From: "Kobre & Kim LLP"

From: "Kobre & Kim LLP" To: [email protected] Subject: Know Your Regulators: FSC, FSS, and KB Financial Date: Tue, 27 Jan 2015 13:56:34 +0000 a New York I London I Hong Kong I Washington DC I San Francisco I Miami I Cayman Islands I British Virgin Islands 27 January 2015 Know Your Regulators: FSC, FSS, and KB Financial WjtiRola M When operating in a foreign jurisdiction, it is important for a financial institution to understand the roles the various local regulatory authorities play and how the different regulatory bodies interact with one another. This is doubly true in Korea, in which financial regulators manage and regulate the industry very closely. For the financial sector players, the two key regulatory bodies in Korea are the Financial Services Commission (FSC) and the Financial Supervisory Services (FSS). The FSC covers banking, securities, insurance, and non-bank financial institutions. The primary function of the FSS is to examine and supervise a broad array of activities conducted by these financial institutions, and it can extend to other oversight and enforcement functions. One recent development involving KB Financial Group's (listed on NYSE: KB) efforts to replace their electronic system demonstrates just how closely FSC and FSS supervise banks. KB Financial Group's main subsidiary Kookmin Bank holds and manages approximately US$ 267 billion for its clients and itself, which is the largest in asset size among the Korean financial institutions. Kookmon Bank has been using IBM Korea's main electronic system since 2008, and was planning to move on to the Unix-based system Kobre & Kim Korean Litigation Team Michael S. Kim Robin J. Baik S. Nathan Park Min Jean Kim Practice Areas Govemment Enforcement Defense PROT0 when the IBM deal expired in the fall of 2015. The decision was at the final approval stage when IBM Korea offered a deep discount for renewal pricing, which Kookmin Bank's president Gunho Lee brought to the Kookmin Bank board to consider as an alternative. This proposal was ultimately rejected, and in April 2014, the Kookmin Bank board decided to proceed with the Unix deal. Shortly after the decision, Lee reported the incident to the FSS, alleging KB Financial's Chairman Yongrok Lim exercised undue influence over the Kookmin Bank board members and caused them to falsify relevant records, pushing for the Unix deal. Based on the FSS's special investigation, the FSC decided to take disciplinary actions against both bank president Lee and holding company chairman Lim for failing to adequately supervise the review and determination process. Lee later resigned and Lim was reprimanded. Lim's appeal from the disciplinary action was withdrawn 10 days after commencement. KB Financial has announced that it will review the replacement plan from the scratch, and it is reported that IBM Korea will most likely be able to renew the existing contract. This event is a clear example of the willingness of Korea's financial regulators to severely discipline even the highest level executives. In Korea, banks are very closely regulated to a point that the Korean financiers joke, with some justification, that the government runs all of Korea's financial institution. This is particularly true for a large institution like KB Financial and Kookmin Bank. Although, as a matter of form, there is a process of selecting the chief executives of KB Financial and Kookmin Bank in a neutral manner, the actual selection process involves heavy politicking, with much of the pressure coming from the Korean government itself. On a cursory look, a row over selection of internal IT system may not appear to be a scandal significant enough for not one, but two, chief executives to lose their positions. However, because the FSC and the FSS do not hesitate to exercise their far-reaching power, any internal dissension exposed to the eyes and ears of Korea's financial regulators raises the possibility that severe consequences may follow. In certain instances, such drastic measure could be taken to resolve the issue quickly, rather than going through the long way of conducting thorough investigation. In short, when operating a financial business out of Korea, one must always remember that any internal strife may implicate regulatory scrutiny, and manage the company accordingly. Investigations & Monitorships Class & Derivative Actions Financial Products & Services Litigation Bankruptcy & Debtor-Creditor Disputes International Judgment Enforcement & Offshore Asset Recovery Intellectual Property Joint Venture & Partnership Disputes International Arbitrations Trusts & Estates Litigation PROT1 금S감독원 입니다. 口 이와 관련하여 최근oh 붇71진 KB국민욘행의 주전산키 교云I 사EH는 금융위윈 나 자산 267조원의 국내 州 욘행인KB국민욘행 ( " 국민욘행 ' )욘2008넌부E1 한국 이oil 이 행장욘 KB 금용치주'F 내부 검토 국민욘행욘 주전산71 교체안0il 대하01 전면 재검토를 선언하였고1 행장욘 PROT2 About Kobre & Kim's Korea Team: 100% devoted to litigation, arbitration, and investigations Led by a former U.S. Department of Justice prosecutor All members of the team are fluent in Korean and English 어ces in New York, London, Hong Kong, Washington DC, Miami, Cayman Islands and British Virgin Islands It匕s ma川no 아ov小引nrc.m出n and convnen四 이니09찌 邸此S 心너 dove뗘men四 山恤rest to our 이由nt的nd Mends and Sb에너 not be constr此da引叩이 ad너ce on any rnattec The con始nit of these ma伯II曲 may constitule aft여Th카 미加0tt,引ng 너bonier叩U놔'ci寸 아 various如ri吐나'ci也 ]Oupdate inrcim出'A 아 너目ubscrlbe. please ems 白 2015 Kobre & 씨m LLP.川 Rights Rese寸ved. 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