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Key evidence found in CJ probe

The prosecution has secured a key piece of evidence to substantiate suspicion that CJ Group established an overseas holding company in order to avoid gift taxes at home.

According to prosecution sources, CJ Global Holdings, the conglomerate’s animal feed producer based in Hong Kong, was started to assist CJ Chairman Lee Jay-hyun transfer wealth to his two children. Lee used the conglomerate’s financial team to purchase certain kinds of bonds in a scheme to hand over his wealth to his children without paying taxes, the sources said.

Prosecutors have secured a document, allegedly the action plan for the wealth transfer, the sources said. The document, labeled “Bequeath plan to reinforce ownership structure,” was created by a financial affairs team of the CJ Group in 2005. It was seized by a special investigation unit of the Seoul Central District Prosecutors’ Office, and prosecutors are currently analyzing the evidence, according to sources.

The document outlines a long-term project to transfer ownership of the group to the chairman’s 28-year-old daughter and 23-year-old son.

The report pointed out the gift tax in Korea is as high as 50 percent and stressed that “the owner family’s stakes in the conglomerate will be diluted unless a special measure is created,” said the sources. The report identified Lee’s daughter and son by their initials, “KH” and “SH.”

One year after the report’s creation, the CJ Corporation announced a plan in March 2006 to establish a holding company that would oversee the animal feed business in Asia and list it on the Hong Kong stock market.

“If we go through Hong Kong, there are some tax disadvantages over making a direct investment from Korea to China, but we can also create an opportunity to maximize the assets increase of individuals [in this case Lee’s two children],” the sources said quoting the report.

The prosecutors believe that Chairman Lee used the group’s affiliate to facilitate the ownership transfer to his children.

It is not the first time that the prosecution investigated a conglomerate’s technique of issuing convertible bonds and bonds with subscription warrants at lower than market prices to assist the ownership transfer. The nation’s largest conglomerate, Samsung Group, was probed in 2003 on a similar charge, but the Supreme Court in 2009 eventually cleared the Samsung Chairman Lee Kun-hee of breach of trust charges.

The prosecution said CJ Group used a similar technique but with an overseas holding company instead of an affiliate in Korea. “Because the technique was used by Samsung and there was controversy in Korea, we will actively use it with an overseas business,” the CJ report said.

The prosecution believes that a 57-year-old former CJ Hong Kong branch head oversaw the entire portfolio of the family’s overseas assets and is grilling him.

The prosecution sources also told the JoongAng Ilbo that the CJ Group was suspected of making a total of 540 billion won ($481.7 million) worth of “abnormal” transactions between its headquarters in Korea and its overseas offices. They also said investigators are tracing the flows of money to verify their ties to the Lee family’s creation of overseas slush funds.

According to the prosecution, dozens of abnormal transactions, each worth from billions of won to tens of billions of won, took place between 2006 and now. While there are records of the transactions, many of them were not substantiated with actual proof to verify the deals, the prosecution sources said.

The information is based on financial records confiscated from CJ Group last week and data provided by the Financial Intelligence Unit. Some CJ’s financial executives were questioned over the weekend about the transactions, the sources said.

The prosecution has asked the anti-corruption authorities of Hong Kong and Singapore to cooperate with its CJ Group probe.

As the CJ Group scandal snowballed, ruling and opposition parties yesterday issued barrages of criticisms of the conglomerate.

“We can no longer tolerate a conglomerate owner’s abuse of the system and profiteering by giving special treatments to affiliates using legal loopholes,” Representative Choi Kyung-hwan, the new floor leader of the Saenuri Party, said during a party leadership meeting. “The prosecution should not engage in unreasonable conglomerate bashing, but it must conduct a stern and fast investigation to lay bare such irregularities as tax evasion.”

During a luncheon with journalists, Choi continued to criticize the CJ Group. “If they think the investigation and subsequent trials will be just a slap on the wrist like what happened to conglomerate owners in the past, they are mistaken,” Choi said.

The opposition Democratic Party issued a statement to condemn the irregularities of the conglomerates including CJ Group. Representative Lee Un-ju, spokeswoman of the party, said the conglomerate must cooperate with the prosecution’s probe into its various attempts to “increase and hide the assets of the owner family.”

By Shim Sae-rom, Ser Myo-ja [myoja@joongang.co.kr]