Hyundai Head Faces Arrest Over Slush Fund

Prosecutors in South Korea were last night poised to arrest the chairman of the country’s biggest carmaker over embezzlement allegations that have rocked public trust in Korea’s powerful family-run businesses.

Chung Mong-koo, who heads the Hyundai motor group, is suspected of embezzling about 100bn won (£60m) of his company’s money to operate a slush fund to seek favors from politicians and officials via two lobbyists.

The lobbyists were arrested on suspicion of receiving money from Hyundai in exchange for promising to help it win construction permits and business favors for struggling affiliates. It is unclear, however, whether any of the money found its way to politicians.

If convicted, Mr Chung faces a maximum sentence of life imprisonment. Prosecutors said they also planned to look into allegations surrounding his son, Chung Eui-sun, who is president of Kia Motors, a Hyundai subsidiary.

Mr Chung and his son have apologized publicly and promised to donate 1 trillion won in personal assets to charity. But the gesture failed to mollify prosecutors, who yesterday repeated their determination to take action. "We are determined to arrest Chung on charges that he made a 100bn won slush fund and caused 300bn won worth of damage to the company through breach of trust," a senior prosecutor, Chae Dong-wook, said.

The scandal is not the only case of financial irregularity involving Hyundai and the Chung family. Three years ago, Mr Chung’s younger brother, Chung Monghun, committed suicide by jumping from the 12th floor of Hyundai’s headquarters in Seoul after being implicated in a scandal involving secret cash payments to North Korea in return for the historic 2000 summit meeting.

The investigation threatens to frustrate the Hyundai group’s efforts to become the world’s sixth-biggest carmaker by the end of the decade. Hyundai and Kia are aiming to make half their output - more than 3m vehicles - overseas within the next five years. Together the firms account for nearly 10% of South Korea’s exports. The government attempted to play down the impact Hyundai’s troubles might have on the Korean economy, the fourth biggest in Asia.

"We think that it will inevitably have some impact on the economy, but it won’t be that huge," the finance minister, Han Duck-soo, said at a briefing. "It is regrettable that the Hyundai incident has happened. As the auto industry plays a great role in the local economy, I hope this doesn’t hurt it much."

But a Hyundai spokesman, Jake Chang, said the allegations had shaken the firm to its core. "Hyundai executives are all in a panic," he told Associated Press. "Chairman Chung’s absence is enormous and its ramifications are beyond description."

The case is not the first time South Korea’s family-run industrial conglomerates called chaebol - have been accused of attempting to buy political influence. In 1996 several influential business leaders, including the chairman of the Samsung electronics firm, were convicted of contributing millions of dollars to a slush fund belonging to the former South Korean president, Roh Tae-woo, who was later jailed for corruption. Mr Roh said he had used the fund, worth about £300m, to "help carry out state policies smoothly". He was released in 1998.

In 2004 the vice-chairman of the Hyundai group and a chief executive of Korean Air were given suspended sentences for raising illegal funds to support candidates in the 2002 presidential elections.

An aide to the winner, the current president, Roh Moo-hyun, was found to have received about £300,000 in illicit funds.

A local court is expected to decide today whether to issue an arrest warrant for Mr Chung, the eldest son of Chung Juyung, who started Hyundai in 1947.