"Unstoppable Chairman... Persistent Issues in Internal Control and Supervision of Mutual Finance Sector"

[Asia Economy Reporter Bu Aeri] #A, who worked as a branch manager at a credit union in Eunpyeong-gu, Seoul, faced jeopardy in his career after pointing out various illegal activities internally. A reported to the higher-ups about hundreds of forged signatures on insurance application forms occurring within the credit union and irregular loan practices during a real estate-secured loan process involving a construction company. However, afterward, A was isolated by being assigned a desk in a cramped corridor and subjected to CCTV surveillance. Eventually, citing pressure for voluntary retirement, A filed a workplace harassment complaint with the Ministry of Employment and Labor.

Within mutual finance institutions operated with funds from ordinary citizens, outdated corruption and bad practices are repeated annually. According to mutual finance officials on the 1st, the biggest causes are the chairman (union head)-centered management and lack of internal control systems. Even when internal misconduct is reported, a closed organizational culture that believes "just expelling the whistleblower is enough" causes fraudulent acts to become entrenched.

In the case of credit unions, which have assets totaling 124 trillion won, 1,680 branches operate across 873 unions nationwide (as of the end of last year). Each union is independently managed by its chairman, and the National Credit Union Federation acts as a kind of control tower. Credit union members elect their chairmen through a direct election system. Chairmen can serve up to 12 years consecutively. Unlike Nonghyup and Suhyup, which hold nationwide union head elections simultaneously, credit union elections restrict campaign activities such as debates, favoring incumbent chairmen, resulting in local entrenched powers often serving long terms.

Industry insiders believe that fraudulent activities in mutual finance institutions, which financial authorities fail to detect, are considerable. One mutual finance official said, "Before chairman elections, any noise must be avoided, so even if fraud occurs, it is quietly covered up," adding, "When auditors managing branches are from the central federation and personally acquainted, audits by the central federation sometimes do not function properly."

Another issue is that internal IT systems responsible for first-level monitoring of rule-violating loans lag several years behind those of commercial banks. Commercial banks’ systems display warning messages when entered loan documentation exceeds allowable values, but some mutual finance institutions lack such systems.

Unlike commercial banks, mutual finance institutions fall under different government ministries, resulting in no consistent supervisory framework. Credit unions fall under the Financial Services Commission, making their oversight relatively better, but Saemaeul Geumgo is under the Ministry of the Interior and Safety, Nonghyup under the Ministry of Agriculture, Food and Rural Affairs, and Suhyup under the Ministry of Oceans and Fisheries.

Experts advise increasing audit personnel and establishing a consistent supervisory system for mutual finance institutions. Professor Han Jaejun of Inha University’s Department of Global Finance said, "It is difficult for the Financial Supervisory Service, which oversees banks, insurance, and securities, to also monitor mutual finance institutions. Ultimately, the most practical method is for the central federation to increase audit staff and frequency." He added, "In the U.S., there is a separate supervisory agency for mutual finance institutions. Because supervisory systems differ, there is a need to unify them."

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