Regulators in South Korea have launched an intensive probe into trade financing transactions between companies and banks. The Financial Supervisory Service (FSS) announced the initiative days after it said Ssangyong Corp had obtained 114 billion won (US$95 million) from banks with fake and forged bills (DC World News, 10 September 2002).

The FSS is now saying that financial irregularities practiced by South Korean conglomerates and financial institutions are on the rise and threatening the country's economic fabric.

Sanctions

The FSS said it was preparing tough measures to crack down on accounting scandals, including - as in Ssangyong's case - the use of forged letters of credit to overstate profits.

"Heavy sanctions will be imposed on any firms involved in accounting scandals," said Lee Keun-young, chairman of the FSS' Financial Supervisory Commission.

Bank targets

Banks are also in the regulators' sights. The banks involved in the Ssangyoong case -including Kookmin, Chohung, Woori, Korea First Bank, Daegu and Industrial Bank of Korea - are under fire for their failure to detect the fraud at the giant trading company until the prosecution launched its investigation.

Regulators pledged to hand out "grave punishment, including dismissals, for bankers or others involved in or responsible for the fraudulent deals."

More scandals

Accounting scandals are not new to Korea. Irregularities at Daewoo Group during the 1990s are estimated to have topped US$30 billion. The group was dismantled in the wake of that crisis, leaving its 12 affiliates under creditor-led debt rescheduling program.

South Korea toughened its corporate and financial rules in the wake of Daewoo's meltdown but according to the regulators, the recovery of the country's economy since it collapsed in 1997 is threatened by a revival of irregular accounting methods.

In the first half of 2002, investigators found that 36 companies had overstated profits totalling around US$3.25 billion.

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