Bank branches will face random checks

Regulators move after a series of ‘financial incidents’

By Kim Jae-kyoung

Staff reporter

Branches of local banks are facing random inspection from financial regulators as the Financial Supervisory Service (FSS) has taken steps to beef up its on-site audits in a bid to prevent financial wrong doings.

The move came after local banks, over the past year, have been involved in a series of financial embezzlements, money laundering, leaks of customer information and irregular sales of financial products.

Since 1997, the financial watchdog has mostly conducted its inspection against head offices of banks as part of deregulation efforts. However, the FSS decided to change its stance by strengthening on-site audits against bank branches following a series of incidents there.

For these inspections, the FSS has launched a task force consisting of officials from the bank supervision department. It said that the task force focused mostly on policing irregular business practices, such as misleading sales, in the first half of the year, but it plans to concentrate on preventing financial incidents by monitoring their internal control systems in the second half.

"Financial problems at banks have increased sharply since the global financial crisis erupted in 2008, which we believe was due mainly to malfunctioning of their internal control systems," said a ranking FSS official, asking not to be named.

"In 1997, we decided to loosen our inspections of branches on the assumption that the internal control systems work well. But if it does not function properly, we have no choice but to conduct direct inspections against branches," he added.

The amount financial incidents have cost continued on an upward spiral, reaching 56.9 billion won in 2008, up from the previous year's 49.2 billion won.

Late last year, the FSS overhauled its inspection strategy. Under the change, it will conduct a comprehensive inspection against local lenders exposed to high system risks once a year. At the same time, it plans to make random audits of bank branches.

In the past, the internal control systems at major local lenders were in question as they have been entangled in a variety of financial incidents.

Most recently, Kyongnam Bank, an affiliate of Woori Financial Group, has been under the prosecution's investigation since May after its sales manager allegedly illegally issued bank guarantees on real estate project loans last year. He issued false payment guarantees and used its corporate seal without permission, according to the lender.

Woori Bank, the flagship of Woori Financial, also suffered losses of around 200 billion won stemming from irregular payment guarantees for project financing (PF). The financial watchdog said that the lender provided guarantees for PF worth 4.2 trillion won for six years from 2002 to 2008 without going through proper procedures.

Early this year, Kookmin Bank, the nation's largest lender, gained unwanted attention after one of its IT managers committed suicide after the FSS' comprehensive audit. It was also feuding with the watchdog due to the alleged leak of a memo regarding its preliminary audit of its holding company KB Financial Group.

Korea Exchange Bank (KEB) is also under the prosecution's probe due to the alleged 20 billion won lending fraud case in 2008 involving employees at its Sadang branch.