IBK Industrial Bank of Korea view

The Financial Supervisory Service will conclude its on-site inspection of the Industrial Bank of Korea, which has been involved in a 24 billion won illegal loan incident, this week.

According to the financial sector on the 20th, the FSS will finish its on-site inspection of the Industrial Bank of Korea, which began on the 3rd, before the Lunar New Year holiday. Initially expected to take a week, the inspection period has been extended to three weeks. A senior FSS official noted, "The number of (illegal loans) has increased more than expected, and it is necessary to look more closely into the nature of the incident as many current and former employees are involved, which has lengthened the inspection."

The Industrial Bank of Korea identified and reported to the FSS that certain branches and loan centers in Gangdong and Seongbuk districts of Seoul inflated the value of real estate collateral to approve more loans during their internal audit. At the time of the report by the Industrial Bank of Korea, the estimated amount of the incident was expected to be in the range of 10 billion won, but additional illegal loans were identified during the FSS investigation, confirming that the amount rose to 24 billion won. There is a high possibility that the amount could increase further.

Financial incidents involving excessive loans through inflated collateral values have been frequently detected since last year. For instance, while the actual value is 5 billion won, during the real estate appraisal process it was assessed at 10 billion won, allowing for loans exceeding 5 billion won, which is referred to as "loan inflation." There are two main types of incidents: one caused by bank employees' negligence in verifying forged or manipulated documents, and the other involving collusion between bank employees and borrowers.

This illegal loan incident is thought to relate to the latter scenario. The borrower is a former employee of the Industrial Bank of Korea working in the real estate development business, and they are colleagues with three branch managers and one loan center manager who approved the loans. The FSS is investigating reports of the retired employee providing favors, such as golf outings, to current employees. An FSS official stated, "The involvement of current and former employees is a significant aspect of this incident," adding, "We are looking into whether there are any types of incidents derived from the illegal loan process."

Actions by bank employees that exceed the loan limit against collateral or use items that cannot be collateral for loans constitute occupational breach of trust. If monetary gifts or favors were received in exchange for approving illegal loans, it qualifies as bribery. According to Article 5 of the Act on the Aggravated Punishment of Specific Economic Crimes, individuals employed by financial companies who accept, demand, or promise money or benefits related to their duties may face up to five years in prison or disqualification of up to ten years.

The key issue is the level of sanctions. As of this year, a new accountability structure has been implemented that allows for holding the chief executive officer accountable when financial incidents occur. Incidents that occurred before the implementation of this accountability structure on the 3rd are not subject to sanctions; however, if there are any illegal loans linked to loans executed after that, the situation could change. A financial sector representative noted, "There is a high likelihood that loans planned for execution during the investigation phase for the Industrial Bank of Korea were halted, making it appear less likely that these will be counted as incidents for this year."