Employees of KB Kookmin Bank and NH NongHyup Bank colluded with loan brokers to prepare false sales contracts and engaged in improper loans amounting to hundreds of millions of won, according to the inspection results from the Financial Supervisory Service. These employees were also confirmed to have received billions of won in bribes from the brokers.
Euh Bo-kyun, head of the Financial Supervisory Service, announced the inspection results of KB Financial Group and Kookmin Bank along with NongHyup Financial Group and NongHyup Bank on 4th at the Financial Supervisory Service in Yeouido, Seoul. These financial companies underwent regular inspections by the Financial Supervisory Service last year.
According to the Financial Supervisory Service, Kookmin Bank's Head of Team A handled improper real estate loans worth 89.2 billion won in collusion with a construction company and brokers. Head of Team A received false sales contracts and other related documents from the construction company and brokers and issued loans under the name of fictitious borrowers. Head of Team A inflated the real estate appraisal value using false sales contracts and executed loans exceeding the actual transaction price. A total of 291 loans were made in this manner. The construction company involved in the improper loans suffered from a funding crisis due to the failure of real estate project financing.
Head of Team A was confirmed to have received bribes and rewards from brokers and the construction company in exchange for the improper loans. The Financial Supervisory Service is currently trying to ascertain the exact scale of the bribes and rewards.
Additionally, it was confirmed that despite suspicions that the rental agreements submitted during the loan handling were fraudulent, loans for facility funds were processed without additional verification, and household loans were improperly processed by directly forging loan documents.
Employees at a branch of NongHyup Bank also made improper loans amounting to 64.9 billion won in a similar manner. Branch Manager B and Head of Team C conspired with brokers and borrowers to inflate appraisal values based on false sales contracts. To avoid internal lending limits and authorization criteria, they also divided the loans into multiple applications under fictional borrowers’ names and processed a total of 64.9 billion won in improper loans. It was also confirmed that Branch Manager B and Head of Team C received bribes totaling 130 million won from borrowers for some of the loans.
Furthermore, it was confirmed that a total of 22.6 billion won in loans were misused due to inadequate after-management, such as transferring funds for facility loans to broker or borrower accounts, and failing to check the usage details of working capital loans.
The Financial Supervisory Service has notified investigative authorities of the allegations related to large amounts of improper loans.
Kookmin Bank has been found to have failed to properly implement monitoring of its branches despite ongoing financial incidents. Kookmin Bank has uniformly operated its internal audit cycle for branches at 3 years, with audit periods as short as 3 to 4 business days. It has been revealed that risk analysis focused primarily on past financial incidents, making it difficult to detect early signs of new methods of financial misconduct. NongHyup Bank did not report the financial incidents to the financial authorities despite their occurrence.
◇ NongHyup Financial, despite lowest capital level, pays 1 trillion won annually to the central association
The Financial Supervisory Service pointed out that NongHyup Financial Group is draining capital to its largest shareholder, the National Agricultural Cooperative Federation, without a mid- to long-term plan. NongHyup Financial pays about 1 trillion won each year to the National Agricultural Cooperative Federation in agricultural support business expenses (land expenses) and dividends. Land expenses refer to the money imposed by the central association on affiliates that use the NongHyup name to support rural areas. Related affiliates, including NongHyup Financial, are required to pay 2.5% of their revenue or operating income in the form of land expenses to the central association every year. As of 2023, NongHyup Financial paid 1.1677 trillion won to the National Agricultural Cooperative Federation, including 492.7 billion won for land expenses and 675 billion won in dividends.
The Financial Supervisory Service stated that NongHyup Financial's capital adequacy ratio is at the lowest level compared to other financial holding companies, yet it continues to pay large dividends to the central association without a mid- to long-term capital management plan, weakening its ability to respond to crises.
NongHyup Financial and NongHyup Bank have been supporting the central association bypassing besides land expenses and dividends. The Financial Supervisory Service discovered during a regular inspection in 2022 that NongHyup Bank indirectly supported central association projects by designating donations of 22.2 billion won to NongHyup-related foundations and has guided strengthening internal control procedures. However, NongHyup Bank was found to have continued its indirect support to the central association without preparing improvement measures during this inspection as well.
The Financial Supervisory Service pointed out that KB Financial and Woori Financial Group did not closely measure and manage risks, including hidden asset quality risks within the groups. It indicated that if all of these were taken into account, the common equity tier 1 capital ratio (CET1) of the two financial holding companies could fall by 10 to 20 basis points (bps; 1 bps = 0.01 percentage points). CET1 is a measure of a financial institution’s ability to respond to crises. The financial authorities recommend maintaining a CET1 of over 12%, but the financial holding companies are maintaining 13% autonomously. However, Woori Financial is the only one among the four major financial holding companies that falls below 12%.
The Financial Supervisory Service highlighted that losses continue to occur at affiliate trust companies with a high proportion of responsibility-based completion projects, yet associated risks were not properly reflected when calculating capital ratios. It stated that reflecting this would be a factor in causing the CET1 to decline.
◇ Kookmin Bank, inadequate support procedures for overseas subsidiaries
Kookmin Bank decided on liquidity support for its overseas subsidiaries by prioritizing the necessity of fund transfers only in the morning report to the board of directors and virtually made the decision. On the same day, the risk management committee was held afterwards, raising the exposure limits by country and transferring funds of 200 billion won overseas. The Financial Supervisory Service pointed out that sufficient reviews at the risk management committee level were not conducted in this process.
Kookmin Bank was also revealed to have indirectly supported its overseas subsidiaries by bypassing bad assets through special purpose companies (SPCs) that the bank effectively controls by about 700 billion won.
It was also confirmed that due to inadequate training, an employee without qualifications to suggest investment advisory personnel invested in specific money trusts and derivatives. Additionally, although bridge loans could not be handled according to the internal credit evaluation model, they were improperly processed as real estate-backed loans by the sales department.
The Financial Supervisory Service plans to impose strict sanctions based on the principle of zero tolerance for the illegal acts identified through this regular inspection, such as the handling of improper loans. Furthermore, it plans to improve relevant systems to address management and internal control vulnerabilities identified during the inspection.
Park Chung-hyun, deputy director of the bank department of the Financial Supervisory Service, said, "We will check compliance with internal control management obligations under the accountability structure introduced this year and strive to ensure the stable establishment of the accountability structure." He added, "In the future, we will hold employees accountable who have been negligent in their management obligations in relation to financial incidents."