[The Editors' Verdict] Woori Financial: The Cost of Poor Internal Controls

Wag the Dog. The dog's tail wags the body. This phrase became widely known in Korea after the U.S. subprime mortgage-driven financial crisis. It describes a phenomenon where derivatives originating from the main financial markets?such as stocks, bonds, foreign exchange, and loans?cause significant volatility in the main body, likened to a tail wagging the body. "Wag the Dog" is originally the title of an American film. The movie depicts how the White House, to cover up a presidential scandal involving the sexual harassment of Girl Scouts, designates Albania as an enemy and wages war, enabling the president to regain approval ratings and win re-election. Although it is a clich?d conspiracy story, the process of a leader sacrificing lives and even waging war to avoid responsibility is harrowing.

The 61.4 billion KRW embezzlement by a Woori Bank employee might be just a tail wagging, if judged solely by the scale of the corruption. Considering the size of Woori Financial Group, this issue is unlikely to significantly impact Woori Bank’s financial structure and performance or the stock price of its listed parent company, Woori Financial Group. In fact, Woori Financial’s stock price dropped about 3.59% on the day the embezzlement scandal broke but then recovered. Like other embezzlement cases, there is a tendency to downplay the issue as an individual misconduct problem. Emphasis is placed on the fact that the embezzlement involved a former employee of the Corporate Improvement Department, seemingly to deflect blame elsewhere. Woori Bank President Lee Won-duk said, “The trust that our entire family has built up through hard work was shaken to its core by one person’s malicious intent and selfish crime,” adding, “Depending on the investigation results, strict responsibility will be imposed not only on the individual involved but also on any additional related parties.”

However, blaming the incident on the misconduct of a few individuals does not mean the responsibility for Woori Bank’s internal control failures will be easily resolved. When financial accidents occur due to internal control issues, the institution’s head and standing auditor, as the ultimate persons responsible for internal control, must bear appropriate responsibility. Experts commonly agree that large-scale embezzlement mostly stems from operational issues rather than the design of internal control processes. Considering that the Woori Bank employee’s embezzlement dates back to 2012, key executives of Woori Financial Group and Woori Bank, including Chairman Sohn Tae-seung, are part of the responsibility line. Chairman Sohn was previously subject to severe disciplinary action by financial authorities due to internal control problems arising from the incomplete sale of overseas interest rate-linked derivatives (DLF). Woori Bank has experienced embezzlement incidents for four consecutive years, earning the label of a bank prone to embezzlement. Can this label be removed merely by punishing the embezzler?

Woori Financial is pushing for privatization after 23 years, making it more important than ever to secure trust from financial authorities and consumers. To properly establish itself as one of the top five financial holding companies after privatization, it has also accelerated acquisitions of financial affiliates such as insurance and securities companies. To this end, Woori Financial and Woori Bank officials have been moving quite concretely. Among insurance companies, Kyobo Life Insurance, which is in a management rights dispute with Affinity, is considered a potential acquisition target, with close attention paid to the outcome of the management rights shares. Among securities firms, they are scouting for potential candidates such as Ebest Investment & Securities. If suitable candidates do not appear, converting Woori Finance into a securities company or establishing a new one is also an option.

Whether privatization or acquisition of financial affiliates, none of these efforts will succeed without the support of financial authorities, consumers, and public opinion. Since the incident has already occurred, the speed of trust recovery depends on how the aftermath is handled. The longer appropriate responses are delayed, the more Woori Financial’s core strategy will be shaken, and the costs to be paid are likely to increase.

Lim Jeong-su, Head of Capital Markets Department