Shinsegae Group, the country’s second-largest retailer, declared Friday its founder and chairwoman Lee Myung-hee owned 380,000 company shares worth around 80 billion won ($69 million) under borrowed names and that she would convert them to her own name on the day. 

The problematic stocks were 258,449 shares of large discount store chain E-mart, 91,296 shares of Shinsegae and 29,938 shares of Shinsegae Food, which were technically owned by incumbent or former Shinsegae executives.

“They were kept under borrowed names because it was a common practice back 20-30 years ago as a means to protect the managerial rights. Now, there is no stock owned under borrowed names, not a single share,” a Shinsegae spokesman said. “The money is thought to be part of Lee Myung-hee’s father and Samsung Group founder Lee Byung-chull’s inheritance to his youngest daughter. It is nothing close to a slush fund creation,” he added.

The sudden, but also predicted, announcement was made after local tax authorities spotted the illegal practice during its tax investigation held throughout the summer. But the rumors of their existence has long lingered in the market. 

Zhin Woong-seob, head of the Financial Supervisory Services, said last month that he would seek to punish Shinsegae officials involved in the malpractice should the borrowed-name stocks be verified. Lawmakers also called for tougher regulation on the country’s 13th-largest business conglomerate. “And what Lee has done with the dividend throughout the years still remains to be investigated,” the Solidarity for Economic Reform stated.

With her named unveiled as the legal owner of these problematic company shares, Lee Myung-hee’s portion in Shinsegae rose to 18.22 percent from the previous 17.3 percent and 28.07 percent in E-mart from 27.14 percent.

But many suspect this is not all of it, and it is just a portion of many lucky cases that haven’t been caught for the company that started as Samsung’s retail arm and went independent in 1997.

In 2006, the company was imposed with a fine of 350 billion won for having 800 billion won of stocks hidden under borrowed names.

And business watchdogs suspect that Lee Myung-hee may have more borrowed-name stocks in order to secure her son Chung Yong-jin’s status at the 20-trillion-won business, given the fact that borrowing names is a widely held practice among the superrich to avoid gift taxes during inheritance.

Indeed, Chung, who serves as the vice chairman of Shinsegae and the de facto ruler of the company, could use the boost.   

The eldest son of Lee Myung-hee has been struggling to expand his business territory to duty-free sales. While his cousin and Samsung heiress Lee Boo-jin, CEO of Hotel Shilla, has been flourishing with the success of the Shilla Duty Free, Chung has seen less progress after leading the merger of Busan-based Paradise Group in 2012 in order to advance in the industry.

Apart from winning the Incheon International Airport duty-free zone bidding, the company has rarely showed off its presence. Shinsegae Duty Free is now competing to win the lucrative urban duty-free store bid, the winner of which will be announced on Saturday.

Now that the dirty laundry has been revealed, some business observers suggest that Lee will speed up the power transition inside the company to yield more power to the heir. “In order to offset this scandal, the inheritance may speed up in a very legitimate way from now,” a company insider was quoted as saying to a local daily. 

In fact, in 2007 Chung Yong-jin used 200 billion won worth of Shinsegae stocks to pay taxes when inheriting his father Chung Jae-eun’s wealth.

“Brought up with a more liberal upbringing, Chung is clever enough to know that he will never get the public’s approval if he is suspected of tax evasion. He will try to keep his regal image by abiding by the rules and his mother is expected to help, just like she did in 2007,” a company insider was quoted as saying to a local daily.

Shinsegae refused to discuss future power transition plans.

By Bae Ji-sook(baejisook@heraldcorp.com)



Shinsegae chairwoman Lee Myung-hee

Shinsegae vice chairman Chung Yong-jin