Rising Crime with Cause... FSC Authority Reduction and Strengthening Defense Rights of Investigation Subjects [War Against Stock Manipulation]

③-⑸ Exercise of delegated authority for detention and on-site investigation until 2009
Loss of authority with the integrated enforcement of the Capital Markets Act
Strengthening defense rights of witnesses and suspects in stock manipulation
Prior notice for all investigations except Fast Track
Self-counseling lawyers allowed to attend and testify

"The seizure and on-site investigation rights limited to the Financial Services Commission... Criminal groups are very well aware of this fact"

Seizure and On-site Investigation Rights That the Financial Supervisory Service Cannot Exercise

While the authority of the Financial Supervisory Service (FSS) to investigate the three major unfair trades?insider trading, market manipulation, and misuse of undisclosed information (seizure and on-site investigation rights)?has been reduced and then stagnated, the defense rights of investigation subjects have been strengthened. This is pointed out as one of the factors contributing to the increase in various securities crimes.

A senior official in the financial investment industry said, "In fact, the FSS used to exercise seizure and on-site investigation rights comprehensively delegated from the Financial Services Commission (FSC), but lost these powers when the Securities and Futures Investigation Regulations and the Securities Exchange Act were integrated into the Capital Markets Act in 2009," adding, "Criminal groups are very well aware of this fact and cleverly exploit it, engaging in market manipulation and other acts using various new methods."

The Capital Markets Act limits the entities that can exercise seizure and on-site investigation rights to the Financial Services Commission. According to Article 426, Paragraph 3 (Items 1 and 2) of the Capital Markets Act, "The Financial Services Commission may take the following measures when conducting investigations pursuant to Paragraph 1, if it deems necessary for investigating violations of Articles 172 to 174, 176, 178, 178-2, 180, and 180-2 to 180-5." Item 1 of Paragraph 3 refers to seizure rights, and Item 2 describes the on-site investigation rights to visit the business premises of the investigation subject to examine documents and mobile phones.

The official pointed out, "The argument that seizure and on-site investigation rights cannot be granted to the FSS is based on concerns about abuse of authority, but this is an excessive worry," adding, "Both on-site investigation and seizure rights are voluntary investigations, so there is no authority to enforce them."

Strengthening of Defense Rights for Investigation Subjects

The defense rights of investigation subjects have been continuously strengthened since 2015. 'Prior notification' and 'right to have a lawyer present' are representative examples. Prior notification means that the FSS informs the investigation subject in advance if there is suspicion of unfair trading violations. Previously, prior notification was only given for general cases such as warnings and imposition of fines.

However, as the need to protect the rights of investigation subjects emerged, the FSC and FSS have been providing prior notification for cases involving referral for prosecution since 2015. Because of this, there are frequent cases where evidence such as anonymous group messages or Telegram chats containing indications of insider trading or market manipulation is reported and investigations begin, but such evidence is deleted during the prosecution's investigation process. Currently, only fast-track (emergency measures) cases are investigated immediately without prior notification.

The right to have a lawyer present was also introduced in 2019 at the request of investigation subjects. Professor Seong Hee-hwal of Inha University Law School said, "Besides self-defense, the FSS allows lawyer statements in general investigations," and pointed out, "The authority of the FSS general investigations (non-special judicial police) also needs to be strengthened."

Editor's NoteIt has been almost one year (April 24, 2023) since the occurrence of the 'Ra Deok-yeon Gate,' the largest stock manipulation-related crime in history (total illicit gains of 730.5 billion KRW), yet the victims' nightmares have not ended. There are no effective victim remedies in the Korean capital market. Litigation is the only option, but due to cost burdens and difficulties in proving damages, victims cannot even attempt it. The amendment to the Capital Markets Act, which supplemented the limitations of criminal punishment and introduced highly effective monetary sanctions due to the 'Ra Deok-yeon Gate,' is significant. However, to eradicate the continuously increasing securities crimes in various forms, it is necessary to establish a system that can efficiently detect and investigate them and to improve additional systems for swift and strict sanctions. The Asia Economy Securities Capital Market Department Special Investigation Team examines advanced systems in overseas capital markets and reviews the challenges and directions for our market to suppress securities crimes. Since intelligent and organized criminal acts occur, we also seek effective measures to compensate investors for damages.

We plan to intensively report from various perspectives on all kinds of unfair trades such as insider trading, fraudulent trading, market manipulation, and reporting obligation violations. We will strive to prepare comprehensive countermeasures to eradicate capital market crimes. Please send tips to (lsa@asiae.co.kr). We will investigate thoroughly and report.

▲Team Leader Seon-ae Lee, Manager △Min-young Kim, Yun-joo Hwang, Min-young Cha, Dae-hyun Kim, Reporters

This content was produced with the assistance of AI translation services.