[Song Seungseop's Financial Light] Financial Accidents and the Responsibility of Leaders

Supreme Court Ruling on Financial Supervisory Service vs Son Tae-seung Legal Battle
Chairman Son Wins Again Following 1st and 2nd Trial Verdicts
"If Internal Controls Were Established, No Sanctions for Non-Compliance"

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[Asia Economy Reporter Song Seung-seop] The legal battle between the Financial Supervisory Service (FSS) and Sohn Tae-seung, Chairman of Woori Financial Group, ended in a decisive victory for Chairman Sohn. The lawsuit began in the wake of the large-scale losses from the overseas interest rate-linked derivative-linked funds (DLF) incident but gradually evolved into a debate over how much responsibility a financial company's CEO should bear for accidents. What was said during the trial, and what ruling did the judiciary make?

'CEO Responsibility' Controversy Started by the DLF Incident

The trigger was the DLF incident. DLFs are funds that invest in securities based on underlying assets such as interest rates, exchange rates, and credit ratings. Several financial institutions, including Woori Bank, sold these products. Although these products could result in total loss, banks effectively explained them as if the principal was guaranteed, leading many consumers to invest money. However, in 2019, global bond yields plummeted, causing significant principal losses. As the damage grew, the FSS stepped in.

Upon investigation, the FSS pointed out that the cause was the banks' 'excessive sales' and 'poor internal controls.' They disciplined the then bank presidents, including Chairman Sohn. The disciplinary action was a 'reprimand,' a severe sanction that restricts reemployment in financial companies for 3 to 5 years. In March 2020, Chairman Sohn filed a lawsuit at the Administrative Court seeking to cancel the disciplinary action, claiming it was unfair. Thus began a 2-year and 9-month legal dispute between the financial authorities and Chairman Sohn.

Chairman Sohn and the FSS legal teams clashed over three main issues: ① Whether the CEO should bear responsibility for internal control failures; ② Whether the DLF incident occurred due to internal controls not functioning; ③ Whether disciplinary action can be taken for the 'duty to establish' internal controls if they were established but not strictly followed. Both the first and second trials recognized the CEO as responsible for internal controls. However, regarding whether there was a significant internal control flaw in the DLF incident, the appellate court overturned the first trial's ruling, stating that the FSS's pointed facts were "marginal and detailed."

The biggest controversy was over the 'duty to establish internal controls' and the 'duty to comply with internal controls.' Internal control refers to the 'procedures that all members of a company must follow.' According to current law, financial company executives have the obligation to establish internal controls. If this is not properly fulfilled, financial authorities can impose sanctions. However, there is no basis for sanctions if the established internal controls are not thoroughly operated. Chairman Sohn's side argued that internal controls were established, but the FSS unfairly imposed sanctions due to 'content deficiencies' or 'operational issues.' The lawyers on both sides even brought in other cases and trial contents to engage in disputes.

Sharp Disputes Over Hana Bank Ruling and Embezzlement Case

FSS Legal Team: We will emphasize the internal control establishment standards mentioned in the Hana Bank ruling. That court recognized that the bank failed to establish standards that would allow proper internal control, resulting in only formal compliance monitoring. Considering that Woori Bank also had ambiguous regulations in its product selection committee, other violations should also be recognized.

Court: Comparing this case to the Hana Bank trial here is somewhat inappropriate.

Chairman Sohn's Legal Team: We will also state our position orally. The FSS judges the Woori Bank case as if there were no internal control standards established, even though there were. In contrast, the Hana Bank case concerned the issue of mis-selling itself. The Hana Bank ruling accepted the defendant's argument as is and ruled based on the ambiguous concept of effectiveness.

April 8, 2022, Seoul High Court

FSS Legal Team: “Recently, a 61.4 billion KRW embezzlement incident occurred at Woori Bank that went unnoticed. This shows that Woori Bank neither established general internal control standards nor complied with them. In conclusion, all sanctions related to the DLF incident were based on sanction grounds, and the damage was enormous, so the plaintiff's demands should be dismissed.”

Chairman Sohn's Legal Team: “The FSS is bringing up an unrelated 60 billion KRW embezzlement case. The investigation is ongoing, and the circumstances are not confirmed. From what is currently revealed, internal control standards were not violated, and the scope of work is different. The basic facts differ, and it is highly inappropriate to mention this as a reason for sanctions.”

May 13, 2022, Seoul High Court

Court: "If Internal Controls Were Established, Non-Compliance Cannot Be Sanctioned"

On the 15th, the Supreme Court ruled in favor of Chairman Sohn after reviewing the intense arguments from both sides. It deemed it unfair to sanction non-compliance with internal control standards as a violation of the 'duty to establish.' The court ruled that once internal control standards are established, failure to comply with them cannot be grounds for disciplinary action.

However, the FSS focused on the fact that 'Appendix 2' was recognized as the standard for establishing and operating internal controls. Appendix 2 refers to 'Appendix 2 of Article 11, Paragraph 1 of the Financial Company Governance Supervision Regulation.' Article 11 defines the standards for internal controls, and Appendix 2 specifies the establishment and operation standards in 16 items. In the first trial, the court viewed Appendix 2 as 'not a statutory matter but other necessary matters,' making it difficult to use as a standard, but ultimately, it was recognized as normative. [Reference article: Dissecting the DLF ruling... 'Appendix' that decided the first trial outcome for Sohn Tae-seung and Ham Young-joo]

The financial authorities also expressed their stance on the Supreme Court ruling. The Financial Services Commission stated, “We respect the Supreme Court ruling and plan to refer to and reflect it in handling sanctions related to internal controls under the Financial Company Governance Act and future system improvements.” The FSS also said, “We will work with related agencies such as the FSC to develop measures to enhance the effectiveness of internal controls.”

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