Chasing paper

“Look at it from the Darwinian perspective. Anger is to make you effective. That’s its survival function. That’s why it’s given to you. If it makes you ineffective, drop it like a hot potato,” one of the main characters in American writer Philip Roth’s Cold War era novel “I Married a Communist,” tells his daughter. He is explaining that being angry is not the important thing, but being angry about the right thing is. Indeed, if mankind had not raged over the “right things,” human civilization could not have evolved in a positive and progressive way.

This advice on anger occurs to me every time I read the news about tax cheating and other illegalities by business tycoons. Owners and chairmen of well-known business conglomerates like Hanwha, Taekwang, Orion, and SK have had their days in court on charges of embezzlement. A handful of second or third generation owners or chief executives of family-run chaebol were also pronounced guilty of stock manipulation.

The recent tax probe of CJ Group and public release of lists of Korean business tycoon names suspected of hiding fortunes in offshore tax havens by a local faction of the International Consortium of Investigative Journalists are also part of the dark and immoral greedy side of the capitalist ethos and the world of the rich. CJ and the people on the leaked lists are under investigation by the government for setting up offshore shell or paper companies to set aside and run vast slush funds.

As the words “shell” and “paper” suggest, these companies existed only on the books without any physical presence or genuine business activity. “A shell company is an entity that exists in name as a vehicle for another company’s business operation. It is itself not illegal. But what causes problems is its funding. It can be used for trade but also for money-laundering, tax evasion, and other illegal activities,” explains Choi Seung-pil, professor at Hankuk University of Foreign Studies Law School.

The companies also can serve to secretly funnel corporate funds into personal accounts of individuals - mostly the business’s owner or his family members. It sounds like a magic wand but how it works is quite simple. One can create and register a limited liability company in tax havens like the British Virgin Islands and have an address there. In Tortola, the largest part of the archipelago of the Virgin Islands, each building has mailboxes used by global offshore companies created largely as tax havens. South Korean business conglomerates have caught up with the popular fashion of the world’s richest to safely tuck away their wealth.

But the magic will come to an end if and when our local tax authorities and prosecutors discover any illegality involved in the offshore operations. Blind greed may have led them to create shell companies. If they thought they could create their own safe haven through shell companies, they may have to come to a rude awakening and pay the price. Those who are secretly relieved to discover their names were not included on the lists should not be entirely at ease. The entire business sector should draw a lesson. On what grounds can they resist the political call for greater economic justice and fairness through tougher regulations on large companies?

Questions arise. How could a public company and a household brand like CJ get away with unsavory business practices of running extra-corporate operations to fatten its owner and his family for so long? Why didn’t financial authorities catch traces of the slush funds and stock manipulations before? Why didn’t the National Tax Service take further criminal action against the group after discovering traces of slush funds in 2008? Why did the prosecutors turn a blind eye when they had the chance to investigate CJ back in 2008 and 2009?

Around the same time in 2008, Germany launched a series of raids and investigations of hundreds of super-rich Germans on suspicions that they held accounts with Liechtenstein-based trusts to evade taxes in Germany. When federal authorities came under attack for paying 4.2 million euros ($5.45 million) to an informant for data, a spokesman for the Federal Ministry of Finance claimed it was effective investment. The U.S. government also pressured the Swiss banks to hand over secret accounts of 285 American citizens suspected of hiding assets to evade taxes.

One prosecutor said while other governments aggressively conducted campaigns to crack down on secretive and deceptive offshore finances, our local authorities idly sat back and watched. All its talk about uncovering the underground economy could end up as no more than rhetoric if authorities do not follow through, he said.

The legislature has been equally negligent. Despite reports of offshore tax evasion, the National Assembly has done little to rein in such activities. The U.S. and other countries for instance added special articles to include some stakes in offshore assets as income in order to prevent tax evasion through overseas outlets.

In one letter, a CJ employee who ran offshore funds for the company, wrote to CJ Group Chairman Lee Jay-hyun pledging his absolute loyalty because the chairman was his king and CJ his country. Was that because he thought this country, without a strict supervisory system and authority, exists only in name? Imagine the anger building up in the hearts of the people who have been faithfully paying taxes to such a country. What, they may ask, has the country been doing with their money?

*The author is an editorial writer of the JoongAng Ilbo.

by Kwon Suk-chun