Corruption starting with the Jaebeol

Introduction:

Korean society is generally made up of people that occupy a territory. Within Korea [1], there are people known as a Jaebeol [2] (Conglomerates). They are the epitome of material and symbolic markers of difference; the upper class. But are Jaebols the reason for corruption? Korea has been known as one of the 4 Asian Tigers along with Hong Kong, Singapore, and Taiwan. During the last few decades, South Korea has established itself as an example of economic success for developing countries throughout the world (Albrecht 2010: 257). However, as an example of economic success, the path to this stage was difficult and is still proven to be difficult till this day. Along with being one of the more successfully developed countries, there is a vast amount of underlying corruption within South Korea. According to Transparency International’s 2016 Corruption Perception Index, South Korea ranks 52nd place out of 176 countries as one of the higher corrupt countries (Shanmukha et al,. 2018: 12). Additionally, Korea has had a former dictatorship. The existence of laws for control of populace such as the National Security Law, the Law of Assembly and Demonstration, and defamation policies help keep the country together. As well, there is censorship and therefore, press freedom is not complete. Korea has been a prosperous country developing and improving in all areas since colonization. However, the problem with corruption in Korea seems to be deepening and stuck in place. In this paper, I will explain the Jaebeol and their underlying roles that aid in the continuation of corruption.

The drama I will be referencing in this paper is called Chief Kim (김과장). Chief Kim was directed by I Jaehun and Choe Yunseok. It was released on January 25, 2017 and ran until March 30, 2017. The drama usually ran Wednesdays and Thursday at 22:00 on KBS2. The reason for why I am using this specific drama is because it address corruption within companies by giving the viewer an inside look.

Background: What is corruption?

The main focus of this paper addresses the corruption in South Korea however, what makes up corruption? Corruption occurs when businessmen use bribery, personal connection or some other means to attempt to influence policy decisions and gain rents (Kang 2009: 13). Additionally, political connections override economic criteria and allows overcapacity and bailouts of indebted and poorly managed firms (Kang 2009: 97). In order to make use of their power, Jaebeols exchange bribes for political favours with business and political elites. There are generally four types of corruption groups that are relevant to the economy as a whole. The more they are likely to attempt to influence Government policy, the more likely they are to wield political influence (Kang 2009: 15). Furthermore, corruption is a form of dishonest or unethical conduct by people who are entrusted with the duty and position of authority that may involve in personal benefit (Shanmukha 2018: 12). Corruption has effects on economics as well as the social and mentality of people.

What is a Jaebeol?

As mentioned above, South Korea is one of the developing countries throughout the world that is an example of economic success. The Jaebeol system is one of the reasons for Korea’s economic success. The Jaebeol system had transformed the country into a major global player (Paik, 2006; Haggard et al., 2003; Amsden, 1989). Jaebeols first became important in the early 60’s and 70’s. They received Government protection and support as well as exclusive rights and access to resources. The Government provided the Jaebeols with financial assistance, low interest rates, tax benefits, foreign exchange allocations, import and export licenses, and foreign investment incentives (Lee 2000). In return, Jaebeols provide jobs, foreign currency, and an opportunity for Korea to be known in the world market. It was in the late 80’s when Jaebeols became financially independent; did not need to rely on the Government. This was also the time when they became part of the global market which slowly exposed cracked within the Jaebeols, including Governance weaknesses. The 80’s were when Jaebeols started to have economic and social influences as South Korea as well as the new global market. Until the late 90’s, the Jaebols played an important role in the economy. The state refused to let large Jaebeols fail and therefore, guaranteed the existence of already pre-established Jaebeols and freed them from market forces; they had the support of the state. In 1995, five of the largest jaebeol organizations were known as Hyundai, Daewoo, Samsung, LG Electronics, and SK Global. In Chief Kim, the Jaebeol group that is shown in the drama is known as TQ Group.

Censorship to frauds to Corruption in Korea

One of the reasons for corruption in Korea is censorship. Transparency is one of the major factors corrupt individuals are afraid of implementing (Shanmukha et al,. 2018: 12). A society without transparency is a society of corruption (Shanmukha et al,. 2018: 12). An example of censorship leading to corruption is when Bak Geunhye was accused of bribery, power abuse, and leaking confidential Government documents that had resulted in the society of Crony Capitalism (Shanmukha et al,. 2018: 13).

