[Accountability Structure Dilemma] ② "No Executive Takes Responsibility Even When Hundreds of Billions Are Embezzled from Below"

The Accountability Structure Chart is an Extreme Measure to Prevent the Annually Increasing Financial Accidents
No Executives Held Accountable Even When Financial Accidents Occur
Expectations That "Cutting Off Responsibility" Will Also Disappear

Editor's NoteSince this year, the introduction of the 'Accountability Structure Chart' in the financial sector has heightened tension within the industry. The Accountability Structure Chart is a system where each executive of a financial company clearly defines the scope and content of the internal control tasks they are responsible for. The government established this system as a preventive measure in response to recurring financial accidents, but on the ground, there are concerns about increased responsibility and disciplinary risks. There is also a significant fear that a single small mistake could lead to losing one's position. This special report examines the background and current status of the Accountability Structure Chart's introduction and explores ways to make the system more efficient and rationally established.

Bank executives are troubled over internal control issues such as improper loans. AI image.

The main reason the government introduced the Accountability Structure Chart is that not only the number of financial accidents in the financial sector has been increasing every year, but their scale has also grown. Although financial companies have been strengthening internal controls on their own, the effects have not been properly realized, leading to calls for effective institutional improvements. Another key background for the system's introduction was the limitation of the legal framework, which made it difficult to legally punish those responsible even when major financial accidents occurred.

The Accountability Structure Chart is a drastic measure to prevent the annually increasing financial accidents

According to the Financial Supervisory Service and the office of Kim Jae-seop, a member of the People Power Party, the financial accident damage amount at 15 major domestic banks last year was 187.7 billion KRW, a 2.8-fold increase compared to 66.6 billion KRW recorded the previous year. The financial accident damage amount, which was around 6.8 billion KRW in 2020, increased 27 times in just four years. The number of financial accidents also more than doubled, from 30 cases in 2023 to 61 cases last year. Looking at the financial accident amounts by bank, damages were concentrated in large banks such as KB Kookmin Bank (69.4 billion KRW), NongHyup Bank (45.3 billion KRW), Woori Bank (38.3 billion KRW), and IBK Industrial Bank of Korea (24.3 billion KRW).

A Financial Supervisory Service official explained, "Financial accidents increased most significantly last year among the past five years," adding, "Financial accidents have become larger and more sophisticated, involving brokers or collusion among employees, which has increased the scale of financial accidents as well as the average amount per incident." Lawmaker Kim Jae-seop pointed out, "The sharp rise in financial accidents and legal violations in recent years indicates that internal controls have not been functioning effectively."

As financial accidents have not decreased annually, voices have grown louder that existing laws and internal control standards have limitations in preventing accidents. Before the introduction of the Accountability Structure Chart, internal control regulations were perceived as formalities, and there were continuous criticisms that they failed to bring about changes in awareness and behavior among managers and employees in operational departments, making punishment difficult. There has been increasing demand for stronger institutional improvements to substantially strengthen internal controls in financial companies.

In particular, although financial accident damages have increased every year, it has been controversial that punishment of internal control officers is not easy. For example, in the 2019 Derivative Linked Fund (DLF) incident, significant consumer damage occurred due to incomplete sales, but since the governance law only required establishing internal control standards at the time, there was no legal basis to punish even if internal control standards were inadequately followed, leading to the cancellation of sanctions against financial executives by the financial authorities. Similarly, regarding the incomplete sales of the Hong Kong H-Index Equity-Linked Securities (ELS), which became a major issue last year, there was no legal basis to punish the CEOs of the financial companies that sold the product, causing considerable concern for the financial authorities.

Legal amendments introduce punishment regulations for senior executives failing internal controls

However, with the recent legal amendments, the responsibility for internal control failures has become relatively clear, and it is expected that executives can be punished when financial accidents occur. A senior official from the financial authorities said, "Before the introduction of the Accountability Structure Chart, even if a major financial accident occurred, financial company executives responsible for managing internal controls rarely took responsibility," adding, "With the law amended, such unreasonable cases are expected to decrease."

Hyun-kyun Lee, a research fellow at the Korea Law Institute, stated, "Before the amendment, the obligation to establish an internal control system under the Financial Company Governance Act was principle-based regulation, making it difficult to hold management accountable for violations," emphasizing, "However, under the amended Financial Company Governance Act, even if the Accountability Structure Chart, internal control standards, and risk management standards are prepared and submitted, if due care is not exercised and a financial accident occurs as a result, responsibility can be imposed, making effective accountability possible."

Research fellow Lee also predicted, "The Supreme Court of Korea has ruled that directors of stock companies are required to comply with monitoring duties over the company's overall operations through establishing internal control systems," and "In the future, the Accountability Structure Chart will play an important role in determining compliance or violation of monitoring duties."