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Samsung internal turmoil after a series of senior executives arrested for accounting fraud

In the last week alone, many senior Samsung executives were in turn arrested for alleged accounting fraud. The incident caused Samsung Electronics' internal turmoil and the situation could be pushed high when prosecutors expanded their investigation to Lee Jae-yong, the son of Samsung's chairman Lee Kun Hee.

Since last month, two senior vice presidents named Baek and Seo of Samsung Bioepis have been arrested for alleged fraudulent accounting practices and after the investigation expanded, the third person named Lee was arrested immediately. Tuesday night when the man was allegedly ordered to cancel servers and laptops at a Samsung BioLogics facility – Samsung's pharmaceutical manufacturing joint venture.

All three are members of a business-support force, preceded by Samsung's Future Strategy Department, who are also part of the "control tower" of the episode. Samsung Group. There are 14 executives who work closely with the president of Samsung Electronics, Lee Jae-young.

The seizure occurred when Samsung Electronics was struggling to retain its declining earnings due to the downturn in the semiconductor market, namely memory and smartphone businesses that were struggling. On Wednesday, Samsung announced to cut production and lay off many employees at its last production base in China. Samsung's market share has dropped dramatically from 20% in 2013 to less than 1% this year against rivals like Huawei. Samsung is also forced to delay the time of selling a new folding screen phone that is Galaxy Fold due to design errors.

This is an unfortunate moment for Samsung because the scandal will distract Samsung's management while the company should take advantage of the US blockade of many business activities. Chinese companies with the most formidable rivals are Huawei.

But in the words of an executive at Samsung: "The company is not strong enough to focus on attacking Huawei at this critical time because what Samsung is prioritizing is protecting owners who are family members. This is also the weakness of the family treatment system "- chaebol.

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Analysts say Samsung's reputation will be affected by the scandal. However, forces of more than 800 Samsung executives have reassured themselves that the chaos will soon be resolved without affecting other activities. Lee Seung-woo, an analyst from Eugene Investment & Securities, said that although arrested executives play an important role in corporate management, they can be replaced.

The arrest of senior executives in this critical moment triggered an internal contest. The person accused the other person and the topic was being talked about among employees on the Internet, an executive of the Special Forces, said.

Prosecutors have pursued Samsung's accounting fraud since November last year after the Korean financial regulator accused Samsung BioLogics of cheating $ 4 billion by inflating the value of research units. assist.

According to the prosecutor's allegations, Baek and Park instructed BioLogics employees to delete all documents containing the JY, Merger and Future Strategy Department keywords.

JY is the acronym for Samsung Electronics vice president – Lee Jae-yong, who has been in charge of managing the group since 2014 after his father Lee Kun-hee was hospitalized after a heart attack. Meanwhile, the keyword "merger" refers to the merger of Samsung C&T and Cheil Industries in 2015. C&T is actually a company that holds all of Samsung's subsidiaries while Lee Jae-young is largest shareholder of Cheil Industries. This merger is suspected to help increase Lee's influence on the group size.

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The Future Strategy Department (FSD) is an organization under Lee's control which manages its core businesses. Lee closed FSD in 2017 after facing criticism that the organization is behind a corruption scandal involving former President Park Geun-hye. The incident caused Lee Jae-young to be jailed for one year on charges of bribing a friend of Ms. Park but was later released in 2018 after the Seoul Supreme Court sentenced two and a half years of suspended sentence to charges. bribery and embezzlement. This case is still pending handling at the Supreme Court.

According to internal disclosures from Samsung, FSD helped Lee's family retain control. FSD executives are then rewarded by being placed in leadership positions of Samsung's subsidiaries even though they have no expertise. A former Samsung executive said: "FSD members treat everyone like their mother-in-law, they direct the details of the branch's business. People don't like them."

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FSD was later replaced by the Business Support Task Force in 2017 and the organization continues to help promote the Lee family's interests. Park Ju-keun, president of analytics company CEO Score, said: "It shows nothing has changed for Samsung and this specialized force plays an important role in strengthening the power of the system. family rule. "

Park revealed that President Chung Hyun-ho – leader of the Specialized Force, is considered the right-hand man of Lee Jae-yong. Both Lee and Chung graduated from Harvard and Chung University business schools who were an expert in human resources before becoming leaders of the organization.

The main function of the Special Forces is to coordinate business between subsidiaries, conduct sales, mergers and explore new sources of growth, Park said.

However, the challenge is more and more posed when Samsung's companies enter a chaotic period. Free memory chip prices hurt the group's semiconductor business, which accounts for 28% of revenue. Samsung's net profit fell more than 60% to 6.23 trillion won in the first quarter of 2019 compared to the same quarter last year, largely due to the decline of memory chips, sales fell 34% over the same period. .


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