Borrowed-name accounts

CEOs should set example for transparency

Seventeen years after the introduction of the real-name financial transaction system, the use of borrowed-name or fictitious name accounts seems to be a rule rather than an exception. The prevalence of the non-real name accounts indicates that Korea has a long way to go before removing corruption completely.

Ra Eung-chan, chairman of Shinhan Financial Group, reportedly has about 1,000 borrowed-name accounts. Prosecutors raided the office of the Hanwha Group following tips that the group had mobilized slush funds through the names of former and incumbent executives. The Taekwang Group is also under investigation on similar charges.

Shinhan, Hanwha and Taekwang, are three of the many companies which have resorted to the decades-old practice in violation of the real-name financial transaction law. Samsung, CJ and other conglomerates have already paid huge penalties for hiding the personal wealth of owners under the non-real name accounts.

Shocking is the widespread use of borrowed-name accounts among the executives of the nation’s third largest financial group Shinhan. Investors will take a second look at Shinhan's managerial transparency. Ra faces criminal and regulatory punishment for committing the crime. Shinhan’s reputation is in serious question because it is a financial company.

Strategy and Finance Minister Yoon Jeung-hyun indicated the possibility of levying inheritance and gift taxes on the borrowed-name accounts through the revision of the law. He said the country should root out the violators of the real-name system in financial transactions. This is necessary to upgrade transparency.

Rooting out the illegalities is not easy. Companies and people exploit the loopholes in the system as a way of laundering money, creating slush funds, transferring wealth to their offspring without paying due tax.

Under the current law, users of borrowed-name accounts and lenders of names are free from criminal punishment. A penalty of up to half of the amount in borrowed-name accounts is permissible. Court rulings have been lenient on borrowed-name account holders. These laws should be revised in such a way as to discourage the use of the illegal accounts. Regulators must be tough against financial companies for using the factious accounts. Courts should be strict in interpreting the letter of the law.

Bona fide uses of borrowed-name accounts need to be protected, however. For example, families and fraternity groups pool funds in the accounts of leaders. Parents deposit money in the names of children. In such cases, legal interpretation should be flexible. Rooting out such practices may inconvenience the daily lives of ordinary people.

In hindsight, the introduction of the system was one of the epochal and revolutionary measures which had reduced the underground economy, blocked the flow of bribery and reduced crimes linked to money. Tax bases were broadened following the implementation of the system.

Businessmen and bankers should bear in mind the fact that it is a matter of time for their bogus accounts to be brought to light. They can no longer hide their wealth and stash slush funds thanks to the existence of whistle blowers.