Citibank union attacks fees sent out of Korea

A conflict between labor and management at Citibank Korea, sparked by the bank’s decision to shutter about a third of its branches, is spiraling into a bigger war.

The labor union of U.S.-based Citibank’s Seoul subsidiary is arguing that CEO Ha Yung-ku, who is in his 15th year in the job - unprecedented in the financial industry - has contributed to the “leakage of state capital” by remitting more and more service fees to overseas offices of Citibank and its New York headquarters. It called the fee-paying a form of tax evasion.

According to data provided by the union, overseas outsourcing service payments, including management advisory fees, by the bank’s Korea subsidiary have been increasing recently regardless of the profitability of the Korean unit.

In 2012, about 91 percent of the subsidiary’s net profit was transferred overseas, the union said, including both service fees and dividends.

From 2005 through 2013, the company spent a total of 1.22 trillion won ($1.19 billion) in service fees. About 62 percent of the total, or 774.1 billion won, was sent abroad, it said.

“Such excessive service fee payments are a disguised form of state capital outflow,” said Cho Seong-gil, a director of the union. “The National Tax Service has not accepted about 60 billion won of the overseas payment, and it is currently a pending issue internationally.

“Sending a significant portion of net profits under the name of service fees to overseas offices helps the company pay less in corporate taxes, which can be an act of tax evasion,” Cho added.

Some of the fees are being sent to the U.S. headquarters as dividends in order to avoid taxes on dividends, the union member said.

According to tax lawyers, the Korean tax authority imposes a 10 percent tax rate on dividends that are less than 25 percent of a foreign company’s total net profit, and 15 percent on those over 25 percent.

The bank has not been disclosing details of the fees despite the labor union’s demands, saying there is no legal requirement to do so.

“Most global businesses pay such service fees, especially the advisory fees, and Korean law allows doing so,” a Citibank executive said. The Korea unit receives advice from the bank’s Asia Region Office and often from the U.S. headquarters, he said.

On April 11, the union requested the Financial Supervisory Service investigate the transfers of overseas service fees and unfair sales practices of the bank, including the legitimacy of its closing of many branches.

The financial watchdog and the Bank of Korea embarked on a one-month inspection into the bank on Monday. Although the investigation is a regular one, the authorities are likely to conduct close monitoring into the bank’s salary system for executives, including CEO Ha, who reportedly receives 2.8 billion won a year on average.

What made the union angry was the bank’s latest decision to close about 56 of 190 branches across the nation, including some profitable ones.

“Reporters in Jeonju asked me where customers should go after the bank’s single Jeonju branch closes,” Cho said. “The branch made 3.5 billion won in total profit last year. Why should this profitable branch be shut down?”

According to an analysis by Credit Suisse, Korea is the fourth-largest contributor to the banking group’s revenue after the United States, Mexico and the United Kingdom. However, the bank said it is struggling to compete against Korean banks in the retail banking market, which led to an 8 percent fall in net profit last year.

The union is currently in the first stage of a strike, demanding the cancelation of the company’s branch shutdown plan, which is believed to lead to the laying off of as many as 650 employees.

The strike, the first over layoffs in the Korean financial industry, got fiercer this month after the Seoul Central District Court rejected in late April two injunction requests by the union demanding the branches not be shut down.

Kwak Sang-eon, a lawyer for the union, said he is preparing an appeal.

“The court said the shutdowns are no problem because none of the workers have been affected,” Kwak said.

“We’re appealing the decision since the shutdowns will lead to large layoffs of employees.”

Kwak is a son-in-law of late President Roh Moo-hyun.

Citibank Korea’s labor union and the Korean Financial Industry Union are planning to hold a strike together in June if management does not withdraw its branch-closure decision.

“Citi’s case may be the trigger for layoffs throughout the financial industry,” said Kim Young-hoon, leader of the Citibank union. “Other financial institutions that are suffering management difficulties are considering restructuring and layoffs, so we can’t back down.”

The union was more upset when it found out the bank’s law firm Kim & Chang had a secret consulting deal with the bank. According to documents later discovered, Citi would pay 500 million won to the law firm to help it lay off 650 employees.

According to Economist, a Korean weekly magazine, there was a contract written by Citibank Korea Vice President Jeol Conrich and the law firm, which was brought to the Seoul Central District Court in the case over the injunctions. Citibank’s management refused to comment on the contract.

“The ‘no comment’ itself means that they admit there was such a deal,” said a union member. “The deal also indicates that the latest shutdown is aimed at restructuring the work force.”

The bank’s union is planning a three-stage strike. In the first stage, they will refuse writing internal documents, stop sales-promotion activities and will not speak or write in English at work. In the second, union members will reject sales of new products. In the final stage, they will go on a partial walkout branch by branch.

“In the headquarters building, it is impossible to work without using English,” said a member. “In 2006, labor and management reached an agreement that all documents should be primarily written in Korean and then be written again in English only if the receivers of documents are foreigners, but this is not being followed at all.”

BY Song Su-hyun [ssh@joongang.co.kr]