I Revival of Comprehensive Audit

Significance

The

reinstatement of a comprehensive audit of all issues (as opposed to a special

audit that is instigated when a particular issue has arisen) (“Comprehensive

Audit”) by the Financial Supervisory Service (“FSS”) means that the selected

financial institutions will need to be better prepared for the increased

breadth and depth of the upcoming Korean regulatory audits. Impacted entities

include: (i) Korean Financial institutions including banks, securities

companies, insurance companies, and asset management companies; and (ii) local

Korean branches and subsidiaries (including banks, securities, insurance and

asset management) of foreign financial institutions.

The

following takeaways are noteworthy:

Reimplementation of the

Comprehensive Audit

On

February 20, 2019, the FSS announced the reinstatement of the then 2015

abolished Comprehensive Audit. The FSS will resume the Comprehensive Audit

effective on January, 2019. Comprehensive Audit means that for the selected

institutions, the FSS will conduct a lengthy review of all issues (financial or

non-financial). The FSS explained that, after consultation with the Financial

Services Commission (“FSC”), it came to recognize the need for the

Comprehensive Audit to create a safer and sounder environment for financial

services consumers, financial soundness of relevant institutions, and more

robust internal controls.

The

FSC and the FSS recognize the negative aspects of traditional Comprehensive

Audits. Therefore, going forward, FSS announced that it plans to conduct the

Comprehensive Audit by:

establishing

a criteria for selecting institutions for the Comprehensive Audit; and

pursuing

a more focused review of predetermined target business areas so as to identify

and reform the weaknesses of the selected institution.

Comprehensive Audit

Implementation Plan

The

FSS will:

by

the end of March 2019, establish the criteria for selecting institutions to be

subject to the Comprehensive Audit in 2019;

by

April 2019, select institutions based on the established criteria; and

resume

the Comprehensive Audits in the first half of 2019.

Broadly,

the FSS announced four criteria for selecting institutions to be subject to the

Comprehensive Audit: (i) consumer protection, (ii) financial soundness, (iii)

internal control and management structure, and (iv) market influence.

The

FSS is expected to begin its selection process and publicly announce the

selected institutions (most likely will be institutions whose weaknesses are

already known) beginning as early as April.

Request for information from the selected institutions, and actual

on-site audit will soon begin thereafter. Korean branches and subsidiaries of

foreign financial institutions are also subject to the selection criteria, but

it is uncertain whether they will actually be selected for a Comprehensive

Audit in 2019.

In

addition, the FSS announced that it will not conduct any other special audit on

the financial institution subject to the Comprehensive Audit three months prior

to and three months after the Comprehensive Audit. We will provide you further

information once all financial institutions have been evaluated by the FSS and

the list of the selected financial institutions are confirmed.

Anticipated Audit Points

The

FSS has recently highlighted the stability of the financial system and the

protection of consumer rights as the purposes of financial supervision.

Accordingly, the reinstated Comprehensive Audit is expected to focus on

investigating unsound business activities by financial institutions. For

example, it is expected that:

with

respect to banks, the FSS may examine consumer coercion practices such as

approving loans subject to purchase of financial products as well as incomplete

disclosures regarding sales of various financial products such as

bancassurance, fund or derivative linked securities;

with

respect to the insurance companies, the FSS may focus on the frequency of

policy holder complaints and the claim rejection rate; and

with

respect to financial investment companies, the FSS may review improper sales

practices and financial soundness of relevant institutions.

If

such activities are intentional and/or negatively impacted numerous consumers

then the related penalties are expected to rise accordingly.

Also,

as part of establishing public order in the financial market, anti-competition

activities such as large financial companies’ abuse of superior bargaining power,

insider trading by major shareholders, and improperly favoring of subsidiaries

will be subject to higher penalties.

In

addition to the above, the below amendment should be on the watch list for

Korean regulatory audits.

Amendments

to the Korean Anti Money Laundering Law

Amendments

to the Act on Reporting and Using Specified Financial Transaction Information

(the “Specified Financial Information Act”) will become effective on July 1,

2019 (the “Amendments”). The Amendments reflect the heightened focus on anti-money

laundering (“AML”) and counter-terrorism financing (“CFT”).

The

following takeaways are noteworthy:

Strengthening

Prevention of Anti-Money Laundering and Counter-Terrorism Financing

The

Specified Financial Information Act requires financial companies a) to

designate persons responsible for suspicious transaction reporting and currency

transaction reporting, b) to prepare and implement relevant procedures and work

guidelines for management and employees, and c) to educate and train management

and employees to prevent money laundering and terrorism financing

(collectively, “Internal Control Obligation”).

The

Amendments obligates the institution to:

include

a process to identify, analyze and assess money laundering and terrorism

financing;

establish

an independent department which reviews and assesses the appropriateness and

effectiveness of the Internal Control Obligation;

supervise

its management and employees to comply with the procedures and work guidelines;

retain

records related to AML and CFT review including suspicious transaction

reporting, currency transaction reporting, customer due diligence, and

information on the originator and recipient of wire transfer, all for a minimum

of 5 years from the date of the relevant financial transaction; and

certain

other matters to be determined by the Presidential Decree in order to

efficiently prevent money laundering and terrorism financing.

Increasing

the Maximum Administrative Penalty

The Amendments raised the maximum administrative fine imposed on

a violation of AML or CFT to KRW 100 million from KRW 10 million. An

institution which fails to take measures to meet Internal Control Obligation or

fails to comply with and/or interfere with a regulatory order, direction or

audit is now subject to this penalty. The administrative fine for failure to

meet suspicious transaction reporting and currency transaction reporting is

raised to KRW30 million from KRW 10 million.

This

update is intended as a summary news report only, and not as advice. For

legal advice, please inquire with your contact at Bae, Kim & Lee LLC, or

the following authors of this bulletin:

Jun Ki PARK

T 82.2.3404.6512

E [email protected]

Young Mo KIM

T 82.2.3404.0255

E [email protected]

Chris Kim

T 82.2.3404.0291

E [email protected]