FSS "Intensively Inspecting Financial Investment Firms for Private Gain... Strict Measures Enforced"

On the 18th, the Financial Supervisory Service (FSS) announced that it has selected the prevention of private interest pursuit by financial investment firms as a key inspection item and is conducting focused inspections.

According to the FSS, the number of financial investment firms reached 916 as of the end of last month, a sharp increase of 77.9% compared to the end of last year. With the low entry barriers in the financial investment industry, the number of financial investment firms, especially private equity firms, is rapidly increasing, and some major shareholders and executives are continuously engaging in unfair acts to pursue private interests.

Major violations include cases where false or fabricated construction contracts, consulting agreements, and the like were created to remit fund money to family-named corporations under the pretext of fees, thereby embezzling funds.

The FSS stated, "These entities entered into contracts with conduit companies or companies under the names of executives’ family members that lacked the capacity to provide services, and withdrew fund money under the pretext of construction costs or fees, which were ultimately embezzled by the investment firm executives and employees." It also revealed cases where false service reports were prepared by re-editing external materials to conceal false or fabricated contracts. Cases of embezzlement of company and investee company funds by using nominal persons were also uncovered.

Additionally, there were cases where executives and employees used non-public information obtained through their duties as investment opportunities for themselves or related parties to gain private benefits. After learning about real estate development project information or internal information of companies planned for investment during their work, they concealed this fact by using family members or family-named corporations to make prior investments in PFVs (Project Finance Vehicles) or companies planned for investment. There were also cases where false information about the decline in the value of investment assets was provided to purchase beneficiary certificates at low prices and realize profits.

Cases were also identified where major shareholders and executives exerted undue influence on internal decision-making to provide funds or collateral unfairly for their own or related parties’ benefit. Furthermore, there were instances where they participated in key decision-making bodies and exercised influence, failing to properly fulfill conflict of interest management duties.

The FSS explained, "Private interest pursuit by executives and employees mainly occurred in companies with weak internal controls and specific business areas, with a high frequency in alternative investment sectors such as real estate where funds were concentrated and internal monitoring was lax." It added, "Such private interest pursuit acts are increasingly sophisticated, designed to be difficult to detect through ordinary internal control activities."

It continued, "To restore trust in the capital market and eradicate private interest pursuit, we plan to take strict measures along with continuous inspections," emphasizing, "We will also strengthen efforts by financial companies themselves to prevent recurrence through the activation of internal control activities within financial investment firms."

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