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(EDITORIAL from Korea Times on Sept. 1)

All News 07:01 September 01, 2022

Verdict on Lone Star case
Government seeks to appeal compensation order

An international tribune has ordered South Korea to pay $216.5 million to the Texas-based private equity firm Lone Star Funds, virtually putting an end to the decade-long legal battle. The International Centre for Settlement of Investment Disputes (ICSID) announced its decision in an investment-state dispute, according to the justice ministry on Tuesday. However, the ministry expressed regret, saying it is considering appealing the decision.

The compensation accounts for 4.6 percent of the $4.68 billion the equity fund demanded from the Korean government. Due to the relatively small portion of compensation, it may be safe to say the Korean government has coped well with the legal case. Yet, the ICSID instructed South Korea to pay aggregated interests of about $74.1 million under the one-month U.S. Treasury rate calculated from Dec. 3, 2011, to the date of payment.

This means the country needs to pay a total of around $290 million to the equity firm. The firm has claimed that the bid to sell its controlling stake in the now-dissolved Korea Exchange Bank (KEB) to the global banking giant HSBC ended in failure in 2007 because then Korean financial authorities deliberately postponed approval of the deal. Yet the ICSID rejected such a claim.

The ICSID also refuted the equity fund's assertion that the Korean government pressured it to lower the sell-off price of KEB to Hana Financial Group. Yet the ICSID partially acknowledged Lone Star's claim that Seoul imposed heavy taxes on it in a discriminatory and unfair way despite the agreement on the prevention of double taxation between South Korea and Belgium. Seoul has been repudiating the assertion, describing Lone Star's Belgian entity as a shell company set up to avoid taxes.

The hedge fund took over KEB in 2003. It left the Korean market in 2012, after raking in 4.2 trillion won ($3.14 billion) in profits. Lone Star immediately invited the public's wrath and severe criticism for its predatory "hit and run" practices. The Lone Star case took place in the process of tackling then economic crisis. Then officials had to sell the troubled KEB to the private equity fund in a desperate bid to prevent it from going under.

However, this does not necessarily justify their decision. ICSID's recent verdict will likely prompt fierce disputes and repercussions. There should be comprehensive debates and reflections on the financial crisis and the insolvency of local banks to prevent recurrence of such a mishap. The ministry said Wednesday it would press for needed procedures to nullify the ICSID decision, though that is hard to do.

For instance, among the 60 complaints filed in defiance of the ICSID's verdicts by 2018, only five were admitted. Yet, the government should take all possible measures to minimize the loss. Intensive efforts are needed to deal with possible ICSID-related cases properly in the future. It is necessary to consider setting up a department in charge of international legal disputes under the wing of the justice ministry.


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