How Banks have also been affected by “Choi-Gate”.

Recently, the “Choi-Gate” scandal shook Korean society. The absurdity of some of the allegations and the parties implicated are varied but the scale of the unfolding story is huge. The scandal is so broad that it is hard to keep up with all the flow of information. One feature of the scandal is the bank involved in the movement of money. This has not been highlighted in most media reports. Allegations have been made that some banks provided special benefits to Choi Soon-Sil and her daughter Jung Yu-ra. The accusations claim they received concessions, such as favorable loans and other related financial services.

The bank that many sources are making accusations towards is KEB-Hana Bank. In December last year, the bank gave a KRW300million loan to Jung, who was only 19 years old back then. Moreover, the bank issued her a letter of credit (LC), regarding land in Pyeong-Chang. With this, Jung borrowed Euros from the German branch of Hana Bank. In other words, the bank provided her a warranty for foreign currency. Many people resent this incident since Letters of Credit are usually only used in trade, and are not normally for individual use.

Even more suspicious is the rapid promotion of the overseas president of Hana Bank’s branch in Germany after he returned back to Korea. Lee, who was the overseas president of Hana Bank in Germany, not only received a rapid promotion to become the branch manager of the Samsung Town Office Park Hana Bank branch, but also became the Assistant Director at their Headquarters, which placed him at the executive level. His role as the Assistant Director is also suspicious. Originally, there was no job in the organization with the title of Assistant Director, but Hana suddenly divided departments and made a new role. Suspicions about whether Choi Soon-sil’s power was involved in this incident still remain.

Hana Bank strongly argued repeatedly that the loan for Jung was not a special favor. According to an article from the Korea Times, Hana bank insisted that anyone can issue a warranty to receive foreign currency, revealing that 802 of their 6975 (11.5%. of their total) customers received a warranty of foreign currency. In addition, Hana Bank stated that Jung was eligible to receive a loan and the promotion of Lee was an acknowledgement of Lee’s capacity in business.

However, a stray bullet was also heading towards KB bank. Choi’s sister, Choi Sun-Deuk received KRW500 million Won as loan from the bank to secure the purchase of a building in the Sinsa-dong area of Gangnam. There is no clear evidence so far of illegal acts from both banks, but taking into account that illegal acts involving banks are usually connected to every financial scandal, this incident will have to be investigated. In Korea, banks have been implicated in corruption scandals on multiple occasions already. One example was the Han-bo Group scandal. In the 1990s, details of the Han-bo Group’s illegal loans displayed the corruption between the Government and the banks. The banks allowed loans without checking the viability of their business plans due to external pressure. The banks had to give extra money in order to get back the loan money. While investigating the Han-bo Group incident, corruption was revealed and a politician was implicated. As the result, several politicians and presidents of banks were punished. The investigation expanded and even implicated Kim Hyun-Chul, the second son of the then Korean President Kim Young-Sam.

During Kim Dae-Jung’s presidency, Woori Bank were involved in another illegal loan incident. Woori Bank loaned more than 1 trillion won to a medium sized firm, called “Ark World”. The person at the center of this incident was Park Ji-won, who was the minister of culture and tourism at that time. In order to apply for the loan, applicants need to have a guarantee for the funds, and accusations were made that Minister Park’s put pressure on the banks at this stage. The issue got a lot of attention the president of Woori Bank made a statement saying, “I received Minister Park’s calls and he tried to apply pressure to me”. In the end, Minister Park was acquitted, but he had to resign from his position before attending the prosecution interviews. In addition, KDB bank, which is a Government-run bank, became a big story in 2000. Hyundai Corporation became the focus of suspicion because they transferred a large amount of money to Kim Jung-Il, who was the president of North Korea just before the North-South Korean summit. The result of the investigation concluded that the Hyundai Corporation sent KRW223.5 billion to North Korea, and arrests were made.

The question is “Why do Korean banks become involved in so many large scandals?”. First of all, the banks tend to have weaknesses when it comes to Government pressure. The banks rely on the policies of the Government and politicians including the financial authorities. Specifically, the promotion of senior executives in banks is closely dependent on Governmental influence. This can be assumed with Government-run banks, but commercial bank are also easily swayed by Government power. The second reason is of course, money. Large scale corruption eventually involves the transfer of money. Banks are the storehouses of money and they decide conditions for loans. In other words, they can offer “special loans” with outrageous benefits. The Government’s power and the submission of banks and consequently employee’s morals can lead to large scale corruption. Banks, which are under scrutiny regarding Choi’s “Hell gate” can’t relax in these circumstances. An employee at a commercial bank said “Individuals have the right to receive LCs (letters of credit), but it is not acceptable that a branch has allowed the issue of an LC to a 19 year old student with no job”. In the status quo, among financial markets, various suspicions toward Hana Bank have already spread, so we should wait and see if this ends with just “suspicion”, or if this incident will be added to an already long page of historical bank corruption in Korea.