Financial firms face credibility crisis

The Korea Times

The Korea Times

Finance

Mon, December 4, 2023 | 11:57

Economy

Financial firms face credibility crisis

Posted : 2014-04-15 16:40

Updated : 2014-04-15 17:36

Internal control systems need radical overhaul

By Kim Tae-jong

Major banks and other financial firms are facing a credibility crisis in the wake of a series of massive corruption and data-theft cases in recent months.

What is of concern is that these did not take place accidentally but were caused by fundamental problems with their internal control systems and vulnerable security measures.

The crisis began with data-leakage cases at two foreign banks here in December.

Standard Chartered Bank Korea and Citibank Korea were found to be responsible for the leak of about 190,000 cases of sensitive customer information.

But in January, the nation's worst-ever leak took place at three major credit card firms ― KB Kookmin Card, Lotte Card and NH Nonghyup Card ― which affected about 20 million people.

Amid growing concerns over security breaches, other data-leak cases were also discovered. It has been recently discovered that about 30,000 items of customer information at IBK Capital and Citi Capital were leaked illegally to brokers in December.

But what's shocking about the recent cases is that they were not the result of hackers, but perpetrated by insiders, showing another massive data theft could happen at any time at any financial firm.

Along with the data-theft cases, lax internal controls and poor work ethics have also put many financial firms in trouble, and leading commercial banks were no exception.

The Tokyo branches of KB Kookmin, Woori Bank and the Industrial Bank of Korea have been investigated for alleged illegal lending involving employees.

The officials at the three branches are suspected of receiving massive kickbacks in return for offering loans to those who were not qualified for them, and it is known that the bank employees fabricated documents to avoid regulations.

Investigators also suspect that part of the kickbacks may have been used to create slush funds and to lobby the influential.

During the financial authorities' probe into the allegations, two employees at Woori and KB took their own lives

Of local lenders, KB Kookmin Bank has been hit hardest after a series of mishaps and incidents of corruption involving its employees.

An employee at the bank allegedly issued a fake deposit receipt for 970 billion won at the request of a real estate developer who needed it for business purposes. The bank asked the prosecution to investigate the worker.

Another mid-level employee has been also under investigation for the allegations that he was entrusted with about 24 billion won of his relatives and friends, but refused to return the money.

Before the cases, some staffers were accused of embezzling about 11 billion won by forging documents related to national housing bonds. That made the bank unable to sell new bonds for three months from April.

A total of 17 commercial and savings banks, including Hana Bank, are at risk of losing a huge amount of money from the worst-ever loan fraud, as they did not take the necessary steps to verify submitted documents before giving loans totaling 1.8 trillion won.

Among financial firms, Hana Bank sustained the largest financial loss at 157.1 billion won, followed by NH Nonghyup and KB Kookmin with 29.6 billion won each.

Insurance firms are also involved in illicit lending scandals, and the latest example is Hanwha Life Insurance.

An employee from the insurer forged a document last year and gave it to another man, who took out loans worth over 3 billion won from a lender using the document as "collateral," and fled without repaying the debt.

The fraud took place in October and the company learned about it a month later, but it did not immediately report the crime to financial authorities, although the company should have done so by law.

Experts say that financial firms have many loopholes in their internal controls, as they have focused on external growth through mergers and acquisition deals in the past few years.

"Amid growing pressures of restructuring in the financial sector, employees seem to be easily tempted to commit wrongdoings," said Sohn Sang-ho, research fellow at the Korea Institute of Finance.

With mounting criticism of irregularities at financial firms, financial regulators have urged the heads of financial firms to come up with measures to regain trust from customers.

The authorities have also expanded their investigation into the firms in question, vowing to take strict punitive measures depending on the probe results.

But critics argue that a supervision failure by the financial authorities has also contributed to the recent irregularities in the financial sector.

"Financial firms have their own internal control systems," said Financial Consumer Agency President Cho Nam-hee. "The problem is the system doesn't work properly and the authorities' lax supervision and light punishments have made things worse."

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