hankyoreh

The US private equity fund Lone Star Funds, which triggered a furor by making off with over 4 trillion won (US$3.7 billion) with its acquisition and sale of Korea Exchange Bank, has now filed a investor-state dispute claim with the World Bank’s International Centre for Settlement of Investment Disputes. The amount hasn‘t been specified, but judging from the letter of intent to pursue arbitration that it submitted back in May, it looks to be in the billions of euros. The company is saying that it suffered losses due to approval delays and discriminatory tax measures by the South Korean government during the sale. These claims are both shameless and utterly without merit.

Lone Star acquired majority shareholder status by concealing the fact that it was industrial capital without the necessary qualifications to acquire a bank, and it committed a host of crimes including stock price manipulations and tax evasion. The South Korean Supreme Court already ruled that the government was justified in charging taxes because Lone Star’s offices in Belgium only existed on paper. Now the company has the gall to file an investor-state dispute claim citing a bilateral investment treaty between South Korea and Belgium. It also included as a plaintiff a holding company that it did not report to South Korean financial authorities, claiming that it was omitted previously. All these factors amount to a confession that Lone Star is an industrial capital fund.

Lone Star is obviously in the wrong, but the South Korean government’s response has also been deplorable in handling its first ever ISD claim. It basically sat on its hands even after Lone Star first broached the possibility of arbitration four years ago. A response team was set up in the Office of the Prime Minister after Lone Star announced its intent to file the ISD claim this past May, but its MO was secrecy from the get-go, insisting that the matter was not a suit, but a “raising of questions.” Not only that, but it also defied an information disclosure request and failed to take appropriate action to hear the opinions of interested parties or experts. It would never have gotten caught in this ridiculous suit if it had amended the bilateral treaty with Belgium to put in safeguards against a pseudo company in a tax haven.

The situation to come is an even bigger problem. The bilateral treaty and investor-state litigation system between Korea and Belgium are similar to the ones in the South Korea-US Free Trade Agreement. The government has urged the people not to worry too much about the KORUS FTA ISD system, saying it was a global standard, yet the dangers of its more toxic provisions have become obvious. In the future, we can expect to see overseas companies citing the FTA’s investment treaty when pulling out their investments or bombarding the government with lawsuits against public policies in areas like social services and health care.

If the government has to weigh the risk of a lawsuit with every public policy, then our sovereignty could be compromised not only in our courts but in our policy as well. The Office of the Minister for Trade has already opposed amendments to the Distribution Industry Act and the Act on the Promotion of Collaborative Cooperation between Large Enterprises and Small-Medium Enterprises out of fears of trade frictions. The toxic ISD system has to be renegotiated.

Please direct questions or comments to [english@hani.co.kr]