South Korea Arrests Chairman of Hyundai

The chairman of Hyundai Motor Co., an icon of the South Korean economic miracle, was arrested Friday for allegedly creating a political slush fund and trying to evade inheritance taxes.

The sight of Chung Mong-koo, square-jawed titan of the ruling establishment, being led off to jail sent a shock wave through the country. Although there have been past campaigns to clean up South Korea’s chaebol, as conglomerates are known here, rarely has anyone so prominent been arrested in such a public spectacle.

Seoul District Court Judge Lee Jong-seok said Friday that the court had granted prosecutors’ arrest request because of the risk that Chung, 68, could tamper with the investigation.

“The suspect is denying most of the charges and it is feared he could destroy evidence,” the judge said in a statement issued by the court.

Under South Korean law, Chung can be held for 20 days while the court decides whether to issue a formal indictment.

Hyundai is the world’s seventh-largest car manufacturer and until recently looked to be on track to pass Volkswagen and DaimlerChrysler to become No. 5. But the investigation has twice forced the postponement of groundbreaking at a $1.2-billion Kia Motors plant in West Point, Ga. Kia is a subsidiary of Hyundai.

The investigation has also delayed construction of a factory in the Czech Republic that was to become Hyundai’s first European plant.

“We hope this investigation will be concluded as quickly as possible to minimize the negative impact on our business and the tarnishing of our image,” Hyundai spokesman Oles Gadacz said.

The company said Vice Chairman and Chief Executive Kim Dong-jin would assume operational control.

The shock factor in the case comes from the fact that a man as powerful as Chung could be arrested; the actual allegations are fairly pedestrian by the standards of South Korean big business.

Chung is accused of creating a slush fund of more than $100 million used to influence the 2002 presidential election and political campaigns.

He is also alleged to have embezzled hundreds of millions more by setting up an elaborate system of shell companies to avoid taxes while bequeathing his holdings to his son, Chung Eui-sun.

Prosecutors say charges are also likely for the younger Chung, the head of Kia, although he has not been taken into custody.

South Korea’s powerful conglomerates are a legacy of the military dictators who sought to develop a ravaged land as quickly as possible after the devastation of the 1950-53 Korean War. In the modern-day democracy that South Korea has become, there is vigorous debate about whether the conglomerates, many run by industrial families as recognizable as the Rockefellers or Vanderbilts, have outlived their usefulness to the economy.

“Certainly the chaebols had their roles in the development of the economy, but we didn’t have the legal system and institutions to control their activities,” said Yoon Deok-ryong, an economist with the Seoul-based Korea Institute for International Economics.

President Roh Moo-hyun, a left-of-center maverick elected in 2002, has made corporate and political transparency one of the main themes of his presidency.

Many South Koreans have praised the government’s willingness to take on Hyundai, while fretting about the effect on the nation’s economy and image.

“They could prosecute this case without making so much noise and causing so much disruption,” said Sohn Hak-kyu, governor of Gyeonggi province, home to many Hyundai-related manufacturing and research facilities.

“We should be considering Hyundai’s contribution to South Korean employment and to our competitiveness in world markets,” Sohn said.

The arrest of the Hyundai chairman could be a taste of turmoil to come in corporate boardrooms.

The charges in the Hyundai case were brought in large part because of the prodding of a powerful civic group known as People’s Solidarity for Participatory Democracy. In a study of 55 conglomerates published this month, the group claimed that 70% had serious irregularities in their finances.

“The chaebol have to realize that the government is getting more serious about enforcing the law,” said Lee Ji-soo, a Seoul-based lawyer working with the group.

Last year, prosecutors investigated similar allegations at Samsung, a conglomerate whose involvement in the economy runs so deep that critics often use the term “Republic of Samsung” as a nickname for South Korea.

No criminal charges came out of the probe, although the scandal led to the resignation of the South Korean ambassador to the United States, Hong Seok-hyun, brother-in-law of Samsung Chairman Lee Kun Hee.

Chung Mong-koo is the oldest of five sons of the late Chung Ju-yung, an almost mythic figure who as a young man stole money from his father in a North Korean village and used it to go south and build an empire in shipping, construction and cars. A younger son, Chung Mong-hun, who was head of another unit, Hyundai Asan, leaped to his death from his office in 2003 in the midst of an investigation into bribes paid to the regime of North Korean leader Kim Jong Il.

High drama, indictments and arrests are relatively commonplace in South Korean boardrooms and do not carry the stigma they might elsewhere.