Industrial Bank of Korea Avoids Severe Sanctions... Closely Monitoring Banking Sector Ahead of Disciplinary Hearing

IBK, 1-Month Partial Suspension of Operations in Disciplinary Hearing... Former President Receives 'Cautionary Warning'

Representatives of the US Fintech Global Bond Fund Victims' Association are holding a rally in front of the IBK Industrial Bank of Korea headquarters in Jung-gu, Seoul, urging compensation for damages. Photo by Moon Honam munonam@

[Asia Economy Reporter Park Sun-mi] Industrial Bank of Korea (IBK) has avoided severe disciplinary action at the Financial Supervisory Service’s Disciplinary Committee (hereafter, the Disciplinary Committee) regarding the private equity fund scandal, prompting other banks that have been pre-notified of severe sanctions and are awaiting the Disciplinary Committee’s decision to closely monitor the situation.

At the Disciplinary Committee held on the 5th, the Financial Supervisory Service (FSS) decided to recommend to the Financial Services Commission a one-month partial suspension of business operations and a fine against IBK for violating the obligation to establish internal control standards (under the Financial Company Governance Act) related to the incomplete sales of the Discovery Fund and Lime Fund. Additionally, Kim Do-jin, the former IBK president who was the bank’s CEO at the time of the private equity fund sales, received a “cautionary warning,” while the former vice president was given a three-month salary reduction.

The level of discipline corresponds to a minor sanction. The disciplinary levels for financial company executives are divided into five stages: dismissal recommendation → suspension from duty → reprimand warning → cautionary warning → caution. Among these, reprimand warning or higher is classified as a severe sanction that restricts employment in financial companies for 3 to 5 years.

Former President Kim had previously been notified of a severe sanction by the FSS, but the disciplinary level was lowered through two Disciplinary Committee hearings. IBK emphasized efforts to compensate victims in order to reduce the severity of the sanctions. Last May, IBK agreed to prepay up to 50% of the investment amount to victims related to the Discovery Fund’s redemption suspension incident, and also decided to prioritize payment of 51% of the unrecovered balance for the Lime Fund.

Between 2017 and 2019, IBK sold Discovery US Fintech Global Bond Fund and Discovery US Real Estate Senior Bond Fund worth 361.2 billion KRW and 318 billion KRW respectively. However, the U.S. asset manager failed to recover the bonds invested with the fund’s money, resulting in delayed redemptions of 69.5 billion KRW and 21.9 billion KRW respectively. IBK also sold 29.4 billion KRW worth of the Lime Fund, which caused a large-scale redemption suspension incident.

Disciplinary Committee for Banks Involved in Lime Fund Scandal Scheduled for the 25th of This Month

As the FSS begins disciplinary hearings for a total of eight banks that sold the problematic private equity funds, starting with IBK, the banking sector is on edge. However, the fact that the disciplinary level for former IBK President Kim was lowered by one step compared to the pre-notification is seen as somewhat easing the pressure on the banking sector.

Previously, the FSS pre-notified severe sanctions against the CEOs of Woori Bank and Shinhan Bank in connection with the Lime Fund scandal. Son Tae-seung, chairman of Woori Financial Group and CEO of Woori Bank at the time of the fund sales, was suspended from duty, while Jin Ok-dong, CEO of Shinhan Bank, received a reprimand warning as a severe sanction. Cho Yong-byeong, chairman of Shinhan Financial Group, was issued a cautionary warning. The disciplinary hearings for these banks are scheduled for the 25th of this month.

If the FSS imposes severe sanctions on current and former CEOs of financial institutions related to the private equity fund scandal, it could lead to reputational damage due to lawsuits challenging the decisions and intensify controversies over the FSS’s evasion of supervisory responsibility. The financial authorities cannot ignore their responsibility for failing to prevent the private equity fund scandal, yet there is public outcry that only the CEOs of financial companies are being held accountable. During last year’s overseas interest rate-linked derivative-linked fund (DLF) incident, the FSS also sparked controversy by excluding the Capital Markets Act?which provides grounds for sanctions on incomplete sales?while focusing on the Financial Company Governance Act for internal control deficiencies, with severe sanctions against CEOs in mind.

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