"Inadequate Internal Controls in the Financial Investment Industry"…FSS Strengthens Inspections of Securities, Asset Management, and Trust Companies

"Internal Controls in the Financial Investment Industry Relatively Inadequate"
Director Lee Bok-hyun Points Out at Executive Meeting
Capital Market Bureau to Strengthen Inspections in Second Half
Speeding Up Ongoing Internal Control Inspections

Lee Bok-hyun, Governor of the Financial Supervisory Service, is greeting attendees at the "Construction Industry Meeting for the Soft Landing of Real Estate PF" held on the 29th at the Construction Hall in Gangnam-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

The Financial Supervisory Service (FSS) is strengthening internal control inspections in the financial investment industry. This is due to ongoing internal control issues such as employees’ pursuit of personal gain at securities firms, asset management companies, and trust companies.

According to the financial investment industry on the 4th, the FSS’s Financial Investment Inspection Bureau plans to intensify internal control inspections targeting securities firms, asset management companies, and trust companies in the second half of the year. Additionally, it intends to accelerate the ongoing inspections. This decision is based on the judgment that there is a need to strengthen internal controls in the financial investment sector. Recently, FSS Governor Lee Bok-hyun reportedly pointed out at an executive meeting that "internal controls in the financial investment industry are relatively inadequate compared to those in the banking or insurance sectors."

Currently, internal control issues persist at securities firms, asset management companies, and trust companies. A representative example is the pursuit of personal gain related to real estate financing projects (PF).

Earlier, the FSS uncovered cases where securities firm employees embezzled hundreds of millions of won by manipulating the PF commission amounts received from developers and reported the matter to investigative authorities. These employees received 1 billion won in commissions from developers but reported only 500 million won to their employing securities firms.

There were also numerous cases of loans made using development costs as collateral. PF loans from financial companies are subject to the Loan Business Act, which limits the maximum interest rate to 20% per annum. If this is exceeded, the principal loan amount must be reduced by the excess portion. However, among the cases uncovered by the FSS, some had annual interest rates reaching 100%.

In addition, trust company employees were found to have engaged in real estate speculation using undisclosed information obtained in advance. They reviewed project analysis materials such as the schedule for designation of maintenance zones by local governments and expected sale prices, then purchased other apartments and villas within the same project site.

The FSS judges that the reason such cases continue to occur is due to inadequate internal control systems in the financial investment industry. Accordingly, it plans not only to strengthen internal control inspections but also to comprehensively review the internal control systems of financial companies.

A financial regulatory official said, "Starting from June, we will accelerate the ongoing inspections and plan to strengthen inspections related to internal controls going forward."