Insurers’ lax policies led to fraud
The abrupt bankruptcy of Moneual, the No. 1 maker of robot vacuum cleaners, seems to have been caused by negligence of duty at state-run trade insurance institutions - the Export-Import Bank of Korea and the Korea Trade Insurance Corporation (Ksure). Neither institution took a thorough look at the company’s balance sheets before guaranteeing loans to help its exports.
According to a recent investigation by the Korea Customs Service, Moneual, run by Korean-American entrepreneur Harold Park (Hong-seok), inflated the unit export price of its products by more than 300 times and manipulated about 3,330 export-related documents to say the company sold about $2.9 billion worth of products overseas.
But the fraudulent company was selected by Korea EximBank in 2012 as one of Korea’s 300 “hidden champions,” which refers to a small but strong business.
For years, the home appliance maker was able to take out loans totaling 670 billion won ($624 million) by creating paper companies overseas and making it look like the company was doing well in other countries by fabricating documents. Then it abruptly filed for court receivership about a week ago.
The public financial institutions were embarrassed and made official comments, saying, “We didn’t know.”
“It was a successful company, but it suddenly collapsed,” said Lee Duk-hoon, president of Korea EximBank, in a parliamentary audit session. “We are embarrassed as well, and will try to find out the truth.”
Ksure guaranteed a total of 300 billion won worth of loans for Moneual, and Korea EximBank issued 113.5 billion won worth of credit loans.
It was found that about 90 percent of the contracts the Moneual CEO submitted to the institutions were false. Unlike other institutions’ loan guarantees, the public institutions fully guarantee the credit of such small exporters, so commercial banks that actually issue the loans do not bother to carefully examine the details of the company’s situation.
Public financial institutions that support government policies by guaranteeing loans or providing loans have emerged as a gray area where negligence has been rampant, which could lead to another large-scale financial mistake.
Ksure, which operated in a conservative manner until 1990, changed its policy for export loan guarantees to become more aggressive in the early 2000s due to the government’s efforts to ramp up exports.
Before 2000, the institution had required both exporters and importers to have high credit ratings and long-term experience in the relevant business areas to minimize risks of problems with payment. New companies had to have real estate collateral to get a Ksure guarantee.
Due to the tough regulations, Ksure was not popular among small businesses. But according to critics, in the 2000s the institution sharply lowered the qualifications for loan guarantees and promoted itself as a supporter of small exporters.
“It is true that the institution has been gradually raising guarantees for small businesses in line with the government’s policy to boost trade and support small entities,” said Choi Sang-bong, a spokesman for the institution. “But I believe it is misleading to say that the institution intentionally lowered qualifications for the guarantees.”
What makes a Ksure guarantee risky is that the it covers 100 percent of the total export payments of a company. Other public finance institutions such as the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation only cover 80 or 90 percent.
Another issue that allowed Moneual to develop its scam is that the institution does not frequently check factories that produce goods for export. The institution formally visits production places once before giving confirmation of a loan guarantee, but it does not usually notice if the fiscal health of a company it guaranteed is worsening. In other words, the institution has been consistently guaranteeing loans for companies without seeing their products actually being shipped out.
“Through an internal investigation, the institution will try to find any irregularities involving the institution’s employees and corrupt practices,” Ksure said in a recent statement.
The situation is the same for Korea EximBank.
“Letters of credit and bills for deliveries prove and confirm that items have been shipped,” said an official at the bank. “So institutions do not confirm every shipment in person.”
To help small companies get more public finance, the government has also banned the institutions from guaranteeing other property or collateral of a company.
For example, Ksure can guarantee loans for a company’s export products only, while Korea EximBank can guarantee only based on the company’s credit. So, the company’s total loan guarantees can be doubled.
“It is hard to say that the institutions are carefully inspecting small businesses’ financial health,” said Lee Jae-yeon, a senior researcher at the Korea Institute of Finance. “To increase guarantees for them, the initial inspection should be conducted more thoroughly.”
BY SONG SU-HYUN [firstname.lastname@example.org]