South Korea’s Lotte Cinema has been dragged into a widening bribery probe against its parent company, with allegations that its concessions business has been used for slush funds. Several divisions of the Korean family-owned chaebol, which operates everything from chemicals and beer to cinemas and hospitality business, have been raided in the past week. The scrutiny by over 200 prosecutors and investigators led the Lotte Group to scrap a USD $4.5 billion IPO of its hotel business and cancel a planned acquisition of US chemical company Axiall.
Investigations centre on accusations that Lotte embezzled money, used slush funds and illegally lobbied Korean government officials in order to win approval for the construction of the 123-storey Lotte World Tower in Seoul, which amongst other things houses the 21-auditorium Lotte Cinema World Tower that claims to be the largest multiplex in Asia and housing the largest permanent screen, measuring 34 by 13.8 meters. It is home to the country’s largest 4D theatre and five of the screens are Dolby Atmos, while all screens are equipped with Christie Solaria projectors.
The corruption probe is examining money transfers of billions of Korean won’s from Lotte Shopping’s head office to four affiliated businesses: Lotte Department Store, Lotte Mart, Lotte Super, and Lotte Cinema. This money is later said to have been withdrawn as cash. Lotte Shopping was previously convicted for tax evasion and fined KRW 60 billion (USD $51 million) in 2013. Other Korean companies have also been caught using employee’s personal bank accounts for slush funds.
In the case of Lotte Cinemas prosecutors allege that Lotte Cinema claimed KRW 569 billion (USD $480 million) in revenue in 2014, with an operating profit of KRW 57 billion (USD $50 million), with sales an profits ‘skyrocketing’ after Lotte Cinema took over the rights of concession sales form Lotte Shopping. The previous year the profit was just KRW 25 billion (USD $20 million), meaning that it more than doubled year-on-year.
As Lotte Cinema is part of the larger Lotte Group is has only released very limited financial information. As a “small company” in the group, much of the financial performance gets filed under “other”, meaning that there is a lack of transparency and accountability. Lotte Cinema’s larger rival CJ CGV recorded a 2014 revenue of KRW 1.0392 trillion (USD $880 million) but smaller profit than Lotte Cinemas.
Complicating the matter is the complex holding structure of the Lotte Group by members of the Shin family, cross ownership transfers and internal feuds over control over Korea’s fifth biggest conglomerate. As outlined by YonHap News:
Cinema shareholders are 7.6% belonging to Hyeseon, the daughter of Mr. Hyeseon, while the new Chairman and a new president holds a stake of 28.3%, and the second daughter of Samnyeo Seonyun, Mr. Jeongan 5.7%. Cinema Food also has a new Chairman whose stakes are 33.1% and 8.9% respectively for Mr. Hyeseon, Seonyun Jeongan, while Mr. Jae-young and his son have a 6.6% stake each.
The combined share of other relatives, including his brother and nephew of President Shin Shin Kyuk-ho, oversees the family stake in these companies and amounted to about 90%.
In addition it is claimed that Lotte Shopping offered unfair support for affiliated companies by renting out real estate space to cinemas below market rates, for which it was fined in 2007. The latest crisis “can be viewed as a problem of governance and lack of transparency at Lotte Group,” Kim Ho Joon, director of the governance research department at Daishin Securities Co. in Seoul, is quoted as saying.
The problems are Lotte are, however, no reason for rival CJ CGV to celebrate. Last year CJ Group chairman Lee Jay-hyun was sentenced to four years in prison for embezzlement and tax evasion. The court found him guilty of misappropriating KRW 165.7 billion (USD $156 million) worth of company assets to various offshore slush funds as well as tax evasion. CJ Global Holding’s VP Shin Dong-ki was also sentenced to three years in prison for aiding Lee’s crime, as were also other senior figures.
It would seems that when it comes to Korean cinema operators, slush funds are more common than slushies.
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