S. Korean financial firms vulnerable to security breaches: regulator

Korean banks face risk of losing credibility on irregularities

Korean banks face risk of losing credibility on irregularities

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Published : 2013-12-23 09:41
Updated : 2013-12-23 09:41

After a year muddied by irregularities, exposed corruption and profit losses, the South Korean banking sector faces strong supervision by the regulator as well as demand for internal controls.

Scandals have damaged the reputations of top lenders, who have been implicated on suspicion of private data leaks, shady art work purchases and the possession of slush funds.

The Tokyo office of No. 2 lender Kookmin Bank is under investigation by the Seoul financial watchdog and the prosecution for alleged slush fund operations and money laundering. The branch is believed to have provided illegal loans of over 200 billion won ($188.5 million) using accounts under false names and receiving commission fees in return.

The case became more high profile when an official at the branch was found dead last week in what appeared to be a suicide.

Japanese financial authorities have also stepped into the investigation.

No. 3 lender Shinhan Bank is suspected of illegally looking through the private data of customers without their consent.

Industry leader Woori Bank is accused of luring investors into a project to build a distribution complex without fully explaining the risks of possible financial losses.

The financial watchdog is also looking into why Hana Financial Group made large-scale purchases of fine art pieces during the days of former chairman Kim Seung-yu.

Foreign banks are not an exception. Recently, personal data of some 130,000 customers of Standard Chartered Bank Korea and Citi Bank Korea were leaked from branches in a regional city, the largest leak in the history of the country's banking sector.

The number of bank officials disciplined by the regulator this year reached 424, the largest number since the 1997-98 Asian financial crisis.

"The environment facing local banks is getting tough as internal competition stiffens. More irregularities have been revealed amid tough business conditions, like low growth," said Cho Nam-hee, head of the Financial Consumer Agency, a consumer advocacy group.

The banking industry as a whole is indeed suffering from falling profitability amid squeezed margins and the economic slowdown.

Korean banks' combined earnings declined 14.5 percent on-year to 1.7 trillion won in the third quarter, according to the Financial Supervisory Service.

At the consumer end, however, the banks are guilty of corporate greed, raking in money from interests by charging a higher spread on borrowers from cash-strapped households and smaller firms.

The Financial Services Commission (FSC), the financial regulator, is moving to impose heavier disciplines on violators in case of irregularities. The commission's chairman Shin Je-yoon earlier said that the government is considering dealing with the issue of the internal control system.

Experts say that chief executive officers should aggressively strengthen the internal control system since the capacity of the regulator in monitoring and punishing bank irregularities is limited.

"The role of CEOs is important in enhancing the internal control scheme," said Kim Dong-hwan, senior research fellow at the Korea Institute of Finance. "The culture of protecting whistleblowers should be also nurtured." (Yonhap News)

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