Massive irregularities at South Korea’s largest bank

Financial authorities and prosecutors are looking into allegations that employees of South Korea's largest lender, Kookmin Bank, faked government bonds and embezzled the money from their sale; that the bank's Tokyo branch lent more than permitted to a Japan-based firm to secure returns that were used to set up a slush fund; and that the bank didn't return interest as required to businesses for a mortgage product.

The bank has admitted all three allegations, but says the extent of wrongdoing, such as the number of employees involved and amount of money involved in each has not been established.

Kookmin says the bond fraud was uncovered following a tip off from a whistleblower. The bank has not revealed the scale of the fraud nor how many employees were implicated. However, the Financial Supervisory Service (FSS) suspects that the amount could exceed KRW 10 billion and reckons at least 10 employees were involved. The fraud would have required about 10,000 fake documents which could only have been encashed individually, or in very small numbers, across large numbers of bank branches.

The investigation into illegal lending progressed quickly when the FSS handed the case over to prosecutors.
Prosecutors have now sought arrest warrants for two former Kookmin Tokyo branch managers on bribery charges. They, and other workers, in Kookmin’s Tokyo branch are alleged to have made illegal loans worth about KRW 170 billion to unqualified customers in return for bribes between 2008 and 2012. Financial authorities and the prosecution suspect the bribes were channelled to the bank in Seoul to create a slush fund for as yet unknown purposes.

No public comments have been made about the failure to pay interest due to customers.

Further problems for Kookmin loom in Kazakhstan. Operations at the Bank CenterCredit in Almaty, of which Kookmin bought a 41.9 percent stake for KRW 940 billion in 2008, have been suspended by the Kazakh authorities. Mismanagement is alleged, incurring losses of KRW 400 billion for Kookmin.

Financial authorities say there are serious questions about Kookmin's internal controls. Press comments say the regulatory agencies also need scrutiny and there might be need for improvements.

The FSS has also launched investigations at three other major banks, the Hana Financial Group, the Woori Bank, and the Shinhan Bank following allegations of widespread irregularities. According to the FSS, their intention is to stamp out corruption in the banking system.