Counsel Appointed (Dec 2007) The special investigation team working on the Samsung slush fund case has confirmed circumstances in which hundreds of billions of won were received and withdrawn from 150 bank accounts under other names. As the data on tracing bank account records is expected to go to the upcoming prosecutors' team, the funds' purpose and use will be disclosed soon. The investigation team's head said, "I can say for sure that the actions of the prosecutors' team have been well founded and proceeded. Most of accusations made by Kim Yong-chul, the former lawyer of Samsung, have turned out to be true." Prosecutor Park Han-cheol, who oversaw the special investigation, said the conglomerate managed "considerable" slush funds. He added his team laid "a solid foundation" for an independent counsel to uncover the truth. He confirmed most of the allegations by the whistleblower Kim Yong-chul, a Samsung legal adviser from 1997 until 2004, who among other things accused the conglomerate of regularly bribing senior prosecutors and other officials on a so-called "Samsung scholarship."

When asked which parts are true, however, he said, "I cannot tell the whole story yet." Just one month after its establishment, the special investigation team has completed 22 books of investigation records with 11,000 pages. Prosecutors after a raid on Samsung Securities found more than 500 proxy bank accounts among thousands of accounts held by 200 Samsung employees. Regarding account fraud, 160 boxes of documents have been submitted. The team is expected to hand over 79 books of records (42,000 pages) to prosecutors with prosecutors' documents included. The team received and executed six arrest warrants at Samsung headquarters, the SDS center in Gwacheon, the data center and the Financial Supervisory Service. Samsung executives including Lee Kun-hee, the group chairman, and Lee Jae-yong, a vice president of Samsung, have been banned from going overseas.

The head of the team dissolved the investigation today, saying, "Under the law, two investigative bodies cannot exist at the same time." President Roh Moo-hyun appointed former senior prosecutor Cho Jun-woong as the special counsel who will investigate the Samsung scandal. (Source: Donga Ilbo and Chosun Ilbo.)

Massive volume of artwork found in warehouses of Samsung's amusement park (Jan 2008) Investigators on 21 Jan found a massive volume of artwork in the warehouses of Samsung's Everland Resort, an amusement park located in a suburb southeast of Seoul. The raid on the company's warehouses in Yongin was part of an independent investigation probing allegations of bribery and shady business transactions by the family-owned conglomerate. (SITE NOTE: This seems to substantiate that Samsung CEO and his wife Hong Ra-hee did invest heavily in art works as alleged by Kim. Previously, the investigators raided Samsung headquarters in Jan 2008 to seek an alleged secret vault, but no such vault could be found. The on-going investigation has verified the existence of "secret" accounts and that some banks had worked in collusion with the Samsung executives to illegally create these accounts. The evidence continues to mount.)

January 2008

Special Prosecution Finds Alleged 1 Trillion Won Samsung Slush Fund (Jan 2008) A team of special prosecutors reportedly discovered slush funds amounting to one trillion won in bond accounts under the names of Samsung’s employed and retired high-level executives in financial institutions including Samsung Securities. The special prosecution team explained that the sum does not include sums double-counted in the course of money transfers.

Accordingly, the special prosecution has summoned Samsung’s employed and retired high-level executives whose names were used in the accounts. The prosecution is expected to look into where the money came from and whether they managed the accounts themselves. The team also summoned four or five employees of Samsung affiliates such as Samsung Securities as references to examine whether they managed these accounts and the slush funds.

Prior to this, the special investigation-audit headquarters of the prosecution discovered slush funds worth about 700 billion won until it was dissolved last December and the case turned over to the special prosecution team. Special prosecutors also said that it is confirming whether the paintings suspected of being purchased with slush funds are included among the thousands of paintings and antiques preserved in a warehouse in Everland, Yongin, Gyeonggi Province.

Last November, the group’s former lawyer Kim Yong-chul disclosed the list of 30 high-priced paintings of famous modern artists, arguing, “Samsung purchased 30 expensive paintings from Christie’s, an auction house in the U.S., through Seomi Gallery, between 2002 and 2003.” At a press conference on the same day, assistant prosecutor Yun Jeong-seok said, “We are looking into whether the list of art pieces presented by Kim and the photographs we took (in the warehouse of Everland) match.” “For example, we can not be assured that Lichtenstein’s work was purchased with slush fund. We are making sure because there can be two works with the same title,” he noted. Special prosecutors plan to examine the source of money with which the works were purchased and how they were purchased, focusing on works suspected to have been bought with slush funds. For this purpose special prosecution sent President Hong Song-won (55) of Seomi Gallery a letter requesting her attendance. (Source: Donga Ilbo.)

Over 20 investigators searched the headquarters of Samsung Fire and Marine Insurance Co. in downtown Seoul, the officials said, amid reports that the firm accumulated about 1.5 billion won (US$1.5 million) in a secret safe by failing to make proper insurance payments to clients. Over the past couple of weeks the independent counsel's team has raided a dozen Samsung offices, including Chairman Lee Kun-hee's house and personal office.

Suspicions have mounted that Samsung hid evidence ahead of the raids. Surprise searches conducted on Lee Kun-hee's house and private office in Jan produced little evidence, according to sources at the independent counsel team. A group of lawyers and civic activists filed a complaint with the prosecution on 23 Jan alleging Samsung destroyed evidence. They claim Samsung issued a directive to destroy files that might injury company investors and executives prior to the raids.

