CJ Group chairman detained over slush fund allegations

CJ Group Chairman Lee Jay-hyun was detained Monday night, marking the first chairman of a conglomerate sent to prison under the Park Geun-hye administration. Lee is under charges of embezzlement, breach of trust and tax evasion.

Lee created slush funds by overstating employee benefits by 60 billion won (53 million U.S. dollars) and fabricating payroll records at a subsidiary in Indonesia. He is also accused of dodging some 60 billion won (53 million dollars) in income taxes and hiding properties overseas by trading works of art using other people’s names. He is also investigated whether he used illegally acquired confidential information for stock investment and whether he lobbied to politicians and government officials.

Lee helped grow the company to Korea’s 14th largest group with annual sale of 33 trillion won (29 billion dollars) from a company with annual sales of 1.7 trillion won (1.5 billion dollars) in 1995 when the company was spun off from Samsung Group. On the other side of the growth of the company, he misappropriated big amount of company money to make himself rich. Offshore tax evasion or creating slush fund overseas through paper companies in tax havens is one of the four major tasks of the National Tax Service for this year.

Since the financial crisis, the government has put in place a variety of systematic measures to enhance transparency of company management and to prevent company owners from abusing their power. This investigation, however, uncovered the fact that owners of conglomerates still overpower the other shareholders. If one conglomerate fails, it can also fail the country’s economy. Korean conglomerates are underestimated in overseas stock markets partly due to their opaque management practice by owners and their abuse of power. Illegal practice of large company owners can also effect negatively to the global credit ratings.

Conglomerate owners should leave wrong practices behind and move forward to abide by global standards. The court now sentences heavy punishment against conglomerate chairmen for charges of embezzlement and breach of trust as seen in the cases of Hanwha Group Chairman Kim Seung-youn and SK Group Chairman Chey Tae-won. The court no longer believes the assert that sending company owners to prison will lead to a decrease in investment and management crisis. Korean companies should put more efforts in nurturing professional businessmen.

If the charges of Lee are admitted by the court, he will likely have to face a severe punishment. Sentencing guidelines to tax evasion crimes applied from July 1 this year stipulates that five to nine years of prison term for tax evasion of 20 billion won (18 million dollars) or more. Lee has reportedly dodged taxes worth from 50 billion (44 million dollars) to 60 billion won (53 million dollars). Lee is expected to continue court battle by hiring able lawyers and law firms. But recently, the court has rigorously investigated into crimes by conglomerates and punished severely. "Economic democratization” is a buzzword these days. Nevertheless, punishment should not be too severe for companies or owners to endure.