[Inside Chodong]Why a "Serious Accident Punishment Act" Is Needed for the Financial Sector

Responsibility Disputes over Embezzlement in Financial Companies
Urgent Need for a Robust Internal Control System
Strict Accountability Required for Failures

An embezzlement incident occurred at BNK Gyeongnam Bank. The photo shows a BNK Gyeongnam Bank branch in downtown Seoul. Photo by Jinhyung Kang aymsdream@

Following the embezzlement incident involving approximately 70 billion KRW at Woori Bank in April last year, a series of embezzlement and misappropriation cases occurred: 5.9 billion KRW at Moa Savings Bank in May, 9.5 billion KRW at KB Savings Bank in June, and around 300 billion KRW at Gyeongnam Bank in September. Notably, Lee (50), head of the Investment Finance Planning Department at Gyeongnam Bank, embezzled funds over seven years without anyone noticing. This has sparked ongoing debates over accountability for embezzlement incidents in financial companies.

The Financial Supervisory Service (FSS) pointed to the failure of internal controls at BNK Financial Group, the holding company of Gyeongnam Bank, as the root cause of the embezzlement. According to the Enforcement Decree of the Financial Holding Companies Act, internal control and risk management duties for subsidiaries are explicitly assigned to the holding company. Since BNK Financial Group incorporated Gyeongnam Bank as a subsidiary in October 2014, it did not conduct inspections on high-risk tasks such as Project Financing (PF) loan handling and management.

The responsibility of the accounting firms conducting external audits of Gyeongnam Bank has also come under intense scrutiny. In 2016, when Lee began embezzling PF loan repayment funds, the external audit was conducted by Anjin Accounting Firm; in 2017, when the misconduct continued, it was Samil Accounting Firm. From 2021 to 2022, when PF loan funds and repayments were diverted, Anjin Accounting Firm was the external auditor.

A senior official from one of the accounting firms recently met by a reporter acknowledged that if financial authorities raise accountability issues, it is true that the firms cannot be completely exempt. However, the official implied that placing sole responsibility on the accounting firms is somewhat unfair. The fundamental problem lies in the company’s control and monitoring system. The primary responsibility rests with Gyeongnam Bank for failing to properly operate its accounting management system, while if Anjin and Samil were negligent in their audits, secondary responsibility could be assigned.

Lee’s embezzlement was carried out by diverting amounts recoverable from bad PF loan write-offs into personal accounts. In such cases, since the claims are initially written off as losses and do not appear in the books, even an audit cannot detect them. This allows some degree of evasion from accountability for audit negligence. The accounting industry complains that because sampling rather than full inspections is applied, it is difficult to detect deliberate internal document manipulation by responsible personnel.

The authorities are not free from accountability either. Despite conducting regular and ad hoc inspections, the FSS failed to detect the embezzlement early on. In fact, recent cases were first discovered through whistleblowing or individual financial institutions’ own inspections. However, the authorities argue that embezzlement crimes can only be uncovered by tracing funds, making early detection realistically difficult.

It is not the time to engage in mutual blame games. Attention must be paid to the fact that both authorities and auditors have limitations in detecting embezzlement. To fundamentally eradicate embezzlement, establishing a robust internal control system is paramount.

How can this be achieved? Above all, CEOs and executives of financial companies that fail internal controls must be held strictly accountable. Since the adoption of the Sarbanes-Oxley Act in the early 2000s in the United States, which holds CEOs responsible for accounting fraud, corporate misconduct has significantly decreased. This is why calls for legally strengthening CEOs’ responsibility for internal controls are growing.

On the 11th of last month, Yoon Han-hong, a member of the People Power Party, introduced a bill titled the "Partial Amendment to the Act on the Governance of Financial Companies," which focuses on strengthening financial companies’ internal control management duties and preemptive monitoring roles. The core of the amendment is the introduction of a "Responsibility Structure Chart" that clearly defines the authority and responsibilities of the "Chief Internal Control Officer." This chart documents the duties of financial company executives by position in advance. The UK and Singapore already utilize this system.

Embezzlement and breach of trust incidents involving astronomical sums are emerging almost daily at banks, credit card companies, and other financial institutions. Isn’t it time to establish a "Financial Sector Serious Accident Punishment Act" to shed the stigma of the "era of financial sector embezzlement"?