Korean financial sector faces criticism over deficiency in internal control

[Photo by Yonhap]

South Korean financial institutions are facing mounting criticism following a series of reported embezzlement and other financial mishaps, despite their assurances of bolstered internal controls.

KB Kookmin Bank on Wednesday disclosed two financial missteps on its website.

According to the bank, one of its branches in Daegu had inflated the incomes of loan applicants in the process of granting 11.14 billion won ($8.2 million) in household loans between August 31, 2020 and March 8, 2024.

Another branch, located in Gyeonggi Province, applied inflated rent-to-interest rates when granting secured loans of up to 27.2 billion won for specific commercial building unit owners.

The bank has already been under scrutiny by financial authorities for a breach of trust case reported in mid-March.

In this case, another branch in Gyeonggi Province allegedly inflated collateral values when lending 10.4 billion won to commercial unit buyers.

Korea Investment Savings Bank also faced serious sanctions from the Financial Supervisory Service after its employee was found to have embezzled 1.54 billion won in customer funds.

Although the employee was not authorized to withdraw company funds, the staff falsified expense claim forms, forged loan agreements, or obtained account passwords to carry out these acts.

OK Savings Bank received sanctions from the FSS for prematurely transferring information on overdue payments of more than 4,000 individual rehabilitation loan borrowers to a credit information company.

A branch of MG Community Credit Cooperatives is also currently under scrutiny for its loan management practices following suspicions of loophole loans emerging during a lawmaker’s election campaign.

About 40 out of 53 mortgages for individual business operators at the branch are suspected of misappropriation, according to the FSS and the supervising organization of the cooperatives chain.

Following the high-profile embezzlement cases in recent years, financial institutions had pledged to strengthen internal controls through measures such as rotating work schedules and mandatory leave for employees.

Critics, however, noted that the controls have not been effectively implemented.

Given the apparent lack of internal controls, the introduction of a responsibility structure chart requirement in the financial sector could potentially strengthen internal controls, some expect.

An amendment to the law governing financial institutions’ governance structure, effective this July, mandates the creation of these charts for financial companies. Financial holding companies and banks must submit their charts by January next year.

Despite financial holding companies consulting law and accounting firms to develop these charts specifying internal control responsibilities for executives, there is considerable debate on how to enhance effectiveness, especially in addressing authorities‘ concerns about the current development of responsibility charts in financial institutions.

Financial Services Commission Chairman Kim Joo-hyun has recently urged banks to ensure their responsibility structure charts are practically effective in addressing internal control issues.