When business goes bad

“It just doesn’t make sense,” a venture businessman said about Moneual, a couple of months before the innovative home appliance maker’s success turned out to be fraudulent. “It is simply impossible for a manufacturer to grow so big in only four, five years.”

He emphasized how hard it was to secure an account. “I’ve never seen a product by Moneual at appliance stores in the United States and Europe. They seem to be exaggerating unit costs and export volumes.”

Soon, his concerns turned out to be true.

The collapse of Moneual, which claimed to have achieved a trillion won venture in the shortest time ever, has revealed the vulnerability of Korea’s financial system. More than 3 trillion won in exports were fabricated, and the company owes nearly 700 billion won to banks. But financial institutions failed to detect the fraud. The scam was only revealed after the Korea Customs Service and prosecutors investigated. Most of the loans were from state-funded banks such as the Export-Import Bank of Korea, or secured loans from the Korea Trade Insurance Corporation or Korea Technology Finance Corporation. In the end, citizens will have to foot the bill.

In hindsight, the scam was ridiculously simple. When the company was still small, it received guarantees from government-run institutions. Being given a guarantee or investment means being given a “certificate” showing that the company is promising. Moneual was designated a “hidden champion.” By this time, banks were competing to lend money to it at low interest rates.

But how was this even possible? The government guarantee is for sure overused. Too many institutions are offering guarantees. Trade transactions are secured by the Korea Trade Insurance Corporation, corporate security is provided by the Credit Guarantee Fund, and the Korea Technology Finance Corporation offers guarantees for technology ventures. The Import-Export Bank of Korea, the Korea Development Bank and the Industrial Bank of Korea provides guarantees for exports.

While each institution covers different areas and stages, many overlap, as the Moneual scandal shows. These institutions serve similar duties, and when encouraged by the government they compete to expand. When they focus on boosting performance, it leads to slack management and assessment. Government guarantees that risks are contained so banks have no risk or responsibility. When a company goes bankrupt, banks can still get the money, so the bank has no reason to monitor operations. The government does what banks should do, and banks become mere keepers. When the guarantee is excessive, the risk grows. If the government hopes to promote “creative finance,” the first step should be financial policy reform.

*The author is a deputy business news editor of the JoongAng Ilbo. JoongAng Ilbo, Dec. 24, Page 34

by RAH HYUN-CHEOL