Siphoning ATM Funds, Defrauding Banks of Tens of Billions of Won with Fake Export Documents... Overseas Financial Incidents Take "Many Forms"

[The Unvarnished Reality of Korean Banks Abroad] ②
Embezzlement Made Up 60% of 32 Overseas Incidents at Five Major Banks
Funds Siphoned from ATMs; Books Balanced Ahead of Audits
Forged Letters of Credit, Collusion with Outsiders... A Range of Tactics

Reporting on how overseas financial incidents unfolded revealed a variety of methods used to circumvent banks’ internal control systems. In some cases, local employees siphoned off funds from automated teller machines (ATMs); in others, they colluded with outside business partners to falsify export documents and defraud banks of large sums. The perpetrators came from both inside and outside the banks, and the methods ranged from straightforward embezzlement to organized fraudulent transactions.

According to the office of Kim Jae-seop of the People Power Party on October 21, embezzlement was the most common type of incident among the 32 overseas financial incidents reported at the five major commercial banks from 2022 through August this year, accounting for 19 cases, or about 60% of the total. Fraud followed with nine cases, while there were three cases of breach of trust in the course of business and one case of theft or robbery. Although embezzlement accounted for the largest number of incidents, fraud was by far the costliest. Fraud losses totaled KRW 114.225 billion, or 88.8% of all losses. Breach of trust in the course of business accounted for KRW 9.692 billion, followed by embezzlement at KRW 4.749 billion. Losses from theft or robbery totaled KRW 12 million.

A financial incident that caused a major stir in Vietnam last year was an embezzlement case involving a locally hired employee. According to reporting by The Asia Business Daily, an employee at the Vietnamese subsidiary of a South Korean commercial bank allegedly siphoned off ATM funds. To prepare for audits, the employee concealed the missing funds by bringing in money from elsewhere to replenish the ATMs and make the balances in the books match. The embezzlement continued for more than two years.

An employee at Bank A’s Vietnamese subsidiary, who agreed to speak on the condition of caution, said, “I heard that Vietnam’s audit system is relatively less robust than South Korea’s, and that the employee concealed the embezzlement by bringing in money from elsewhere to cover the shortfall during audits.” The employee added, “I understand that the branch manager was Vietnamese rather than Korean. Unlike in South Korea, where branch managers are transferred every two to three years, it may have been difficult to rotate staff frequently in rural areas of Vietnam.” In effect, some locally hired employees were given work authority for extended periods, creating conditions that allowed the embezzlement to continue for a long time.

The incident was also reported in the media. The bank, however, disputed some reports about the cause of the incident. It said, “Some of the reports contain inaccuracies, portraying an individual’s misconduct as organized misconduct by locally hired staff and citing several unverified possibilities as causes of the incident.”

In another case, an outside business partner turned out to be an accomplice in fraud. This was the case with a major fraud incident at a local subsidiary in Indonesia last year. The subsidiary suffered losses in the 100-billion-won range after being deceived by a forged, false export payment guarantee document (letter of credit), fabricated by an employee in collusion with a mid-sized local export company. Indonesia’s Financial Services Authority (OJK) publicly raised the possibility that bank insiders were involved in the transaction.

A letter of credit is a mechanism through which a bank guarantees payment in international trade, where exporters and importers may find it difficult to trust each other directly. Bank officials say that even when documents appear valid on their face, it is virtually impossible to verify whether the goods were actually shipped or whether the goods listed in the documents match those loaded into the container. A former banker who served as the head of a subsidiary in the United States said, “Even if a container is filled with rocks or bricks instead of goods, the bank has no way of knowing. This is a risk that can arise in any country.”

A branch manager currently working at a Vietnamese subsidiary also said, “Foreign exchange transactions are generally processed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT), but in some countries, including Indonesia, documents are still often processed manually, leaving the system vulnerable to financial incidents that exploit this.” The manager added, “The most effective way to prevent financial incidents at overseas branches is to upgrade local institutions’ IT systems, but in reality, that is likely to take a long time.”

The problem becomes even more serious if an outside exporter independently commits fraud in collusion with an importer, or if bank employees are also involved. This would mean that the review and approval of the importer’s creditworthiness and the substance of its business, as well as internal control procedures, had failed to function properly.

Kim Young-hoon, a professor and specialist lecturer on trade payments at the Korea International Trade Association’s Trade Academy and a former adjunct professor at the Korea Banking Institute, said, “Banks face limitations in detecting fraud in letter-of-credit transactions through document reviews alone. Since people handle these transactions, the possibility cannot be ruled out that an employee might participate in fraudulent dealings by exploiting these loopholes, for example by applying review requirements less strictly.”

There was also a case in which a large sum could not be recovered during the purchase of a local subsidiary’s head office building in Cambodia. In a bizarre turn of events, the company was defrauded by the government while attempting to buy a Cambodian government building.

Fraud also occurs in local business activities, including lending. At Bank B’s local subsidiary in Shanghai, China, the bank was reportedly defrauded by a local platform company while conducting business with individual customers.

Some accounts also suggest that bad loans can arise when sales staff, prioritizing performance, bring in loans that may be risky, while employees dispatched from the home country lack a sufficient understanding of local conditions. At some commercial banks, their Chinese subsidiaries separately hire local staff dedicated to loan sales. When a sales employee brings in a loan transaction, an employee dispatched from the home country gives final approval. Loan performance is directly tied to the sales employee’s bonus. A banker who had worked at Bank C’s Chinese subsidiary noted, “There is a possibility of problems arising from this kind of sales structure.” The combination of performance-driven sales practices, dispatched employees’ understanding of the local market, and lending procedures may make it difficult to screen out potentially risky transactions.

This content was produced with the assistance of AI translation services.