Financial Supervisory Service Imposes Fine on Gwangju Bank for 'Compliance Officer Negligence'

Violation of Large Cash Transaction Reporting Obligations
Issues with Reflecting Financial Performance in Compliance Officer Evaluations
Orders to Improve Management and Internal Controls at Vietnamese Securities Firms

Gwangju Bank, which underwent a regular inspection by the Financial Supervisory Service (FSS) two years ago, has been sanctioned. Issues were pointed out such as failure to properly report matters that should have been reported to the FSS, and inadequate internal control systems within overseas subsidiaries and the bank itself.

The FSS recently imposed a fine of 12 million KRW on Gwangju Bank. In addition, it notified one current employee and five retirees of violations. It also announced that there were 16 management caution items and 22 improvement items.

First, the FSS judged that Gwangju Bank’s compliance officers violated the obligation to report high-value cash transactions. According to the Act on Reporting and Using Specified Financial Transaction Information, the person responsible for reporting at a bank must report to the head of the Financial Intelligence Unit within 30 days any cash transactions of 20 million KRW or more (10 million KRW or more since July 2019). However, three former compliance officers at Gwangju Bank delayed reporting 217 cases that should have been reported to the head from November 2016 to January 2020 by at least 23 days and up to 838 days.

The evaluation criteria for compliance officers’ performance were also criticized as inappropriate. Compliance officers oversee internal control-related tasks to ensure that financial companies comply with laws and regulations during business operations. According to the Act on the Governance of Financial Companies, compliance officers and risk management officers must have separate compensation and evaluation criteria that are not linked to the company’s financial performance. However, from October 2016 to February 2019, Gwangju Bank applied the same evaluation criteria as general employees, setting long-term performance bonus evaluation indicators based on Return on Equity (ROE) achievement and relative Total Shareholder Return (relative TSR).

The Financial Supervisory Service imposed a fine of 12 million won on Gwangju Bank. It also issued notices of violations to one current employee and five retirees. Additionally, it announced 16 management caution items and 22 improvement items.

The FSS also called for proper management of Gwangju Bank’s business in Vietnam. Gwangju Bank acquired Morgan Stanley Gateway Securities (MSGS), a local securities firm in Vietnam, in 2019. The FSS stated that large-scale investments such as IT system development and securing specialized personnel are necessary for MSGS, and noted, “Due to intense market competition in Vietnam and Gwangju Bank’s lack of expertise in the securities business, difficulties are expected in establishing a stable business foundation.” It also pointed out that “the bank’s board of directors lacks sufficient oversight functions regarding subsidiary management strategies and overall management.” Furthermore, it warned that “relying on a small number of resident employees to manage subsidiaries poses risks of financial accidents during large-scale investment contract signings and fund management processes.”

Most of the management caution measures were related to the improvement of internal control systems. It pointed out that the scope of responsibility for internal control by executives is unclear. For example, the internal control regulations established by Gwangju Bank’s board of directors broadly delegate the obligation to establish and operate the internal control system to the bank president, while the roles and responsibilities of other executives are vaguely defined.

The FSS also saw the need to reorganize personnel for internal control. The number of personnel performing internal control tasks was eight, which is 0.52% of the total workforce (1,615 as of 2022), lower than the regional banks’ average of 0.58%. It also criticized the bank’s self-inspections to check compliance with regulations and guidelines, pointing out that audit results could be subjectively interpreted and that compliance activities such as self-inspections were not properly reflected in management performance evaluation criteria (KPIs).

Additionally, management caution measures were issued regarding strengthening the evaluation of business feasibility for real estate project financing (PF) loans and credit evaluation of construction companies, enhancing risk management for household credit loans such as strategic loans, strengthening risk management for credit portfolio concentration, and improving the effectiveness of capital management plan establishment and operation.

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