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Samsung trial gets underway, with potentially sweeping results for Korea Inc

CNBC logo CNBC 9/03/2017 Nyshka Chandran
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On Thursday, South Korean courts begin their first hearing of a landmark case that could potentially reform corporate governance in a country known for collusive ties between politics and business.

Samsung Group (593-KR) de-facto head Jay Y. Lee is one of five executives from the tech giant standing trial — separately — for alleged involvement in a political scandal that threatens to impeach President Park Geun-hye.

48-year old Lee, who has been in custody since last month, is facing charges that include bribery and embezzlement for allegedly donating $37.2 million to foundations controlled by Choi Soon-sil, a confidante of the embattled President, in exchange for government approval of the 2016Samsung C&T and Cheil Industries merger.

The other four leaders — vice chairman Choi Gee-sung, CEO Kwon Oh-hyun, president Park Sang-jin and executive vice president Hwang Sung-soo — will undergo trial without detention, according to local news.

The nation's largest chaebol, or family-run enterprise, Samsung is now in the cross-hairs . Importantly, the verdict on Lee could influence future investigations on other C-suite leaders accused of crony capitalism, a well-documented issue in Asia's fourth-largest economy, thus making his case the most significant among the five.

Court proceedings are due to start at 2 p.m. local time in Seoul, and a final decision is expected by May. Because Thursday's event is a preliminary hearing, Lee isn't required to attend in person, but his team of 13 top lawyers will be present. The majority of Lee's counsel works for Bae, Kim & Lee, one the country's largest law firms known for their defense of other chaebol heads in criminal cases, according to Reuters.

If convicted, Lee could face up to two decades in prison, but Samsung has repeatedly claimed that all charges leveled against its executives are false.

The legal arguments

The case — dubbed "the trial of the century" by local media — has two key issues, according to Troy Stangarone, senior director of congressional affairs and trade at the Korea Economic Institute.

First, state prosecutors will be trying to show Lee bribed the government to allow for last year's merger, he said. "One of the key potential pieces of evidence will be the notes of (Samsung Electronics President) Park Sang-jin. He had taken notes of his meeting with Choi and the prosecution appears to have those notes."

The prosecution will also attempt to link Samsung's alleged bribes to South Korean President Park. Named as an accomplice to Choi, Park remains immune from prosecution while still in office. On Friday, a panel of judges will decide whether to approve or reject parliament's motion to impeach her.

Samsung meanwhile will strive to prove that it was extorted by the government to make contributions to the entities overlooked by Choi, Stangarone continued.

"How Park Sang-jin's notes are worded and what they might lead to will indicate whether this was a case of bribery or an issue of extortion."

Implications

The case is widely expected to lead to tougher moves against big business in the country.

A majority of the major chaebols have faced corruption cases in the past, including SK Group chief Chey Tae-won and former Hanwha Group boss Kim Seung-youn, both of whom were sentenced to prison for embezzlement. Diverting contracts to favored partners or seeking government licenses to enter into duty free business are examples of other typical scandals.

"If Samsung's Lee is convicted and receives more than a suspended sentence, it would be a significant step in demonstrating that the court system has evolved to the point where it can prosecute white collar crime cases against chaebol heirs," Stangarone said.

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