Banks are strengthening internal controls to prevent financial incidents, but loan fraud involving outsiders continues to occur. Critics say it is difficult to detect such cases in advance through existing credit screening and post-loan management if loans are managed as normal credit with no delinquency or if parties disguise dealings as legitimate transactions. Some in the banking sector are calling for institutional measures to verify the authenticity of private contracts and other documents.

According to the financial sector on Aug. 31, Hana Bank disclosed on Aug. 26 that a financial incident worth 2.42 billion won had occurred on suspicion of fraud by an outsider. The period of the incident ran from Sept. 18, 2023, to March 20 this year. The counterparty is currently classified as normal credit with no delinquency. Hana Bank said whether fraud actually occurred will be determined based on the results of an investigation.

With Hana Bank also disclosing a financial incident linked to suspected outsider fraud, all four major banks - KB Kookmin, Shinhan, Hana and Woori - have recently confirmed financial incidents related to outsider fraud. Kookmin, Shinhan and Woori also made new or revised disclosures this month on loan fraud involving outsiders.

The recently disclosed incidents at Korea Development Bank, Industrial Bank of Korea and Hana Bank are drawing attention after reports said they are related to the same counterparty. Korea Development Bank disclosed 58.3 billion won, Industrial Bank of Korea 9.44 billion won and Hana Bank 2.42 billion won as financial incidents. The combined amount for the three banks reaches 70.2 billion won.

The disclosed incident amounts do not mean the banks' final losses. Actual losses can vary depending on how much can be recovered through collateral and other means, and whether fraud occurred has not been finally confirmed as investigations are under way.

No delinquency, 'normal loans'... how to catch suspected fraud

The problem is that it is not easy for banks to detect suspected outsider fraud early on their own. Hana Bank said it discovered the case through "financial incident disclosures by other financial institutions and related media reports". In the disclosure, information related to other institutions' incidents, rather than the bank's own detection, served as the trigger for recognising the incident.

Korea Development Bank also managed the counterparty as normal credit because there was no delinquency, then recognised suspected fraud after receiving notice of a police search and seizure and other developments. Critics say that if there are no apparent warning signs such as non-payment, existing post-loan management focused on delinquencies and bad loans may have limits in detecting outsider fraud early.

Other banks have also confirmed a series of real estate-related loan incidents involving outsiders. KB Kookmin Bank disclosed this month that a financial incident worth 3.58 billion won occurred due to loan fraud involving collusion between a real estate developer and fake buyers. Shinhan Bank and Woori Bank also confirmed real estate-related loan incidents by outsiders and expanded their previously disclosed incident amounts to 17.34 billion won and 9.87 billion won, respectively.

Banks say they filter risks during the credit screening process through document checks and on-site inspections. Shinhan Bank explained that it checks sales and purchase contracts submitted by the parties, proof of payments, income and financial data, and business and collateral-related documents, and also conducts on-site inspections of collateral and business sites.

It said that for loans intended for sale or subscription to acquire new vulnerable collateral, it has strengthened internal procedures by raising the minimum approval authority to credit officers or above and making external appraisals or head office price checks mandatory, while monitoring such loans on an ongoing basis.

Banks say that even with these screening procedures, there are practical constraints on financial companies' ability to judge authenticity when the parties collude and falsify the documents that form the basis of the review. They say private documents drawn up between parties, such as subscription contracts, offer limited means for banks to objectively verify authenticity, unlike documents issued by public institutions.

Calls are growing for tools to verify the reality of transactions and the authenticity of private contracts more objectively, rather than simply strengthening each bank's screening procedures.

Do banks bear responsibility for outsider fraud?... accountability map also at issue

Whether financial incidents involving outsiders lead to management responsibility under the accountability map requires a separate judgment.

Banks operate internal control systems based on accountability maps. Under the revised Act on Corporate Governance of Financial Companies, executives at financial companies that submit accountability maps have a duty to take management measures to ensure internal controls and risk management function effectively in connection with the responsibilities allocated to them. If a breach of that duty is confirmed, they could face sanctions from financial regulators.

Still, the mere fact that a financial incident occurred does not mean responsibility is immediately imposed on the executive in charge under the accountability map. When determining whether there was a breach of the management duty, financial authorities comprehensively review the circumstances of the incident, whether it was long-running or repeated, whether the possibility of risk was raised in advance, and whether the executive took necessary management measures. As a result, it is difficult to conclude at this stage whether these incidents will fall under accountability-map responsibility.

Some in the banking sector say there are limits to preventing outsider fraud solely by strengthening screening and internal controls at financial companies. They also worry that as incidents are repeated, banks will be more likely to run credit screening conservatively and demand additional documentation, shifting inconvenience even to normal borrowers.

A banking sector official said, "Outsider loan fraud is similar to voice phishing in that it exploits loopholes in the financial system," adding, "This should not be viewed simply as a problem with financial companies' credit screening, but requires a social response, and punishment for fraud suspects should also be greatly strengthened."

Another banking sector official said, "Banks make judgments in the loan screening process based on submitted documents such as contracts and proof of income, but if parties collude and falsify the documents themselves, there are limits to distinguishing authenticity under current procedures." The official added, "If such incidents are repeated, banks will have no choice but to screen more conservatively and demand additional documents, which could ultimately lead to inconvenience for normal borrowers."

The official added, "Rather than responding only by strengthening screening at individual banks, there is a need for the state and financial companies to prepare supplementary measures to verify the authenticity of documents or detect abnormal transactions."