Prosecutors raid head office of South Korea's Lotte Group over alleged slush fund, corruption

An investigator from the prosecution office carries boxes containing confiscated articles at Lotte Group's headquarters in Seoul, South Korea, on June 10, 2016.
An investigator from the prosecution office carries boxes containing confiscated articles at Lotte Group's headquarters in Seoul, South Korea, on June 10, 2016. PHOTO: REUTERS
Lotte chairman Shin Dong Bin.
Lotte chairman Shin Dong Bin.PHOTO: REUTERS

SEOUL (KOREA HERALD/ASIA NEWS NETWORK) - Prosecutors raided the head office of Lotte Group, the nation's fifth-largest conglomerate, and its seven affiliates in Seoul on Friday (June 10) over allegations that they created a multibillion-won slush fund through shady asset transfers between subsidiaries as well as possible capital inflow to Japan.

More than 200 investigators combed 17 Lotte offices including residences of Lotte chairman Shin Dong Bin and other top executives and the secluded office of Lotte founder Shin Kyuk Ho at Hotel Lotte.

Computer hard disks, accounting books and asset transfer records were confiscated during the raid. Prosecutors imposed an emergency travel ban on Lotte's executives, including a vice-chairman surnamed Lee, believed to be the second-most powerful man within the group.

Mr Shin is reportedly in the US for a business trip.

"We have conducted searches and seizures over speculations that Lotte established black funds via asset trading processes between its subsidiaries," said an official at the Seoul Central Prosecutors' Office.

"The case involves key executives with embezzlement and malpractice allegations."

The prosecution has been tracking down suspicious capital flow between a policy coordination division of Lotte Group and its key units, including Hotel Lotte, Lotte Shopping and Lotte Home Shopping.

Investigators believe that executives had created secret funds by inflating supply prices from their subcontractors. They are reportedly looking into possibilities of the slush funds flowing into Lotte owner families and also to the unlisted companies in Japan that control the group's Korea operations through opaque cross shareholding structure.

Calling it an outflow of national wealth, the prosecution is likely to conduct an intensive probe into the connection between Hotel Lotte and companies in Japan that collectively owns 99 per cent of shares in the group's hotel unit, according to industry sources and reports.

For the last five years, Hotel Lotte paid cash dividends totaling 121.3 billion won (S$140.8 million). According to the ownership structure, 99 per cent of money could have gone to companies in Japan, including Lotte Holdings and Kojunsha, the apex of the retail giant's entire governance, a local daily DongA Ilbo reported.

Those Lotte units in Japan are unlisted companies that are not obligated for publicizing any activities or ownership structures according to the Japanese law.

Some critics raised speculation that the investigation by the Korean prosecution is intended to bring Lotte's shady governance structure to surface and see if any illegal activities were involved.

The prosecution is also reportedly investigating into suspicions that Lotte offered kickbacks to politicians close to the Lee Myung Bak administration in exchange for business favors.

The Lee government approved Lotte's controversial skyscraper project in Jamsil, southern Seoul, despite lingering safety concerns over flights, including the presidential jet, heading to Seongnam Air Base nearby.

The military had disapproved the plan for years. But Lotte won approval from the Lee government on condition of shifting one of the air base's runway by 3 degrees. Speculation has remained that Lotte may have lobbied high-ranking officials in the military, presidential office and political circles close to the then president to get the greenlight.

Some have speculated as to the political motives behind the investigation, saying it might target aides of the former president.