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[NEWS IN FOCUS] BioLogics scandal threatens entire group

Suspicious accounting leads prosecutors up chain of command

May 10,2019
The Samsung BioLogics accounting scandal threatens to engulf other Samsung companies and drag the entire group, and some of its top executives, into the fray.

Escalation of what has been a serious but relatively contained case of alleged fraud comes after raids located stashes of information hidden under the floor of a factory and testimony claiming that the destruction of evidence was ordered at the highest levels.

Civic groups and some lawmakers have long contended that the questionable accounting maneuvers were aimed at increasing Samsung Electronics Vice Chairman Lee Jae-yong’s control over the Samsung Group. They believe Samsung BioLogics was instrumental in a group-wide restructuring to help clear the succession path for Lee through its ownership structure.

Samsung BioLogics is 75 percent owned by Samsung Electronics and Samsung C&T, which sits at the top of the Samsung Group’s organizational chart. Lee is the largest shareholder of Samsung C&T, with a 17 percent stake. In May 2018, the Fair Trade Commission (FTC) designated Lee as the person responsible for exercising management rights over Samsung companies.

Prosecutors requested arrest warrants for two Samsung Electronics executives Wednesday for ordering Samsung BioLogics employees to hide servers with data detailing the accounting being scrutinized by the regulators. The court is scheduled to rule on the warrants Friday.

Also on Wednesday, the court arrested a Samsung BioLogics employee in charge of security, surnamed Ahn, on the charge of concealing accounting data and a server under the floor of the pharmaceutical affiliate’s factory in Songdo, Incheon. Prosecutors secured dozens of laptops and a network server when they raided the factory and ripped up its floors Tuesday.

“Most of the criminal charges are confirmed,” Judge Myung Jae-kwon said of Ahn. “There is a chance that the suspect may destroy evidence.”

Since November last year, investigators have been following up on the Financial Services Commission’s (FSC) ruling that Samsung BioLogics intentionally violated accounting rules to inflate the value of its Samsung Bioepis subsidiary ahead of the initial public offering in 2016 of Samsung BioLogics.

Loss-making Samsung BioLogics suddenly reported profits in 2015 after changing the calculation method in determining the value of Samsung Bioepis, a joint venture with Cambridge, Massachusetts-based Biogen.

Samsung BioLogics soon challenged the ruling by filing an administrative lawsuit against the regulator. The biopharmaceutical arm of Samsung Group has claimed that its changes of accounting methods are in line with international accounting standards.

Since the launch of the probe, the prosecution raided the Samsung BioLogics headquarters in December 2018 and Korea’s main stock exchange in March this year. The court put two Samsung BioLogics executives under arrest in late April on charges of destroying evidence in relation to the allegations of accounting fraud.

Investigators suspect that the Samsung Group as a whole was involved in the accounting scandal, as members of a Samsung Electronics business support task force seem to also have taken part in destroying relevant evidence. They requested arrest warrants Wednesday for the two executives, surnamed Baek and Seo, on charges of making orders to destroy evidence at Samsung Bioepis.

The task force was assembled in November 2017 to serve as the center of control for the Samsung Group amid the arrest of Vice Chairman Lee and the dismantling of the Samsung Electronics’ Future Strategy Office. Lee was convicted of bribery in a scandal that resulted in the impeachment and imprisonment of former Korean President Park Geun-hye.

Sources speculate that the alleged accounting fraud is connected to Lee’s bribe to Park while she was in office.

The two task force members who might be arrested are suspected of physically going to Samsung Bioepis with Samsung SDS employees last summer and ordering the deletion of accounting information on employee laptops and cell phones even before investigation into the matter started. Officials said prosecution had already called in the two executives for questioning several times before the arrest warrants for them were requested.

Samsung SDS is a Samsung Group affiliate that specializes in providing software solutions and information technology services.

The prosecution reportedly secured testimony from Samsung SDS employees that they were brought in to install programs that permanently deleted accounting information on electronic devices of Bioepis employees.


BY KO JUN-TAE, JEONG JIN-HO [ko.juntae@joongang.co.kr]


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