A series of previously unthinkable fraud and information leaks have hit the Korean financial community hard, showing how vulnerable our financial system is

2014-02-10 17:44

Biggest financial scam

A series of previously unthinkable fraud and information leaks have hit the financial community hard, showing how vulnerable our financial system is.
The Financial Supervisory Service (FSS) last week revealed that the nation’s leading commercial and savings banks were unaware ― for more than five years ― of a massive loan fraud case in which an employee of KT ENS, a network operating subsidiary of KT Corp., embezzled nearly 300 billion won in loans allegedly in collusion with a number of subcontractors. The employee, surnamed Kim, is suspected of having issued fake bonds using an official stamp stolen from the company to the subcontractors, which were then used as collateral to take out loans from the banks.    
The fraudulent activity began in May 2008 and was perpetrated nearly 100 times through to last month, when the FSS finally discovered the scam during its inspection of a savings bank. Of the 300 billion won in loans, about 220 billion won was from Hana, NH NongHyup and KB Kookmin banks, while the rest came from 14 savings banks.
KT ENS and the banks are busy shifting the blame onto each other in the biggest loan scam, raising the possibility of massive legal disputes.
KT ENS denies its responsibility, saying it was perpetrated by an individual worker and had nothing to do with the company. The affiliate of KT, the nation’s second-largest mobile carrier, argues that the banks should have been more prudent in screening the loan applications.
The banks claim that KT ENS should pay back the loans, noting that Kim, a company official, spearheaded the scam and that the official company stamp was on the documents submitted to the banks. Brokerage houses, which had provided payment guarantees to the bonds, also hint at lawsuits against KT ENS, saying the collateral was bogus.
Whatever the results of the lawsuits may be, our concern is that banks habitually pass on such losses to customers by, for example, raising lending rates down the road.
The financial authorities have launched an intensive audit into all financial companies, including banks, to find similar irregularities in lending, but this is the time for them to plunge a scalpel into the “predatory’’ financial system across the board.
In fact, the latest loan fraud case has laid bare the two faces of our financial firms, which give confidence to large companies blindly while being too picky toward households and smaller firms. The result is that more than 1 million middle-class people have seen their credit ratings downgraded since 2008.
Given that financial companies should play a role in allocating resources efficiently by managing customer credit elaborately and providing best customer services, the flawed financial system must be rectified as soon as possible.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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