Japanese watchdog slaps three-month new business ban on Korea Exchange Bank

Source: Financial Services Agency

The Financial Services Agency (FSA) took the following administrative actions today against Korea Exchange Bank, Japan Branches.

1. Description of the Administrative Actions

Orders based on Article 47, Paragraph 2 and 4 and Article 26, Paragraph 1 of the Banking Act
1. Suspend new business operations at Japan Branches from January 14, 2010 to April 13, 2010 (however, this shall not preclude business operations (including the explanation of products) that are conducted in cases where there are any voluntary manifestations of intention by customers and where the manifestations of intention can be objectively recognized as voluntary).

In order to ensure appropriate and sound business operations, review and restructure the governance and internal control systems (including adequate staffing and the construction of a proper organization and structure) of the Japan Branches in regards to compliance with laws, regulations, etc., from the following points:

(1) An unequivocal statement of the management's commitment and responsibilities with respect to compliance with laws and regulations.

(2) Ensure a thorough understanding of and compliance with laws and regulations by officers and employees and foster, improve and entrench awareness of compliance with laws and regulations (including conducting comprehensive checks of and ensuring awareness and compliance with internal rules).

(3) Review and reform the organizational structure and operations pertaining to the accurate execution of the obligation of notification of suspicious transactions and ensure the execution of said obligation.

(4) Clarify the assignment of authority and responsibilities pertaining to the supervision of business operations between headquarters and the Japan Branches, and among the Japan Branches, restructure and strengthen the governance and internal control systems of the Japan Branches based thereon, and implement said systems.

(5) Re-evaluate the method, frequency, etc., of audits of the Japan Branches to ensure that operations are properly run and constems.

(5) Re-eva to ensure that operations are properly run and constems.

(5) Re-evaluate the method, frequency, etc., of audits of the Japan Branches to ensure that operations are properly run and controlled in compliance with laws, regulations, and execute effective audits and implement and enhance post-audit follow-up reviews.

(6) Investigate the reasons why the improvement plan that was submitted to the FSA in response to the FSA's previous order on March 3, 2006 to improve business operations was not implemented appropriately and clarify where the responsibility lies (management to be included in the investigation).

Submit a business improvement plan (including clarification of the assignment of responsibilities for establishing an internal control system that enables steady implementation of the business improvement plan and for ensuring the effectiveness thereof) pertaining to the matters stated in 2. above, the notice of the inspection results, and the order for reporting, by February 5, 2010, and execute the plan immediately.

In addition, the Japan Branches shall verify and ensure the appropriateness of the business improvement plan by subjecting it to evaluation by, for example, an outside, unbiased third-party expert, as well as evaluation by the internal audit division, and shall report the status of the improvements made and the establishment thereof to the FSA.

Report the progress and implementation status of the business improvement plan and the status of improvements made as a result by the fifteenth day of the following month, every three months starting March 2010 (1st report), until the business improvement plan is completed.
2. Reasons for the Administrative Actions

In light of the FSA's on-site inspection (notification of September 25, 2008), reports submitted by the Japan Branches pursuant to Article 24, Paragraph 1 and Article 48 of the Banking Act, etc., the following fundamental problems with the compliance and governance systems of said branches were recognized in relation to the management and control of the branch business operations:

In March 2007, the branch manager of the Osaka branch, in response to a request from a customer with whom he had also maintained a friendly relationship, helped to accept a deposit of 400 million yen which had been temporarily borrowed from a person related to an anti-social force who came to the branch together with the customer, as well as upon its request the issuance of a certificate of deposit balance for the account by having the relevant officers and employees take necessary procedures, although said branch manager was aware that said transaction would be improperly used to make said customer's financial base appear stronger than it really was and serve as a credit guarantee for the acquisition of a golf course.

Although the compliance officer of said branch pointed out to the branch manager that said transaction constituted a suspicious transaction as defined under Article 9 of the Act on the Prevention of Transfer of Criminal Proceeds, the branch manager instructed the compliance officer not to notify the FSA. While the branch manager agreed to notify the FSA at the compliance officer's second asking, the branch manager ordered the description of the relationship between said customer and the anti-social force to be deleted from the notification, and thereby deliberately making a notification that concealing important facts concerning the suspicious transaction.

In addition, between the period from December 2005 to February 2008, the branch manager of the Osaka branch repeatedly and continuously instructed branch employees and officers to book a large amount of fictional expenses, had them improperly expense the amount, and eventually embezzled and misappropriated the funds.

Despite receiving a report from the compliance officer of the Osaka branch with regard to the matters described in 1. to 3. above, the chief compliance officer responsible for Japanese operations, who was based at the Tokyo branch, did not investigate or report these cases to headquarters and representative manager in Japan in accordance with internal rules, and made no misconduct report to the FSA, thereby allowing the cases to be covered up for a long period of time as a result. In light of the above, it is deemed that the compliance system of the Japan Branches is not properly functioning.

In March 2006, following an on-site inspection conducted by the FSA, the Japan Branches received a business improvement order pursuant to Article 47, Paragraphs 2 and 3 and Article 26, Paragraph 1 of the Banking Act, which required the establishment of an internal control system pertaining to its compliance with laws, regulations, etc. However, as described in 2. above, the improvement order has not been completed as a system has yet to be properly set up for the appropriate execution of the obligation to notify the FSA of suspicious transactions, which was the subject of the order, in accordance with a plan drawn up by the Japan Branches. In light of the above, it is deemed that the business improvement order has been violated.

As a sufficient internal audit of the Japan Branches has not been conducted with an appropriate and carefully thought-out audit method, the above-mentioned problems have not been pointed out or checked based on an accurate identification of what happens in Japan Branches. Thus, the effectiveness of the internal audit is not being ensured.

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