Examining the DLF Ruling... The 'Asterisk' That Decided the First Trial Outcome for Sohn Tae-seung and Ham Young-joo

Uri·Hana, Similar Trials with Different Verdicts
'Violation of Internal Control Compliance Obligation' as Trial Issue
Intense Court Battles Expected in Future Appeals

[Asia Economy Reporter Song Seung-seop] The question of who is responsible for preventing financial accidents or illegal activities has emerged as a key issue in the financial sector. This comes as "internal control" became a decisive factor in the verdicts of the derivative-linked fund (DLF) related trials of Sohn Tae-seung, Chairman of Woori Financial Group, and Ham Young-joo, Vice Chairman of Hana Financial Group. Some regulations saw completely divergent interpretations by the courts, making them expected to be core issues in upcoming trials.

On the 17th, Asia Economy analyzed the rulings of the two trials and found differing interpretations of "Appendix 2 of Article 11 of the Financial Company Governance Supervision Regulation." This regulation sets out necessary matters for the Financial Services Commission to execute supervision. Article 11 defines the standards for internal control. Appendix 2 consists of 16 items and specifies the criteria for establishing and operating internal controls in detail.

Chairman Sohn and Vice Chairman Ham are currently involved in lawsuits with financial authorities over responsibility for the DLF incident. The financial authorities imposed disciplinary actions on them for failing internal controls during their tenure as bank heads, and they filed lawsuits seeking cancellation of these disciplinary measures. Although the cases are similar in nature, Sohn won his case in August last year, while Ham recently lost.

Both trials involved intense disputes over whether "internal controls were properly established (Article 11)" and whether "the established internal controls were properly followed (Appendix 2)." In particular, there was debate over whether disciplinary action is possible for failing to comply with internal controls. In other words, the issue was whether violating Appendix 2 regulations can be punishable.

Is disciplinary action possible if internal control 'compliance' is not properly maintained?

The first trial court for Chairman Sohn ruled that "Appendix 2 regulations do not add legal matters but rather other necessary items." Since these are not legal matters, they should be interpreted strictly and are difficult to use as grounds for punishment. Accordingly, the court argued that "there is no legal basis to impose sanctions for violation of the duty to comply, rather than the duty to establish internal control standards."

On the other hand, the first trial court for Vice Chairman Ham interpreted that "Appendix 2 regulations can be regarded as having the same effect as enforcement decree provisions unless there are special circumstances." This means that violating Appendix 2 should be considered equivalent to violating enforcement decrees. The court also stated, "If the standards set during the internal control establishment process are not followed and remain merely formal, it cannot be considered that internal control standards have been established."

However, both courts pointed out common issues. Although their legal interpretations and severity differed, they both highlighted that internal control failures were part of the background of the DLF incident. In Woori Bank’s DLF product selection committee, one member’s evaluation sheet was forged and submitted, and absences were treated as approval votes. If the financial consumer protection center representative opposed, the product could not be launched, but the DLF sales began regardless. Hana Bank did not separately set the validity period for investor information. The courts criticized this by stating, "They failed to prevent suitability assessments based on outdated information."

The outcomes of these two trials are expected to have significant ripple effects. Sohn’s side is already undergoing a second trial due to an appeal by the Financial Supervisory Service, which lost in the first trial, and Ham’s side has also decided to immediately appeal the court’s decision. Initially, the financial sector viewed the banks’ chances of winning as high, but the financial authorities cautiously anticipate a possibility of winning the second trial, judging that internal controls were effectively not properly implemented.

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