IN ONE of the many interrogations Lee Jae-yong has undergone in connection with a presidential influence-peddling scandal, he said that he would surrender management control of Samsung, the South Korean electronics giant that he is running on behalf of his incapacitated father, Lee Kun-hee, “if there is anyone better than me”. He may now be forced to do so. On February 17th Mr Lee was arrested on suspicion of bribery, embezzlement, perjury, moving assets abroad illegally and concealing evidence of criminal profit, after a local court agreed to a request from a special prosecution team for a pre-trial detention.
Last month investigators accused Mr Lee of paying 43bn won ($36m) in bribes to organisations tied to Choi Soon-sil, a confidante of South Korea’s president, Park Geun-hye (who is herself under investigation by the constitutional court). The prosecution team’s first request for a pre-trial arrest warrant was rejected. But the court reversed its decision, it said today, after prosecutors put forward additional evidence. (The court denied, however, a request to arrest another Samsung executive, Park Sang-jin, on similar charges.) The move allows prosecutors to detain Mr Lee for a total of 20 days while they pursue their probe.
The detention of Mr Lee suggests Samsung was not simply a victim of state extortion. State prosecutors investigating the case had stopped short last year of accusing them of bribery. The special prosecutor, however, alleges that, in return for that multi-million-dollar payment, Samsung secured government support via the National Pension Service (NPS), a huge pension fund, for a controversial $8bn merger of two affiliates—Cheil Industries, the group’s de facto holding company, and Samsung C&T, its construction arm—in July 2015. Last month prosecutors formally charged the head of the NPS with abuse of authority for, they allege, ordering the fund, which is a shareholder, to cast its votes in favour of the merger. Samsung admits to providing grants but denies all accusations of bribery.
The arrest signals that the longstanding collusion between the state and the chaebol, the large conglomerates that fuelled South Korea’s impressive growth, is no longer assured, says Chung Sun-sup of Chaebul.com, a corporate tracker. Many feel that South Korean courts have too long resisted holding chaebol bosses fully to account: Mr Chung says that, after the judges’ first refusal to grant a warrant last month, the mood within legal circles was disapproving. As head of Samsung, the elder Mr Lee (who has been in hospital since 2014) was convicted twice, and twice pardoned by the president of the time—but spent no time behind bars. His son has not yet been formally charged, yet is now in jail.
Park Jung-man of Lawyers for a Democratic Society, an activist group, says that other chaebolbosses who have been accused of wrongdoing in the case—among them the heads of Hyundai, SK and Lotte—are “all on the line now”.
Mr Lee could yet decide to apply for bail. Prosecutors still need to prove their case in court. But for many South Koreans, fed up with the impunity of its corporate chieftains, his pre-trial arrest will be seen as an early indictment of sorts. In a recent survey by Realmeter, a local pollster, over 40% said the government should mete out stiffer punishments to corrupt bosses.
For now, investors in Samsung are composed. When the elder Mr Lee resigned, for a short spell, after his indictment in 2008, professional managers stepped in; fellow vice-chairmen are likely to do the same for his son. Mr Chung says any formal replacement would risk factional division within the company. And, like other bosses behind bars, Mr Lee is expected to continue to steer the company through visiting staff and lawyers. During the first year and a half after his imprisonment in 2013, Chey Tae-won of SK reportedly had three visitors a day, and a merger that increased his direct stake in SK’s holding company from 0.02% to 23% took place. A vote on February 17th on the $8bn acquisition of Harman, an automotive firm, that Samsung announced last November (the company’s largest-ever), was expected to go smoothly.
But if Mr Lee’s detention is extended, Mr Chung expects M&A activity, which had ticked up under his stewardship, to fall away, as well as some of its investment in research and development. And it is not certain that the courts will have much sympathy for prolonged attempts to run the company from a distance.
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