Regulations on Executive Liability for Financial Accidents
Authorities May Also Demand Dismissal
'Financial Sector Serious Accident Punishment Act'
Role of Dedicated Compliance Officers to Grow
As the amount of damage caused by large-scale embezzlement and other financial accidents has surged recently, structural reforms to strengthen internal controls within the financial sector are gaining momentum. In particular, since the implementation of the Governance Act in July, financial companies have been required to submit a responsibilities map that clearly defines the responsibilities of top management, prompting busy efforts to establish internal control systems and other countermeasures. Interest in the role of compliance officers, who are responsible for the responsibilities map, is also growing within the financial industry.
Mandatory Submission Due to Governance Act Implementation
According to data submitted by the Financial Supervisory Service to Min Byung-duk (54, Judicial Research and Training Institute class 34), a member of the Democratic Party of Korea, the amount of damage caused by monetary accidents in the banking sector reached 66.2 billion KRW as of May this year. The damage amount from monetary accidents in banks was only 10.2 billion KRW in 2019 and 6.9 billion KRW in 2020, but surged to 91.5 billion KRW in 2022.
In September, KB Kookmin Bank disclosed a financial accident involving 2.6 billion KRW caused by employee fraud. The employee is suspected of illicitly profiting by inflating working hours and falsifying documents under the guise of a contract with a cleaning service company affiliated with a large corporation from November 2019 to December 2021. At NongHyup Bank, an employee at branch D embezzled a total of 11.7 billion KRW by taking out loans using acquaintances' names from June 2020 to August this year and transferring funds to accounts under those acquaintances' names.
The responsibilities map is a system introduced to enhance transparency and consistency in reviewing and sanctioning violations of internal control management duties by senior executives. It consists of a ‘responsibility system chart’ that allows a quick overview of duties by executive position and a ‘responsibility description’ that explains the details of each executive’s responsibilities.
The introduction of the responsibilities map signifies strengthening the ‘internal control management responsibility’ of executives such as financial holding company chairpersons and bank presidents. In case of internal control failure, under Article 30-4 of the Governance Act (Act on the Governance of Financial Companies), the CEO who neglected internal control management can even be subject to a ‘dismissal request.’
The internal control management obligation under the Governance Act applies from the time a financial company prepares and submits the responsibilities map to the financial authorities. As of the 31st, KB Kookmin Bank, Shinhan Bank, Hana Bank, and Woori Bank have submitted theirs.
The Governance Act passed the National Assembly plenary session on December 8 last year as a single bill from the Political Affairs Committee and was promulgated on January 2 this year. According to the National Assembly legislative information system, the Political Affairs Committee explained the legislative intent, stating, “Many countries including the UK have introduced and operated the responsibilities map system to clarify executives’ internal control responsibilities, so domestically, each executive is required to faithfully fulfill their internal control management duties in their respective areas.” It added, “Especially, the CEO and other final persons responsible for overall internal control are given comprehensive management duties to clearly define responsibility for internal control system failures that cause long-term, repetitive, organized, or widespread problems.”
On February 13, the Financial Supervisory Service stated regarding the introduction of the responsibilities map, “By assigning internal control management duties to financial company executives for their respective tasks, fundamental changes in internal control behavior in the financial sector are expected.”
Lee Sang-jik (59, class 26), president of the Financial Lawyers Association and a lawyer at Bae, Kim & Lee LLC, said, “Although financial accidents have occurred repeatedly in the domestic financial sector, sound regulation is needed to foster self-sustaining capabilities and create an ecosystem that can self-check.” He expressed concern, saying, “However, controlling companies through special methods such as the responsibilities map should be carefully reviewed.”
Placement of Financial Experts is Desirable
Interest in compliance officers, who lead the introduction and operation of the responsibilities map, has increased in the financial industry.
Since the IMF foreign exchange crisis, the need for internal control functions in financial companies has been emphasized, leading to the introduction of internal control standards and compliance officer systems in financial regulatory laws such as the Banking Act, Securities Exchange Act, and Insurance Business Act in the early 2000s. Subsequently, the Governance Act enacted in 2017 unified the scattered internal control systems. According to Article 25, Paragraph 1 of the Governance Act, financial companies must appoint at least one compliance officer and may report to the audit committee if necessary.
An industry insider explained, “When the compliance officer system was first introduced, it was perceived as a position where one takes responsibility and steps down in case of financial accidents.” He added, “As a result, there was a tendency to assign executives nearing retirement to this position rather than personnel with expertise to prevent financial accidents.”
He continued, “To effectively prevent financial accidents, personnel with expertise in financial law or internal control should be assigned to compliance officers and compliance organizations.” He also noted, “In fact, there are talks about strengthening the qualifications of compliance professionals at organizations such as the General Insurance Association recently, and more colleagues are entering graduate school majoring in financial law or insurance law.”
Kim Ji-hyun, Legal Times Reporter
※This article is based on content supplied by Law Times.
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