Financial accidents due to internal failures cause $85 mn damage at institutions

Woori Bank [Photo by Park Hyung-ki]

Financial accidents at major financial institutions in South Korea, such as alleged embezzlement and breach of trust, due to failures in internal control have led to 110 billion won ($84.6 million) in losses last year.

According to data submitted by the Financial Supervisory Service to Representative Yun Chang-hyun of the People Power Party on Monday, there were 49 financial accidents in 2022 worth 109.8 billion won. There were 30 alleged embezzlement and misappropriation cases, causing 81.42 billion won in damages, five breach of trust cases causing 24.36 billion won, 12 fraud cases causing 3.87 billion won, and two theft cases causing 110 million won.

Banks excelled other financial institutions in terms of the number of cases and damage size, reporting 28 cases and 89.76 billion won in losses. Brokerage houses reported six cases with 10.07 billion won in damages, and savings banks six cases with 8.71 billion won.

Shinhan Bank had a total of three fraud cases that caused 320 million won in losses and four embezzlement and misappropriation cases (300 million won). KB Kookmin Bank reported one breach of trust case that caused 14.95 billion won in losses. Woori Bank reported five embezzlement & misappropriation cases with 70.1 billion won in losses.

Among the securities firms, Hana Securities Co. had 8.81 billion won in damages from two breach of trust cases, and Samsung Securities Co. 790 million won from two fraud cases. At other financial institutions, KB Insurance Co. reported 630 million won in damages from one embezzlement & misappropriation case, and KB Kookmin Card Co. 10 million won from one embezzlement & misappropriation case.

Among the savings banks, Yegaram Savings Bank and Go Ryo Saving Bank had one fraud case each, causing 630 million won and 200 million won in damages, respectively. Moa Savings Bank and Korea Investment Savings Bank each reported one embezzlement & misappropriation case, causing 5.89 billion won and 1.54 billion won in damages, respectively.

Financial Supervisory Service [Photo by Han Joo-hyung]

In response to the wave of recent compliance failures, the FSS has sought revisions to the compliance principles of the Korea Federation of Banks, with new and improved internal controls added last year. The financial oversight authority is making sure that they apply to individual banks this year.

The new compliance principles require sufficient workforce in compliance departments, reduced long-term workers, separation of duties, and a standard for whistleblower systems.

Assessments of internal control will take up a larger portion of management evaluations in the first half of this year. Internal control will be an independent segment for assessment, with more weight given to it, and the evaluation will be linked to the organization‘s overall evaluation ranking.

Concerning savings banks and credit finance businesses, assessments in the “financial troubles” category will be expanded. More weight in the assessment of internal controls will be sought, too, at mutual savings banks.

“An overhaul of internal control at financial groups is necessary,” FSS Governor Lee Bok-hyun said.

Representative Yun also noted that financial institutions should make their best effort to build reliability so that their customers can trust them.

“Higher responsibility and awareness will have to be sought by having strong sanctions on any small compliance failures, as any mischief by staff or executives at a financial institution can affect the company’s reliability,” Yun said.