Prosecutors begin raids as South Korea launches tax probe into powerful chaebols

May 29, 2013 3:25 pm

Prosecutors begin raids as South Korea launches tax probe

By Simon Mundy in Seoul

Prosecutors raided the home of one of South Korea’s most prominent businessmen on Wednesday, amid growing scrutiny of offshore financial arrangements made by the country’s corporate elite.

The search of the Seoul residence of Lee Jay-hyun, chairman of the conglomerate CJ Group, was part of an investigation into “allegations of tax evasion through overseas bank accounts”, the company said, while declining to comment further. Mr Lee was not available for comment.

Meanwhile, the authorities said they had launched a probe into 23 companies and individuals suspected of tax evasion through shell companies in tax havens.There has been growing international controversy in recent weeks over the use of offshore financial arrangements to avoid tax, spurred in part by the International Consortium of Investigative Journalists’ release of data showing investments in tax havens. Last week a Seoul-based partner of the ICIJ said that it had identified 245 South Koreans who had set up companies in tax havens.

The announcement attracted heavy publicity in South Korea, where public opinion has become increasingly critical of the country’s powerful conglomerates, or chaebol, as economic growth has slowed.

Park Geun-hye, president since February, has responded by putting “economic democratisation” at the heart of her policy platform, promising to tackle bad practices among the chaebol. This has included a pledge to abandon the sometimes lenient approach to high-level corruption of her predecessor Lee Myung-bak, who repeatedly pardoned corporate bosses convicted of embezzlement and tax evasion, including the chairmen of Samsung Electronics and Hyundai Motor.

Ms Park has also promised to strengthen tax collection, although her statements on the subject have focused more on regularisation of the informal sector than on tax dodges on the part of the chaebol. Improved collection of taxes would help Ms Park to meet her ambitious promise to implement Won135tn ($119bn) of social spending over the next five years, without increasing public debt or most tax rates.

NewsTapa, which partnered with the ICIJ to investigate use of tax havens by South Koreans, plans to publish details of its findings gradually over the coming months. Several current and former executives of some of the country’s major groups have been named in the first releases.

“I view this as just the tip of the iceberg,” said Shin Won-gi of People’s Solidarity for Participatory Democracy, a civic group. “Korean tax authorities have not taken enough measures on the conglomerates in the past.”

The investigation into CJ Group had begun before NewsTapa’s announcement last week, and centres on allegations that Mr Lee evaded tax by funnelling money to secret offshore accounts. Five years ago, Mr Lee was ordered to pay Won170bn relating to accounts held under different names, but he was not prosecuted for tax evasion.

CJ Group, which covers sectors ranging from pharmaceuticals to entertainment, was part of Samsung Group until 1997, and Mr Lee is the grandson of Samsung founder Lee Byung-chul.