JB Financial Group Falsified Business Reports and Omitted Some Submissions Over 4 Years

Financial Supervisory Service imposes a fine of 192 million KRW on JB Financial Group
Violation of obligation to submit quarterly business reports for 16 quarters since Q2 2019
Notified of 5 management caution items and 9 improvement items
Inadequate risk management of subsidiary real estate PF and classification system for asset soundness of overlapping corporate borrowers

JB Financial Group was found to have failed to submit or accurately report certain information regarding its financial condition and other items in its regularly required business reports for four years. Additionally, deficiencies were identified in its compliance monitoring functions, subsidiary real estate project financing (PF) risk management, and the classification system for asset soundness of overlapping corporate borrowers.

According to the Financial Supervisory Service (FSS) on the 1st, the Bank Examination Division 2 recently notified JB Financial Group of a penalty of 192 million KRW for violating the obligation to submit business reports over 16 quarters from the second quarter of 2019 to the first quarter of 2023. Related employees received 'self-correction required' sanctions. Under the current Financial Holding Companies Act, holding companies are required to prepare and submit quarterly business reports detailing operating performance and financial condition, among other items prescribed by Presidential Decree, to the FSS Commissioner by March, June, September, and December of each fiscal year.

The FSS examination revealed that JB Financial Group either failed to submit or inaccurately prepared information concerning intercompany transactions among holding companies and financial condition in the business reports submitted over approximately four years. The Enforcement Decree of the Financial Holding Companies Act requires business reports to include an overview of the financial holding company, subsidiary business operations, executives, major shareholders, branches and personnel, and FSS Commissioner actions over the past five years, including the items problematic in JB Financial Group's examination.

The FSS also detected that JB Financial Group violated reporting obligations related to outsourcing between subsidiaries and notified it as a matter requiring self-correction. The current law mandates that holding companies report to the Financial Services Commission when outsourcing non-core financial business operations that may involve risk transfer or conflicts of interest, or when the scope of outsourced work changes, including additions to the main outsourced tasks, with reports due within one month after the half-year period.

The examination found that after reporting the loan solicitation outsourcing contract among subsidiary A, the outsourcing party B, and the trustee C to the Financial Services Commission on June 1, 2015, JB Financial Group changed the outsourcing content by adding ancillary tasks in November 2019 but failed to report this change within the prescribed deadline.

Financial Supervisory Service, Yeouido, Seoul. Photo by Younghan Heo younghan@

Furthermore, the FSS pointed out deficiencies in compliance monitoring functions, classification of asset soundness for overlapping corporate borrowers, and subsidiary real estate PF loan risk management, notifying JB Financial Group of five management advisories and nine improvement items. The examination revealed that JB Financial Group holds two bank subsidiaries requiring strengthened internal control functions under the banking sector's internal control innovation plan, with an additional subsidiary incorporated in June 2022, expanding the need for compliance monitoring. However, the number of personnel in the relevant department remained at five since 2019. The internal control innovation plan requires banks to secure at least one specialist in six areas: credit, foreign exchange, derivatives, risk, IT, and accounting.

The FSS stated, "There are only two internal control staff members, all with experience solely in branch operations, resulting in a lack of professionals with diverse work experience. The shortage of personnel limits effective internal control activities, such as the absence of on-site inspection records. Therefore, it is necessary to increase compliance monitoring personnel to strengthen compliance functions." As of June last year, the relevant department within JB Financial Group had five employees, including one manager and two legal team members, leaving only two staff responsible for internal control.

The FSS also emphasized the need to strengthen procedures for classifying asset soundness and reviewing allowance for loan losses for corporate or individual business borrowers receiving credit from two or more subsidiaries. According to internal regulations, holding companies must apply the same asset soundness classification and loan loss provisioning standards to overlapping corporate borrowers unless separate standards are prescribed by law.

However, during the examination period, JB Financial Group failed to adjust differences in asset soundness classification stages for some overlapping corporate borrowers with differing classifications among subsidiaries without justifiable reasons. This neglect risks loosening asset soundness classification and weakening loss absorption capacity. Particularly, the FSS noted that subsidiaries participating in joint loans with identical credit risk had differing loan loss provisioning rates, yet these were not adjusted, and loan loss provisions were simply aggregated across affiliates, which was problematic.

The FSS notified, "Specific standards must be established to adjust discrepancies in asset soundness classification and loan loss provisioning rates among subsidiaries for overlapping corporate borrowers, and related inspection procedures should be strengthened to enable corrective actions."

Deficiencies were also pointed out in subsidiary real estate PF loan risk management. Some affiliates of JB Financial Group evaluated six projects with potential business deterioration due to poor sales, delayed construction and sales, and progress delays as having 'good' business viability and classified asset soundness as 'normal.' Additionally, some subsidiaries required loan loss provisions for real estate PF loans classified as 'precautionary' to be made through collective evaluation rather than individual assessment, potentially leading to under-provisioning.

The FSS stated, "It is necessary to improve and operate business viability evaluation standards to align with the fundamental principles of asset soundness classification and strengthen supervision. Related regulations should be revised to ensure loan loss provisions correspond to the increased credit risk of real estate PF loans, and related tasks should be reinforced."

The FSS also noted the absence of a procedure for the board of directors to actively express opinions during the financial group's crisis situation analysis and the lack of a validity check process for funding sources when establishing an annual emergency funding plan, recommending improvements. The FSS emphasized, "While operating group crisis situation analysis, the role of the board, documentation of related standards, and agenda management by the risk management committee should be strengthened. When establishing emergency funding plans, procedures to verify the validity of funding methods should be established and regularly reviewed, and related regulations should be improved."

Meanwhile, the FSS also notified nine improvement items citing overall deficiencies in JB Financial Group's subsidiary evaluation operation system, post-credit management system for subsidiaries, executive performance compensation system, management and evaluation system for outside director candidates, and continuous CEO candidate management system.