[Exclusive] Court Rules “Hana Bank Cannot Expense ‘Employee Embezzlement Settlement’ and ‘Lone Star Arbitration Fees’”

Hana Bank filed a lawsuit requesting that the settlement money from the ‘customer deposit embezzlement case’ and the arbitration award from the ‘Lone Star international arbitration’ be treated as deductible expenses (losses or costs) under the Corporate Tax Act to receive tax reduction benefits. However, the court ruled that the tax authorities’ decision to disallow these as deductible expenses (non-deductible expenses) was correct.

According to the legal community on the 27th, the Administrative Court of Seoul, Administrative Division 4 (Presiding Judge Kim Jeong-jung) recently announced that there was no problem with three decisions in the administrative lawsuit filed by Hana Bank and Hana Financial Group against the Namdaemun Tax Office, requesting the cancellation of six tax impositions including corporate tax, education tax, and securities transaction tax from 2013 to 2018. These three decisions were ‘non-deductibility of employee embezzlement accident settlement money,’ ‘non-deductibility of Lone Star international arbitration award,’ and ‘tax imposition related to non-receipt of affiliate trademark usage fees.’

This lawsuit was mainly filed concerning incidents surrounding the Foreign Exchange Bank, which Hana Bank acquired in 2015.

Previously, Foreign Exchange Bank paid approximately 59 billion KRW in settlement money to the victims related to an employee embezzlement incident in 2013-2014. This stemmed from a case where branch manager Jeong, formerly of Foreign Exchange Bank, managed a total of about 68.4 billion KRW in assets of VIP clients from 2006 to 2010, but incurred losses from arbitrarily invested funds and was defrauded by companies he had lent money to, resulting in a confirmed five-year prison sentence for embezzlement.

Additionally, Foreign Exchange Bank paid 41.3 billion KRW to the US-based private equity fund Lone Star following an international arbitration court’s decision on damages in 2015. At that time, Lone Star had to pay approximately 71.3 billion KRW in damages to Olympus Capital and others, the second-largest shareholders of Foreign Exchange Card, due to spreading false information to reduce the sale price during the merger of Foreign Exchange Card. The Singapore International Arbitration Tribunal ruled that “Foreign Exchange Bank must also share the compensation.”

Hana Bank argued that these payments should be fully treated as deductible losses. However, the tax authorities issued a corporate tax correction notice stating, “These cannot be treated as deductible expenses, so please correct.”

The court stated, “Jeong’s embezzlement was established in relation to the plaintiff. The plaintiff’s payment of the related settlement money (on behalf of Jeong) was the fulfillment of the deposit return obligation to the customer,” adding, “Since both assets (cash) and liabilities (deposit return obligations) decreased simultaneously, there was no net asset reduction at the time of the settlement payment.”

Furthermore, the court explained, “The cause of the expenditure of the (Lone Star) arbitration money was the joint illegal act recognized in the arbitration award between the plaintiff and Lone Star funds, etc. The illegal act occurred during the process of urging Olympus Capital to sell shares despite incurring losses to overcome the exceptional liquidity crisis of Foreign Exchange Card caused by the so-called card crisis.” The court also emphasized the 2017 Supreme Court ruling that “Costs incurred in violation of social order are generally excluded from recognized ordinary expenses.”

However, the court ruled that the entire tax impositions in this case should be canceled. Regarding the other three tax impositions in this lawsuit?‘non-deductibility of refund from the interest rate manipulation case,’ ‘securities transaction tax related to stock exchange between Hana Financial Group and Foreign Exchange Bank,’ and ‘education tax related to the merger of Foreign Exchange Bank’s Indonesian subsidiary’?the court found illegality. It judged that it was difficult to calculate the tax amount by separating only the lawful impositions. Once the ruling is finalized, the tax authorities must recalculate and impose taxes on the impositions deemed illegal.

The ‘interest rate manipulation case’ involved Foreign Exchange Bank illegally raising additional interest rates on about 3,000 small and medium-sized enterprises from 2006 to 2008, collecting an extra 18.1 billion KRW in interest, which led to sanctions including refunds by the Financial Supervisory Service. Foreign Exchange Bank treated the refund of about 11 billion KRW as deductible expenses, but the tax authorities disallowed this and taxed accordingly. Considering that Hana Bank was not held responsible in related civil and criminal lawsuits, the court pointed out that the tax authorities’ decision on the refund was unjust.