More Property Fallout: Kwangju Regional Construction Group Foundering
by Brendon Carr
Another regional construction-based conglomerate is teetering on the edge. The JoongAng Ilbo’s English edition chalks it up to the traditional Korean cocktail of tax evasion and corporate embezzlement, but your Uncle B sees things a little differently.
The story starts off innocently enough, with a corporate chieftain accused of looking the other way while his team underpaid tax (it bears repeating the Representative Director bears criminal liabilities for the company), and having a little walking-around money duked his way when the company sold some property. In American parlance, pocketing some of the price is called “usurpation of a corporate opportunity”:
The Gwangju District Prosecutors’ Office sought a warrant yesterday to detain Huh Jae-ho, chairman of the Daeju Group, for evading 50.8 billion won ($55.4 million) in taxes and embezzling an additional 12.1 billion won.
The Daeju Group is a large business based in Gwangju, southwestern Korea, which runs 15 affiliates. They include shipbuilding, insurance, mutual banking and housing construction businesses, as well as a local newspaper and cable channel.
Huh, 65, is charged with directly or indirectly helping two of the group affiliates, Daeju Construction and Daeju Housing, evade both corporation taxes and surtaxes from 2005 to 2006, according to prosecutors.
“We found evidence that Huh was involved in the tax evasion process so we are asking him to take general responsibility because he is the head of the entire management team,” said a Gwangju prosecutor.
Huh insisted during the investigation that he never ordered his employees to evade taxes and did not intervene in any way, prosecutors said, though they said Huh told them he knew that tax evasions existed “habitually.”
The Seoul tax office asked prosecutors to investigate Daeju after they found billions of won unaccounted for during a two-month audit in June and August.
Huh is also charged with personally stealing 12.1 billion won that had been earmarked for the Daeju Corporation to invest. That money is part of what a Busan apartment developer paid to Daeju Construction for redeveloping a 396,000 square-meter (98 acre) apartment complex in Yongho-dong, Busan, prosecutors said.
But what was really behind these moves? I think Roh Moo Hyun’s economic management helped do this company in. The company is teetering because of overdevelopment of property in the provinces, one of the planks of Roh’s “balanced regional development” mantra. It now cannot repay all the money borrowed for that development.
I won’t cry for the loss of another greedy chairman, but it seems that Daeju has contracted-for apartments for 10,000 families in the pipeline—apartments that may or may not get finished if the company fails:
Daeju, which was founded in 1981, is also facing a growing problem from a lack of liquidity.
Aside from the president’s personal fraud, Daeju Construction is liable for W520 billion in debt from an apartment complex business in Mugeo-dong, Ulsan. It tried to survive by selling off the land to build a golf course. In addition, it sold its affiliate, Daehan Insurance, in September and obtained 1 trillion won to help with its liquidity.
If the company goes into bankruptcy, the worst possible scenario, critics said it would hurt at least 10,000 residents who have already purchased the apartments that Daeju Construction is developing.
The misery is still largely confined to the provinces, which carry 90% of the nation’s unsold apartment inventory, but last month saw a spike of more than 57% in the unsold inventory in Seoul [Korean-language source]. This is a worrisome development.
Mark my words: Korea is commencing a repeat of Japan’s deflation-led “Lost Decades”, where policymakers caused, then prolonged, an unprecedented period of economic hardship for the Japanese people. As for me, it’s not a big problem because I’m in a profession which thrives in such times—hello, bankruptcy practice—but for the rest of Korea this is not optimal.
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