IBK faces criticism over internal control weaknesses following 80 billion won incident

Criticism is growing that internal control weaknesses at the Industrial Bank of Korea (IBK) worsened the damage from a financial incident involving more than 80 billion won ($57.9 million), in which a third-party platform diverted borrowers’ loan repayments.

The incident arose from an arrangement between IBK’s Chinese subsidiary and a local nonbank financial institution to provide non-face-to-face loans. Under the arrangement, IBK disburses loans directly to borrowers, and the institution relies on a third-party online platform to collect principal and interest payments, according to data submitted by the Financial Supervisory Service (FSS) and IBK to Rep. Shin Dong-uk of the People Power Party on Monday.

The platform allegedly diverted borrowers’ principal and interest payments instead of transferring them to IBK and processed false electronic records to make it appear as if repayments had been made when no funds had actually been transferred.

As a result, borrowers who had repaid their loans were recorded as having outstanding or overdue balances, subjecting them to debt collection and damaging their credit scores. IBK was also unable to recover the principal and interest that the borrowers had already paid.

Despite IBK saying that it compared repayment records against actual deposits every day, the bank failed to detect the irregularities for months. It said that it first became aware of the incident on June 24, when settlement payments failed to arrive and borrower complaints increased.

However, the incident lasted from Dec. 1 of last year through June 29, according to an FSS report, meaning that problems had continued for about seven months without detection.

Local financial institutions were seemingly already aware of the online platform’s problems. Five Chinese financial institutions using the platform dropped it from their lists of partner institutions in March and April, but IBK failed to learn of this in time.

IBK disclosed on July 15 that the incident involved 83.4 billion won but has yet to determine the exact amount involved, how much has been recovered or its own expected losses. It also stated that local authorities are currently investigating the matter.

Following the incident, IBK established a separate direct repayment system allowing borrowers to check their repayment amounts or repay their loans early without accessing the online platform. The move, however, has drawn criticism for being a belated response.

“IBK disbursed the loans directly while entrusting an outside platform to collect principal and interest, and it did not establish a direct repayment system until after an incident involving more than 80 billion won occurred,” Rep. Shin said. “Weak internal controls at its overseas subsidiary and the FSS’s belated oversight, with the regulator simply waiting for the final report, are serious problems as well.”

The financial authorities’ response has also come under scrutiny. After receiving a report of the incident, the FSS reported the matter internally, shared details of the case and checked for changes in the amount involved. However, it has not conducted in-person inquiries with IBK representatives, requested additional documents or launched an on-site inspection.

The FSS plans to review whether the incident was handled appropriately once IBK completes efforts to compensate for the losses and submits a final report.

BY JEONG JAE-HONG [[email protected]]