To fully recognize why Jaebeol organizations are one of the leading causes to corruption, it is important to understand the fraud theory. There are three common elements to all frauds: perceived pressure, perceived opportunity, and rationalization (Albrecht et al,. 2010: 265). Most pressure involve a financial need, although non-financial pressures, such as the need to report results better than the actual performance, frustration with work, or even a challenge to beat the system, can motivate fraud (Albrecht et al,. 2010: 265). Other motivations for fraud includes greed as well as the need to meet short term credit crises. Frauds can arise as long as there is an opportunity. Weak board directors, inadequate internal controls, fraud behind complex transactions, lack of access to info, as well as a lack of an audit trial are openings to fraud opportunities. Adding on, frauds happen when there is a lack of checks or balances, weak financial structures, cross-subsidiaries, weak corporate Governance, lack of transparency, lack of public regulatory oversight, as well as lack of independence between entities within the organization (Albrecht et al,. 2010: 257). Checks and balances are systems implemented to help a company to ensure that power is not abused. An example from Chief Kim was when the auditors came to do a yearly check on the companies status. The president as well as the accounting department had rearranged the actual statistic numbers to conceal their actual profit loss and the underlying hints of corruption and accounting fraud; fabricating lies. Furthermore, due to the censorship, the lack of access to information can also be seen when none of the other departments know what kind of documents are shown to the audit. Every trace of authentic information has been shredded or covered with fake numbers as well as fake subsidiaries. Additionally, the Chairman was discovered to use different routes to transfer money. Furthermore, the media is unable to expose the lies within corrupt Jaebeol corporates due to their connections to the Jaebeol. They have close connections to political and business powers and as mentioned above, they are under their protection.

Reasons for Jaebeols for commit frauds are usually “For the good of the company,” “We cannot let the company fail,” or “we need to keep the stock price high.” An example of a real life fraud was when a Government inquiry was made into Samsung in 2006. What they found were slush funds to politicians and illegal transfer of shares from I Geonhuie to his son I Jaeyong. Due to the limited public and regulatory oversight at Samsung, it created the opportunity for I Geonhuie to illegally transfer his shares to his son. Moreover, this allowed I Geonhuie’s children to purchase over 64% of a holding company at less than one tenth of the market value (Albrecht et al,. 2010: 268). Due to the large amounts of fraud incidents in Korea, many executives have also accepted fraud as being an established “cultural social norm” for South Korea. As Albrecht asserts, “As long as leaders and employees of these organizations consider fraudulent acts as acceptable, frauds will continue.”

Power abuse and privilege

Jaebeol can easily break the law for their own benefit. Elections and other purposes are dependant on Jaebeols for money. Furthermore, Jaebeol owners when found guilty, may be acquitted or pardoned from a prosecutors’ charges and possibly court rulings. An example would be when I Geonhuie from Samsung was found guilty and sentenced to prison but was immediately pardoned (Kim 2013: 59). It was shown that Samsung had bribed politicians, prosecutors, as well as journalists. This case was known as an instrumental state. An instrumental state is when the capitalist class controls the state apparatus for its own economic benefits (Oh 2017: 245). The instrumental state in advanced capitalist countries is achievable due to rich corporations with the ability to buy out rogues and thugs from the Government in order to make the state business friendly. This is done to the extent that the state abandons its duty of prosecuting Jaebeol family members for the unlawful business transactions as well as political activities; examples include illegitimate donations and slush fund payments to state officials (Oh and June 2016).

Other ways Jaebeol can abuse power is through credible threats instead of credible commitments to discipline both domestic and international stakeholders. In order to maximize their power in Korea and abroad, corruption is committed by the Jaebeol. Through extending protection (Eg, Samsung Insurance) to stakeholders in the market, Jaebeols gain their trust and thus their committed crimes against giant firms are handled more leniently. Furthermore, Jaebeol have the ability to break any regulatory rules of the market in order to minimize their social and market costs, including investments in innovation which boosts GDP [3] growth altogether (Oh 2017: 247). Lastly, another way for Jaebeols to abuse their power is when democratic Governments press charges against them, they would hire corrupt judges, politicians, as well as bureaucrats to derail such litigations (Oh 2017: 247).

In Chief Kim, there are many episodes where power abuse is evident. During the episodes where managers and part-timers working under the TQ company were not being paid, Gim Seongyong had a meeting with the managers, promising he will try his best to fix the payment issue. However, Bak Hyun Do, sends his executives to blackmail the managers as well as find out about their financial information and use it against them. Another instance of blackmail was when the Business operations team was forming a plan to revive TQ delivery. During the presentation, both witnesses were unable to tell the truth, and thus, the plan had failed the the punishment was that Business Operations disband.

Implemented ways and why it has not worked

Korea has tried many ways to end or reduce corruption however, their anti-corruption efforts have not been sufficient enough to bring about a change in corruption. To control corruption, there are two aspects: Preventing corruption before it takes place and detecting and punishing corruption after it occurs (Choi 2018: 303). Another way would be formal authority intervention. If corruption becomes an obstacle to maintain an orderly society, it becomes a problem to be solved either by a society itself or by the state (Choi 2018: 303). With reference to Albrecht’s statement, “Due to the large amounts of fraud incidents in Korea, many executives have also accepted fraud as being an established “cultural social norm” for South Korea,” if a society holds strong foundations of informal institutions such as norms of integrity, it tends to resist corruption by imposing severe social sanctions on corruption; by changing the norm, corruption can be minimized. The prevalence of corruption in a country shows that corrupt means are deeply present throughout the society and have become a social norm and a way of life (Choi 2017).

