"Preventing Embezzlement and Breach of Trust by Card Companies"…FSS Revises Internal Controls in Credit Card Industry

Lotte Card 10 Billion Embezzlement Case as a Trigger
Marketing Partnership Firms and Real Estate PF Management Measures Expected
Comprehensive Model Guidelines to Be Established and Reflected in Company Regulations Early Next Year

Financial authorities are set to overhaul internal controls within the specialized credit finance industry. They plan to prevent incidents such as embezzlement and breach of trust, and also establish management measures for real estate project financing (PF).

According to authorities on the 7th, the Financial Supervisory Service (FSS) will prepare an internal control improvement plan for the specialized credit finance sector within this month and implement it starting next year. The recent embezzlement and breach of trust case involving Lotte Card served as a direct trigger.

Earlier, in August, the FSS uncovered allegations that two employees of Lotte Card’s marketing team embezzled over 10 billion KRW and reported the employees and related parties to the prosecution. According to the investigation, the two marketing team employees colluded with a partner company to enter into a faulty partnership contract, paid 10.5 billion KRW, and then siphoned off the funds through paper companies and family-owned firms to invest in real estate development, purchase automobiles, and gift certificates. During this process, Lotte Card’s internal controls were also found to be inadequate.

Following major incidents in the banking sector, this case raised concerns about the lack of internal control efforts in specialized credit finance companies such as card and capital firms. As a result, a separate internal control improvement plan has been prepared for the specialized credit finance sector. The FSS explained, "Until now, there has been no comprehensive joint model code for the specialized credit finance sector. We plan to create such a model code and have each company incorporate it into their regulations starting January next year."

This plan is expected to include management measures for real estate project financing (PF), such as separating loan sales entities from fund execution entities. It will also reflect the sector’s characteristics, where partnerships, cooperative companies, and marketing activities are more frequent than in other financial sectors, and include related management measures. Strengthening management of partner companies is likely to cover aspects such as the types of businesses of partner firms and tracking fund movements during partnership processes. Additionally, for capital companies focused on automobile financing, management measures related to automobile agents are expected to be included.

Alongside this, financial authorities are also pushing for amendments to the Specialized Credit Finance Business Act (SCFBA) to strengthen internal controls within specialized credit finance companies. While laws such as the Banking Act, Insurance Business Act, Capital Markets Act, and Savings Banks Act include provisions allowing financial authorities to sanction executives and employees for legal violations, the SCFBA currently lacks such provisions. This means that even if executives or employees of specialized credit finance companies commit financial misconduct such as embezzlement or breach of trust, financial authorities do not have the legal basis to directly sanction them.