South Korea's financial watchdog is in talks with its Japanese counterpart over inspections into Tokyo branches of local banks on suspicions of various illegal activities.

The Financial Supervisory Service (FSS) recently held discussions with Japan's Financial Services Agency on cooperative steps in looking into allegations that Tokyo branches of Woori Bank and state-run Industrial Bank of Korea (IBK) were involved in illegal lending and creating slush funds.

The watchdogs are also discussing follow-up measures on Kookmin Bank, South Korea's leading lender, which has been under FSS investigation on suspicion of making about 400 billion won (US$376.9 million) worth of illegal loans to Japan-based firms.

They believe some of the money was used to create secret funds in Korea.

"We are talking about sharing information on financial firms and branches of both countries and conducting joint probes, and signing a memorandum of understanding to that effect with Japan," an FSS official said.

He cited difficulties in the FSS carrying out the investigations alone as suspicious activities have occurred in branches in Japan.

Attempts to probe into alleged irregularities have been thwarted when senior officials at the banks committed suicide after investigations were launched. The former head of Woori Bank's Tokyo branch was found dead in an apparent suicide on Tuesday. Last December, another senior official at Kookmin Bank under investigation committed suicide.

The FSS has questioned employees of Woori's Tokyo branch and traced their bank accounts to track down the shady loans and their inflow to Korea to connect them to the slush funds. The watchdog estimates that Woori and the IBK extended illegal loans amounting to 70 billion won, some 6 billion won of which came to Korea.

Sources said the FSS will be checking each overseas branch for signs that they, too, were used as a means for creating slush funds.

At home, the watchdog launched probes on Foreign Exchange Bank and Daegu Bank after finding signs of irregularities and misconducts by their employees, another FSS official said.

The official said employees of the two banks are believed to have engaged in wrongful business activities to mark up more deposit and embezzled a large sum of money.

"We had on-site inspections on Foreign Exchange Bank and Daegu Bank as we detected some irregularities," said the official. "We found a considerable level of problems there, so a special examination will be carried out."

Kookmin Bank earlier reported that one of its employees issued fake deposit slips worth nearly 1 trillion won to a real estate agent.

"We will carry out a special inspection on Kookmin Bank and reprimand those responsible for the misconducts after watching its own probe results," said the FSS official. (Yonhap)