Who Took the Cookie From the Cookie Jar? Hyundai Chairman Arrested for Embezzlement
Just as Hyundai was beginning to show skyrocketing growth and improvements in quality, their chairman gets caught with a secret fund containing more than 100 billion won (roughly $106MM). Chung Mong Koo allegedly used the money to bribe lawmakers and secure permits illegally. The investigation has been going on for over a month, culminating in Chung’s arrest on Friday. He is charged with embezzlement and misappropriation of corporate funds, charges that can each carry up to ten years in prison. There is also an ongoing investigation into illicit transfer of funds to his son, Chung Eui Sun – the president of Kia. Prosecutors say that they are seeking legal action against Eui Sun but do not plan to arrest him.
Currently, much of the South Korean economy is built upon enormous family-run conglomerates known as chaebol. They can own everything from grocery stores and gas stations to heavy industry and railway lines, all under the same family leadership. Many of their practices are secret, and calls for increased transparency to investors have not yet been heeded. Accusations of shady business dealings are not uncommon, including tax evasion, illegal transfer of assets to other family members, and bribery.
It is currently unclear how big of a blow this will be to Hyundai’s grandiose plans - Chung has only been charged, not convicted. It may turn out to be an Enron-style scandal, or it may blow over harmlessly. Samsung was involved in similar scandals last year. As part of their ‘apology’ to society, Samsung donated 800 billion won (about $848MM) to charity – an action that may in and of itself be suspect. Hyundai is taking the same tack. The Chungs donated more than $1.1B to charity last month. They also plan to donate their stake in Glovis, which is also caught up in the investigation of corporate fraud.
The whole situation reeks of scandal. As South Korea’s economy improves, investors may refuse to put more money into the South Korean market until better corporate governance rules are put in place. If these charges stick, it’s likely that prosecutors, emboldened by success in exposing scandals at two of the largest chaebol, will continue to dig into other conglomerates and be rewarded with more dirt – similar to the string of prosecutions that followed the Enron collapse. Other South Korean companies would do well to learn from the mistakes of Global Crossing, Refco, and Samsung: they need to start cleaning up their acts now, lest they be next.
Bloomberg report on the arrest
More information on chaebol and current attitudes towards them