Will Lee introduce stern penalties to prevent irregularities at banks?

President Lee Jae Myung, second from left, attends a meeting at the Korea Exchange in Yeouido, Seoul, June 11. Yonhap

Expectations are growing over whether President Lee Jae Myung will introduce stern penalties to eradicate employee misconduct, including embezzlement, poorly screened loans and fraud, at banks and other financial institutions, market watchers said Tuesday.

The most widely discussed measure is "one strike, you're out" rule, a zero-tolerance policy for stock manipulation to be enforced by Financial Services Commission, the Financial Supervisory Service (FSS) and the Korea Exchange. The three said last week that a joint response team will be established to investigate and monitor irregularities related to stock price manipulation.

The team will also delist poorly managed and fraudulent companies. The policy will be applied to illegal short selling practices and false financial data disclosures, a significant step in stricter oversight promoting market fairness.

“The capital market is coming under strengthened oversight, and so should the banks,” an industry official said on condition of anonymity. “Employee embezzlement, poorly screened loans and fraud continue to happen every so often because they are not met by consequences severe enough to deter them in the first place."

Embezzling tens of billions of won leads to a prison term of less than 10 years. This a slap on the wrist and is even an incentive for those who are willing to engage in the illegal act, he said.

“Think about it. The benefit of taking tens of billions of won in company funds outweighs a couple of years in prison," the official said. "The perpetrators think that they can take some years in prison as long as they can use the large amount of money to make a quick investment in cryptocurrencies or stocks. Blaming them will not have as strong an effect as three decades in prison, for example. Harsh penalties are the way to go.”

This year, financial irregularities including embezzlement have been reported every month.

The latest was a fraud case in an amount of over 2.6 billion won disclosed by KB Kookmin Bank last week. The fraud involved real estate and took place in September 2023, meaning it went undetected for nearly two years.

KB also reported another fraud case involving a solar power project loan worth over 2 billion won. It occurred between June 2019 and July 2022, but remained uncovered for six years.

Standard Chartered Korea reported a financial fraud case of over 13 billion won in an FSS disclosure late June.

The misconduct continued for a little more than two years, from February 2022 to June 2024, and was uncovered in the lender’s recent internal investigation.

In February, the bank reported fraudulent applications for jeonse housing deposits and unsecured loans totaling 1.47 billion won.

Jeonse is a leasehold unique to Korea. The home-renting system allows tenants to pay a refundable lump sum in lieu of monthly rent.

Similarly, Toss Bank reported embezzlements adding up to 2.8 billion won in May and June. The cases occurred on May 30 and June 13.

The cases went undetected for more than two weeks, before an internal monitoring system picked up the signs of unusual activities.