(Bloomberg) -- Ordinary families might stash spare cash under a mattress or in a safety deposit box. South Korea’s Lee family are so rich they spent years leaving billions of dollars under the names of their employees.
This strategy is back in the spotlight after first being exposed in an investigation by prosecutors that led to the 2009 conviction of Samsung Electronics Co. Chairman Lee Kun-hee. He was found guilty of evading taxes through borrowed names and handed a suspended prison sentence. He was pardoned at the end of 2009 to help the country win its bid to host the 2018 Winter Olympics.
A South Korean civic group filed a case against Lee last month, claiming he illegitimately acquired the wealth from his late father, Samsung founder Lee Byung-chull. They accused Lee of failing to pay taxes for the inheritance that was passed down through accounts using other people’s names.
The accusation comes several months after police said they uncovered 260 fresh accounts under the names of 72 different Samsung executives harboring about 400 billion won ($352 million) worth of assets belonging to Lee. Police released the details in a statement this February, while a police officer who investigated the case separately confirmed the size of the assets.
The accounts were managed by what used to be the conglomerate’s core governing body, whose latest name was Future Strategy Office. The office, dubbed as the control tower of Samsung, was disbanded last year amid mounting public criticism over its involvement in a graft scandal that resulted in the ouster of former President Park Geun-hye and the conviction of Lee’s son, Jay Y. Lee, for bribery. Samsung Electronics Co. Vice Chairman Lee was released from prison in February after his sentence was suspended.
Handed Over
The employees, whose identities weren’t disclosed, told police they handed copies of their IDs over when the company requested, according to local media reports.
It’s unlikely they ever got their hands on the money, or even had knowledge of the accounts. The strategy office was involved in the whole process from opening to making withdrawals, an official at the Financial Supervisory Service told a parliamentary audit in October last year.
"Accounts found to belong to Lee no longer contain money in most cases," Park Yong-jin, a ruling party lawmaker said in a phone interview. "He took out the money without complying with any legal procedures, including converting the accounts into his own name."
The findings highlight how far some wealthy individuals may go to conceal their wealth. In the past five years, data leaks like the Panama Papers – comprising more than 11 million files from Panamanian law firm Mossack Fonseca & Co. – have exposed the complex network of cross-border structures that rich people sometimes use to stash their assets in tax havens.
Cracking Down
They also come at a time when governments are cracking down. Last month, more than 100 nations received unprecedented levels of financial data on their overseas residents through an OECD-led initiative to target individuals evading taxes.
Set at 50 percent, South Korea’s top inheritance tax rate is one of the highest among developed nations, driving wealthy families to resort to circuitous -- if largely legal -- measures to preserve and pass down their wealth without paying hefty tax bills.
Read more: How to Keep a Billion-Dollar Fortune in the Family, Korea Style
Special prosecutors discovered in 2008 that Lee had stashed away assets worth 4.5 trillion won in accounts under the names of 486 people, made up of former and then-current Samsung employees. The 1,229 accounts bore some 2.2 trillion won at the end of 2007, according to the FSS report submitted to lawmaker Park earlier this year.
Social Benefits
Lee, who admitted this was part of his inheritance, stepped down from the helm of Samsung in 2008 with a promise to convert those accounts into his own name and to find ways to spend the money that came to light for social benefits after settling his unpaid taxes.
"The major reason for using accounts not in your own name is to avoid tax, especially inheritance tax," said Kim Nam-geun, vice chairman of a Seoul-based liberal legal association called Lawyers for a Democratic Society. "When the Samsung founder passed away, he left behind massive fortunes, along with huge tax burdens for his children."
All of the false-name accounts belonging to Lee don’t appear to have undergone a change of holders, according to the report. And the newly discovered accounts had been maintained under names of the Samsung executives until 2011, according to police, who declined to comment on when they were opened. Lee made the late payment of 130 billion won in tax in 2011 when the accounts were reported to the National Tax Service, but the investigation accused him of evading taxes of another 8.2 billion won on the profits from those accounts.
Health Issues
Police couldn’t question Lee directly due to his health issues and sent the case to prosecutors. Lee remains hospitalized after suffering a heart attack in 2014. Prosecutors confirmed they are currently investigating, without commenting on when the findings will come out.
Samsung Electronics has no access to details related to the chairman’s personal finance, a company spokeswoman said. "It is our understanding that taxes levied by the authorities on the accounts in question have been paid in full." Lee has said that the accounts, which mostly held stocks in Samsung companies, were part of his inheritance and they were to help him maintain control over the conglomerate.
Lee is currently the richest person in South Korea with a net worth of $17.4 billion. His son, Samsung Electronics Co. Vice Chairman Jay Y. Lee, is the country’s third-richest with $6.9 billion.
Tax authorities disclosed in August that they had collected more than 109 billion won in taxes from actual owners behind accounts in other people’s names in the first half of this year. The National Tax Service, citing the confidentiality of taxpayer information, declined to answer how much of it was generated from Lee.
For lawyer Kim, it’s too little and too late. "The government should have taken action at the time of the 2008 investigation in order to collect most of what Lee had owed," he said.
(Updates to add pardon in 2009 in second paragraph.)
--With assistance from Ben Stupples and Tom Metcalf.
To contact the reporter on this story: Yoojung Lee in Singapore at ylee504@bloomberg.net
To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net, Steven Crabill
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