How do Korean tycoons transfer wealth to their sons?

Behind the Scenes: Samsung vs. Hyundai Motor (2)
A Tale of Fathers and Sons: Looking into Korea’s Conglomerates

When Hyundai Motor Group was facing public outcry for its alleged attempt to transfer wealth from chairman Chung Mong-koo to his son, Ching Eui-sun, sources say that the younger Mr. Chung visited his professor to seek advice on the matter.

Chang Ha-sung, professor of Economics at Korea University and a high-profile supporter of shareholder rights, told Mr. Chung that the time is over for sons to inherit control over large conglomerates through murky transactions, the sources said.

The previous day, the younger Mr. Chung canceled his plans to merge his Kia Motors Corp. with Hyundai Mobis Co., an automotive parts company that many experts suspected would be used as a channel for wealth transfer.

However, his father, Chung Mong-koo, arrested last month on charges of creating slush funds in order to bribe government officials, continued to push for the passing of managerial power to his only son in unorthodox ways.

The senior Mr. Chung had used what many people dubbed "straw" business tactics, experts noted. The slang stems from making money transfers so effortless they are like sucking water through a straw. Mr. Chung's family first created an affiliate, provided a variety of business deals in a way to enhance the affiliate's share value, and then pushed for either its listing on the stock market or a merger with another affiliate. Through these means, his offspring gained necessary money to buy stake in other core businesses.

The tactics used were nothing new, experts said. Samsung Group has already employed such methods: Seoul Commtech Co. was created in much the same way, and the only son of Samsung Group's Chairman Lee Kun-hee, Lee Jay-yong, held around 40 percent stake in the company. In a few years, Seoul Commetech grew at a breathtakingly fast pace, thanks to juicy contracts granted by Samsung Electronics Co., a flagship company of Samsung Group.

This was not an isolated case by Samsung, observers added. Since 1995, Lee Kun-hee had attempted to pass on his share holdings in the group's unlisted firms to his four offspring at rock-bottom prices. The share prices were boosted artificially, at which point the elder Mr. Lee had children resell their stake after the share price surged, the observers said. These funds were then used by the Lee siblings to gain managerial control over core businesses.

In December 1996, chairman Lee covertly transferred money to his offspring through Everland, Samsung's de facto holding company. The process, similar to the one used by Hyundai in the Mobis transfer scandal, was completed so swiftly that it was over in a day. Samsung executives and ranking officials at the group's restructuring headquarters claim to know nothing about the transfer.

"Such a swift move would not be possible without direct involvement by high-level officials," a business source said.

The prosecution is investigating the Samsung Group wealth transfer between father and son. However, the investigation has dragged on for over six months, fueling speculation that the prosecution is inconsistent in its handling of the major conglomerates.

Many observers suspect that the money transfer at Samsung Group must have been the brainchild of Vice Chairman Lee Hak-soo and President Kim In-ju, both of whom are regarded as close aides to Chairman Lee. The two pledged to take full responsibility in the case of any legal issue, sources say.

Lee Hak-soo was even quoted as saying in a private meeting: "My last objective is to help Jay-yong receive full managerial power [over Samsung Group] with the blessing of the South Korean people."

The net value of stocks owned by Chung Eui-sun is estimated at 925.2 billion won (about 925 million US dollars) as of the end of January this year, making him Korea's eighth wealthiest man in terms of stock value.

Lee Jay-yong of Samsung owns stocks worth 1.794 trillion won, making him worth roughly twice the Hyundai heir apparent. Lee Kun-hee and Chung Mong-koo must have dreamt of transferring their gigantic wealth to their sons without paying any taxes, but their dreams have been dashed. The Hyundai chairman has been under arrest, while the Samsung head is suspected of having skillfully pulled strings, as he escaped scot free from similar charges.

Though having joined the ranks of Korea's wealthiest men in their 30s, the younger Mr. Lee and Mr. Chung are worried whether their status as the "crown princes" of two of Korea's largest conglomerates might be seriously damaged amid criminal charges.

Lee Jay-yong once complained to his personal friends that the practices of amassing slush funds and passing down managerial rights to offspring are so common in Korea that he feels unfair about the latest investigation targeting Samsung's wrongdoings, sources said. However, observers note that unless Korea's chaebol owners break free from their long-held practices-the assumed right to rule an entire business group with only a marginal share-this kind of situation will only repeat itself.