ed Loan scandal in Tokyo

Constant oversight of banks’ overseas branches needed

What happened to the Tokyo branches of Korea’s leading commercial banks?

Ripples from an illegal lending scandal involving these branches continue to spread, as bank employees who were under investigation over allegations of illicit lending commit suicide one after another.

The body of a former manager of Woori Bank’s Tokyo branch was found inside a burned-out car in Yangju, north of Seoul, Tuesday night. The victim, surnamed Kim, is suspected of killing himself after knowing that new evidence emerged related to his charges.

Kim, who worked as a manager of the Tokyo branch until last year before returning to Korea, had been under investigation by the Financial Supervisory Service (FSS) on suspicion that he and other employees received kickbacks for issuing loans.

In December, an employee at Kookmin Bank’s Tokyo branch also took his own life amid an FSS probe into allegations of illegal lending.

The suicides came after the financial regulator uncovered illicit loan cases involving the two branches, plus the Tokyo branch of the Industrial Bank of Korea. Kookmin is charged with offering 500 billion won in illegal lending, while Woori and IBK allegedly lent 60 billion won and 13 billion won, respectively.

The officials at the three branches are suspected of receiving massive kickbacks in return for offering loans to financially strapped Korean business owners and ethnic Koreans in Japan who are unable to gain access to Japanese banks for loans. The typical method was to inflate the appraised value of real estate offered as collateral, which made it possible for borrowers to provide more kickbacks through loan brokers.

In the process, the bank employees fabricated documents to avoid the regulation concerning credit lines, created borrowed-name accounts and engaged in money laundering.

Even more serious is that part of the kickbacks may have been used to create slush funds, which have been funneled into the country for various lobbying activities. It’s no coincidence that all the three involved banks are those under greater state control.

Allegations of slush funds, if proven true, will rock the financial community significantly, and their implications will be far-reaching, given that some cronies of former President Lee Myung-bak once dominated our financial circles.

The most serious aspect of the latest loan scandal is that such irregularities are not limited to Tokyo. Rather, it may be reasonable to think that similar incidents could take place in overseas branches of other banks, although there are differences in methods and size as far as illegal lending is concerned. Eleven Korean banks currently operate 150 branches and local subsidiaries abroad.

The FSS vowed to overhaul its supervisory structure and inspect all overseas offices to confirm if there is any wrongdoing, but that’s not enough, considering that irregularities were handed down systematically for too long. It’s essential to establish a constant oversight system for banks’ overseas branches.

Also, this may be a good occasion to re-examine if such branches need to exist, taking into account their inadequate role and functions.