Is Samsung's Lee Kun Hee guilty of tax evasion?

Lee Kun Hee, former chairman of Samsung Group, was convicted of tax evasion, concluding a trial that prompted the billionaire to end his 20-year reign over South Korea’s biggest business empire.

The Seoul Central District Court handed Lee a three-year prison sentence, suspended for five years, and fined him 110 billion won ($109 million), Judge Min Byung Hoon said. Lee, 66, was cleared of charges that he oversaw illegal trades designed to transfer control of Samsung to his son.

Lee, who succeeded his father as chairman, joins the heads of Hyundai Motor Group and SK Group in winning clemency for white-collar crimes. The decision may revive criticism of the family-run chaebol business model, which has been blamed for perpetuating corruption and disadvantaging minority shareholders.

“All these things just cause foreign investors and corporate-governance advocates to sort of roll their eyes and say here we go again,” said Jamie Allen, Hong Kong-based secretary general of the Asian Corporate Governance Association. “The family has got what it wants.”

Samsung Electronics, Asia’s largest maker of semiconductors, flat screens and mobile phones, declined to comment on the ruling and how the decision may affect the company, said Luke Cho, a Seoul-based spokesman. He also declined to comment on whether Lee will appeal the conviction.

Lee quit as chairman of the group in April after he was indicted for causing losses at Samsung by helping his son, Lee Jae Yong, gain control of group units and for failing to pay 112.8 billion won in taxes. Group Vice Chairman Lee Hak Soo and President Kim In Joo also resigned.

Suspended Sentences

Lee Hak Soo and Kim both received suspended sentences for tax evasion, Judge Min said.

“The judicial branch has officially shown us that in Korea, the chaebol are above the law,” the Solidarity for Economic Reform, a Seoul-based civic group, said in an e-mailed statement. “No Korean will respect the authority of a judicial system that’s powerless before the chaebol.”

The Federation of Korean Industries, a group representing the chaebol, hopes the ruling will help businessmen concentrate on reviving the economy, spokesman Jeon Je Kyung said.

Prosecutors last week asked for a seven-year sentence for Lee Kun Hee and a fine of 350 billion won. They also sought five- year prison terms for Lee Hak Soo and Kim.
The tax evasion and breach of duty charges resulted from a probe that began in January into allegations of corruption at Samsung after the group’s former chief lawyer, Kim Yong Chul, said that Samsung diverted funds for bribery.


Hidden Accounts

Prosecutors said in April that Lee Kun Hee evaded taxes on income by trading shares of Samsung units via hidden accounts held by other executives. They also said Lee breached his fiduciary duty because he knew of illegal sales of bonds by Samsung Everland, the group’s de facto holding company, and Samsung SDS, an unlisted information technology company.

Lee was found not guilty of breach of duty related to the Everland transactions, Judge Min said. The charges on the SDS trades are invalid because of the applicable statute of limitations, he said.

During the trial, prosecutors said the sale of Everland and SDS bonds were part of plans to help Lee Jae Yong get control of Samsung Group. Lawyers for the former chairman denied the allegations and claimed there were no losses incurred by the two companies. Two Samsung Executives have been convicted for helping Lee family members buy Everland shares at a discount.

Lee paid 182.9 billion won in overdue taxes to the National Tax Service on May 30, Samsung Group said last month.


Prior Conviction

Lee was convicted in 1996 of corruption for bribing ex- Presidents Chun Doo Hwan and Roh Tae Woo, receiving a two-year prison sentence that was suspended for three years. He was pardoned by President Kim Young Sam a year later.

The chairman took the helm in 1987 after the death of his father, Lee Byung Chull, who founded Samsung from a wooden store selling groceries in the southern city of Daegu in 1938, when Korea was under Japanese occupation.

By 2006, Samsung Group’s revenue had jumped ninefold over two decades to $159 billion, according to the company’s latest consolidated figures. Overseas sales totaled $70 billion in 2006, or 21 percent of the country’s exports.

Samsung is the largest among the family-controlled chaebol, which emerged in South Korea after Park Chung Hee, who seized the country’s presidency through a military coup in 1961, promoted industrialization through multiyear economic plans. The International Monetary Fund cited the chaebol’s debt-driven practices as part of the reason the economy landed in a financial crisis at the end of 1997.

Lee’s resignation contrasts with the path taken by Hyundai Motor Chairman Chung Mong Koo, who kept his position after he was convicted for embezzlement and breach of duty. The Seoul High Court last month upheld Chung’s suspended sentence.

In May, South Korea’s highest court reaffirmed a suspended sentence for SK Group Chairman Chey Tae Won, who heads Korea’s third-biggest industrial group. Chey was convicted of fraud five years ago and the Supreme Court upheld a ruling to sentence him to a suspended three-year prison term.


Will Lee's conviction bring a negative impact on Samsung?