"To Prevent Embezzlement in the Financial Sector, Financial Penalties Must Be Strengthened"

[Asia Economy Reporter Eunju Lee] As a series of embezzlement incidents occur in the financial sector, there are opinions that it is necessary to strengthen monetary sanctions to enhance the effectiveness of internal controls. In South Korea, while strong personal sanctions are imposed when incidents occur, the level of monetary fines imposed on financial institutions is low, leading to an analysis that financial companies have little incentive to establish effective internal controls.

On the 31st, Hyoseop Lee, Senior Researcher at the Korea Capital Market Institute, suggested in the report titled “Current Status and Improvement Directions of Internal Control Systems in Financial Companies” that “the monetary losses caused by negligence in internal control should be greater than the human and material resources invested in strengthening internal control capabilities,” and “if a financial company neglects internal controls, it is necessary to impose substantial monetary sanctions according to the predetermined scope of control negligence.”

Internal control refers to the internal procedures that all members of a company must comply with. It is a set of regulations and procedures established in advance for ‘self-monitoring and supervision’ to minimize employee misconduct and moral hazard within the company. The researcher pointed out that South Korea lacks incentives to promote strong internal controls compared to the United States and the United Kingdom. In particular, the level of monetary sanctions imposed on financial institutions for incidents caused by negligence in internal control is weak.

Lee stated, “South Korea’s governance laws tend not to consider internal control negligence unless a financial accident occurs, and even when negligence is recognized, monetary sanctions are limited to fines.” Therefore, financial companies have little incentive to allocate significant costs to strengthen internal control capabilities. In South Korea, if it is judged that the obligation to establish internal control standards has been violated, a fine of more than 100 million KRW is imposed on financial companies. In contrast, the US and UK impose strong civil penalties on financial institutions that negligently establish or operate internal controls, thereby enhancing the effectiveness of internal control systems.

However, Lee believes that the unique situation in South Korea, where strong sanctions such as dismissal requests or suspension of duties are concentrated on the CEO when incidents occur in the banking sector, should be improved. If strict external controls such as CEO sanctions or dismissal are imposed solely because internal controls with autonomous normative characteristics were negligently established, financial companies may reduce their intermediary functions for venture investments and risky assets to minimize the possibility of financial accidents. In the US, rather than focusing disciplinary actions on the CEO, they adopt an approach that specifies supervisory negligence or the scope of control in advance, allowing middle managers to be held accountable.

Lee suggested that to enhance the “effectiveness” of internal controls in financial institutions in South Korea, it is necessary to hold not only the CEO as the top supervisor accountable but also the final supervisors and middle management executives responsible. He added, “If a financial company has established and operated a reasonable internal control system, an approach that mitigates sanctions (when incidents occur) can also increase effectiveness,” and “because sanctions can be reduced if it is judged that internal controls were reasonably established and operated in advance, financial companies will actively invest human and material resources to strengthen internal controls.”

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