Ethical Performance
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South Korea’s POSCO investigated for slush funds

April 2015

What started out as a probe into a suspected slush fund held by the construction subsidiary of POSCO Corp., South Korea’s largest steelmaker, has expanded to include an investigation of large loss-making investments, and the company’s role in massive overseas governmental projects undertaken by Lee Myung Bak, Korea’s president 2008-13.

On 13 March, prosecutors raided POSCO Engineering & Construction Co. as they launched a probe into allegations that the company created overseas slush funds by exaggerating the amount of money needed to pay subcontractors in Vietnam.

POSCO said it had already detected such a fund worth KRW 10bn during its own inspections earlier and had taken disciplinary action against those involved, saying the money was used as kickbacks to contractors in Vietnam.

However, the prosecutors are looking into the possibility that the Vietnamese fund was much larger than stated, and that the group was systematically involved in creating such funds of which part was transferred to South Korea - allegations which POSCO denies.

There is speculation that the probe may expand to corruption allegations across the group.

The National Tax Service filed a complaint with the prosecutors last year alleging POSCO inflated the value of transactions among group affiliates.

Investigators are also examining a series of M&A transactions from 2009 to 2014. In at least some of these deals, POSCO massively overpaid to acquire poorly performing companies.

According to, a website that tracks Korean conglomerates, POSCO spent over KRW 7 trillion on 11 M&A’s during the five-year period.

For example, the acquisition of a 60% stake in Daewoo International, South Korea’s largest trading company, cost the steelmaker KRW 3.4 trillion. Market analysts say the price paid was about KRW 1 trillion higher than the stake’s face value.
In addition to the 11 major acquisitions tracked by, there were about 30 additional acquisitions for which details have not become available.

During the five year period. POSCO’s operating profit ratio plunged from 17% to 5%, while its debt ballooned from KRW 9 trillion to KRW 14 trillion.

POSCO is suspected of playing a role in the so-called “resource diplomacy” projects of the Lee Myung Bak government in which massive investments were made to secure oil and mineral resources overseas.

These too are under investigation and, according to media reports, it is not clear how much was spent or what resources have actually been secured.  

Asia | Corruption

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