The recently revealed irregular loans amounting to 7.4 billion won at Bank A occurred during a period of intensive financial accident crackdown by the Financial Supervisory Service (FSS) and the banking sector. The FSS directed a limited scope investigation, and Bank A, by merely meeting those criteria, failed to detect new types of irregular loans. It was not until four years later that Bank A realized the incident through an external report. There are indications that the financial sector needs to move away from its past 'after-the-fact' approach and establish a comprehensive financial accident management system.
According to documents submitted to the National Assembly's Political Affairs Committee by Representative Lee In-young of the Democratic Party of Korea on the 19th, Bank A submitted the results of its self-inspection of financial accidents within the bank to the FSS in 2023. This self-inspection was a measure following FSS directives. On Aug. 17, 2023, the FSS summoned 17 bank heads and demanded investigations into comprehensive internal control systems and financial accidents.
The problem is that despite the extensive crackdown period, significant irregular loans occurred at Bank A, which went undetected. Bank A disclosed the irregular loans amounting to 7.4 billion won on the 23rd of last month. An employee at one branch provided loans for facilities and operations while ignoring false documents from corporations, accepting money from October 2021 until November 2023. Irregular loans were also issued right before the FSS directives in June 2023, and new irregular loans were made shortly after the self-inspection in September 2023. The total loan amount executed was 12.77 billion won, and the amount not yet recovered is 7.4707 billion won.
The reason for the gap in internal control was that the FSS and Bank A focused only on certain types of incidents. In 2023, the FSS gathered bank heads to issue self-inspection directives and presented 'recent similar cases related to accidents' as inspection items. At that time, cases of improper gains using undisclosed information by a KB Kookmin Bank employee, arbitrary account openings by Daegu Bank employees under customers' names, and embezzlement of 59.5 billion won in a real estate project financing by a Kyongnam Bank employee came to light. Bank A, concentrating on similar cases as set by the FSS, did not examine operational loans for corporations. As a result, irregular loans occurred before and after the self-inspection without being detected.
Last year, a large-scale investigation into irregular loan status was conducted following FSS directives, but Bank A failed to identify incidents related to operational loans for corporations. In this case, the scope of the investigation was also limited. Beginning in April to June of last year, banks investigated suspicious transactions related to real estate collateral loans for small and medium-sized enterprises and submitted the results to the FSS. Although Bank A participated in the self-inspection, it did not identify the potential for incidents in other loans apart from the real estate collateral loans that were within the FSS investigation scope. A Bank A official noted, "This incident was not included in the inspection targets based on the criteria for selection."
Bank A did not notice the incident for nearly four and a half years after the first execution of the irregular loans. This incident was revealed through a tip sent by a contact in a corporation involved in the irregular loans. On March 5 this year, a tip was sent to Bank A, and the internal inspection department based on this initiated on-site inspections at branches on the 1st of last month. Subsequently, Bank A reported the incident to the FSS on the 9th of last month.
Experts evaluate that this case reveals loopholes in the 'after-the-fact' measures. They note that merely responding to recent accident cases and taking corresponding follow-up actions only leads to incidents occurring in other areas. Professor Jeong Ji-yeol of Hanyang University’s Business School advised, "The FSS should not limit itself to checklist-based inspections but should also activate systems for detecting and reporting atypical transactions." Professor Jeong added, "Banks should not merely meet the FSS directives but should build an internal control system based on a risk-based approach to enhance early detection capabilities for accidents."
Representative Lee In-young stated, "If irregular loans have been left unattended, it is clear evidence of the internal control system not functioning within the bank." He emphasized, "With the current practice of superficial responses, it is impossible to uproot the root causes of financial accidents," urging the FSS to design an effective inspection system while insisting that banks overhaul their internal control systems.