Prosecution raids, an ever-expanding accounting scandal, a governance downgrade and the upcoming retrial of its de facto leader are all converging into a tsunami of risk towering over South Korean electronics colossus Samsung.

On Monday, prosecutors raided offices of a key affiliate as the ripples from a Samsung accounting scandal continue to spread and the group’s third-generation heir, Lee Jae-yong, faces a retrial in a monumental corruption case that saw a president toppled and that could see him put back in jail.

Amid these various woes, Samsung fell to 52nd place in terms of its global reputation, according to the 2019 Global RepTrack report released by the Reputation Institute, which ranks 100 global companies. The year prior, it had been in the 26th spot, making Samsung a “fast faller,” according to the institute. The tech industry as a whole “has an ethics problem … and has failed to build assurance,” the report noted.

Meanwhile, on the commercial front, the giant group battles the headwinds of an ongoing cyclical downturn in its key business area, semiconductors, as well as the fallout from a Seoul-Tokyo political battle which is compressing its supply chain of key Japanese components.

Viewed through most prisms, these might appear to be a fearsome convergence of commercial perils and legal risks. Yet in South Korea, both market watchers and civic activists expect Lee to ride out the hurricane.

The mother of all scandals

On Monday, prosecutors raided the offices of key affiliate Samsung C&T Corporation and the National Pension Service as justices continue to probe alleged accounting fraud at Samsung BioLogics.

Samsung BioLogics was formerly a unit of Cheil Industries and there are suspicions that Biologics fraudulently inflated its value by approximately 4.5 trillion won (US$3.9 billion) to artificially raise the then-value of Cheil ahead of a controversial merger with Samsung C&T.

Monday’s raids were just the very latest development in a case initiated last November, when Korea’s Securities & Futures Commission requested the prosecution investigate Samsung BioLogics.

And Samsung’s biopharmaceutical arm is only one cog in a vaster machine of alleged corruption. The related can’t-make-it-up story is emblematic of a corporate-government nexus that has plagued South Korea’s commerce, politics and society in the decades since it industrialized in the 1960s.

At the heart of this nexus are the chaebol – the family-run conglomerates that fire Korea’s economic engine. Among them, Samsung is the undisputed leader.

The third-generation leader of Samsung is Vice-Chairman Lee Jae-yong. His father, Chairman Lee Kun-hee, has been in a coma, from which he is not expected to recover, since 2014. It is the junior Lee’s alleged attempts to cement his managerial control over the sprawling business group that has generated seismic cracks across Korea Inc’s business and political landscapes.

Questionable merger

In 2015, the National Pension Service cast a deciding vote that enabled the merger of Samsung affiliate Cheil Industries into another Samsung affiliate, Samsung C&T. The NPS decision shocked many – most notably, US activist hedge fund Elliot Asset Management – as the merger was seen as disadvantageous to Samsung C&T.

Due to the two affiliates’ place in the fiendishly complex net of cross-shareholdings that is Samsung, the merger was seen as consolidating Lee’s managerial control of the overall group: Lee held the leading stake in Cheil, at 23.2%.

Allegations subsequently surfaced that Lee had bribed then-President Park Geun-hye, via her notorious crony, Choi Soon-shil, with money for sportive foundations run by Choi and the gift of dressage horses for the president’s equestrian daughter. The aim was to compel the NPS to look favorably upon the merger.

These allegations, combined with abuse-of-power charges and Park’s woefully low popularity, coalesced into a swirl of mass protests that eventuated in her impeachment and overthrow in 2017.

Officials connected with the NPS were subsequently jailed, as were Park, for 33 years in toto, and Choi, for 20 years. Lee was sentenced to five years, but walked free after less than one year behind bars with a two-and-a-half-year suspended sentence in what some considered typically privileged judicial treatment of corporate royalty.

Now, these high-profile cases are all now back in legal play.

On August 29, in the culmination of a series of appeals, South Korea’s Supreme Court kicked the cases – and the weighty responsibilities for the retrial of the century – back down to Seoul High Court for retrial.

