Tax evasion is a curseWe have heard shocking reports about the sleaziness of business tycoons over the last couple of days. A nonprofit Internet media site called Newstapa claimed that a total of 245 Koreans, including executives in the country’s major conglomerates, have shell companies in tax havens like the Virgin Islands. The list includes names like Lee Soo-young, chairman of OCI, a leading polysilicon manufacturer, and his wife; the wife of Cho Choong-kun, former vice-chairman of Korean Air; and Cho Wuk-rai, chairman of DSDL and younger brother of Cho Suck-rai, Hyosung Group chairman.
Separately, prosecutors have begun a search for evidence of suspicions of CJ Group illegally running big slush funds overseas to help CJ Group Chairman Lee Jay-hyun bequeath wealth to his heirs and avoid estate taxes. Of course, it’s too early to jump to conclusions. The investigation of CJ is still in the early stage and creating shell companies in overseas tax havens is not illegal. But if the suspicions are proven true, the social ramifications will be tremendous.
Tax havens are used mainly to hide assets and money. Initially favored by people involved in underground activities, such as drug dealers and gamblers, they now serve businessmen and companies as ways of diverting funds and avoiding taxes.
In one of the biggest information leaks in history, more than two million documents naming individuals and details of their fishy financial dealings through offshore accounts were released by the U.S.-based International Consortium of Investigative Journalists. The Newstapa leak is also part of the “tax haven project” by the consortium. The government must investigate the individuals included on the list.
The investigation of CJ Group must be thorough and quick. If what prosecutors charge is true, the country’s largest food and entertainment conglomerate has broken the law. It allegedly used overseas outlets to run slush funds and launder money. CJ claims that the funds were used to purchase and operate assets overseas, which would be purely legal.
Rich Koreans have been taking their wealth elsewhere since the financial crisis in late 1990s. Illegal flight of assets surged to 273.7 billion won ($242.6 million) in 2011 from 16.6 billion won in 2007, according to the customs authority. The National Tax Service also announced that offshore tax evasion reached 825.8 billion won last year, compared to 150.3 billion won in 2008.
Capital flight can raise serious problems for an economy as it leads to reduced revenues for the government and - not a small matter - justifiable resentment of the rich. Business owners and large companies must be aware that only transparent corporate governance can sustain a healthy economy.