The Financial Supervisory Service said Monday that it had launched an inquiry into suspicions of irregular business practices involving several foreign investment banks operating in Korea.

The foreign banks include the local units of New York-based Goldman Sachs, Zurich-based Credit Suisse and Edinburgh-based Royal Bank of Scotland, according to the financial regulator.

While the main investigation target of the FSS involves the three banks’ sales of financial derivatives in Korea, market insiders expect that other illegitimate practices in their overall business sector could be uncovered.

Some insiders predict that more foreign IBs may be subject to regulatory scrutiny based on the results of the current probe.

The three banks have been placed under the extraordinary supervisory probe as a sample group, as Korean institutional investors have recently increased their investment in foreign financial derivatives, regulatory officials said.

The law on the capital market and financial investment business stipulates that the headquarters or regional headquarters of foreign IBs should notify their Korean units of Korean institutional investors’ purchases of derivatives.

Specifically, the local operator should participate in the deals as an intermediate trader between the parent bank and Korean investors.

The law, which features the banks’ local units as deal brokers, is designed to prevent Korea’s corporate investors from suffering huge losses from reckless trading in the overseas financial market or being implicated in law violations.

Earlier this year, Credit Suisse’s Korean operation was cautioned and fined for violating the law on real-name accounts.

The Royal Bank of Scotland Group, called RBS Bank, was reprimanded in 2011 for breaching laws on currency derivative trading.

Currency derivatives in the foreign exchange market have been a key probe target over the past few years. The FSS, in coordination with the Bank of Korea, has conducted an extensive inquiry into foreign bank units’ currency derivatives in a bid to boost currency market stability.

“Inspectors revealed that several foreign bank branches relocated day-to-day trading operations involving their money to regional headquarters such as Hong Kong and Singapore,” said an FSS official.

Excessive capital outflows led by several investment banks have often been cited as the critical factor stirring the nation’s foreign exchange market.

By Kim Yon-se (kys@heraldcorp.com)