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South Korean prosecutors raid Lone Star office

South Korean prosecutors yesterday raided the Seoul office of US investment fund Lone Star in a probe of alleged tax evasion and other financial irregularities, officials said.

Some 60 investigators searched the offices and homes of Lone Star officials with warrants to arrest the fund's former executive, Steven Lee, and others, prosecutor Chae Dong-wook told reporters.

Lee is now believed to be in the US. Lone Star officials were not available for comment.

"The search was to acquire evidence on criminal activities involving Lone Star," he said.

He refused to say how many arrest warrants were issued.

About 10 people, including Lone Star's Korean officials, were banned from leaving the country pending questioning, he said.

Lone Star is currently engaged in selling a controlling 51-percent stake in Korea Exchange Bank (KEB), the country's fifth largest lender, in South Korea's biggest ever financial deal.

Last week, the fund picked South Korea's top lender Kookmin Bank as potential buyer of its stake in KEB in a deal worth more than US$6 billion.

Activists are trying to block the sale from which Lone Star is expected to recoup a windfall profit of about US$5 billion. They claim that the fund is set on paying no taxes on the profits. But prosecutors are not probing the sale.

"Our investigation is a separate issue from the process of selling KEB," said Chae.

However, Lone Star, which acquired the stake for 1.38 trillion won (US$1.38 billion) in October 2003, is suspected of possible financial irregularities related to its original purchase of KEB, prosecutors said.

Separately, the fund is being probed for allegedly evading tax payments worth 14.7 billion won in a business transaction last year.

Lone Star reaped 280 billion won by selling a building in Seoul last year but refused to pay taxes arguing that the transaction was executed through its business unit based in a tax haven, according to tax officials.

The fund is also suspected of having illegally transferred US$8.6 million overseas, Chae said.

Prosecutors are also investigating allegations that the government had illegally rushed the sale of KEB, he said.

"Along with our investigation into charges of tax evasion and illegal transfer of foreign currency abroad, we are also probing allegations that KEB was sold for its scrap value," he said.

Prosecutors are probing whether the lender's former executives and government officials had exaggerated KEB's poor financial health so they could achieve a quick sell-off.

The latest probe came amid concerns that South Korea was becoming unfriendly to foreign capital. Lone Star and other foreign funds were targetted only last year by a separate tax audit concerning allegations of tax evasion.

The probe reflected a new climate of economic nationalism in South Korea, according to some experts.
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