In a further sign of hostility toward foreign private equity investors, South Korean prosecutors raided the offices of Lone Star Funds on Thursday, reportedly seeking evidence tying the US firm to tax evasion and embezzlement.
According to an article in the New York Times, Korean regulators are blocking 10 people from leaving the country as part of the investigation, and are planning to extradite Steven Lee, the former head of Lone Star Funds Korea, who stepped down in September.
The investigation by Korean authorities delves into whether Lone Star owes taxes on its substantial windfall from its investment in Korea Exchange Bank. Lone Star acquired a 50.5 percent stake in the bank in 2003 for $1.2 billion, and recently agreed to unload the position to publicly held Kookmin Bank.
Kookmin is reportedly paying $6.6 billion for Lone Star’s share as well as a 14.1 percent holding of Germany’s Commerzbank, and Lone Star is set to reap more than $3 billion in profits through the deal.
Lone Star contends that since it acquired Korea Exchange Bank through a Belgian holding company, giving it favourable tax status, it is not subject to double taxation. South Korean regulators, however, feel otherwise.
South Korean Finance-Economy Minister Han Duck-Soo has been an outspoken proponent for foreign investment in the region during the past two years. Yet, many of the US firms that have pursued deals in South Korea have been subject to similar scrutiny. The Carlyle Group, in 2005, had files removed from its South Korean offices by the National Tax Service, and others such as Newbridge Capital and Citigroup were also reported to have been investigated by Korea’s tax authority.
Despite the difficulties in Korea, Lone Star has put together a very successful track record in Asia. In addition to the substantial take to be realised in the Kookmin deal, Lone Star is reportedly attracting interest for its majority stake in Tokyo Star Bank. The firm also realised a partial exit from its investment in Pacific Golf Management late last year.
A spokesman for Lone Star issued a statement to PEO saying, “Lone Star is cooperating with the authorities and looking forward to the end of the investigation.”