Ruling party seeks financial version of Serious Accidents Punishment Act

[Image source: Gettyimagesbank]

South Korea’s ruling party is looking to have a “financial version of Serious Accidents Punishment Act” in place sometime next year, which will hold financial institutions’ top management accountable in the event of a major financial accident or repeated acts of misconduct by their employees.

This move comes after a series of recent financial accidents, including incomplete sales of funds and large-scale embezzlement, have raised questions about the effectiveness of the current internal control and regulatory system and its operation at Korea’s financial institutions.

According to sources from the financial circle on Monday, Representative Yoon Han-hong of the ruling People Power Party has drafted a bill to partially amend the “Act on Corporate Governance of Financial Companies” after consultations with the Financial Services Commission (FSC), which he plans to introduce the bill soon.

Earlier, the top financial regulator decided to push for the revision of the act, aiming to pre-determine the scope of responsibilities of executives related to internal control matters through parliamentary legislation. The regulator believes that legislative action by lawmakers can process a bill faster than government legislation and expedite its implementation.

If passed, the bill will take effect six months after its promulgation and will be applied from the date of the first shareholders’ meeting convened after the law takes effect.

“The chairman of the National Assembly’s State Affairs Committee is preparing to introduce it,” an official from the financial sector said. “Since it reflects the position of financial authorities, there should be no difficulty in passing the bill, and it is expected to be implemented sometime in 2024.”

“The substance of the bill is to strengthen the supervisory role of the board of directors in internal control at financial companies as well as clearly assign internal control management duties and responsibilities to individual executives of financial companies for each business area under their jurisdiction ahead of time,” the official said.

The draft bill includes adding matters related to the establishment and supervision of internal control and risk management policies to the deliberation and decision of the board of directors and establishing a subcommittee on internal control within the board.

The subcommittee will deliberate and decide on basic internal control policies and strategies as well as ways to establish a corporate culture that enhances employee ethics and compliance and perform checks and improvement requests on the internal control management duties of executives.

BNK Kyongnam Bank head office. [Courtesy of BNK Kyongnam Bank]

To clearly define individual executives’ internal control responsibilities, the bill also seeks to introduce the “responsibilities map” system, which is currently being used in countries such as the United Kingdom.

Under this system, each executive will be required to fulfill his/her internal control management responsibilities for the areas under his/her jurisdiction, and the chief executive officer, who oversees internal control, is responsible for overall internal control management.

To this end, the CEO and other executives are required to prepare a structure chart of internal control responsibilities allocated to each executive without duplication or omission through a resolution of the board of directors and submit it to the FSC.

The intention is to clarify responsibility for systemic failures of internal control, such as long-term, repeated, systemic, or widespread problems within a financial company.

The current Act on Corporate Governance of Financial Companies only specifies the obligation to establish internal control standards and does not specify the specific responsibilities for executives, leading to criticism that it lacks substance.

The South Korean government has been enforcing the “Serious Accidents Punishment Act” since January 27, 2022. Business owners and management executives who fail to fulfill their obligations to prevent accidents when major disasters such as worker deaths occur at workplaces with 50 or more regular employees or construction sites with construction costs of 5 billion won or more face imprisonment of more than one year or a fine of less than 1 billion won ($750,185) under the act.

If the bill is passed, it will amount to introducing a “financial version of the Serious Accidents Punishment Act” in the financial industry, making it possible for top management to be held accountable in the event of a financial accident, thus putting the financial sector on high alert.

Recently, there have been many incidents of internal control deficiencies, such as embezzlement, primarily in banks, triggering calls for severe punishment for the CEOs.

A recent example is the massive embezzlement case at BNK Kyongnam Bank, and a case where employees at KB Kookmin Bank were found to have taken advantage of undisclosed information about customers they accessed through their work to profit from stock sales worth 12.7 billion won.

DGB Daegu Bank, a regional bank in Korea which is set to transform into a nationwide commercial bank, faced allegations of creating more than 1,000 securities accounts under customers’ names without their knowledge.