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Government Crackdown on the Hanjin Group and Other Chaebols
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Chaebol stunned by government's hard line on reform, hefty tax fines Korea Herald 10/6/99 |
[Editorial] Korea Times 1999/10/05/99 (Tue) |
| Chaebol apprehensions about the government's growing
willingness to exercise its powers to speed up the stalled reform process
are becoming a reality. In addition to the Hanjin, Tongil and Bokwang groups being slapped with hefty penalty taxes and fines, the Samsung, Hyundai and Kumho groups, among others, are facing similarly uncomfortable tax probes in the coming months. The Daewoo Group, the nation's No. 2 conglomerate, is already on the verge of disintegration under a similar government bid to crack down on the chaebol's debt-financed expansion methods. Stung with the nation's record amount of penalty tax, reaching 541.6 billion won ($445.8 million), the Hanjin Group's controlling family appears to be on the brink of losing managerial control of Korea's No. 6 chaebol, said industry analysts. Cho Choong-hoon, 79, founder and honorary chairman of the Hanjin Group; his eldest son Yang-ho, 50, chairman of Korean Air; and the third son Soo-ho, president of Hanjin Shipping, may forfeit their management rights, if forced to sell off their shareholdings to pay the penalty taxes, the analysts speculated. Even the imprisonment of at least one of the three tycoons reported by the NTS to the prosecution on tax-evasion charges and the subsequent breakup of the group can not be ruled out, they said. Nevertheless, the President Kim Dae-jung administration is showing little signs of letting up on its attack on the chaebol. Indeed, hours after the National Tax Service's announcement of the Hanjin scandal, Minister of Finance and Economy Kang Bong-kyun said that the government is thinking about imposing penalty taxes on Samsung Group Chairman Lee Kun-hee's eldest son, Jae-yong, on charges of failing to pay gift taxes. Lee Jae-yong is being probed for suspected tax evasion in the process of taking over hundreds of billions of won worth of bonds with warrants (BWs) from his father, said Minister Kang in a parliamentary hearing Monday. "The NTS is now working on the allegations surrounding Jae-yong's. If the charges are proven, hefty gift taxes will be levied," he said. In one instance of suspected tax evasion, cited by the Fair Trade Commission, Samsung SDS was found to have sold 3.21 million BW shares to Jae-yong and his three sisters far below market prices, at 7,150 won per share, earning them about 22.5 billion won in profits. "The arrest of the chairman of the Bokwang Group, the largest shareholder in the daily Joongang Ilbo, and the crackdown on Hanjin's Cho family signals the government's intentions to eliminate reform-reluctant and corrupt tycoons standing in the way of chaebol reform," said an official at the FKI. "Yet it is still a shock to see the government tax probe implicate the Hanjin Group founder," he said. Some watchers traced Hanjin's situation to Cho's uncomfortable relations with President Kim, which originated from the group's open support for Kim Young-sam in the 1992 presidential polls. In a nation notorious for one of the most loose tax collection systems in the world, the tax authorities have been generally soft on the chaebol's widespread tax-evasion practices. In truth, tax evasions on commissions and rebates earned by local airline and marine transportation service operators, like Hanjin, in the process of buying jets and ships, have been an open secret for decades. Their foreign currency smuggling has also gone unchecked so far. Therefore, Hanjin and FKI executives are now wondering about the real motives behind the latest get-tough moves by the NTS and the Kim government. Hanjin's ability to pay the hefty penalty taxes are also being questioned, as the group's bottom line is deteriorating due to rising international oil prices. Hanjin's 18 affiliates earned 477.9 billion won in revenue of 14.2 trillion won in 1998. The elder of Cho's second and fourth sons, Nam-ho and Chong-ho, are currently vice chairmen of Hanjin Heavy Industries and Hanjin Securities, respectively. Meanwhile, Samsung Chairman Lee has long been suspected of unlawfully turning over the controlling stake in unlisted Everland and Samsung Life Insurance to Jae-yong, now a graduate student, under the management-right succession scheme, anti-chaebol activists claimed. The chairman himself was accused of raising his stake in Samsung Life from 10 percent to 26 percent this year, using secretly inherited money from his father and Samsung founder Lee Byung-chul, the activists said. In connection with Hyundai Electronics' stock-manipulation scandal, NTS officials have also vowed to launch probes into possible tax evasion by Hyundai Group companies as soon as the prosecution's investigation is completed. Thus Hyundai Securities, Hyundai Heavy Industries, Hyundai Merchant Marine and other major affiliates are soon expected to come under strict tax probes. Executives at the No. 9 chaebol Kumho Group, the parent of Asiana Airlines, are also feeling uncomfortable these days, as the Financial Supervisory Service recently revealed that Park Seong-yawng, honorary chairman, and his three younger brothers, are suspected of earning about 13 billion won ($11 million) in illegal stock-transactions profits last year. Earlier last week, the Fair Trade Commission imposed combined fines of 79.4 billion won on the nation's top-five chaebol for illegal inter-unit financial transactions, under the government bid to accelerate chaebol reform. The figure is the largest-ever fine the antitrust watchdog has levied on the leading