Financial felons roam fearless

The Financial Supervisory Service uncovered billions of won of illegal loans in a full-scale due diligence investigation of 85 mutual savings banks. Three among the seven that were suspended - Tomato, Jeil and Parangsae - used billions of won from customers’ savings to lend recklessly to operations run by their major shareholders. Under the law, loans to a single borrower cannot exceed 20 percent of net worth as a protection against abuse of customers’ money by large shareholders.

One savings bank channeled 640 billion won ($557 million), or 70 percent of its assets, to finance a real estate redevelopment project by its largest shareholder. Like Busan Savings Bank, it invented numerous accounts under false names to hide or scale down the size of the loan. Loans that could not be repaid even if all the collateral assets were sold were rampant.

It is now up to the state and taxpayers to clean up the mess after the banks’ extravagant lending. The Korea Depositary Fund, which insures deposits, must refund deposits up to 50 million won for each customer. Public funds would have to be used to make up the shortfall.

Korea is an ideal destination for those guilty of financial impropriety. The authorities are useless. They once again failed to contain malpractice by savings banks. The Seoul bourse has become a playground for financial racketeers. Neo semitech, which was kicked out of the bourse last year, is a primary example. Its largest shareholder pocketed 51.7 billion won in the form of fabricated exports and window dressing and fled to Macao. The company that once had a market capitalization of 400 billion won was delisted, turning the stakes of 7,000 minority shareholders into trash.

Lenient punishment for financial crimes is the main reason why Korea has become a breeding ground for felons. Excessive loans to large shareholders is a serious crime that demands a prison sentence of up to five years, or fines of up to 50 million won. Earning profits in excess of 5 billion won from stock fraud deserves a life sentence, or at least more than five years in prison. But when these cases go to trial in Korea, the criminals never get more than three years - and some of them walk free after paying a fine. These trends breed moral hazards that cost common consumers and individual investors their life savings.

Bernard Madoff received the maximum prison term of 150 years in the U.S. for defrauding thousands of investors. Our justice authorities must also crackdown on financial crimes.