Financial Supervisory Service Unable to Conclude Severe Disciplinary Action Against Industrial Bank of Korea in Fund Scandal... What Was the Burden?

No Conclusion on Disciplinary Measures in Private Equity Fund Scandal; Meeting to Resume on the 5th of Next Month

IBK Industrial Bank Headquarters Exterior (Photo by Asia Economy DB)

[Asia Economy Reporter Park Sun-mi] The Financial Supervisory Service (FSS) failed to finalize disciplinary action against former Industrial Bank of Korea (IBK) President Kim Do-jin, who caused massive losses to investors through the sale of Lime and Discovery funds, at the 3rd Disciplinary Committee meeting. This contrasts sharply with last year's 3rd Disciplinary Committee, which handed down a series of heavy sanctions against current and former CEOs of securities firms. As the scope of disciplinary targets has expanded to include policy banks and financial holding companies, significant repercussions are expected depending on the outcome, indicating that the FSS is feeling considerable pressure.

According to the financial sector on the 29th, the FSS postponed the disciplinary decision on former President Kim to the 5th of next month at the 3rd Disciplinary Committee meeting held the previous day. The FSS stated, "At this meeting, we thoroughly heard statements and explanations from company representatives, including legal counsel, and the FSS Inspection Bureau."

The FSS holds a principle of imposing strong sanctions and accountability for financial company incidents and accidents, and has previously issued a series of heavy sanctions against current and former CEOs of securities firms that sold Lime funds, citing inadequate internal control standards. However, despite three meetings, the FSS has not decided on the disciplinary level for former President Kim, who was reportedly pre-notified of heavy sanctions by the FSS, implying the FSS's considerable concern over the impact on the banking sector.

It is also burdensome that the first disciplinary target in the banking sector for the Lime fund incident is a policy bank, IBK. Since policy finance has become important, heavy sanctions against a policy bank that aligns with government and financial authorities' policy finance could spark controversy.

The disciplinary decision in this case also serves as a barometer for the disciplinary levels for seven other banks that sold Lime funds, necessitating a more cautious decision. If heavy sanctions against former President Kim are confirmed, heavy sanctions will be inevitable in disciplinary committees for other banks with larger Lime fund sales, such as Shinhan, Woori, and Hana. The sales volume of Lime funds by bank is as follows: Woori Bank with 357.7 billion KRW, Shinhan Bank 276.9 billion KRW, Hana Bank 87.1 billion KRW, Busan Bank 52.7 billion KRW, Gyeongnam Bank 27.6 billion KRW, Nonghyup Bank 8.9 billion KRW, and Korea Development Bank 3.7 billion KRW.

Unlike the heavy sanctions against current and former securities CEOs, the disciplinary committee for the banking sector also affects financial holding company chairmen and vice chairmen, which is uncomfortable for the FSS.

Burden of Heavy Sanctions on Policy Banks and Cautious Impact on Other Financial Holdings
Risk of Escalation into Multiple Lawsuits Like the DLF Incident

In the disciplinary committee to be held within the first quarter, Woori Financial Group Chairman Sohn Tae-seung and Hana Financial Group Vice Chairman Ham Young-joo, who held the president position during the concentrated Lime fund sales period from 2018 to 2019, are within the scope of heavy sanctions. Especially, Chairman Sohn and Vice Chairman Ham already received disciplinary warnings last year related to the overseas interest rate-linked derivative-linked fund (DLF) incident, so overlapping sanctions related to Lime funds could spark controversy over 'double punishment.'

There is also a possibility that heavy sanctions against the banking sector could escalate into large-scale litigation. Last year, in relation to the DLF incident, Woori and Hana Financial Group filed administrative lawsuits and injunctions against the FSS's heavy sanctions, and the court suspended the enforcement of the sanctions, causing embarrassment to the FSS.

The banking sector holds the view that while the financial authorities are also responsible for the private equity fund incident due to inadequate system management, it is unfair to focus disciplinary punishment solely on the banks that sold private equity funds.

This content was produced with the assistance of AI translation services.