[Exclusive] IBK Did Not Report 5 Billion KRW Improper Loan to FSS, Citing "No Loss Incurred"

IBK: "Judged as a conflict of interest during internal audit, not subject to reporting"
FSS: "Proactive reporting was required... The logic that 'performing loans = no reporting obligation' is not valid"
Whether the incident was recognized as a criminal act at the time of discovery will be a future point of contention

It has been revealed that IBK Industrial Bank did not report a financial incident related to improper loans to the Financial Supervisory Service (FSS). The bank explained that, because the loan in question was a performing loan with no delinquencies, there was no financial loss to the bank, and therefore the conditions for reporting a financial incident were not met. However, the FSS maintains that if the bank was aware of the suspected incident, it should have reported it proactively. Since the bank became aware of the case through an internal audit, if it had recognized it as a financial incident rather than a simple conflict of interest at the time, it could have been subject to on-site inspections, investigations, and even fines.

IBK: "Judged as a conflict of interest during internal audit, not subject to reporting"

According to a compilation of information from the office of Kim Jaeseop of the People Power Party and this publication on the 31st, IBK did not report a financial incident worth approximately 5 billion KRW that occurred last year to the FSS. The bank determined that the incident did not fall under the category of financial incidents that require reporting according to the law. IBK added that, since it was not subject to reporting, it also did not disclose the incident on its website. Furthermore, the bank stated that the criminal charges were unclear and, at the time of the audit, the incident was judged to be a simple conflict of interest, such as handling loans under the names of relatives.

The incident was uncovered through an internal audit last year, after which the employee involved was dismissed following a criminal complaint. After the criminal complaint, the Seongdong Police Station in Seoul referred the employee to the prosecution without detention in early May on charges of occupational breach of trust. The employee, who was in charge of corporate loans at a branch in Seoul, is suspected of having issued loans totaling 5 billion KRW to a corporation under a family member's name over a three-month period starting early last year for the purpose of real estate investment.

Specifically, IBK explained that this case does not fall under the category of incidents that must be reported according to the "Enforcement Rules for Inspection and Disciplinary Action of Financial Institutions." According to these rules, a financial incident is defined as a case where an employee, in connection with financial business, commits an illegal or improper act by being deceived, solicited, or requested by themselves or others, resulting in loss to the financial institution or its clients, or disrupting financial order. Additionally, incidents subject to reporting must meet at least one of the following criteria: ▲ the incident amount is 300 million KRW or more; ▲ there is suspicion of violating the Criminal Act or the Act on the Aggravated Punishment of Specific Economic Crimes; ▲ there is suspicion of violating the Real Name Financial Transactions and Confidentiality Act; ▲ the illegal or improper conduct undermines the credibility of the financial institution or causes social controversy.

IBK first determined that, although the loan amount involved in the incident was 5 billion KRW, there was no delinquency and the loan was performing, so there was no financial loss to the bank, and therefore it did not count as an incident amount. Since all the loan funds were recovered, the incident amount is considered to be zero. The bank also stated that, since the criminal charges were unclear, the related loan amount does not constitute a financial loss due to criminal conduct, and thus the second condition was not met. The bank added that it proceeded with a criminal complaint to determine whether any criminal conduct had occurred. It also stated that there was no violation of the Real Name Financial Transactions and Confidentiality Act or any undermining of the financial institution's credibility.

FSS: "Proactive reporting was required... The logic that 'performing loans = no reporting obligation' is not valid"

However, the FSS believes that, since the bank became aware of the suspected incident through last year's internal audit, it should have reported it proactively. An FSS official stated, "The bank and the FSS may have different judgments, and from the bank's perspective, the full details of the incident may not have been revealed yet," but added, "However, a financial incident should be reported not after all the details are revealed, but once there is suspicion and it is judged to be an incident."

The FSS also found IBK's explanation that there was no reporting obligation because the loan was performing to be logically unsound. Even if the loan funds have since been recovered, there is room to consider the loss amount at the time the incident was discovered as the incident amount, so this needs to be examined. The FSS explained that the "incident amount" is calculated on the assumption that it qualifies as a financial incident, and if it is deemed a financial incident, the expected recovery amount should not be deducted. An FSS official said, "IBK may argue that it was merely a conflict of interest and not a financial incident, but saying there is no reporting obligation just because the loan was performing does not make logical sense," adding, "It is necessary to examine the loss amount at the time the incident was discovered, whether the incident was properly recognized and reported, and the term 'performing loan' could be misleading."

Whether the incident was recognized as a criminal act at the time of discovery will be a future point of contention

The future point of contention will be whether there was deception, solicitation, or request by oneself or others, and whether the act constitutes a crime under the Criminal Act or the Act on the Aggravated Punishment of Specific Economic Crimes. Since the police referred the case to the prosecution in May on charges of occupational breach of trust, there is room to consider that a criminal act occurred. Therefore, it is important to determine whether IBK recognized that the incident met the above two conditions at the time of the internal audit. If the bank was aware, this would constitute a financial incident, and IBK could be seen as having failed to fulfill its reporting obligation. Otherwise, it could be judged as a mere violation of internal regulations. If IBK failed to meet its financial incident reporting obligation, it could face a fine of up to 50 million KRW, as well as on-site inspections, investigations, or audits by the FSS. Regarding this, an FSS official said, "We have requested confirmation of the facts from IBK," declining to comment further.