Watchdog backs off heavy punishment for bank heads

Published : Aug 22, 2014 - 11:16 Updated : Aug 22, 2014 - 11:16

The South Korean financial watchdog on Friday reprimanded the heads of KB Financial Group Inc. and its flagship Kookmin Bank for management failures, concluding an investigation that dragged on for two months with a much lighter punishment than earlier indicated.

The Financial Supervisory Service (FSS) said its disciplinary committee gave warnings to KB Financial Chairman Lim Young-rok and Kookmin Bank President Lee Kun-ho, declining to impose heavy penalties that could have forced them to resign.

Lim was penalized for gross negligence in handling what has turned into a scandal after an internal feud over a computation system change, while Lee was held accountable for illegal loans and a slush fund scandal in the bank's Tokyo office last year when he was a vice president.

The FSS also reprimanded 87 executives and officials involved in the misconduct.

The two top executives have clashed over a 200 billion won ($195.6 million) project to change the bank's computation system.

Lim pushed the system change and the board of directors approved the plan in May, but Lee opposed the move and reported the case to financial authorities, citing procedural flaws in the board's decision.

The watchdog had notified them that there would be severe punishment for mismanagement of internal affairs, but the punishment was toned down after it accepted the argument that Lim's intervention was limited because the feud was between the affiliate bank and the directors' board.

The regulator said that in the case of Lee, the bank's president, it took into account the fact he had reported the board's lapses to the authorities.

Insiders say that the Lim-Lee conflict over the system change reflects a power struggle between the holding company and its subsidiary bank.

The chairman of the holding company wields managerial power over the flagship bank, which accounts for a majority share of the group's earnings.

KB Financial posted a net profit of 765.2 billion won for the first six months of the year, with Kookmin Bank making up 546.2 billion won, or 71.4 percent.

The labor union of Kookmin Bank has demanded that both leaders step down to take responsibility for tarnishing the company's reputation by causing the internal strife.

The FSS had convened disciplinary meetings six times since June, repeatedly saying there would be strict punitive measures that would force the two chiefs to step down. Their stated intentions, however, were undercut by the state auditor when it announced a different conclusion from the watchdog.

"It took a long time because we tried to give each person the opportunity to explain himself. The decisions came after in-depth discussions," an FSS official said.

Market watchers, however, criticized the FSS for delaying the final decision so long, allowing months of speculation and administrative confusion at KB group. Management at KB Financial and Kookmin Bank was stalled for months, forcing the postponement of a staff reshuffle and key business plans including the acquisition of LIG Insurance Co.

Rumors swirled within the financial industry during the period, suggesting that KB lobbied heavily to rescue its chairman.

Meanwhile, the FSS has yet to take punitive action against card firms responsible for the country's biggest personal data leak. The leak, discovered in January this year, affected millions of customers at KB Kookmin Card Co., Lotte Card Co. and Nonghyup Card.

The former head of Standard Chartered Bank Korea and Citibank Korea's president also face reprimand for separate data leak cases. (Yonhap)