Chaebol owners have long sought to transfer their wealth to their children without paying taxes. One way they have developed in recent years is to have their group affiliates place sweet deals on companies controlled by their children. It is a clever way to siphon-off corporate wealth to line the pockets of chaebol siblings.
According to a report released by the Economic Reform Research Institute, 190 family members of the owners of 29 top business groups expanded their wealth by about 10 trillion won through this expedient method. The report said the chaebol siblings earned a return of some 755 percent on the 1.3 trillion won they invested in their companies.
But the days in which tycoons can rely on this practice appear to be numbered. The government and the ruling Grand National Party have agreed to impose inheritance and gift taxes on the wealth transferred through dubious related-party transactions. The government will revise tax laws in August for implementation starting next year.
In a related move, the Fair Trade Commission will inspect the companies set up by chaebol siblings for group-wide procurement of maintenance, repair and operation (MRO) supplies. Recently these companies drew fire for forcing subcontractors of group affiliates to purchase MRO supplies from them instead of small and medium-sized companies.
The practice of chaebol affiliates helping the children of their owners to amass a fortune through exclusive deals not only deepens the concentration of wealth in the hands of chaebol families but goes against the principles of fair competition.
Furthermore, it impedes the development of important industrial sectors such as software. Many business groups operate system integration firms that take care of the group-wide computer systems. The main rationale for this practice is that if you outsource maintenance of your computer systems, you put corporate confidential data at risk.
But many global companies leave maintenance of their computer systems to independent contractors, contributing to the emergence of big SI companies such as IBM, Oracle, HP and Accenture. Compared with these firms, Korean SI firms are like frogs in the well.
By monopolizing intra-group deals, they give little room for independent software companies to grow. This is one reason the Korean software industry remains underdeveloped. The same can be said of other industrial sectors such as logistics and distribution.
It is time for chaebol families to practice moderation and teach their children how to make money in an honest way. If they keep enriching themselves in unethical ways, they can never command respect from the general public.