Dark Days For The Empire

One of Asia's pre-eminent family empires is under assault. Samsung (often called the Republic of Samsung, thanks to its dominant role in the South Korean economy) is at the vortex of a swirling corruption scandal set in motion last month by the group's former chief attorney. Kim Young Chul, 49, claims that from 1997 to 2004, Samsung bribed scores of senior politicians, journalists, bureaucrats and court officials (among them the country's sitting chief prosecutor) to win favors for the business. The allegations gained new import last week when South Korean President Roh Moo Hyun announced that he would appoint a special investigator to probe the nation's largest conglomerate. Hours later, several senior Samsung execs, among them the group's 65-year-old chairman, Lee Kun Hee, were reportedly barred from leaving the country.

Neither Samsung's alleged conduct nor Kim's motives for blowing the whistle just weeks before a tight presidential election are fully understood at this juncture. Yet in spite of the fog, it's clear that Samsung's ruling family is caught in an existential struggle over control of an empire worth up to $300 billion. The centerpiece, of course, is Samsung Electronics, Asia's flat-screen TV, cell-phone and microchip giant—the biggest of 17 listed group companies, worth a combined $90 billion. There's also unlisted Samsung Life, Korea's largest insurance provider, as well as some 40 additional affiliates. Kim's central allegation is that chairman Lee masterminded a massive bribery network and paid out millions to smooth the illegal transfer of a controlling stake in the family's business to his son, thus avoiding inheritance tax that, if paid in full, would have cost the family its hold on the group. The scandal will affect "not just [Samsung's] corporate governance, but also its ownership structure," forecasts shareholder-rights activist Jang Ha Sung, dean of the business school at Korea University. One possibility, he says, is "Samsung's breakup into separate financial and industrial groups."

That outcome would re-contour Korea Inc. Last year Samsung's sales topped $160 billion, some 15 percent of South Korean GDP. The group currently generates a fifth of the country's exports, employs 250,000 people globally and ranks 21st on Interbrand's list of top brands, with a "brand value" of $17 billion. Samsung is also the sole top-tier Korean chaebol that avoided breakup after the Asian financial crisis 10 years ago; reformers have argued ever since that it, too, must undergo that process in the interest of better corporate governance. Samsung has always held that it reformed itself from within by taking in billions in foreign investment and making management more transparent. Yet old attitudes die hard. "Samsung believes it can move the entire country through lobbying and bribery," says one former executive, who asked not to be quoted by name for fear that his current business might be affected.

Kim's claims support that opinion. In a series of press conferences staged over the past month, the whistle-blower has alleged the existence of a $220 million slush fund secretly bankrolled by the group's trading arm, used to buy favors for the company and managed through phony bank accounts opened in the name of senior Samsung executives. Kim claims four such accounts worth a total of $5.5 million were opened in his name without his knowledge. On Nov. 23, Korea's legislature passed a bipartisan bill calling on President Roh to investigate Kim's claims and the murky 1996 share purchase that handed group control to chairman Lee's only son, Lee Jae Yong.

It's early to tell whether Kim's allegations will catalyze lasting change. His motives are opaque, and his claim to be acting "to clean up society" rings somewhat hollow given that he has remained silent since leaving the company three years ago. As other witnesses emerge to corroborate aspects of Kim's story (they include a former aide to President Roh who claims Samsung offered the aide a $5,500 cash gift in early 2004), Samsung has vociferously denied all allegations, casting itself as victim of a "vengeful expos?" by an ex-employee with a grudge.

Still, it's not the first time the company has had legal problems. In 2005, a Seoul court convicted two Samsung executives for breach of trust for allowing the younger Lee to buy a controlling stake in Samsung's holding company for less than 10 percent of its market value. In response to that ruling (which is under appeal), chairman Lee agreed to donate $880 million to fund a charity for needy students and make amends "for wrong customs in the past," as he put it. Analysts say Samsung's aim was to acknowledge ethical but not legal lapses, in the hope of paving the way for a smooth father-son succession. Kim's allegations of bribery committed as recently as Korea's last presidential election have seemingly dashed that plan.