conglomerates for their time-honored tradition of diverting funds from healthy units to keep afloat marginal businesses. Laying out new chaebol-reform tasks, President Kim said in August that the government will sharply raise inheritance and gift tax rates in a bid to ban the transfer of wealth and managerial rights among chaebol owner families. But the chaebol and their trade associations vowed to resist the new government policy, saying that imposition of excessively heavy gift taxes will weaken entrepreneurship and give rise to adverse effects, such as overseas wealth smuggling and expansion of the underground economy. "The time-honored tradition of chaebol owner-chairmen handing over their empires to their offspring appears increasingly threatened," the KDI analyst said. The family-controlled structure has long been regarded as a source of the managerial irregularities associated with the chaebol. Despite their insignificant equity holdings, however, chaebol chairmen are able to exercise 100 percent control over their group-wide operations, critics say. Updated: 10/06/1999 by Yoo Cheong-mo Staff reporter |
On top of the Kim Dae-jung government's
anti-corruption crackdown on conglomerates and business tycoons, the
National Tax Service (NTS) has disclosed that it imposed 541.6 billion won
or $451 million in penalty taxes on subsidiaries of Hanjin
Group, the nation's sixth largest business group. Noticeably, the amount
of the taxes imposed on the group, which includes Korean Air (KAL), and
its owners and managers for tax evasion and capital flight is the largest
of its kind yet handed down.
The NTS, at the same time, has asked the state prosecution to further investigate the conglomerate or chaebol and accordingly the investigation authorities have started an intensive probe into the case, and banned the Hanjin management concerned from leaving the country. The Hanjin leaders subject to investigation are group founder Cho Choong-hoon and his two sons, KAL chairman Cho Yang-ho and Hanjin Merchant & Marine president Cho Soon-ho. Naturally, the government's drastic action against the group has sent a shock wave through business circles, and led to apprehension that the crackdown on the Hanjin group could be a signal for the government to launch an across-the-board tax probe and prosecution of other conglomerates. According to NTS officials, KAL is alleged to have evaded a total of 1.09 trillion won in taxes. Specifically, the tax officials revealed that KAL received a huge sum of rebates in return for equipping its aircraft with the engines of a certain American manufacturer and that the group's honorary chairman, Cho Choong-hoon, misappropriated 168.5 billion won of it for his personal use. In addition, Hanjin honorary chairman Cho has allegedly used irregular means of dividing his group and transferring its affiliates to his offspring since 1996, the officials said. The tax probe into the Hanjin group can be seen as part of the Kim administration's efforts to rectify the long-standing corrupt practices by business groups and inject a breath of fresh air into the business sphere. At this point, a senior Seoul District Tax Service official explained, the measure is aimed at preventing the illegal flight of national wealth, including foreign exchange. This is why KAL, heavily involved in foreign business transactions, has become a major target of the tax probe, he added. What prompted the tax scrutiny is said to be the fact that Hanjin group had made little voluntary tax payment and, in particular, no corporate tax payment at all since 1996. Notably. the group was suspected of having taking a huge amount of rebates from abroad in connection with the import of aircraft in 1998. Of particular concern to us is the fact that the official stressed that the government was set to punish businessmen for their wrongdoings, while firms would be given fines for their illegal practices. This hardline position runs counter to the business tycoons' expectations that penalties for corporate misconduct would be confined to businesses themselves. In this context, Hanjin executives, including its founder Cho, could be summoned by the prosecution and investigated for their illegal activities, possibly facing imprisonment, in addition to the imposition of record penalty taxes. Recently, a precedent was already set, when the prosecution arrested Hong Seok-hyun, publisher of the JoongAng Ilbo and the controlling shareholder of Bokwang business group, on charges of tax evasion and breach of trust. In the case of Hanjin, there is little doubt that it has displeased the incumbent government with KAL's repeated accidents, causing a number of casualties, and the violation of government regulations. The ensuing steps taken against the group, involving the removal of KAL president Cho Yang-ho, reflected the Kim administration's firm resolve to take on a family-run chaebol. But the group leaders may have underestimated the strength of the government's determination and instead the former KAL president Cho reportedly began interfering with KAL affairs and even made moves to attempt a return to his previous post. Yet, critics speculate that if the law-enforcement authorities' action against the Seoul daily's publisher is aimed at ``taming'' a newspaper critical of the Kim government, the crackdown on Hanjin is designed to alarm the defiant business tycoons. Politically, this government maneuver could be connected to the crucial general elections next April, they suspect. Whether or not this is indeed the case, the immediate effect of the crackdown on Hanjin could be to serve as a catalyst for the acceleration of corporate reforms in the face of chaebol resistance. |
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