Fifteen more Lotte affiliates raided over alleged embezzlement

Janice Hong, June 14, 2016, 10:17 a.m.

Seoul prosecutors executed a second round of raids on several key affiliates of South Korean retail giant Lotte Group on Tuesday in a widening probe into the country’s fifth-largest conglomerate over alleged embezzlement and slush fund creation. The Seoul Central District Prosecutor’s Office said it raided 15 offices, including Lotte Chemical, Lotte Confectionery, Lotte Chilsung Beverage and Lotte Engineering & Construction, an unlisted company. 

“The search-and-seizures are aimed at examining potential cases of embezzlement and breach of duty during asset transfers and real estate transactions carried out between Lotte’s affiliates,” the prosecution said in a statement.

The new set of raids came only four days after some 240 investigators raided 17 Lotte offices last Friday, including its headquarters in central Seoul and the residence of Lotte Group chairman Shin Dong-bin, Lotte founder Shin Kyuk-ho and key executives.

The Friday raids had also targeted Hotel Lotte, the de facto holding company of Lotte’s operations in Korea, which had indefinitely postponed its plans to pursue an initial public offering valued at up to 5.2 trillion won ($4.4 billion).

From documents confiscated from Lotte’s top management and main operations, prosecutors said they have found evidence of suspicious capital flow at key affiliates such as Lotte Chemical and Lotte E&C, as well as potential slush fund creation during a merger of two Lotte resort operators in Korea.

On Monday, the prosecution also said it had secured testimony from key financial managers within the group that the Lotte founder and his son had collected more than 30 billion won annually from companies affiliated with Lotte Group -- suspected to have been used to create a slush fund.

Based on the seized evidence, prosecutors are now examining whether Lotte Chemical embezzled funds in the process of importing base materials from overseas vendors using paper companies in Hong Kong and Lotte’s Japanese affiliates.

Lotte Chemical, a major part of the group’s businesses alongside retail, withdrew its bid to acquire U.S. chemical-maker Axiall Corp. last Friday after the probes began, with its stock price falling daily as the investigation continues.

The prosecution is also examining whether Hotel Lotte claimed any illegal profits by manipulating real estate value when acquiring Lotte Jeju Resort and Lotte Booyeo Resort through a merger in August 2013. Lotte is alleged to have created a slush fund with the gains in question.

According to local reports, investigators have also seized evidence that group chairman Shin Dong-bin engaged in large-scale embezzlement while aggressively expanding Lotte Shopping’s Chinese operations, which reportedly led to some 3 trillion won in losses.

Local daily Hankyoreh reported Monday that Lotte may have embezzled funds while acquiring China-based supermarket chain TIMES in 2009 and TV home shopping channel Lucky Pie in 2010 at above-market prices.

Among other cases, prosecutors are further zeroing in on bribery allegations involving Lotte Corp., the company in charge of constructing the landmark 123-story Lotte World Tower and Lotte World Mall in Jamsil, southeastern Seoul. 

The supertall skyscraper and mall complex together stand at the center of Lotte’s 3.8 trillion won project envisioned by Lotte founder Shin Kyuk-ho to build an unparalleled legacy for the company in Korea. 

Lotte Corp. is also under suspicions of lobbying government officials from the former President Lee Myung-bak administration as well as transferring bribes to the South Korea Air Force via a retired Air Force brigadier general. 

For decades, the government and Air Force had opposed the tower’s construction given aircrafts taking off and landing at the neighboring Seoul Air Base in Seongnam, Gyeonggi Province, could collide with the tower.

During the Lee administration in 2009, the project was approved on conditions that Lotte pay for the reconstruction of the airport’s runway, prompting controversy over potential kickbacks involved in the approval process.

The ongoing investigation has taken a major toll on Lotte’s business projects for the year. In addition to the delayed hotel unit IPO and the canceled bid for Axiall Corp., Lotte’s chances of winning back a crucial government license to continue operating its second-largest duty-free outlet in Seoul appear to be slim as well, according to industry sources.

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