[The Editors' Verdict] Woori Bank Must Voluntarily Report and Investigate 'Acquaintance' Corporate Loans

On the 12th of last month, the Financial Supervisory Service announced the case of improper loans involving relatives of Sohn Tae-seung, former chairman of Woori Financial Group and Woori Bank. Questions arose as to why financial accidents frequently occur at Woori Bank, including embezzlement incidents involving 70 billion KRW by an employee in the Corporate Improvement Department and 18 billion KRW by a deputy-level employee at the Gimhae branch.

Since the 2nd of this month, Asia Economy has pointed out through a planned series that the financial accidents at Woori Bank are not due to individual deviations but stem from a long-accumulated flawed organizational culture. Fundamentally, unless the organizational culture changes, such incidents will continue to occur.

As mentioned by Lim Jong-ryong, chairman of Woori Financial Group, the core cause of this improper loan incident lies in the hierarchical top-down relationships where employees follow orders even if they are unjust, handle tasks according to entrenched practices tied to factions and connections, and behave opportunistically by watching the eyes of powerful superiors.

Due to the flawed organizational culture, many improper loans were likely made, and there may be latent embezzlement incidents yet to be uncovered. Following successive embezzlement cases, financial supervisory authorities have initiated institutional improvements, and financial companies are strengthening their internal controls. As a result, achievements have been seen, such as the detection of a 11.7 billion KRW embezzlement case at a NongHyup Bank branch in Seoul last month and an 18 billion KRW embezzlement case at a Woori Bank branch in Gimhae, Gyeongnam, in June.

However, cases like the improper loans involving Sohn’s relatives are difficult to detect even with strengthened internal control systems. This is because improper loans appear as 'normal loans' before becoming non-performing. The detection of this improper loan was triggered by the retirement of Director Lim, as all loans handled by the employee at the time of retirement are thoroughly investigated.

The ability to initiate large-scale loans is a privilege. A significant portion of the improper loans to Sohn’s relatives were loans for corporate real estate purchases. Loans to corporations established by Sohn’s wife and relatives, which Woori Bank stated were not improper loans, amounting to approximately 13.9 billion KRW, were used to purchase a building in Seoul valued at 16.5 billion KRW.

If a close acquaintance holds a certain position within the bank, they can establish a corporation, obtain corporate loans in the corporation’s name, purchase buildings worth hundreds of billions of KRW, pay loan interest with rental income, and resell the buildings when prices rise to gain tens of billions of KRW in profits.

Woori Bank must detect all improper loans lying dormant beneath the surface and properly reform its organizational culture. To do so, a thorough investigation of corporate loans involving relatives, seniors and juniors, friends, and other acquaintances handled or facilitated by Woori Bank employees is necessary. The target should be employees at the department head level or branch manager level and above who have significant authority.

Personal loans are subject to regulations such as the Debt Service Ratio (DSR), leaving little room for improper loans. Corporate loans, however, differ as the intentions of the loan officers can heavily influence the approval process.

Require department heads and branch managers and above to voluntarily report all corporate loans to 'acquaintances' within a set period. Review the reported 'acquaintance' corporate loans and assess their appropriateness. To encourage voluntary reporting, improper loans that do not cause losses to the bank due to defaults should not be penalized but simply repaid.

Also, require voluntary reporting of improper loans made out of habitual compliance with superiors’ orders. This is essential to reform Woori Bank’s organizational culture, which includes unjust orders, flawed work practices, and opportunistic behavior. If improper loans that were not voluntarily reported are later discovered, publicly declare and enforce disciplinary actions against those in the approval chain at a level higher than standard procedures.

Furthermore, other banks should also conduct thorough inspections to check whether improper loans similar to those at Woori Bank exist within their institutions.