South Korea's anti-corruption campaign affects growing number of chaebol, complicating future economic growth strategies

Investigations by prosecutors in March and April have focused on the allegation that state-owned companies and large conglomerates (chaebol) were pressured by the administration of former president Lee Myung-bak (2009–13) to promote its "energy" or "resource diplomacy". Lee sought to secure energy assets across the globe in order to enhance South Korea's energy self-reliance. As a result, these companies acquired foreign assets that in many cases proved to be economically weak, or invested in unviable overseas projects.

On 3 April, the Board of Audit and Inspection (BAI) released a report saying that state-run companies suffered net losses of KRW3.4 trillion (USD3.12 billion) as a result of pursuing overseas energy and resource projects during this period. The BAI's investigation covers the Korean National Oil Corporation (KNOC), Korea Gas Corporation (KOGAS), and the Korea Resources Corporation (KORES), and involves onsite inspections in Australia, Canada, and Chile. It is scheduled to continue until June, raising the prospect of further revelations. Investments that are currently under investigation or which are likely to be investigated include:

• State-run KNOC's purchase of North Atlantic (NARL Refining), which was previously owned by Canadian oil producer Harvest Energy, in 2009. The company recorded a KRW1-trillion loss as a result of the purchase, which was made at a higher-than-the-market price.
• KNOC is being investigated for allegedly paying USD31.4 million to the Kurdistan Regional Government (KRG) in return for the right to develop an oilfield in that region of Iraq. The KRG rejected the allegation of any misuse of funds in March.
• Between 2005 and 2009, KNOC and Keangnam invested KRW300 billion in oilfields in the Kamchatka Peninsula in the Russian Far East. The project produced poor results, forcing KNOC to pull out in 2010.
• Keangnam and KORES invested in the Ambatovy nickel mine project in Madagascar in 2008.

Political motivation

Prosecutors claim that KORES paid KRW17.1 billion in debts on behalf of the failing Keangnam Enterprises and purchased shares of the Madagascar project at a higher price than stated in the contract. Keangnam's chair Sung Wan-jong, a former member of the National Assembly and member of the ruling Saenuri Party, was close to Lee who was president at the time, and it is possible that these investments were politically directed. On 6 April 2015, prosecutors requested a preliminary arrest warrant for Sung on suspicion of fraud and embezzlement. On 9 April, his body was found in a national park outside Seoul, with South Korean authorities describing his death as a suicide.

An investigation into POSCO is focusing on numerous merger and acquisition deals signed under its chair Chung Joon-yang, who led the company between 2009 and 2014. Indeed, the company's activities overseas more broadly are being investigated. An executive director with POSCO E&C, who the authorities have named only as Choi, was taken in for questioning on 7 April in relation to the company's creation of an illegal 'slush fund' in Vietnam – identified in an internal company audit earlier in 2015 – that is worth more than KRW10 billion.

The close connections between South Korea's political leadership and the leadership of the chaebol are at the heart of the issue. For example, although POSCO was privatised in 2000, appointments of its chairpersons are widely understood to be influenced by the government. Highlighting this situation, Chung was widely believed to have been chosen with the support of close aides to Lee and was replaced soon after Park Geun-hye was inaugurated in 2013.

Park's support for the anti-corruption campaign is likely to be motivated in part by a desire to bolster her administration's flagging popular support. Yet there is a substantial risk that it could backfire. In particular, the opposition New Politics Alliance for Democracy (NPAD) is calling for Lee to appear before the National Assembly to answer questions about the "energy diplomacy" policy. This would be politically damaging for Park and the ruling party, and disagreement between the parties on this issue could sap the political will to pursue the broader investigations.

Outlook and implications

The leadership understands the necessity of eliminating collusive and corrupt business practices in order for South Korea to be globally competitive, and indeed the public is demanding it. However, attempts to end chaebol dominance and their role in promoting national strategic goals may be damaging for South Korea's economic performance, at least in the short term. This is likely to play out through falling share prices for the affected conglomerates, and as a result of increasingly cautious decision making by the chaebol's leadership. Projects, particularly in the energy and resource sectors, or located overseas, are likely to come under increased scrutiny at the planning stage. As a result of these concerns, and the risk that the investigations could be drawn into political manoeuvring between the Saenuri Party and the NPAD, there is a substantial risk that the drive behind these investigations could be eased. This would limit their positive impact on the level of collusion and corruption within South Korea's economy, and in turn on the chaebol's business practices.