A $365-million loan swindle allegedly perpetrated by a distant relative of South Korean President Chun Doo Hwan has touched off financial turmoil in Seoul and embarrassed Chun's government.
Although Chun has ordered investigators to pursue the case wherever it may lead, rumors of high-level political involvement have swept Seoul amid calls for key Cabinet ministers to step down.
Government prosecutors have charged a former member of South Korea's National Assembly and his wife with fraud in a moneylending scheme that they say netted the couple $365 million in promissory notes from half a dozen major companies as security against loans of $82 million.
The couple then allegedly converted the commercial paper--normally only held by lenders as collateral--into cash, in violation of accepted South Korean business practice.
The latest arrests came yesterday when the former presidents of two major South Korean banks were charged with accepting bribes in return for their complicity in the couple's alleged swindle. Four other bank officials and three private financial brokers also were arrested. The presidents had resigned their posts earlier in the week.
The scandal has driven two industrial companies to the verge of bankruptcy and sent the South Korean stock market into a serious slump. It has also been acutely discomfiting to the Chun government because of the South Korean leader's pledge to root out the corruption that is said to have flourished in political and business circles under his late predecessor, Park Chung Hee, assassinated in 1979.
Charged with fraud were former national assemblyman Lee Chul Hee and his wife, Chang Yong Ja. According to prosecutors, the couple began approaching money-hungry companies in February 1981, offering loans at favorable terms in return for notes in most cases valued at more than three times the amount of principal and interest.
Then, in violation of a longstanding, unwritten agreement between private creditors and debtors, the couple allegedly began unloading the notes on the market at a discount, thereby amassing a fortune that they in turn reinvested in real estate, stocks and other securities.
The couple's alleged scheme began to unravel when individuals to whom they sold the negotiable notes presented them to banks for payment. Two major companies, Kong Yung Construction and Ilshin Steel, were apparently unable to back up their obligations with the required funds, and the banks dishonored the notes.
Stock Exchange officials promptly ordered a halt to trading in the companies' plummeting stocks amid fears of a possible run on the market. Ilshin, one of the country's four leading steelmakers, has all but publicly declared bankruptcy, financial sources in Seoul said.
Kong Yung, which reportedly borrowed $23 million from Lee and his wife against promissory notes of $204 million, has been put under court-appointed management.
According to prosecutors, four other companies were also involved but less seriously affected.
The former presidents of two of South Korea's five city banks, Lim Jae Soo of Choheung Bank and Kong Duk Jong of the Commercial Bank of Korea, arrested yesterday for allegedly accepting bribes from Chang, have also been charged with improperly extending bank loans to Ilshin Steel and Kong Yung Construction despite the companies' financial problems.
The private loan market in Korea, which is known as the curb money market, has been--despite its less savory aspects--an accepted and important part of doing business in South Korea, where lower interest bank loans are often hard to get.
It remains unclear, however, what allowed Lee and his wife allegedly to demand exorbitant collateral backing from the companies. Although prosecutors say they have no evidence of a political connection, there is speculation in Seoul that the couple used purported links with politicians to cement their deals.
Chang, 38, now dubbed the "curb money queen" by the South Korean news media, is related to President Chun's wife by marriage. Lee, 59, a deputy director of the Korean Central Intelligence Agency in the mid-1970s, was appointed to the National Assembly by Park in 1979.
In South Korea, family ties, even tenuous ones, are often viewed as key stepping stones to wealth and influence. In an interim report, the Supreme Court prosecutors said of Chang, "She acted as if she was closely associated with Lee Kyu Kwang" in approaching potential borrowers.
Lee, Chang's brother-in-law and an uncle of South Korea's first lady, was appointed president of the government-run Korea Mining Promotion Corp. by President Chun in mid-1980. Taking moral responsibility for the scandal, Lee resigned his post last Wednesday, although prosecutors stressed that, according to their investigation, he had not knowingly helped the couple. Lee has denied any involvement in the case.
Apparently unsatisfied with the prosecutors' interim report, the National Assembly has initiated special hearings. Politicians from both the government's Democratic Justice Party and opposition parties have called for Finance Minister Rha Woong Bae and Kim Joon Sung, deputy prime minister and economic planning minister, to accept responsibility for the scandal and resign.