August 28, 2014
Financial Services Agency

Administrative Action against Kookmin Bank, Japan Branches

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

I.Description of Administrative Actions

Orders based on Article 47, Paragraph 2 and 4, and Article 26, Paragraph 1, of the Banking Act:

  1. Suspend new transactions by the  Japan Branches in the period from September 4, 2014, to January 3, 2015, (however, this shall not preclude transactions based on existing contracts [including letters of intent, etc.] signed prior to September 3, 2014, the provision of refinancing to existing customers, outward and inward remittances through existing deposit accounts of customers, financing and investment management transactions with other financial institutions, and other business activities individually approved by the FSA).
  2. In order to ensure appropriate and sound business operations, review and restructure the Japan Branches’ current governance and internal control system in connection with its credit risk management and legal/regulatory compliance, from the following perspectives:
    • (1)Clarify the Japan Branches’ management stance and responsibilities regarding credit risk management and legal/regulatory compliance (including clarification as to authorities and responsibilities between the headquarters and the Japan Branches);

    • (2)Restructure and improve the credit risk management function (including a complete restructure of the control system to implement credit screening and management appropriately and strengthen the check-and-balance function, and a review of related internal regulations and  sound implementation thereof);

    • (3)Restructure and improve the legal/regulatory compliance function (including actions to ensure the thorough understanding and full compliance of branch officers as to laws and regulations and internal regulations, and actions to nurture and improve the awareness of branch officers as to legal compliance);

    • (4)Review the audit methodology, frequency, etc. to ensure appropriate and sound business operations of the Japan Branches.

  3. Submit to the FSA by September 29, 2014, a plan to improve business operations (“Business Improvement Plan”) pertaining to 2 above and matters described in the notice of inspection results as well as the report prepared by the Japan Branches, and implement such plan immediately.

    Further, verify and ensure the appropriateness of the Business Improvement Plan by utilizing neutral, external experts in addition to the internal audit division, and confirm the status of improvement and effectiveness of such plan.

  4. Subsequent to the implementation and until the completion of the Business Improvement Plan described in 3 above, generate a report on such plan’s status, including the progress, implemented measures, and improvement, every three months, starting with the period ending at the end of October 2014, and submit it to the FSA by the 15th day of the following month.

II.Reasons for Administrative Actions

According to the FSA’s on-site inspection (notification dated October 15, 2013, and April 25, 2014) and the report prepared by the Japan Branches based on Article 24, paragraph 1, and Article 48 of the Banking Act, etc., fundamental problems regarding the operation and management of the Japan Branches’ businesses were identified in the branch’s credit risk management, legal/regulatory compliance and governance framework as stated below.

  1. Some of the former branch managers and employees of Tokyo Branch have been by themselves structuring and executing a number of inappropriate loans, such as allocation of loan amounts to multiple companies within the same corporate group in order to provide loans in the amount not exceeding the branch manager’s discretionary approval limit and loans executed based on inflated collateral value by using falsified collateral valuation documents.
  2. Some of the former branch managers and employees of Tokyo Branch have received cash payments potentially deemed as rebates from corporations or persons most likely to be borrowers or the representatives of such borrowers.
  3. A former senior manager responsible for branch teller services at Tokyo Branch received cash payments from a customer in return for applying a high interest rate on a substantial amount of cash to be placed in a term deposit.
  4. Prevention measures against conducting transactions with anti-social forces taken by former branch managers of Tokyo Branch were inappropriate, which is evidenced, for example, by an inadequate antisocial force database and ineffective pre- and post-screening in terms of relationships with antisocial forces.
  5. The following fundamental governance and internal control issues were identified as forming the background to the problems described above.
    • (1)Some of the former branch managers of Tokyo Branch lacked awareness as to legal/regulatory compliance, managed the branch excessively focusing on earnings and made arbitrary decisions, without establishing an effective framework for loan screening and legal/regulatory compliance.

    • (2)The middle office has not performed its check and balance function, which is evidenced, for example, by the fact that the compliance officer is not fully acquainted with the relevant laws and regulations of Japan, and the RM Committee is not conducting screening appropriately to prevent inappropriate lending practices, etc. contemplated by former Tokyo branch managers, etc.

    • (3)The control department in the headquarters failed to manage Tokyo Branch effectively, implementing branch management and performance reviews excessively focusing on earnings, unaware of the inappropriate state of management in Tokyo Branch, and failing to select and send an appropriate person to act as the branch manager of Tokyo Branch.

  6. Internal audits conducted by headquarters have not been effective, failing to point out and check, based on an accurate understanding, the aforementioned series of issues identified at this time.

Contact

Financial Services Agency Tel: +81-(0)3-3506-6000 (main)
Banks Division I, Supervisory Bureau
(Ext. 2682, 3398)

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