A South Korean presidential agency on Friday accused thousands of the country's executives of cheating the government by hiding US$5.5 billion of company money overseas during the 1997 to 1998 crisis.
Having moved money abroad -- often in their own name or in that of their wives or friends -- the executives asked the government for emergency assistance to keep their companies from bankruptcy, the report says.
In the course of the crisis, the government advanced 151 trillion won (US$119 billion) to failing banks and financial institutions. The International Monetary Fund lent US$57 billion to South Korea to save it from financial collapse.
We now know the government and the IMF were taken for chumps. Let me rephrase that -- South Korean taxpayers and the IMF were taken for chumps. So far, the government's role in this sleight of hand is far from clear.
Nice work if you can get it. Spirit your company's funds to secret hiding places outside the country and then ask the government for bailout money. When the government ran out of money, the IMF stepped in to plug the gap.
Though US$5.5 billion is a relatively small amount compared with the staggering cash needs of Korea four years ago, it's hardly pocket change.
The report triggered 44 criminal referrals to public prosecutors. South Korea has laws that regulate how much money its citizens can move overseas.
The government appears appropriately contrite. Finance Minister Jin Nyum said, "I apologize for the anger and disappointment the audit result may have brought to the Korean people." Jin also said the government will give no more money to the finance and other industries. What does that mean? He was planning to give them more money but changed his mind when the report came to light? The report was released the same week that IMF First Deputy Managing Director Anne Krueger dropped a bombshell on the financial community.
Krueger said she wants the fund to take the lead in reorganizing the process of sovereign bankruptcy. Her model is the American bankruptcy code. Krueger also wants to slap on capital controls in a crisis so as to prevent international investors from withdrawing funds.
Krueger also attacked those she called "rogue creditors," a term she used for bondholders who avail themselves of the US court system instead of participating in IMF settlement negotiations.
South Korea's experience shows that Krueger's concept of using capital controls to prevent money from leaving a crisis-stricken nation won't work. South Korea's capital controls didn't stop highly placed individuals from getting their billions out of the country.
This isn't the first time the IMF has been hoodwinked.
Remember how Russia's central bank allegedly used some US$5 billion of IMF money to stabilize the doomed ruble? That money has never been accounted for and my guess is it never will be.
The question isn't whether the IMF will ever be repaid what it lent. The question is whether the IMF is in the business of financing financial malfeasance, however unintentional that financing may be.
The South Korean incident, along with similar cases in Russia and many other countries, speaks volumes about the inability of the IMF to manage, and much less control, a financial crisis.
David DeRosa is a finance professor at the Yale School of Manage-ment. His opinons are his own.
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