Professor Sangbok Lee: "Individual Saemaeul Geumgo Must Also Implement Internal Control, Compliance Monitoring, and Standing Audit Obligations"

Financial Law Expert Professor Sangbok Lee, Sogang University Law School
"Many Individual Credit Unions with Assets Over 2 Trillion Won... Must Be Thoroughly Supervised"
Need to Establish a 'Mutual Finance Supervisory Agency' Like the US and UK to Oversee Five Mutual Finance Institutions

Professor Sangbok Lee, Sogang University School of Law. Photo by Younghan Heo younghan@

Professor Sangbok Lee of Sogang University School of Law argued that "individual Saemaeul Geumgo (Community Credit Cooperatives) should also be mandated to implement internal controls, compliance monitoring, and full-time auditor systems." Professor Lee recently met with Asia Economy at Sogang University and stated, "If the internal control systems of individual Saemaeul Geumgo had functioned properly, the risks associated with real estate project financing (PF) could have been managed to some extent." While the Saemaeul Geumgo Central Association follows internal control and compliance monitoring systems, individual cooperatives are not subject to these requirements.

Professor Lee is a financial law scholar with a background as a lawyer specializing in economics. He served as a non-standing member of the Financial Services Commission's Securities and Futures Commission and was even a candidate for the Financial Supervisory Service Governor in 2021. In 2021, he resigned two months before the end of his term as a non-standing member of the Securities and Futures Commission and returned to academia. Recently, he published a practical book on the 'Saemaeul Geumgo Act' for those interested in the law.

The loan delinquency rate of Saemaeul Geumgo in the first quarter of this year, as announced by the Bank of Korea, was 5.34%, which was twice the rate of all mutual financial institutions (2.42%). The delinquency rate of Saemaeul Geumgo continued to rise, reaching 6.49% as of the 15th of last month. This caused concern among depositors, leading to withdrawals and a decrease in deposit balances by as much as 6.99 trillion KRW as of April, sparking fears of a bank run.

This situation is rooted in concerns over project financing (PF) defaults due to the real estate market downturn. As of the end of last year, the loan balance of Saemaeul Geumgo was 213.2 trillion KRW. Of this, loans extended to real estate developers and other companies amounted to 111.6 trillion KRW.

Professor Lee pointed out, "Real estate PF loans are complex loan products secured by cash flow," adding, "There must be specialized operational personnel to decide on real estate PF loans, and an internal control system to monitor their work." He highlighted that individual cooperatives arbitrarily executing loans or incidents of embezzlement, breach of trust, and various corrupt practices continue unabated.

He also criticized the fact that the mandatory appointment criteria for full-time auditors differ among mutual financial institutions. Full-time auditors are responsible for the overall accounting and operations of financial companies. Under current regulations, only credit unions and agricultural cooperatives are required to appoint full-time auditors. Saemaeul Geumgo, fisheries cooperatives, and forestry cooperatives have no such appointment obligation.

Professor Lee emphasized, "It is known that a significant number of individual cooperatives have assets exceeding 2 trillion KRW," and added, "like savings banks, internal control standards should be established, and compliance monitoring and full-time auditors should be mandatory for all cooperatives." This implies that while differentiated measures should be applied according to the size of individual cooperatives, thorough management and supervision are necessary.

Professor Sangbok Lee, Sogang University School of Law. Photo by Younghan Heo younghan@

Professor Lee stressed the need to overhaul the bifurcated management and supervision system of Saemaeul Geumgo. Regarding the discussion on transferring supervisory authority, he said, "It is appropriate to transfer it to the Financial Services Commission, which has the expertise."

According to the Saemaeul Geumgo Act, the Ministry of the Interior and Safety comprehensively manages and supervises Saemaeul Geumgo and the Saemaeul Geumgo Central Association. In contrast, mutual financial institutions such as agricultural, fisheries, and credit unions are directly managed and supervised by financial authorities. The credit guarantee business is regulated to be supervised through consultation between the Ministry of the Interior and Safety and the Financial Services Commission. This means that financial authorities effectively lack direct supervisory and command authority.

However, he sharply criticized that transferring supervisory authority of Saemaeul Geumgo to the Financial Services Commission is not the ultimate solution. Professor Lee said, "It is right to give the Financial Services Commission the management and supervisory authority over all mutual financial institutions and to reinforce professional personnel." He pointed out, "The scale of PF in agricultural cooperatives is also considerable," adding, "If only Saemaeul Geumgo is transferred to the Financial Services Commission halfway, the workload will only increase."

Furthermore, he suggested considering the establishment of a specialized supervisory agency for mutual financial institutions, similar to the United States and the United Kingdom. He said, "It is possible to consider creating a 'Mutual Financial Supervisory Agency' separate from the Financial Services Commission and the Financial Supervisory Service to manage and supervise all mutual financial institutions."

He also advised careful review of the restoration and maintenance of tax-exempt benefits introduced to encourage redepositing of Saemaeul Geumgo deposits. While restoring benefits to quell bank run concerns is inevitable, he pointed out that tax-exempt benefits on deposits contradict their original purpose. The Ministry of the Interior and Safety and Saemaeul Geumgo agreed that customers who prematurely terminate savings or deposits can apply for redeposit within 14 days to maintain the existing contracted interest rate and tax-exempt benefits. Regarding this, Professor Lee said, "Saemaeul Geumgo offers tax-exempt benefits on deposits up to 30 million KRW even to non-members," adding, "This special provision was created as a means for the asset accumulation of ordinary citizens, but since it is being used as a tax-saving method by the wealthy, benefits should be limited to installment savings rather than fixed deposits." Currently, tax-exempt deposits are allowed only for mutual financial institutions such as Saemaeul Geumgo, credit unions, and fisheries cooperatives under the Restriction of Special Taxation Act. Deposits up to 120 million KRW are allowed for a family of four.

Meanwhile, Professor Lee recently published the 'Saemaeul Geumgo Act.' Previously, he published the 'Credit Union Act,' 'Agricultural Cooperative Act,' 'Fisheries Cooperative Act,' and 'Forestry Cooperative Act,' which are part of the Mutual Finance Business Act. He plans to publish the 'Mutual Finance Business Act' in the future. The 'Mutual Finance Business Act' is a book that comparatively analyzes the main contents of the five cooperative laws, including the previously published 'Credit Union Act.' Recently, mutual finance businesses and institutions have attracted attention due to controversies over real estate PF loans in the real estate and financial markets.

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