Exactly one month ago, South Korea's political crisis - recall that the country's president Park Geun-hye was impeached last December - spilled over into the corporate sector when the country's special prosecutor unexpectedly sought a warrant to arrest the head of Samsung, the country's largest conglomerate, accusing him of paying multi-million dollar bribes to a friend of impeached President Park Geun-hye. On the night of January 16, investigators had grilled the head of Samsung, the world's largest maker of smartphones, flat-screen TVs and memory chips, Jay Y. Lee for 22 straight hours last week as a suspect in a massive corruption scandal, which last month led to parliament impeaching president Park.
As a quick tangent, putting Samsung's size and importance in context, the company generates $230 billion in annual revenue, equivalent to about 17% of South Korea's export-oriented economy, the fourth largest in Asia.
The special prosecutor's office had accused Lee of paying bribes total 43 billion won ($38 million) to organizations linked to Choi Soon-sil, a friend of the president who is at the center of the scandal, in order to secure the 2015 merger of two affiliates and cement his control of the family business. The 48-year-old Lee, who became the de facto head of the Samsung Group after his father, Lee Kun-hee, was incapacitated by a heart attack in 2014, was also accused of embezzlement and perjury. Prosecutors allege that Lee, 48, funded Park’s associates as he tried to consolidate control over the sprawling conglomerate founded by his grandfather.
But whereas on January 19 the court rejected a request from prosecutors to arrest Lee, one month later it changed its mind. Fast forward to today, when in denial of some cynics who suggested it would could not happen, Samsung chief Jay Y. Lee was formally arrested on allegations of bribery, perjury and embezzlement, "an extraordinary step that jeopardizes the executive’s ascent to the top role at the world’s biggest smartphone maker and the nation’s most powerful company."
The Seoul Central District Court issued the warrant for Lee’s arrest early Friday and the 48-year-old Lee was taken into custody at the Seoul Detention Centre, where he had awaited the court's decision following a day-long, closed-door hearing that ended on Thursday evening. According to Reuters, the judge's decision was announced at about 5:30 a.m. (2030 GMT) on Friday, more than 10 hours after Lee, the sprawling conglomerate's third-generation leader, had left the court. There’s a chance the suspect could destroy evidence or flee, so arresting him is appropriate, a court spokesperson said.
On Tuesday, the special prosecutor's office had requested a warrant to arrest him and another executive, Samsung Electronics president Park Sang-jin, on bribery and other charges. The court rejected the request to arrest Park, who also heads the Korea Equestrian Federation, saying it was not needed given his "position, the boundary of his authority and his actual role".
The court reversed its opinion because, as Reuters reports, the prosecution said it had secured additional evidence and brought more charges against Lee in the latest warrant request. "We acknowledge the cause and necessity of the arrest," a judge said in his ruling, citing the extra charges and evidence.
When he testified at a parliamentary hearing in December, Lee said he never ordered donations to be made in return for preferential measures and rejected allegations he received wrongful government support to push through a merger of two Samsung affiliates in 2015. Still, Lee, who has been put under a travel ban, confirmed he had private meetings with Park and that Samsung had provided a horse worth 1 billion won that was used for equestrian lessons by Choi’s daughter.
That said, according to Bloomberg, when Including procedural steps and appeals, it may take as long as 18 months for a trial and verdict.
Meanwhile, a Samsung spokeswoman said no decision had been made about whether Lee's arrest would be contested or whether bail would be sought.
Samsung and Lee have denied wrongdoing in the case. "We will do our best to ensure that the truth is revealed in future court proceedings," the Samsung Group said in a brief statement after Lee's arrest.
While Lee's arrest is not expected to hamper day-to-day operation of Samsung Group companies, which are run by professional managers, experts have said it could affect strategic decision-making by South Korea's biggest conglomerate. "There are more than 100,000 of us (in Samsung Electronics). It wouldn't make sense for a company of that size to not function properly just because the owner is away. It's business as usual for us," said an engineer at Samsung Electronics, who declined to be identified.
Of course, when the boss of one of the world's biggest companies is arrested for bribery, perjury and embezzlement, it is hardly ever a good thing.
To be sure, Lee's arrest would have an impact on longer-term investment decisions, said Kim, now a professor at Sungkyunkwan University. "Samsung presidents are evaluated on an annual basis, so they cannot make bold bets about the future. They need a chairman when making long-term investment decisions," he said.
Ultimately, Lee may be just a pawn, albeit very powerful, in the ongoing legal crusade against President Park and her close friend Choi Soon-sil, who is in detention and faces charges of abuse of power and attempted fraud. As reported last month, prosecutors focused their investigations on Samsung's relationship with Park, 65, who was impeached by parliament in December and has been stripped of her powers while the Constitutional Court decides whether to uphold her impeachment.
They accused Samsung of paying bribes totaling 43 billion won ($37.74 million) to organizations linked to Choi to secure the government's backing for a merger of two Samsung units. That funding includes Samsung's sponsorship of the equestrian career of Choi's daughter, who is in detention in Denmark, having been on a South Korean wanted list.
If parliament's impeachment is upheld by the Constitutional Court, Park will become South Korea's first democratically elected leader to be forced from office early. Park remains in office but stripped of her powers while she awaits the Constitutional Court's decision.
"This is a painful event for Vice Chairman Lee," said Kim Sang-jo, a shareholder activist and economics professor at Hansung University who was questioned by the special prosecutor as a witness in the probe. "But this will be an important opportunity for Samsung Group to sever ties with the past," he said, referring to links between the government and the country's conglomerates, also known as chaebol.
What happens to the company's stock? It is unlikely that the market will be too excited about this rather unexpected outcome.
“In the short term, it could have an impact on the stock, only because of sentiment, and also because the stock has risen a lot recently," Jung Sang-jin, a fund manager at Korea Investment Management, told Bloomberg. “In the long-term, there won’t be much impact on the stock, given previous times when other chaebol heads were arrested with few problems for their companies to keep running the business.”
Perhaps he is being too optimistic: keep an eye on the Kospi where trading may be more volatile than usual after today's news. On the other hand, we are confident the fund manager is right: in the long run, it will most likely be business as usual.