On 26 Jan investigators questioned three senior Samsung Group officials Saturday as part of a widening independent investigation into allegations that the nation's largest conglomerate amassed a huge amount of slush funds to bribe government officials, politicians, and prosecutors. Won Jong-un, managing director of Samsung's textile arm, Cheil Industries, was among the three. The two others were not immediately identified, but they reportedly work at Samsung Electronics.

February 2008

Investigation into One Trillion Won Slush Fund Bearing Fruit (Feb 2008) Independent Prosecutors Uncover Samsung Group’s 1 Trillion Won Slush Fund in Hidden Accounts Independent prosecutors have focused on Samsung Group’s alleged slush funds as their efforts are now considered to be yielding results. The investigation team, which was formed a month ago, confirmed that the amount of money hidden in the bank accounts of executives exceeded one trillion won, most of it deposited in cash. (SITE NOTE: Investigators said the group systematically laundered certain funds before they were deposited into the accounts in cash. They are also looking into methods that Samsung might have used to launder the money, including internal trading and cross-subsidiary transactions, window dressing and investing the late Samsung founder’s money into Samsung stock for bigger returns.)

They summoned 30 former and current Samsung Group executives beginning with Hotel Shilla President Sung Young-mok on Jan. 18. Prosecutors secured testimonies regarding the names and bank accounts related to the slush funds. The deposed witnesses claim that the accounts are their own but failed to explain details surrounding the establishment and management of the accounts. Some of those who were summoned said that they had agreed to open the accounts, but discovered that multiple accounts were created later. Investigators are speculating that Samsung may have secretly used the names of its executives.

Prosecutors raided Samsung Fire and Marine Insurance’s headquarters and its data center on Jan. 25. There was speculation that Korea`s largest non-life insurer created slush funds with insurance money intended to go to its subscribers. Prosecutors think that attempts to destroy evidence by Samsung Fire and Marine Insurance hampered the securing of critical evidence. The team called Samsung F&M Insurance Executive Director Kim Seung-eon and Manager Kim as its first suspects. It remains to be seen how the investigation into the destruction of evidence will affect the slush fund investigation. (SITE NOTE: Two Samsung Life staff members have been arrested on charges of obstruction of justice and destruction of evidence. A further investigation will precede their indictment. If convicted, the managers could face up to five years in prison for obstruction of justice and up to five years and fines of up to seven million won for destruction of evidence.)

Independent investigators found that thousands of expensive artworks were stored in a warehouse in Everland, the Samsung-affiliated amusement park, in a raid on Jan. 21. They focused on locating 30 pieces of artworks allegedly bought with illicit slush funds, which Kim Yong-chul, the former head of Samsung Group’s legal department, claimed in a press conference in last November, but which prosecutors have yet to yield. Prosecutors state that the investigation into the art is not directly associated with the broader investigation. However, speculation that expensive artworks were purchased with the slush fund remains unresolved. Hong Song-won, head of Seomi Gallery which is alleged to have bought artwork on behalf of Samsung’s chief and his wife, released Roy Lichtenstein’s “Happy Tears” on Feb. 1. The piece had been missing for some time. Hong, however, said nothing about the owner of the work, the origin of the money for the purchase, and did not say whether she had any other artworks related to the investigation.

With the end of the Lunar New Year Holiday, an investigation into the illegal transfer of wealth related to illegalities surrounding Samsung Everland’s issuance of convertible bonds is expected to begin. In the Everland case, both former Everland President Heo Tae-hak and current President Park Roh-bin were found guilty in an appeals court. The case is now pending in the Supreme Court. Samsung Card Executive Director Shin Eung-hwan, a former chief executive of e-Samsung, was summoned for the so-called “e-Samsung case.” E-Samsung was charged for causing harm to the company and stockholders when other Samsung-affiliated companies bought its stocks at high prices to make up for the 20 billion won in losses in 2001. The company’s chief stockholder was Samsung Electronics Executive Director Lee Jae-yong, son of Samsung Group Chairman Lee Kun-hee. (SITE NOTE: Despite the findings, the team is apparently cautious about subpoenaing key players in the scandal, such as Samsung Vice Chairman Lee Hak-soo and the strategic planning division’s President Kim In-joo. The two will be grilled after the preliminary probe is completed.) (Source: Donga Ilbo.)

Investigators raid Samsung Electronics in corruption probe (Feb 2008) Investigators raided the headquarters of Samsung Electronics on 15 Feb as part of their high-profile probe of the company's parent Samsung Group that allegedly created a huge slush fund to bribe government officials. The agents from an independent counsel team were searching the head office of the world's biggest memory chip maker in Suwon, Gyeonggi Province, the sources at the team said. The search is to find materials related to other suspicions over Samsung's alleged illegal management practices, including a transfer of managerial control from Samsung Chairman Lee Kun-hee to his only son, Jae-yong. The 40-year-old Jae-yong is a senior vice president of Samsung Electronics. Samsung Electronics officials could not be immediately reached for comment.

In the past several weeks, prosecutors have raided several of Samsung's buildings for the probe, including the group chairman's house and his private office that have been beyond the reach of law enforcement officials. But the surprise searches yielded little evidence, raising suspicions that Samsung hid or destroyed pertinent materials ahead of the raids. The high-profile probe kicked off last month after a former lawyer for Samsung raised a slew of bombshell allegations against South Korea's biggest conglomerate. (Source: Yonhap News.)

South Korean special prosecutors on 15 Feb summoned Lee Hak-soo, vice chairman of Samsung Group, for questioning over allegations of creating a huge slush fund to bribe government

Independent counsel's travel ban leads to destruction of evidence in Samsung investigation (Feb 2008) One day after the independent counsel who is investigating allegations that Samsu