Financial regulator to scrutinize governance of NongHyup Financial Group

National Agricultural Cooperative Federation Chairman Kang Ho-dong, left, and Financial Supervisory Service Governor Lee Bok-hyun / Newsis

The Financial Supervisory Service (FSS) will soon launch regular inspections into the governance of NongHyup Financial Group as its majority stakeholder, the National Agricultural Cooperative Federation (NACF), better known as NongHyup, has been accused of impeding proper internal controls within its financial subsidiaries, according to industry officials, Sunday.

On April 24, the top regulator announced that it would begin regular inspections of the two institutions starting mid-May. This follows their decision to convert ongoing spot checks, initiated last month, into regular inspections.

The FSS plans to delve into the financial group’s unique governance system and examine its compliance with its major shareholder, the NACF. Unlike other financial holding groups, NongHyup Financial Group is 100 percent owned by the NACF.

Recent financial misconduct has prompted further intervention by the FSS.

In February, an embezzlement case involving approximately 10.9 billion won ($7.9 million) occurred at NH NongHyup Bank. Additionally, in a separate incident at another branch, an employee embezzled 200 million won by canceling funds without being authorized to do so, targeting a naturalized Korean of foreign origin who was inexperienced in financial matters.

“NH bank branches are likely to have vulnerabilities in their internal control system, as employees from the NACF, (who have not been verified for their financial expertise), are in charge of overseeing these controls while serving as district heads,” an FSS official explained.

The FSS is also concerned about the NACF exerting undue influence over the management of its financial affiliates.

Since the separation of credit and economic activities in 2012, NongHyup Financial Group has been structurally independent of the NACF. Despite the change, there have been criticisms that the financial group still remains significantly influenced by the NACF.

In March, tensions resurfaced between the NACF and its financial affiliates when the NACF Chairman Kang Ho-dong aggressively promoted the organization’s former vice chairman during the CEO appointment process at NH Investment & Securities.

“If managed improperly, it could undermine the principles of separating finance from industry and disrupt the regulatory system established by corporate governance laws. This necessitates vigilant oversight,” FSS Governor Lee Bok-hyun said at a press meeting in March.

Yet, it appears that the FSS cannot avoid criticism over whether it is interfering excessively in the private sector.

“The need for governance reform within NongHyup Financial Group has been a topic of discussion for quite some time. Even amid these calls, the FSS may face further controversy given its history,” an industry official said, referring to past leadership changes at Shinhan, KB, and Woori after Lee’s verbal intervention in the appointment process.