Payoff scandal may take its toll on Korea’s banks, regulators

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Payoff scandal may take its toll on Korea’s banks, regulators


A ripple effect of the Sung Wan-jong payoff scandal is spilling into the financial sector as many financial bigwigs are rumored to have been involved in a debt workout program for Keangnam Enterprises, which was owned by the late construction tycoon and former lawmaker who committed suicide on April 9. His political connections are being highly scrutinized in the worst corruption scandal to hit the Park Geun-hye government.

Shinhan Bank, the country’s largest financial institution, is under investigation by prosecutors as the main creditor of the politically connected construction firm.

Shinhan has been known as the soundest financial institution in the country and has tough standards for loans. How a dubious company like Keangnam managed to borrow from the bank is a key question in the investigation. And many influential financial people are suspected of being involved.

As the investigation goes on, rumors are circulating that some former executives at the Financial Supervisory Service (FSS) had connections with the late Sung, especially Choi Soo-hyun, former FSS governor, whose home province is Chungcheong, Sung’s home turf.

The Board of Audit and Inspection of Korea on Thursday confirmed the FSS put pressure on Shinhan Bank to help Keangnam by giving the company privileges in 2013. The board found evidence of involvement by the former FSS executives in the Keangnam workout. It held a meeting to discuss punishment for the FSS.

The story dates back to 1999 and 2009 when Keangnam underwent two debt workouts. The first workout ended in December 2002 and the second in 2011.

After finishing the second, the company applied for a third in 2013. There have been some complaints within the financial sector about the fairness of helping out that company when other more worthy companies were struggling. Reportedly, the third workout proceeded in a hasty manner, skipping major procedures such as a capital reduction.

It is also known that from 2012 through June 2014, Sung was a lawmaker who belonged to the National Policy Committee, which put him in a position to oversee financial authorities and banks.

In 2012, Sung’s political power was enhanced as his party, the Advancement and Unification Party, was merged into the Grand National Party, the predecessor of the ruling Saenuri Party. But the condition of Sung’s company deteriorated.

According to the rumors, Sung made connections with former executives of the FSS and met many financial industry figures at forums and seminars.

Shinhan Bank became the main creditor of Keangnam in October 2013. At the time, financial authorities’ officials were criticized by lawmakers for failing to properly supervise Tong Yang Group. Shinhan Bank was also under a parliamentary probe for illegal checks of personal account information. Sung, reportedly, covered up for Shinhan.

In February 2014, Shinhan decided to skip a capital reduction and conduct a debt-equity swap restructuring for Keangnam and offer Sung, the largest shareholder, the right to claim the equity. That provoked strong opposition from other creditors, according to the financial industry.

With the help of Shinhan, Keangnam could turn 100 billion won ($92 million) of debt into equity, and receive 380 billion won worth of new funds.

There is speculation that the financial authorities might have pressed creditors to protect Keangnam, being aware of Sung’s political power.

Sadly, this kind of web of corruption is not news to the Korean audience. They are familiar with parachute appointments, irresponsible management of financial institutions, unethical financial scams and mutual back scratching.

Zhin Woong-seob, the new FSS governor, has pledged to regain the public’s trust through closer supervision of financial institutions. But the Sung Wan-jong scandal is now expected to be a huge obstacle to Zhin’s lofty reforms.

How the governor deals with the scandal will determine the fate of the whole industry. Yet Zhin is seemingly trying to distance himself from the scandal by keeping silent. I think it would be a good chance for him to show that he can clean up the mess in the financial sector, a role that his predecessors failed to play with any success.

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