Why is embezzlement continuing at banks?

BNK Kyongnam Bank headquarters in Changwon, South Gyeongsang Province / Courtesy of BNK Kyongnam Bank

Embezzlement by bank employees totals 200 bil. won since 2017

By Anna J. Park

Questions have arisen over the high number of embezzlement cases involving bank employees in the country. Market watchers point out that binding rules and responsibilities on banks' internal control initiatives need to be strengthened, as the financial authorities' current non-binding guidelines fall short of changing banks' practices.

According to data released by independent lawmaker Rep. Yang Jung-suk, the accumulated amount of misappropriated money by bank employees during the first seven months of this year alone reaches about 60 billion ($46 million). It is the second-highest annual amount following the record set last year when the total annual embezzlement amounted to 101 billion won.

The majority of the amount during the past two years was attributed to a couple of cases ― an embezzler in BNK Kyongnam Bank who was recently confirmed to have misappropriated more than 56 billion won, and a Woori Bank employee who was caught last year embezzling a whopping 70 billion won. Yet, smaller cases of embezzlement have been found at many other banks as well.

For this year alone, employees at Shinhan Bank, NH, National Credit Union, IBK, OK Savings Bank, KB Kookmin Bank, Woori Bank and Hana Bank, among others were found to be involved in embezzlement cases.

Since 2017, the aggregated amount of embezzlement by bank employees in the country stands at 220 billion won, as of the end of July.

Insufficient legal framework

Market watchers say the core of the recent increase in financial corruption by bank employees lies in the country's loose rules on internal controls.

The subject matter of internal control is stipulated in the Act on Corporate Governance of Financial Companies. Yet the current law is written in a very abstract way, offering many loopholes for financial companies to avoid the final responsibility of implementing effective internal control.

The lack of binding effectiveness in the law enabled the embezzlement case of BNK Kyongnam Bank, despite the existence of financial authorities' non-binding guidelines.

The internal control guidelines announced late last year by the Financial Supervisory Service (FSS), a state-run watchdog authority, advise banks to separate work procedures involving decisions related to high-risk businesses, such as real estate project financing, and to prevent an employee from working at such departments for an excessive period of time.

BNK Kyongnam Bank is found to have failed at complying with the guidelines, enabling the embezzler to work at a risky real estate project financing department, where the processes of evaluation, transfer and assessment of project financing all take place under the same unit. This loophole allowed the employee, who worked at the department for 15 years, to easily fabricate documents to hide bank funds in his own accounts.

Most other banks, on the contrary, do separate the procedures in order to stem irregularities by individual employees.

"If the bank had been following the authorities' internal control guidelines, it could've somewhat prevented such embezzlement attempts by a bank employee," an official from the FSS said, adding that the guidelines themselves are not legally binding.

Fundamental changes possible with law revision

Acknowledging the lack of binding measures in internal control and its accompanying problems, the country's top financial regulator, the Financial Services Commission (FSC), already announced in late June it would revise the act on corporate governance to counter such issues.

The bill, containing various incentives and penalties imposed on financial firms to effectively manage internal control issues, is expected to pass the Assembly by the end of the year.

"Once the revision is passed, it will hugely change the internal control issues in local financial firms, as the bill contains legal sanctions on banks' CEOs, executives as well as board chairs, depending on the situation," Lee Hyo-seob, research fellow at the Korea Capital Market Institute (KCMI), told The Korea Times, Thursday.

"The level of legal sanctions will be pretty high, which contrasts with the current law that only states rules on internal control in a very abstract way. Besides, financial firms and financial authorities have so far lacked systemic infrastructure for dealing with such matters. It will all be very much changed with the passage of the revision later this year."

He said that advanced financial markets of developed countries have gone through phases of abundant financial irregularities in the past, which resulted in closer-knit legal frameworks to impose heavier penalties on violators.

While the Korean financial industry has so far dealt with internal control issues rather lightly, the passage of the law will bring fundamental changes, the research fellow added.