Analysis: Samsung at risks of losing sheen

SEOUL, Oct. 5 (UPI) -- Samsung Group, South Korea's biggest industrial conglomerate, is enjoying glittering global image as a technology giant in overseas markets, backed by its booming mobile handsets and chip business. Its flagship Samsung Electronics Co, the world's largest computer-memory chipmaker, is touted as the most valuable company in Asia.

At home, however, the family-run business empire is facing growing criticism over scandals from alleged illegitimate dynastic wealth transfer scheme to political slush fund.

The prosecution said on Wednesday said it has launched a full-fledged probe into illegal deals for father-to-son transfer of ownership of the conglomerate. If found guilty, Samsung Group may lose much of its sheen as the symbol of the country's rapid economic development.

The prosecution probe comes after a Seoul court sentenced two executives of Samsung for their role on Tuesday in helping the group's Chairman Lee Kun-hee hand over massive wealth to his only son in illicit bond deals a decade ago, in an apparent bid to pave the way for dynastic transfer of managerial right.

The two Samsung executives were convicted of involvement in sale of convertible bonds to the chairman's son Lee Jay-yong, in December 1996 at a cost substantially lower than the fair market price.

The two executives, former and current president of Samsung Everland that runs a giant amusement park, were sentenced to suspended jail terms of three and two years respectively.

The prosecution vowed to appeal to a higher court for a tougher sentence on the executives, and would seek to summon the group's chairman and his son for questioning. Lee Kun-hee is now in the United States for medical treatment.

Further investigation will focus on whether the bond deal was masterminded by Lee to let his son and heir-apparent avoid paying inheritance taxes. The prosecution is considering searching some Samsung affiliated companies to seize conclusive evidence.

The prosecution has already banned some of the 33 accused executives from leaving the country.

The 1996 deal effectively made the junior Lee the largest shareholder of Samsung Everland, which acts as the group's de facto holding company through cross-affiliate holdings.

Lee Jay-yong, 37, currently holds a controlling 25.1 percent of Samsung Everland, where his three sisters allegedly own about 25.1 percent.

The company holds a 19.34 percent stake in Samsung Life Insurance, which in turn holds 7.23 percent of Samsung Electronics Co., the country's largest company by market value.

The electronics maker holds 46.9 percent of Samsung Card. The credit card unit also holds a 25.64 percent stake in Samsung Everland. Lee is now controlling the group as a senior vice president of Samsung Electronics.

"Lee's family has been using such cross-shareholding as a means to control their vast affiliates despite their minority stock ownership," said Kim Sang-jo who teaches economics at Hansung University in Seoul.

The conviction is another setback for Samsung Group already struggling with a controversy over its ownership structure and corporate governance.

The family-controlled conglomerate has been under growing pressure to revamp its "outdated" governance system based on a web of cross equity investments among its subsidiaries.

The cross-shareholding system enables Samsung's chairman Lee Kun-hee to control his business empire though he has small stakes in its subsidiaries.

Lee and his family control only 4.4 percent stakes in Samsung companies, but they exercise voting rights equivalent to 31 percent, thanks to its cross-shareholding system, civic groups said.

"It's time for Samsung to respond to calls for reform and change its backward corporate governance system," said Kim has long led a campaign for improving corporate governance.

Samsung is also accused of providing large sums of illegal campaign funds to two presidential candidates in the 1997 election. Samsung executives are also suspected of providing bribes to a number of government officials, including public prosecutors.

Critics say Samsung has too much influence on the South Korean economy. There are few corners of Korean life where Samsung's tentacles do not reach.

Samsung's 61 subsidiaries whose business ranges from credit card service to insurance and even amusement park account for 15 percent of South Korea's gross domestic product and one-fifth of its exports.

Samsung's domestic clout is so powerful that some even stigmatize South Korea as "the republic of Samsung." The group's leader Lee Kun-hee and his son, is referred to as the "emperor."

In May, when Lee showed up at Korea University to receive an honorary doctorate in return for the group's $42 million donation, he was greeted by student protests against Samsung's crackdown on labor movement.

President Roh Moo-hyun has sought to clamp down on the country's family-owned business empires, dubbed here chaebol which has been blamed largely on its unbridled expansion, saying more reforms are necessary to bring the chaebol up to international standards of corporate governance.