Dr. Go Ilhun of Japan Securities Economic Research Institute: "One-Stop from Investigation to Penalty" [War Against Stock Price Manipulation]

②-⑶ Capital Market Experience in Both Korea and Japan
Japan: Investigation Centered on Prosecutors and Securities and Exchange Surveillance Commission
High Proportion of Individual Investors in Korea... Need to Strengthen Protective Measures

"For the swift investigation of unfair trade practices, a single institution should be able to take the lead in investigating cases and making recommendations for fines."

Ko Il-hoon, a research fellow at the Japan Securities Economics Research Institute, said in a video interview with Asia Economy Newspaper on the 12th, "In Japan, the Securities and Exchange Surveillance Commission (SESC) is positively evaluated for promptly enforcing the law by proactively using the fine system." Ko Il-hoon studied law in Korea and earned a Ph.D. in commercial law from the University of Tokyo. After working as a lawyer in Korea, he has been working at the Japan Securities Economics Research Institute in Nihonbashi, Tokyo since January last year. He has thus experienced and witnessed the capital markets of both Korea and Japan.

Ilhoon Ko, Research Fellow at the Japan Securities and Economics Research Institute.

Japan Exercises Compulsory Investigation Authority Centered on SESC

He pointed out that although the legal systems related to the three major unfair practices?insider trading, fraudulent trading, and market manipulation?are similar in Korea and Japan, there are differences in enforcement. In Japan, during the initial investigation phase, the Market Analysis and Review Division, which is central to the SESC, collects and analyzes all information and allocates it to investigative departments such as the Trading Investigation Division and the Special Investigation Division. This marks a shift from a prosecutor-centered investigation system to an administrative system centered on the SESC.

On the other hand, in Korea, when sanctioning unfair trade, the case is submitted to the Capital Market Deliberation Committee, an advisory body to the Securities and Futures Commission (SFC), reviewed, then passed through the SFC's resolution before final action is taken. Because the same content is reviewed twice by both the Securities and Futures Commission and the Capital Market Investigation Deliberation Committee, the decision-making structure inevitably leads to longer processing times. Due to the lengthy process, there are concerns about evidence destruction and information exposure during this period.

He said, "When the Financial Supervisory Service (FSS) conducts investigations, it lacks compulsory powers such as seizure rights, on-site investigation rights, and search and seizure rights, making it difficult to timely obtain all lawful evidence." He added, "In contrast, Japan has a two-step system with the Japan Exchange Group (JPX) and the SESC, and the SESC holds all compulsory investigation powers, conducts investigations, and immediately takes action."

Korea Needs to Increase Administrative Investigation Personnel and Combine Punishments Like Fines

He suggested that administrative investigation personnel belonging to the FSS and the Korea Exchange’s Market Surveillance Committee should also be increased. Research fellow Ko emphasized, "Korea needs to increase the number of administrative investigation personnel in the FSS and the Market Surveillance Committee. In Japan, the number of administrative personnel dedicated solely to investigations is twice that of Korea." Due to the limited size of investigative personnel, Korea’s unfair trade sanction system tends to be more of an 'ex-post regulation,' where actions are taken after securities crimes occur rather than preemptive detection. He said, "While a system that can detect many unfair practices in advance is preferable, given the limitations in investigative personnel, it is also necessary to combine strong punishments to generally deter illegal acts." He added, "In this regard, strong fines are expected to have a good effect in deterring illegal acts."

Korean financial authorities have introduced a new fine system that imposes penalties up to twice the amount of unfair profits gained from unfair trade practices to improve the capital market’s structure. This has been in full operation since January this year. The whistleblower reward has also increased from 2 billion won to 3 billion won. Japan has already introduced and operated a fine system since 2005. He said, "It seems that Korea’s introduction of the system was delayed due to differences in stance between financial authorities and investigative agencies. However, in Japan, fines for the three major unfair trades are calculated based on economic gains, which has been criticized for having limited deterrent effects."

Korea’s High Proportion of Individual Investors Leads to Rampant Leading Room Scams

He also advised that stronger protection for general investors is necessary because individual investors account for nearly 70% of the capital market in Korea. Leading room scams related to stock investments are a type of fraud particularly rampant in Korea but rarely seen in Japan. This is due to differences in the composition of investors in the capital markets.

According to the Korea Securities Depository, as of the end of 2023, individual investors accounted for 64% of all investors in Korea, whereas in Japan, the figure was only 17.6%. Japan, having entered a super-aged society, has a strong preference for savings over investment, and elderly people aged 60 and above who have accumulated assets mainly invest indirectly through passive funds rather than direct investments. Research fellow Ko said, "Because Korea has a high proportion of individual investors, the risk of exposure to scams such as leading rooms is greater, so strong measures to protect individual investors rather than professional investors are necessary." He emphasized, "This is very important to secure trust in the capital market and is directly related to resolving the Korea discount (undervaluation of the Korean stock market)."

Korea Needs Compensation Support Such as Fund or Protection Center Establishment

He pointed out the lack of relief measures for victims and suggested establishing a fine fund or an investor protection center to assist with relief procedures. He said, "Although securities-related class actions formally exist in Korea, the filing requirements are too strict, so they are not properly utilized." He advised, "Like the Fair Fund in the United States?which distributes disgorgement or civil penalties collected from violations of federal securities laws to investors instead of reverting them to the treasury?Korea should establish a fund using fines to help compensate victims or set up a center responsible for investor compensation support similar to Taiwan’s Securities and Futures Investors Protection Center (SFIPC)." The SFIPC files class actions on behalf of more than 20 general shareholders against the board of directors when a company violates corporate or securities regulations. When financial accidents occur, it gathers investors, acts as a mediator, demands collective compensation, and also pursues civil lawsuits.

Editor's NoteIt has been nearly one year (April 24, 2023) since the 'Ra Deok-yeon Gate,' the largest stock manipulation crime in history with total unfair gains of 730.5 billion won, occurred, yet the victims’ nightmare has not ended. There are no effective victim relief measures in the Korean capital market. Litigation is the only option, but due to cost burdens and difficulties in proving damages, victims cannot even attempt it. The amendment to the Capital Markets Act, which supplemented the limitations of criminal punishment and introduced effective monetary sanctions through the 'Ra Deok-yeon Gate,' is significant. However, to eradicate the continuously increasing securities crimes in various forms, it is necessary to establish a system that can efficiently detect and investigate these crimes and to improve additional systems for swift and strict sanctions. The Asia Economy Securities Capital Market Department’s special coverage team examines advanced systems in overseas capital markets and reviews the challenges and directions for our market to suppress securities crimes. Additionally, since intelligent and organized criminal acts occur, we seek effective measures to compensate investors for their damages.

We plan to intensively report from various perspectives on all kinds of unfair trades such as insider trading, fraudulent trading, market manipulation, and reporting obligation violations. We will strive to prepare comprehensive countermeasures to eradicate capital market crimes. Please send tips to (lsa@asiae.co.kr). We will investigate thoroughly and report.

▲Team Leader Lee Seon-ae, Manager △Kim Min-young, Hwang Yoon-joo, Cha Min-young, Kim Dae-hyun Reporters

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