Lotte suspected of using shell company in Vietnam for slush funds

Lotte Engineering & Construction Co., a construction unit under the retail giant, in 2014 built a 65-story skyscraper in the Vietnamese capital of Hanoi, which also involves a five-star hotel, a department store, residences and offices.

For the $400 million project, Lotte Asset Development, the group's real estate investment arm, bought Coralis, a special purpose company based in Luxembourg, for 69.7 billion won ($60.2 million). Luxembourg is known as one of the world's major tax havens.

Later, Lotte Shopping and Hotel Lotte, two major affiliates of Lotte Group, each bought a 45 percent stake, lowering Lotte Asset Development's ownership to 10 percent.

But Coralis logged a net loss of 55.1 billion won last year, which lead to suspicions that Lotte pushed for the project despite financial burden on the group.

The entrance of Lotte Group's headquarters in central Seoul is seen, Friday. Prosecutors raided the building as well as other group affiliates and residences of key executives to collect evidence of the group's alleged slush funds and illegal lobbying activities. Photo by Korea Times/ Bae Woo-han

Prosecutors suspect Lotte Group has overestimated expenses of the paper company to exaggerate losses as a way to create a slush fund for the owner family, according to multiple sources.

Lotte has denied such allegations, saying it bought the paper company to acquire the right to do business and lease land in Vietnam.

"Establishing a special purpose company is a business strategy adopted by most companies when they invest overseas or push for development projects to apply under local regulations and improve operational efficiency," a senior Lotte official said.