**Fake Loan Applications Lead to Massive Loans**
Employees of KB Kookmin Bank and NH Nonghyup Bank collaborated with loan brokers to issue loans worth hundreds of billions by creating fake sales contracts, as revealed by a Financial Supervisory Service (FSS) inspection. These employees were also found to have received millions in bribes from the brokers.
**FSS Inspection Findings**
FSS Governor Lee Bok-hyun announced the inspection findings of KB Financial Group, Kookmin Bank, NH Financial Group, and Nonghyup Bank at a press conference in Seoul on February 4th. These institutions underwent routine FSS inspections last year.
According to the FSS, an A-team leader at Kookmin Bank conspired with developers and brokers to execute illicit real estate loans worth 89.2 billion KRW. They provided false sales contracts and other documents to ensure that loans could be issued under fake borrower names. Consequently, a total of 291 loans were issued through this method. The involved development firms, which participated in the wrongdoing, faced financial struggles due to the insolvency of their real estate project financing.
In return for these fraudulent loans, brokers and developers paid bribes and provided lavish entertainment to the team leader. The FSS is still determining the exact scale of these exchanges.
Similarly, employees at a branch of Nonghyup Bank issued unlawful loans worth 64.9 billion KRW using similar tactics. They colluded with brokers and borrowers, inflated property appraisal values, and circumvented internal lending limits by dividing loans under multiple fake borrowers’ names. They also received about 130 million KRW in bribes.
**Issues in Loan Management and Monitoring**
It was discovered that the banks failed in post-loan monitoring, allowing 22.6 billion KRW of loan funds to be misused for non-designated purposes. The FSS has alerted investigative authorities about these significant illegal loans.
**Internal Control and Monitoring Failures**
Kookmin Bank was found lacking in branch oversight, maintaining a uniform internal audit cycle of three years, and a short audit period of three to four business days. The audits primarily focused on past financial incidents, limiting the early detection of new fraud techniques. Nonghyup Bank also failed to report financial incidents to regulators.
**Capital Allocations and Financial Health**
Despite facing capital constraints, NH Financial Group continues to allocate about 1 trillion KRW annually to its parent organization, Nonghyup Central Association, as fees and dividends, weakening its crisis management capability. This practice led to FSS criticism, marking a contrast with other financial holding companies maintaining higher CET1 ratios.
**Support and Risk Management for Overseas Entities**
Kookmin Bank’s inadequate procedures for supporting overseas subsidiaries were also criticized. They initiated liquidity support by informing the board only on the day of the remittance and decided the support before the Risk Management Committee’s post facto review. Furthermore, 700 billion KRW was diverted to improve the asset quality of foreign subsidiaries through Special Purpose Companies (SPCs).
Based on these findings, the FSS plans to impose severe sanctions without tolerance on the violations and improve any identified governance and internal control weaknesses.