Meanwhile Elliot, which had opposed the 2015 merger, revealed in May that it is seeking damages of $718 million from the South Korean government.

That puts Seoul in a ticklish bind. While the current Moon administration has slammed the Park administration for its corruption, and overseen the trials which found her and NPS officials guilty, it reportedly opposes the settlement Elliot seeks.

What happens at the retrial?

A Samsung representative told Asia Times that the group had no comment on the various issues.

No date has been set for Lee’s retrial. Roh Jong-hwa, an attorney and an executive committee member of the People’s Solidarity for Participatory Democracy, or PSPD, a high-profile civic group that has campaigned against white-collar crime, told foreign reporters on Monday that he expected nothing to start until February.

Government departments, including the judiciary, shuffle their personnel in February, Roh explained. He expected Samsung lawyers to delay the retrial date until then, in the hope that more amenable justices are installed.

Roh guessed that the retrial would not be particularly lengthy, as all evidence of state-affairs manipulation, transfer of managerial control and bribery was “clearly confirmed” by the Supreme Court.

Historically, Korea’s judiciary has treated chaebol heads with kid gloves, for fear that their jailing could damage economic growth. Given that first-generation Samsung head Lee Byung-chul and second-generation leader Lee Keun-hee both escaped serious legal entanglements, the chances of the third-generation head dong serious time look slim.

Still, Roh noted that it would be tricky for Lee’s lawyers to paint him as a victim of the politically powerful. “He was seen as a victim of [President] Park, but the Supreme Court confirmed the unfair relationship between them in the process of transition of managerial control,” the attorney and activist said.

Regardless, Roh conceded that Lee might possibly escape with another suspended sentence.

How serious for Samsung?

Maneuvers by business royalty that disadvantage shareholders in order to assert family control are hardly unusual in Korean corporates.

“This is is par for the course for Samsung,” Hank Morris, a longtime Seoul market watcher who advises Erudite Risk, told Asia Times. “You are not dealing with a corporate group that operates in a clear manner. The managerial practices have always been opaque and that is not likely to change any time soon.”

PSPD members were downbeat about the Moon Jae-in administration’s attempts to upgrade chaebol governance. As proved the case with previous governments, fear of rocking the corporate apple cart appears to have manifested itself.

Seoul suffers from “insufficient internal capacity and confidence – they worry about the after-effects,” said Lee Sang-hoon, an attorney with PSPD. “The current administration is so cautious about taking bold action and they worry about [the pushback] of government officials.”

And if Lee is jailed, it is hardly likely to paralyze Samsung’s operations.

“Management continues on a very routine basis even when the group chief is in the slammer,” Morris said, citing cases of jailed chaebol chairmen holding executive meetings behind bars.

Chaebol supporters “… make it sound like it is an enormous hindrance to decision-making in the groups, but that is just a ploy to get judges to go easy on the chaebol chieftains and to spring him from the slammer.”

Contrarily – given Lee’s prior record in business – his removal from daily management might actually be to the advantage of Samsung.

Kim Kyung-yul, a chartered public accountant who chairs the PSPD’s Center for Economic and Financial Justice, recalled Lee’s first managerial experience as the head of E-Samsung, a venture incubator in 1998.

“He could not make any positive performance,” Kim recalled diplomatically. In fact, the firm went bust.

During Lee’s tenure as “Chief Relationship Officer,” Samsung suffered a disastrous breach with Apple’s Steve Jobs. Apple sued Samsung in a US court for $800 million for allegedly copying the iPhone.

Moreover, Kim noted that one of Lee’s key moves in the latest power transition involved Samsung BioLogics – the affiliate now beset by an accounting scandal. “I am cynical about his managerial capacity,” Kim said. “He cannot guarantee the future or vision of Samsung.”

That may well be true. Though Samsung is family-controlled, it boasts highly professional managers, and during Lee’s tenure behind bars, the group’s stock price rose.