[Focus] Daewoo irregularities

The prosecution¡¯s investigation of falsified financial records compiled by officials of the bankrupt Group provide a much clearer picture of the wrongdoing committed by the conglomerate¡¯s management.

The misdeeds started at the British Finance Center (BFC), established in Britain by former chairman Kim Woo-Choong, and ended with the injection of astronomical amounts of public funds. Despite Kim¡¯s much-touted motto of "global management,¡¯¡¯ his company accomplished little more than causing enormous losses to people around the world.

BFC was a secret fund management organization Kim set up in London in 1981 with a total of 30 accounts, including those at Chase Manhattan Bank in the British capital.

Kim borrowed money from foreign banking institutions, deposited it into BFC accounts and invested it in overseas projects such as the construction of automobile plants. In the early going, he saw good results from his "globalization strategies¡¯¡¯ by continuously investing in Daewoo¡¯s overseas corporate bodies and capitalizing on good terms such as low interest rates and long-term repayment schedules. Prosecutors admitted that Kim probably did not set up the BFC with the intention of committing fraud.

However, Daewoo¡¯s debts began to snowball due to a slump in overseas projects after 1995-1996, which resulted in a vicious circle of borrowing money to repay debts. Loans Daewoo obtained abroad during 1997-1999 amounted to more than 20 trillion won.

The currency crisis erupted in Korea in late 1997 and foreign creditor banks began pressing Daewoo to pay off its debts, which only led the conglomerate to obtain further loans. Kim diverted his assets abroad or failed to bring in the money he earned on exports.

He allegedly had close aides like Chang Byung-Joo, president of Daewoo Corp., fabricate documents to show that imported goods were paid for, and sent $2.6 billion to the BFC between October 1997 and July 1999. He also did not bring in $1.5 billion Daewoo received as payment for exports. In the process, Kim entrusted only four or five of his close aides with the responsibility of managing the funds, while he took charge of important funds and the creation of slush funds himself, sources at the prosecution said.

The diversion of domestic funds to overseas locations was a direct cause of the insolvency of Daewoo subsidiaries. The group issued corporate bonds and company bonds by fabricating entries in account books in order to prevent its affiliates from going bankrupt.

Daewoo¡¯s company bonds were taken over mainly by trust and investment firms, resulting in their insolvency. This acted as a scourge on the overall economy and forced the government to inject more than 20 trillion won in public funds into the group.

Prosecutors have evidence showing that Kim created substantial slush funds in the course of sending funds illegally through the BFC, sources said.

But a full-fledged investigation of these allegations will be difficult. Kim, the key figure in the transactions, is apparently in hiding overseas and Daewoo officials claim that he is the only one who knows how the money was used.

Therefore, the investigation of Daewoo Groups¡¯ suspected wrongdoing will remain focused for the time being on the slush funds assembled by the presidents of Daewoo subsidiaries.

Lee Soo-Hyung sooh@donga.com