[Q&A] Lee Sehun: "IBK, Judged to Attempt Concealment of Improper Loans"

IBK Improper Loans Total 88.2 Billion KRW Detected
FSS: "Internal Controls Still Lacking, Strict Sanctions Planned"

The Financial Supervisory Service (FSS) has uncovered improper loans amounting to 88.2 billion KRW at IBK Industrial Bank of Korea. The FSS announced strict sanctions, stating that financial companies were aware of misconduct by employees but tolerated and concealed it.

On the morning of the 25th, the FSS held a briefing at its headquarters in Yeouido, Seoul, revealing 'recent FSS inspection cases related to unfair transactions with stakeholders.'

Lee Se-hoon, Senior Deputy Governor of the FSS, said, "As of the end of last month, the total outstanding balance of improper loans at this bank was 53.5 billion KRW across 58 cases, of which 9.5 billion KRW (17.8%) has become non-performing. Following the detection of these improper loans, it has become difficult to roll over loans, so defaults are expected to increase."

The following is a Q&A with Senior Deputy Governor Lee.

- Could this be the first case to receive sanctions related to the accountability framework?

▲ The accountability framework for banks has been in effect since January this year, and it is difficult to apply it retroactively to past cases. The improper loans at IBK Industrial Bank of Korea occurred previously, so applying the accountability framework law is challenging. However, regardless of the framework's implementation, there are fundamental conflict-of-interest transactions at the bank, and we plan to request improvement measures from the bank. We intend to reflect management obligations and conflict-of-interest transaction management in the accountability framework.

- The IBK case shows issues such as concealment and poor reporting. Do you believe concealment occurred at the bank level? Are you considering sanctions up to the CEO?

▲ Since the inspection is ongoing, it is difficult to comment on the facts or sanction levels at this stage. Securing inspection-related materials and evidence is important. Obstructing this fundamentally or deleting materials is regarded as a serious legal violation. There is a difference between an individual attempting to conceal materials for personal gain and others participating to protect the company's reputation; these are different levels of legal violations. During the inspection, we believe concealment attempts occurred not only by individuals but also at the bank level. The bank may have a different assessment. Although there is room for dispute, we take attempts to delete records very seriously.

- After the IBK inspection, are there any additional institutional improvements under consideration besides the accountability framework?

▲ For record deletion, obstruction of inspection, and concealment, no separate institutional improvements are necessary. Violations are clearly regulated under current laws such as the Criminal Act. Once facts are confirmed, sanctions will be imposed according to existing laws. The Financial Companies Governance Act specifies internal control requirements that the board and management must have. The enforcement decree of the Governance Act requires internal control standards to address transactions with potential conflicts of interest. The financial sector has only formally reflected this part. We plan to order concrete and effective supplementation of this area.

- Do you plan to expand the investigation scope of the IBK improper loan case? Also, when was the improper loan first recognized?

▲ A related tip-off was received by IBK, which conducted an internal investigation and reported the results to the FSS in December last year. The FSS conducted a supplementary investigation after the initial recognition. Organizational concealment is the FSS's view; the bank has a different assessment. Since it is human nature to try to hide wrongdoing, the Criminal Act considers this to some extent. However, based on multiple record deletions and related conversations observed during the inspection, we judge this to be organizational concealment beyond what the Criminal Act permits. We plan to confirm this in future sanctions. There is always a dilemma regarding additional investigations. Investigation personnel are limited, and investigations are prioritized. We believe it is more important to establish measures to prevent recurrence. We will focus on handling inspection results and efforts to prepare self-inspections and recurrence prevention measures by financial companies. Further inspections are expected if necessary.

- Although there is room for dispute, the fact that there was an attempt at organizational concealment suggests holding the organization accountable. Do you also believe management is responsible beyond sanctions? If there was an attempt at organizational concealment, do you think the organization should be held accountable?

▲ Since the inspection is ongoing, it is premature to discuss sanction levels. Legal violations must be finally confirmed, so I said there is room for dispute regarding organizational concealment. It is necessary first to clarify responsibility, such as whether the IBK led the illegal acts or neglected management duties. Necessary procedures will be followed according to relevant processes. At this stage, it is difficult to confirm responsibility or facts and comment on them.