Korea: Concerns Grow over LG as Owner Family Faces Broadening Investigation

(Business Korea) -- Prosecutors are moving to expand their investigation into the tax evasion allegations against a dozen or so members of the LG Group owner family.

Investigators raided LG Corp.’s headquarters in Seoul on Wednesday to gather evidence of the suspicions that the group was involved in the alleged tax evasion by the members of the owner family.

Last year, LG Corp., which is the holding company of LG Group, bought a 24.7 percent stake in LG International previously owned by members of the group’s owner family.

The group says the stake acquisition was intended to bring LG International under the control of the holding company.

Internal reports from LG Corp. showed dozens of family members of the corporate mogul have sold up all of their shares in LG International.

The problem with the stock transactions between LG Corp. and the members of the owner family is that they appear to be sweetheart deals.

Under South Korea’s Inheritance Tax and Gift Tax Act, owner family members of a company are categorized as “special interest” shareholders, as their stockholdings support the owner’s managerial control.

So their shareholdings carry a control premium, which amounts to 20 to 30 percent of the market price of their stocks. For this reason, when they sell their shareholdings, they have to pay capital gains tax, which is not imposed on the gains from stock transactions of ordinary shareholders.

The LG owner family members being investigated by prosecutors are suspected of having disguised themselves as ordinary shareholders to avoid paying taxes on the gains from stock transactions.

They are suspected of having sold their shares to LG Corp. through trading on the floor, which is the normal transaction method for ordinary stock investors, instead of off-hours block trading, which is used for large-volume stock transactions.

To ensure that their shareholdings are purchased by LG Corp. at the specified price, the LG owner family members are suspected of having arranged sweetheart deals with the company in violation of the relevant law.

These shady deals between LG Corp. and the owner family members were detected by the National Tax Office last November. The tax office filed a request with the prosecutors’ office to investigate the company and the involved owner family members.

With over 10 close associates of the owner family having been probed, the prosecution is looking at the possibility of a systematic tax evasion within LG Group, while a brokerage firm that helped broker the deal is also being looked into.

Prosecutors are reportedly expanding their investigation to examine stock transactions between LG group affiliates and owner family members that have been made during the past 15 years since 2003, the last time the group was investigated by prosecutors.

They suspect that the group’s owner family members had frequently used sweetheart deals with group affiliates in disposing of their shareholdings.

Amid the ongoing probe, some industry experts are carefully speculating the investigation could spill over into other matters such as the group’s scheme to transfer managerial control from the current chairman to his son.

LG has been seen as a role model in management in South Korea as it is the first among chaebol groups to make its corporate governance structure transparent by adopting a holding company system.

The group remained aloof when other conglomerates struggled in corruption scandals and were pressed by the government to reform their governance structure.



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