Loan scandal crisis at Woori Financial Group endangers leadership, takeovers

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Loan scandal crisis at Woori Financial Group endangers leadership, takeovers

Published: 10 Sep. 2024, 06:00 Updated: 10 Sep. 2024, 19:28

SHIN HA-NEE
shin.hanee@joongang.co.kr

A brother-in-law of former Woori Financial Group Chairman Son Tae-seung heads to the Seoul Southern District Court in Yangcheon District, western Seoul, for questioning regarding an illicit loan scandal on Saturday. [NEWS1]

[NEWS IN FOCUS]

Woori Financial Group, the fourth-largest financial firm in Korea, is facing the worst crisis yet under its current leadership after a series of illicit loan scandals.

Under intensifying scrutiny from financial regulators, a leadership shake-up appears imminent — and Woori Financial Group Chairman Yim Jong-yong, who has been at the helm since March of last year, is not immune to the potential fallout. Woori's ambitious plan to acquire Tongyang Life Insurance and ABL Life Insurance, now awaiting regulatory approval, is also facing a murky future.

As pressure on management increases, experts are urging stricter regulations on banks to be implemented, pointing fingers at Korea's relatively lenient penalties for financial misconduct.

Mounting scrutiny

The Financial Supervisory Service (FSS) announced on Sept. 3 that it will conduct a regular inspection of Woori Financial Group starting in early October, moving the schedule up from its initial plan to commence the review next year.

It is the first regular inspection by the FSS of the group since late 2021. The financial watchdog conducts a regular inspection of financial firms once every two to five years. In the upcoming inspection, the agency is expected to look closely into the internal control system within the parent company and its flagship Woori Bank.

The decision to expedite the review follows a recent loan scandal involving the group's former chairman.

The FSS uncovered that Woori Bank granted 61.6 billion won ($45.9 million) in loans to borrowers with connections to Son Tae-seung, who held the top post from January 2019 to March of last year. Of the total, 35 billion won was found to have been improperly granted without appropriate screening. Son's brother-in-law, identified by his surname Kim, was arrested on Saturday on charges of embezzlement and document forgery.

FSS Gov. Lee Bok-hyun has not shied away from strongly criticizing Woori Financial Group.

“The way [Woori] is handling this raises doubts about whether they truly have the will to implement structural reforms to the current system, which is perceived as being interested in benefiting only those within the inner circle,” the governor told the press after a conference on Sept. 4.

Financial Supervisory Service Gov. Lee Bok-hyun speaks during a conference held in western Seoul on Sept. 4. [NEWS1]

“Although this outrageous loan incident involving the former chairman occurred in the past, I believe the current management should also take this matter seriously and take responsibility,” stressed Lee.

The FSS alleges that Woori did not report the incident in a timely manner, as the bank was aware that loans were improperly granted from earlier in the year, yet did not report employees and executives involved to law enforcement authorities until August. Woori refuted the allegation, claiming that the bank was not aware of any illegal activities aside from negligent reviews of loan applications.

Prior to the loan scandal surrounding Son, an unnamed employee of Woori Bank was found in June to have misappropriated loans worth 17.9 billion won. This was yet another major embezzlement case for Woori Bank, coming two years after a 70 billion won loan scandal was uncovered in April 2022.

Acquisition deals on the line

Woori Financial Group’s planned portfolio expansion into non-banking sectors is also on the line.

Woori recently signed stock purchase agreements to acquire controlling stakes in Tongyang Life Insurance and ABL Life Insurance for a total of 1.55 trillion won to reduce its revenue reliance on the banking business.

However, the planned acquisitions also hit a major snag as the top financial regulator expressed skepticism over whether risk factors were appropriately examined.

"Acquiring life insurers would certainly help [Woori] with business expansion, but considering that operating an insurer entails a different set of risk factors compared to banks, I have my reservations about whether such risks were fully reflected in the parent company's risk management plan," said Lee.

Though incumbent Woori Chairman Yim has issued public apologies twice so far, speculation is rising over the potential resignation of top executives within the current management, especially Yim and Woori Bank CEO Cho Byung-kyu. The loan scandal has cast doubt about whether Cho, whose term is up at by the end of the year, will be able to serve another term at the helm of the bank.

Woori Bank CEO Cho Byung-kyu attends a conference in central Seoul on June 19, following the uncovering of a major embezzlement case. [YONHAP]

The FSS governor has been increasingly pressing management by saying, “Someone responsible should be held accountable for the delay in reporting,” a comment widely interpreted to be targeting Yim.

Responding to the public criticism, the chairman said on Aug. 28 that “the executives and employees, including the Woori Bank CEO and I, will abide by the decision and procedures [of the financial authorities] when the investigations are completed.”

A systemic failure

Merely replacing high-profile executives, however, is not enough to prevent financial misconduct caused by management oversight, experts pointed out, calling for regulative measures to encourage banks to bolster their internal control systems.

"The regulatory system in Korea still largely imposes penalties on individuals, often resulting in management replacement, but financial regulators abroad are also focusing on corporate fines as well, which can be severe enough to lead firms to potential bankruptcy," Lee Hyo-seob, head of the financial services industry division at the Korea Capital Market Institute, told the Korea JoongAng Daily.

Harsh financial penalties push firms to reinforce internal control measures, said Lee, stressing that the Korean legal system needs to shift its regulatory paradigm to put a bigger focus on financial penalties instead of individual penalties.

Kang Kyeong-hoon, professor of finance at Dongguk University, also noted that "Korea's regulations are primarily focused on imposing penalties on individuals rather than institutions," adding that "as the current level of corporate fines is too weak [in Korea], we need to implement stricter measures, similar to those of the United States, that would have an actual impact on corporate operations."

The recent introduction of the management responsibilities road map, which took effect in July, is also nudging financial firms to further bolster their internal control systems. The road map designates individuals with ultimate accountability for each key business area, which compels C-suite executives to take clearer and bigger responsibility for operations.

"There may be concerns that the responsibilities map can be used for chief executives to avoid taking accountability, which are valid points, but financial authorities would then step in to point out any loopholes, ultimately leading to general progress in corporate practices," said Kang.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]