Lotte Group, Korea’s fifth-largest conglomerate, is facing an investigation into allegations that its chairman and other top executives embezzled corporate money to create slush funds.
Some 200 investigators raided Friday the group’s headquarters and six major affiliates to seize hard disk drives and accounting books. They also searched the homes and offices of the group chairman, Shin Dong-bin, and other key officials.
Prosecutors are focusing on asset deals among Lotte subsidiaries, suspecting that their transaction prices have been rigged to help Shin raise funds illegally.
They also suspect that the CEOs of the group’s major subsidiaries have created secret funds with the kickbacks they received from their subcontractors.
Prosecutors said they had been collecting evidence against Shin and other Lotte executives since early this year. What motivated them to target the retail giant was the unseemly feud that flared up last year between Shin and his elder brother over the control of the 80 trillion won ($68.6 billion) conglomerate.
The power struggle, which continues, highlighted the group’s complicated and outdated ownership structure. The group’s affiliates were found to be linked together through circular equity investments, enabling the founding family to control the entire group with a mere 2.4 percent stake.
Furthermore, Lotte avoided market scrutiny by leaving most of its firms unlisted. Lotte operates 86 affiliates in Korea, but only eight of them are listed. In Japan, it has left all of its 36 subsidiaries unlisted.
An opaque shareholding structure and weak market scrutiny facilitate the creation of slush funds through shady transactions among subsidiaries.
Prosecutors said they were also motivated by a series of corruption scandals involving Lotte Group. For instance, Lotte Homeshopping was found in February to have presented fabricated documents to the government in applying to renew its channel license last year.
In 2014, officials of the home shopping company, from president down to merchandisers, were found to have squeezed money out of vendors, abusing their superior bargaining position.
Most recently, prosecutors last week raided Hotel Lotte and the house of Shin Young-ja, the head of Lotte Foundation and daughter of group founder Shin Kyuk-ho, on allegations that she had received kickbacks from a cosmetics company in return for favorable space in Lotte’s duty-free shops.
The probe into the group founder’s daughter has forced Hotel Lotte to restart its plans for an initial public offering, which it had already postponed until next month. Listing the hotel, which is the de facto holding company of Lotte’s subsidiaries in Korea, is one of the key reform measures promised by the embattled group chairman.
The already delayed IPO of the hotel, however, could be further postponed due to the prosecution’s investigation into the group chairman.
Prosecutors need to proceed with their probe swiftly in order not to disrupt the group’s business at home and abroad. They should find out how the Lotte executives created slush funds and where they used them. They will have to expand the probe if they find that the funds were used to lobby politicians or government officials.
Although Lotte Group is one of Korea’s top five conglomerates, with sprawling operations, its governance structure and business practices remain outdated. The crisis it is undergoing now is the price it has to pay for its failure to undertake reforms earlier. The probe should serve as a reminder for the group to speed up reforms.
