South Korea's powerful business lobby group dealt big blow by Park scandal

By Christine Kim

SEOUL, Dec 15 (Reuters) - Long the voice of the conglomerates that form the engine of South Korea's economy, the Federation of Korean Industries could become another casualty of the scandal that is poised to cost President Park Geun-hye her job, as key members flee.

The FKI, whose board is made up of the chiefs of the country's conglomerates, or chaebol, has been the nexus for close ties between government and big business. It formed the two non-profit foundations, Mir and K-Sports, backing Park initiatives that are central to the current political crisis.

Prosecutors have charged Park's friend Choi Soon-sil with colluding with the president into pressuring conglomerates such as the Samsung Group to pay funds to the foundations.

Last week, Jay Y. Lee, scion of the Samsung Group, the FKI's largest member, said it will leave the group, prompting others including the LG Group, SK Group and state-run banks including the Industrial Bank of Korea (IBK) and Export-Import Bank of Korea (KEXIM) to follow suit, raising questions over whether the group can survive in its current form.

"We're leaving because abandoning the FKI won't change anything for us," an IBK official said, declining to be identified because the matter is sensitive.

An FKI official declined to comment on its future plans. It has said it will devise plans for reform by the end of February.

In recent years, some members complain, the FKI was being used by the government to pressure businesses - and not the other way around, fueling resentment. Hiring paid lobbyists is illegal in South Korea.

"The FKI's role was to be a voice for companies as Samsung or LG can't speak for all conglomerates," said another source whose company is also preparing to leave the FKI. "The members are leaving because they feel the FKI was being used by the government to demand concessions from businesses."

FKI Vice Chairman Lee Seung-cheol told a parliamentary hearing last week that the presidential Blue House had played an unusually pushy role in managing the two foundations.

"It was difficult to turn down the Blue House's orders and requests," he said.

"What was different about the Mir and K-Sports foundations from other foundations the FKI established was the fact that the Blue House became involved in detail."

POWER THROUGH GENERATIONS

The FKI has more than 600 members, mostly large businesses, including government-backed companies.

As of the end of 2014, it reported 360 billion won ($305 million) in assets and 349 billion won in liabilities. Its funding mainly comes from member dues.

The FKI was founded in 1961, just after Park Chung-hee seized power in a coup that led to 18 years of his rule until he was assassinated in 1979. Park was the father of the current President Park, who was impeached last week by parliament, a decision that will now be upheld or rejected by a constitutional court in a process that could take up to 180 days.

Jay Y. Lee's grandfather, Samsung founder Lee Byung-chull, was FKI's first chairman. In those early days of the country's industrialisation, the FKI was a voice to funnel corporate opinions to the military government.

FKI has over the years become entangled in various scandals involving the chaebol and government, sowing public disdain for the group, although none of its employees have ever been convicted of wrongdoing.

FKI's power ebbed in the early 2000s as liberal presidents Kim Dae-jung and Roh Moo-hyun focused on chaebol reform, but the group regained some traction during the 2008-2013 presidency of Lee Myung-bak, and then under Park, both conservatives.

In a survey conducted early this month, the newspaper Naeil and a polling firm found 68.7 percent of 1,000 respondents said the FKI should disband, although that would require approval of 75 percent of its members.

Lee Un-ju, a senior member of parliament from the opposition Democratic Party, has drafted a resolution calling for the FKI to disband without seeking a vote from members. That resolution has widespread backing in her party.

GOOD RIDDANCE?

Samsung Group declined to say how it would communicate with the government after it leaves FKI.

"I don't think we're at the stage of talking about that yet," a Samsung spokeswoman said.

The chaebol have plenty of ways to get the government's ear without help from the FKI. From modest roots, South Korean conglomerates now play a dominant role in the economy and have been critical in making the country the world's sixth-biggest exporter.

"FKI was once a community where businesses could go," the IBK official said. "Now it's meaningless and we have plenty of communication channels with the government even without it."

In the absence of FKI, the broader Korea Chamber of Commerce and Industry, with some 160,000 members, will play a bigger role, says Yang Jun-seok, economics professor at Catholic University, while companies will step up bilateral meetings to communicate with officials.

"The end result will no doubt be positive," Yang said, by removing a forum that had concentrated the power of the chaebol, although he warned it could engender the sort of secretive meetings that came in for criticism during the current scandal.

Samsung's Lee told parliament that he had met with Park alone in July 2015 and again last February in previously undisclosed meetings at a house near the Blue House, where they discussed issues including an ongoing government project and investment in South Korea.

The location raised eyebrows as it conjured up memories of the "safe houses" that were created around the Blue House in the 1970s and used by the country's military leaders as private places for entertainment and meetings, including some with business leaders.

($1 = 1,178.72 won) (Reporting by Christine Kim; Editing by Tony Munroe and Martin Howell)