Board of Audit and Inspection: "Korea Trade Insurance Corporation Neglected Risk Management, Incurred 59 Million Dollar Loss"

The Korea Trade Insurance Corporation neglected risk management by releasing key collateral based solely on the credit of overseas importers, incurring losses totaling 59 million dollars. It also provided export credit guarantees to companies with unpaid wages and arrears in the four major social insurance contributions, resulting in improper guarantees amounting to 10.5 billion won. It was further confirmed that the corporation failed to share corporate information with the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation, thereby increasing the risk of guarantee accidents.

Yonhap News Agency

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On February 3, the Board of Audit and Inspection announced the results of its "Regular Audit of the Korea Trade Insurance Corporation," stating that it had identified a total of 16 illegal or improper matters in overall business management and internal duty management, and had taken measures such as issuing cautions, notifications, and disciplinary actions.

According to the Board of Audit and Inspection, the principle of maintaining collateral was not properly observed in the course of ship export financing. In ship financing, the structure is such that the borrower acquires a vessel with the loan and repays principal and interest with charter hire (rental income). Therefore, securing a long-term charter contract before loan disbursement, and maintaining the collateral of ship ownership and charter hire until loan maturity, are the key elements of risk management.

The problem arose when the conclusion of a long-term charter contract by the overseas importing company was delayed. The importer requested loan drawdown before the fulfillment of the precedent conditions, relying on a six-month short-term charter contract and a letter of intent (LOI) for a long-term contract. The Korea Trade Insurance Corporation and the Export-Import Bank of Korea approved this request, relying only on the non-binding LOI and the importer's payment guarantee. The long-term contract ultimately fell through.

In addition, when the importer requested the release of co-collateral on the condition of early repayment of the loan for another vessel, the long-term charter contract for the relevant vessel was still incomplete, meaning that key collateral had not been secured. Nevertheless, the Korea Trade Insurance Corporation and the Export-Import Bank of Korea approved the request. The Board of Audit and Inspection concluded that the loan agreement amendment (waiver) in this process was carried out without sufficient review.

Ultimately, as oil prices entered a declining phase, the importer's liquidity deteriorated, leading to guarantee and loan accidents. Subsequently, during the restructuring process after the importer filed for corporate rehabilitation twice in U.S. courts in 2017 and 2021, the recovery of principal and interest was delayed or reduced, and the loss was finalized in 2023. The Board of Audit and Inspection stated that the combined losses of the Korea Trade Insurance Corporation and the Export-Import Bank of Korea were confirmed at 59 million dollars (24 million dollars and 35 million dollars, respectively. The Board of Audit and Inspection issued a "cautionary request" to the presidents of both institutions, instructing them not to process important contract amendments, such as approvals that could exacerbate loss risk when financial accidents occur due to international market fluctuations, without sufficient review.

Loopholes were also identified in the screening and post-management of export credit guarantees. The Board of Audit and Inspection found that the Korea Trade Insurance Corporation checked only the "certificate of full payment of the four major social insurance contributions" to determine whether there were grounds for denial of guarantees due to unpaid wages. As a result, over the past five years, it provided guarantees totaling 25.5 billion won for loans to 64 companies with unpaid wages, and among these, guarantee accidents amounting to 5.9 billion won occurred at 15 companies (23%).

Post-management after assuming guarantees was also inadequate. The Board of Audit and Inspection pointed out that the Korea Trade Insurance Corporation failed to take follow-up measures such as reducing guarantee amounts for companies in arrears on the four major social insurance contributions. As a result, over the past five years, guarantee accidents occurred at 258 companies (22%) out of 1,158 companies with such arrears. Transactions between domestic headquarters and overseas branches, which are subject to guarantee restrictions under the regulations, were also not filtered out. The Board of Audit and Inspection determined that, because the Korea Trade Insurance Corporation did not impose on banks the obligation to verify head office-branch relationships, it issued guarantees even for such related-party transactions. In a sample survey of 130 companies, it found that transactions amounting to 4.6 billion won between seven pairs of companies in a head office-branch relationship could have been identified simply by cross-checking company names.

Accordingly, the Board of Audit and Inspection notified the president of the Korea Trade Insurance Corporation to establish measures to accurately identify companies with habitual unpaid wages, to set action standards that reflect the number of warnings issued to companies in arrears on the four major social insurance contributions, and to review sanctions such as suspension of guarantees, complaints, and criminal charges against companies that abuse head office-branch transactions. It also issued a cautionary request to strengthen verification procedures at the screening stage.

The Board of Audit and Inspection also criticized the Korea Trade Insurance Corporation for increasing losses by failing to share corporate information, such as guarantee and accident records, with similar guarantee institutions, namely the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation. Over the past five years, the average loss ratio of the corporation's export credit guarantees was 579%, which the Board of Audit and Inspection explained was excessively high compared with the Korea Credit Guarantee Fund (65%) and the Korea Technology Finance Corporation (29%).

The Board of Audit and Inspection confirmed that, while the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation have managed risks by sharing grounds for denial and accident information since a previous disposition request by the Board, the Korea Trade Insurance Corporation did not share such information even after the National Assembly requested the sharing of credit information in October 2020. As a result, the corporation assumed guarantees for cases that the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation had previously refused, making subrogation payments totaling 134.9 billion won for 398 companies. It also provided follow-up guarantees totaling 3.8 billion won to 14 companies that had already experienced guarantee accidents at those institutions, and then had to make full subrogation payments, thereby causing losses to public finances, according to the Board of Audit and Inspection.

The Board of Audit and Inspection notified the president of the Korea Trade Insurance Corporation to establish measures to share, in a timely manner, credit information, guarantee histories, grounds for denial, and guarantee accident information with the Korea Credit Guarantee Fund and the Korea Technology Finance Corporation, in order to reduce export credit guarantee losses and enhance the stability of the Trade Insurance Fund.

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