In a corrupt country, a community is neither experiences nor empowered to mobilized social resources for placing pressure on corruption. Even if people attempt to do so, they are suppressed by the corrupt powers of the Government (Choi 2018: 303). With reference to Chief Kim, the opposite is shown as the part-timers join forces together along with Business Operations to protest against TQ Group and to get their wages back. In this case, they were able to win against TQ Group with numbers. A way for the Government to react to the increasing pressure from the international or local community to end corruption, the Government can choose to either remain within the status quo with no effort, or to adopt strong anti-corruption measures (Choi 2018: 303). By remaining to the status quo, TQ Group had used Seo Yul as a scapegoat in order to retain their image and hence, lost Seo Yul as one of their subordinates.

The corruption incidents mentioned above such as the Bak Geunhye case as well as the Samsung case were characterized by the presidents’ or family members’ illegal abuse of power over business people, and maintaining the close power-business nexus as in Crony Capitalism (Choi 2009: 199). Another example referencing from Chief Kim is when Bark Hyun Do offers Cha Gi Wu a luxurious gift in exchange for his protection and security. Cha Gi Wu is known as a political manipulator and has the connections and power in order to clear up Bak Hyun Do’s name.

Additionally, if Jaebeols have enough money to buy out politicians as well as bureaucrats from the institution of credible threats by using them in ways one would use an instrument, the optimal way to buy the Jaebeol out from credible threats would be to stop their cash from flowing into the state illegally (Oh 2017: 148). Through this method, the state can also stop money from flowing through inheritances to sons from official Jaebeol owners or the chairman.

The Gim Yeongran Bill [4] was passed in the legislature in 2015. Through this bill, all civil servants (including politicians, public officials, and bureaucrats) who had accepted one million won or more in bribes will end up in jail for up to 3 years regardless of reason (Oh 2017: 148). However, with this bill, the Jaebeols will more or less not be as effective as the political status of people mentioned above who have accepted the bribery. An example would be if a politician bought Samsung insurance. The Jaebeol responsible or close to that politician would take care of corrupt officials even when they are imprisoned for taking bribes (Oh 2017: 149). In order for The Gim Yeongran Bill to be effective, it must punish bribers as much as the recipients.

Along with the Gim Yeongran Bill, the Monopoly Regulation and Fair Trade Act [5] help with curb cross shareholding. Curb cross shareholding are often used by Jaebeols to have control over the market as well as handing over firms to male successors. Although the Monopoly Regulation and the Fair Trade Act was not implemented to hurt the Jaebeol, its intentions were to curb only new cross shareholding agreements between firms (Oh 2017: 150). Thus, it does not affect current shareholders. In order for the Fair Trade Act to be efficient, it should ban cross shareholdings, whether they are new or old. Or alternatively, cross shareholdings should only be allowed when the ownership and the control of the Jaebeol are fully separated with a strict cap on individual, family, or institutional ownership of any Jaebeol group (Oh 2017: 150).

The Anti-corruption methods mentioned above are no easy tasks to put into effect. A way to improve the probability of the success rates of the anti-corruption methods mentioned above is to make sure the justice system works properly. If within the justice system, many of the judges were recruited by the Jaebeol for anti-Jaebeol suits, the results of the anti-corruption methods will be very hard to achieve. The only way for the justice system to remain neutral is if the Jaebol stop recruiting them. This process can only be done when the state provides full protection of the state prosecutors and judges towards Jaebeol lawyers (Oh 2017: 150). To efficiently put the plan in action, state protection should be provided to prosecutors and judges by maintaining the national exam system instead of the law school system. Through the Jaebeol influences, law schools have become deeply connected to Jaebeol lawyers and their firms in the recruitment of justice officials. Prosecutors just need to keep punishing bribers as well as recipients in the Government in order to pass laws that implement separation between Jaebeol ownership and control (Oh 2017: 150).

Conclusion

To summarize this paper, corruption still exists in Korea and the Government is doing everything it can to prevent or minimize it. Unfortunately, corruption control does not work everytime because it may not be present at that time or there are weak mechanisms of institutionalization. Although corruption has boosted the GDP growth in Korea, as a result it is obstructing the economic growth; a double edged sword. It is apparent that even with the Gim Yeongran Bill, Monopoly Regulations, as well as the Fair Trade Act is not enough to fully cure Korea of corruption. In order to fully minimize corruption with efficiency, Korea should secure its Democratic Justice System since the beginning (Oh 2017: 150).

Chief Kim is an excellent drama that gives the viewers an insider look at the thought process of the Jaebeol as well as the middle class that are pursuing to free the company of corruption. It shows many points of views as well as the large amount of censorship present in a company. It also shows a few ways in which ordinary citizens can work together to cure a corrupt company of corruption.

As mentioned above, Korea has been a prosperous country developing and improving drastically in all areas since colonization. However, the problem with corruption in Korea seems to be deepening and stuck in place. Nonetheless, corruption is no easy task to remove or improve and as of now, there are no real ways of eliminating corruption permanently. As long as there is censorship and no transparency, there will be corruption.

Word count: 3074

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Footnotes

[1] When I mention just 'Korea' I am specifically talking about South Korea.

[2] In this paper, I will be using Revised Romanization System.

[3] GDP = Gross Domestic Product

[4] Anti-Corruption and Bribery Prohibition Act

[5] Last revised in 2015