International Business: South Korea
Kim's Fall from Grace at Daewoo
Inside the Korean conglomerate's fraud scandal
What an ignominious fall. As recently as two years ago, Kim Woo Choong, founder of South Korea's Daewoo Group, was revered as the man who built a small textile-trading house into Korea's second-largest industrial conglomerate. Since then, revelations of deep losses, corruption, and mismanagement at Daewoo have shredded his legend. Now the last vestiges of respect are gone.
In the first week of February, the Supreme Public Prosecution Office, Korea's top law-enforcement agency, announced it had arrested seven of Kim's top lieutenants on four criminal charges, including fraud and embezzlement. They were jailed to await formal indictment and trial. Those in custody include top current and former executives of the group's many divisions, among them Kang Byung Ho and Chang Byung Ju, ex-presidents of Daewoo Corp., and Kim Tae Gou, former chairman of Daewoo Motor. Kim Woo Choong, whose empire once produced 10% of South Korea's gross domestic product, is a fugitive, flitting between Europe and Africa to avoid prosecution on charges including fraud and embezzlement.
The prosecutors allege that Kim and his associates organized what they believe is Asia's biggest single financial fraud--false accounting between 1997 and 1998 that inflated the value of Daewoo's equity by $32 billion. More disclosures could come. "It's not over, with dozens of other people still being probed," says Kang Kap Jin, a spokesman for the prosecutor's office. One arrested executive, Yoo Ki Bum, admits the company, like many, manipulated the books, though not on his orders: He will "face the music," his lawyer, Surh Jeong Woo, says. However, says an official, "the most important part of the jigsaw puzzle that's missing is Kim Woo Choong, who masterminded the whole operation." Korean missions worldwide are on alert, and prosecutors plan to ask Interpol for help finding Kim.
Kim's lawyer couldn't be reached for comment, but local press reports have quoted the lawyer as saying Kim hasn't decided whether to return home. Prosecutors sound determined to get their man--though some cynical observers speculate that Kim hasn't yet been found because Daewoo money ended up in politicians' pockets.
It's no secret that over the years, Korea's chaebol relied on accounting maneuvers to plump up profits, diminish liabilities, and generally make the business look good. But the scale at Daewoo was breathtaking. The government prosecutor's office has released only scant details. It appears, though, that its investigation centers on a few areas: asset-swapping between Daewoo entities to create fictitious profits; cover-ups of failed ventures; and a London-based slush fund that diverted money from Daewoo's trading arm, Daewoo Corp.
Unfortunately, says Lee Dong Gull, a former economic adviser to President Kim Dae Jung, much of what prosecutors are uncovering could have been detected long ago. "To send a strong message, the government must also hold responsible the accounting firms and regulatory officials who overlooked the fraud," he says. "Anyone carefully studying Daewoo's books could detect misconduct of that magnitude."FICTITIOUS PROFITS. Take Daewoo Corp., Daewoo Heavy Industries, and Daewoo Electronics. In 1998, they posted a combined net profit of $272 million, though South Korea was in the depths of its worst recession since the Korean War. Their publicly available income statements, however, list $2.7 billion in gains from asset sales carried out between Daewoo companies: One Daewoo business would sell an asset far above stated book value to an affiliate, and book the capital gain as profit. Government lawyers say the assets were actually worth far less. "By swapping their shares and other assets at inflated prices, they generated all the gains without exchanging even a single cent," Lee says. Once these fictitious profits were deleted, the three companies collectively lost $2.4 billion.
Some of the prosecutors' allegations border on the farcical, such as Daewoo Motor Co.'s attempt to cover up its failed $200 million investment in a car plant in Ukraine. When Daewoo Motor was unable to get parts to keep the plant running, the Ukrainian government complained. To placate it, Daewoo surreptitiously shipped cars built in Korea to the Ukrainian border, where they were taken apart and sent to the plant for reassembly. Prosecutors say the company claimed sales and profits from the bogus production and fraudulently obtained loans based on them.
The slush-fund accusation has a familiar ring. In November, 1995, Kim and a group of top Korean executives were charged with paying bribes to Roh Tae Woo, who was President from 1988 to 1993, from a $650 million slush fund: Kim got a suspended jail sentence for that. In the current case, prosecutors say Kim set up a shell company called British Finance Center (BFC). In preliminary filings, prosecutors could not put a precise figure on how much cash was shifted to the fund. But they said that $2.6 billion made its way into the account after Daewoo forged documents to create an import-export transaction that never occurred. The group diverted an additional $1.5 billion from car-export revenues. Prosecutors did not say how the money was spent, but industry executives and analysts think at least part of it was earmarked for the chairman's personal use and for bribing government officials around the world and executives at client companies and banks. One former Daewoo executive told BusinessWeek: "Chairman Kim carried with him bundles of money to lobby for projects in emerging markets."PUNISHING THE INNOCENT. The disclosures may explain why Ford Motor Co. last September dropped its bid for Daewoo Motor, which went bankrupt in November, 2000. (The entire chaebol was declared insolvent in 1999, with more than $70 billion in debt.) The allegations of Kim's wrongdoing have complicated an already arduous restructuring and negotiations with General Motors Corp. to buy the company. Management has pledged to lay off some 2,000 assembly-line workers this month. Understandably, the company's unionized workers resent the sacrifice. "Kim Woo Choong has been stealing money from the company, and we should not be punished for the mess he created," says Daewoo Motor Labor Union representative Choi Jong Hak.
The Daewoo arrests may give the government the political cover it needs for a fresh attack on the cronyism infecting chaebol, banks, and politicians. Ensuring transparency in business transactions would help the entire financial system. For decades, Kim Woo Choong has been a role model for ambitious Korean youths. The government could now hold him up as a model of a different kind.By Moon Ihlwan in SeoulReturn to top