[Initial View] The Island of Embezzlement and Breach of Trust

"Why are there so many financial investment accidents these days?"

I asked a senior financial expert who retired from the Financial Supervisory Service and is now overseeing supervision tasks at a private financial institution. The answer was unexpected.

"When someone handling money is isolated like an island, accidents happen."

According to his long experience in supervisory work, accidents continuously occur in money-handling tasks. He interpreted that the recent increase in both the scale and frequency of financial investment accidents is due to the lack of watchful eyes.

When the relevant department operates separately like a ‘remote island’ or when the number of staff per branch is drastically reduced, employees have no capacity to pay attention to or monitor each other's work, increasing the risk of accidents. The trend of individuals working like ‘islands’ with the help of digital tools has contributed to the frequent financial accidents. While internal controls, stricter punishments, and AI-based risk management came to mind as solutions, he was caught off guard by an analog analysis that was quite the opposite.

This year, financial investment accidents were particularly frequent in banks and securities firms. Following the large-scale improper loan incident at Woori Bank, an internal employee at Shinhan Investment Corp. attempted trades outside the intended purpose from August until recently, resulting in losses exceeding 100 billion KRW. It is reported that after suffering heavy losses on the so-called ‘Black Monday’ when the KOSPI index plummeted, the employee continued reckless trading to recover losses, which only worsened the damage. The accident occurred in a department that supplies liquidity to Exchange-Traded Funds (ETFs), which is somewhat different from typical securities firm operations.

"If an organization pressures individuals too much, it creates an accident-prone environment."

The senior expert cited excessive performance-driven culture as another intangible cause of frequent financial investment accidents. While some accidents involve personal embezzlement, more often employees make reckless choices out of necessity to achieve results.

The recent crisis faced by securities firms that helped defend the management rights of Korea Zinc can also be seen as a result of walking a fine line between legal and illegal actions for performance. Mirae Asset Securities and KB Securities are undergoing on-site inspections by the Financial Supervisory Service related to Korea Zinc’s share buyback and paid-in capital increase. The authorities view that if Korea Zinc’s board planned to acquire and cancel treasury shares through the buyback while simultaneously planning to repay borrowings via the capital increase, it constitutes unfair trading. If Mirae Asset and KB Securities knowingly assisted such unfair trading, they could be punished for aiding under the Capital Markets Act. In the banking sector, actual arrests of individuals have occurred. A former Woori Bank vice president suspected of improper loans was detained by prosecutors.

No one joins Korea’s leading financial investment companies intending to embezzle. Organizations and authorities need to look into the psychology behind why individuals make such choices. Of course, it is very important for individuals to uphold professional ethics themselves and for organizations and authorities to prevent accidents through thorough systems and strict punishments. However, financial investment firms managing the public’s money should reconsider whether their organizations are isolating individuals into ‘islands of embezzlement and breach of trust.’