[Shaking Financial Leadership] ① 70% of Bank Chiefs Have Disciplinary Records... Revival of Government Control Controversy

It has been found that 70% of the former chairpersons and bank presidents of the four major financial groups?KB, Shinhan, Hana, and Woori?have been disciplined by financial authorities. The reasons for the disciplinary actions included causing harm to customers through incomplete sales and abusing power illegally, such as recruitment irregularities.

On the 30th, Asia Economy investigated the disciplinary records of 47 individuals who served as chairpersons and bank presidents of the four major financial groups from 2001 to the end of 2022, revealing that 33 people (70.2%) had received various degrees of disciplinary actions from financial authorities. KB Financial Group and KB Kookmin Bank accounted for 9 cases, while Hana Financial Group and Hana Bank, Woori Financial Group and Woori Bank, and Shinhan Financial Group and Shinhan Bank each had 8 cases.

The severity of the disciplinary actions was recorded as 19 minor sanctions and 14 major sanctions. According to current regulations, sanctions against financial company executives are categorized as ‘recommendation for dismissal - suspension of duties - written warning - cautionary warning - caution.’ From written warning onwards, the sanctions are classified as major, restricting employment in financial companies. The most common measure was cautionary warning with 10 cases, followed by written warning with 8 cases. There were 5 cases each of caution and suspension of duties, and only 1 case of recommendation for dismissal. The rest were penalties such as salary reductions.

Focusing on the eight individuals who served as chairpersons and bank presidents of the four major financial groups as of the end of November 2022, five had been disciplined. Cho Yong-byeong, Chairman of Shinhan Financial Group; Jin Ok-dong, former President of Shinhan Bank; Ham Young-joo, Chairman of Hana Financial Group; and Sohn Tae-seung, Chairman of Woori Financial Group were disciplined for incomplete sales of financial products and the resulting consumer harm. In the case of Yoon Jong-kyu, Chairman of KB Financial Group, a three-month salary reduction was imposed during his tenure as vice president due to tax treatment issues related to loan loss provisions.

Recently, there have been more lawsuits contesting disciplinary actions rather than acceptance. Chairman Ham and Chairman Sohn filed lawsuits seeking to cancel the disciplinary actions related to the overseas interest rate-linked derivative-linked funds (DLF). Ham lost in the first trial, while Sohn won at the Supreme Court after going through three trials. Sohn is currently reviewing whether to file a lawsuit related to the Lime incident. Chairman Yoon won a related lawsuit in 2015, eight years after the disciplinary action.

Among the 33 individuals disciplined by financial authorities out of the 47 former chairpersons and bank presidents of financial holding companies, 72.7% (24 cases) were disciplined due to customer harm caused by incomplete sales.

Bank Presidents Disciplined for Incomplete Sales

A representative case is the incomplete sales scandals involving Lime Funds and overseas interest rate-linked derivative-linked funds (DLF). Private equity funds with the possibility of total loss were sold to customers as if principal was guaranteed, causing significant consumer harm. During this process, there were indications of artificially adjusting the investment propensity ratings of general investors or improperly intervening in the product selection process. Disciplinary actions were taken against Jin Ok-dong, the then prospective Chairman of Shinhan Financial Group and former bank president, Ham Young-joo, Chairman of Hana Financial Group, and Sohn Tae-seung, Chairman of Woori Financial Group. Financial authorities maintain that the disciplinary actions are justified because the CEOs failed to properly establish and operate internal controls.

The fact that the public suffered damages due to CEOs not properly implementing internal controls is not a recent issue. In 2011, Min Byung-duk, former President of Kookmin Bank, was cautioned for taking responsibility for the widespread ‘kkoekgi’ (forced sales) practice. A comprehensive inspection by the Financial Supervisory Service revealed that 56.1 billion KRW was loaned to 497 small and medium-sized enterprises, with a coercion to deposit 13.5 billion KRW. This was due to arbitrarily increasing loan and deposit targets by 15-20% within the internal board. Executives were informed of these sales practices but took no significant action.

There were also cases involving fraudulent loans. In 2014, it was revealed that employees of KT ENS, a small subsidiary of KT, and cooperating companies embezzled 1.8 trillion KRW. They manipulated accounts receivable to secure large loans from banks, with over 1.1 trillion KRW involved at Hana Bank alone. According to the Financial Supervisory Service, Hana Bank failed to conduct proper on-site verification. Consequently, Kim Byung-ho, former President of Hana Bank, received a cautionary disciplinary action.

Financial Companies Marred by Recruitment Irregularities

Although not leading to disciplinary actions, there have been continuous cases where financial company CEOs were involved in recruitment irregularities. Lee Kwang-gu, who led Woori Bank from 2014 for three years, was prosecuted for obstructing business by unfairly hiring 37 applicants who were otherwise ineligible, including children of high-ranking public officials and major clients, and was sentenced to eight months in prison.

In 2018, a large-scale recruitment irregularity scandal erupted in the banking sector, involving financial holding company chairpersons and sparking controversy. Yoon Jong-kyu, Chairman of KB Financial Group, faced allegations of recruitment irregularities involving his great-granddaughter during his tenure as bank president. Cho Yong-byeong was prosecuted for giving preferential treatment to external applicants, including the nephew’s grandson of former Chairman Ra Eung-chan and the son of a deputy director at the Financial Supervisory Service. Ham Young-joo, Chairman of Hana Financial Group, is also accused of obstructing business by giving preferential treatment to children of senior banking executives. Cho was acquitted with a final verdict, Ham was acquitted in the first trial, and Yoon was not prosecuted.

How Should We View Bank Presidents Receiving Disciplinary Actions?

How should we interpret the fact that 70% of those who served as chairpersons and bank presidents of the four major financial holding companies since 2001 have been disciplined for incomplete sales, recruitment irregularities, and other issues? Did these financial holding company chairpersons and bank presidents actually commit many wrongdoings warranting disciplinary actions, or did financial authorities excessively exercise their disciplinary powers? In the past, financial companies rarely filed lawsuits against disciplinary actions by authorities, but why have such cases increased recently? Has the authority of financial regulators fallen so low that financial companies disregard them?

Recently, there was controversy over government intervention (gwanchi) when financial authorities blocked the reappointment and forced the retirement of Cho Yong-byeong, Chairman of Shinhan Financial Group, and Sohn Tae-seung, Chairman of Woori Financial Group. Where is the boundary between good and bad government intervention? How should we view internal governance (naechi), where financial holding company chairpersons form close relationships with major shareholders in ownerless companies and maintain long-term rule without checks from boards or auditors? What should be the desirable governance structure or internal control system in South Korea’s financial sector?