"Preventing Embezzlement Accidents"... Financial Supervisory Service Announces Policy to Strengthen Internal Controls in Financial Companies

[Asia Economy Reporter Song Seung-seop] The Financial Supervisory Service (FSS) has introduced a policy to strengthen internal controls to prevent financial accidents. This comes about five months after the FSS and the industry formed a task force (TF) in response to a series of embezzlement incidents.

According to the FSS on the 3rd, a total of 20 improvement tasks for internal controls in financial companies were prepared across four sectors. These tasks were derived by sector-specific TFs based on self-assessments of internal control operations by financial companies, FSS inspection results, and analyses of major accident cases.

First, control functions for vulnerable areas prone to accidents will be strengthened. Improvements will be made to the rotation system, mandatory leave system, and segregation of duties for employees at risk of incidents. Procedures for exceptions to the rotation system will be tightened, and limits on the duration of exception work periods will be set. The scope of mandatory leave will be expanded from ‘risky duties’ to ‘long-term employees.’ Access control to terminals will also become more stringent, enhancing mutual checks and the effectiveness of accident prevention functions.

Control capabilities in vulnerable areas identified through recent accident analyses will also be enhanced. For savings banks and specialized credit finance companies (yeojeonsa), measures such as segregation of duties during project financing (PF), designated account remittance systems, IT systems, and prevention of forgery and alteration of fund withdrawal requests will be established. In the banking sector, for joint funds of creditors related to corporate restructuring, a regular verification procedure by creditors on the appropriateness of fund management will be mandated.

Measures to enhance financial companies’ own internal control capabilities have also been introduced. By establishing conflict of interest prevention devices, the effectiveness of self-audits will be secured, and the manpower and expertise of compliance monitoring organizations will be expanded to strengthen the companies’ internal capabilities. Additionally, a ‘self-diagnosis system’ will be introduced for small and medium-sized specialized credit finance companies (with total assets under 2 trillion KRW). This system allows companies to select risk-prone areas as self-diagnosis tasks and conduct self-inspections and improvements according to checklists. The criteria for installing audit offices in mutual finance cooperatives will also be expanded.

Alongside this, the financial sector will work to establish a sound internal control culture. The criteria for rewarding whistleblowers will be expanded to enhance the effectiveness of the system, while sector-specific standard ‘Financial Accident Prevention Guidelines’ will be prepared (or improved), and accident prevention education and campaigns will be expanded. Furthermore, the FSS plans to encourage the establishment of a healthy organizational culture in the financial sector where internal controls can operate effectively.

Efforts to expand supervisory functions for accident prevention will also be undertaken. The FSS will strengthen continuous monitoring and accident inspections of financial companies’ internal control operations. The weight of internal controls will be increased in management evaluations, and work to specify evaluation criteria will be promoted. For small mutual finance cooperatives with weak internal control systems, the central association’s internal control evaluation model will be revamped.

The FSS stated that tasks that can be immediately implemented through amendments to financial companies’ internal regulations will be promptly promoted and enforced within the year to prevent the spread of financial accidents. Other tasks will be implemented step-by-step as preparations are completed, considering sector-specific circumstances such as organizational and personnel adjustments and IT system integration. The FSS said, “We will prepare detailed implementation plans for each improvement task to ensure they are carried out without disruption according to the characteristics of each sector and monitor their progress. Together with each association and central organization, we will share best practices within sectors to continuously ensure that internal controls operate effectively across the entire organization.”