Financial Watchdog in the Doghouse

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Financial Watchdog in the Doghouse

The impact of the scandal involving Chung Hyun-joon, head of the failed venture firm Korea Digital Line, has triggered snowballing doubts about Korea''s financial watchdog. Some people were suspicious even before this case came up, because of widespread rumors concerning the staff of the Financial Supervisory Service.

They feel that the watchdog''s employees cannot be innocent in this case, and are insisting that there''s no smoke without a fire. There is even a rumor that money from venture capital firms flowed into political and bureaucratic circles. The general public''s outrage is growing not only over the venture capitalist''s crimes, but also over the conduct of staff of the watchdog. Many people wonder who they can put their trust in now.

Now that the prosecution has embarked on an inquiry, the priority must be to clear up three lingering issues. The first is whether or not an FSS bureau chief bought Korea Digital Line stocks and received money from Mr. Chung in compensation for losses stemming from this investment.

The second issue concerns whether employees of the financial watchdog accepted 30,000 shares in Pyungchang Computer and Communication at one-third of the market price from Mr. Chung to cover up the illegal loan at the end of last year involving Daeshin Mutual Savings and Finance Company, also one of Mr. Chung''s companies.

To clear up the third issue, the prosecution should determine whether some Financial Supervisory Service staff received bribes from Yuil Semicon, a semiconductor manufacturer under investigation because of allegations that it had issued new corporate stock at a level much lower than market price.

If the allegations are true, the scandal is indeed a grave matter. The very existence of the Financial Supervisory Service will be in question. The watchdog''s employees are forbidden to invest in stocks for obvious reasons. The law also prohibits them from exerting influence over financial institutions to grant loans. As an organization set up to audit and supervise the conduct of financial institutions, this watchdog organ holds sway over the survival of financial institutions.

Along with the Financial Supervisory Commission, the FSS is a key organ in the current government''s reform policy. These newly established organizations have led banking and corporate restructuring since the 1997 foreign exchange crisis. The motto of the FSS is "Only when banking is upright, can the economy be upright," and its accountability and integrity have been especially emphasized.

In this respect, the current scandal is naturally provoking anger from the public and investors. What the prosecution and the government have to do is to thoroughly investigate and settle the case according to the law. As the FSS itself has always asserted in the process of leading restructuring, a fundamental cure is only possible after the infected boil has been lanced. If the prosecution merely goes through the motions of investigation and hastily closes the case, the recovery of confidence in the financial watchdog will be impossible.

If the matter is not thoroughly investigated, it will not only become impossible to deal with pressing issues such as the liquidation of ailing companies and bank mergers, but future restructuring efforts will also be put in jeopardy. In the long run, it may be necessary to spread out the functions and rights of the Financial Supervisory Service. Proper checks and balances should be put in place. What is more urgent, though, is a painstaking investigation by the prosecution and strict punishment if illegalities come to light. Unless a thorough investigation takes place, the FSS will not be able to escape the cloud of corruption currently enshrouding it.


by Song Jin-hyuk

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