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Financial crimes around the world

Financial crimes around the world


1)        Introduction

When you think about the word “crime”, what does it usually remind you of? Murder, theft or assaults? But today, we focus on the topic of financial crimes. This article will be depicting the importance of knowing the types of financial crimes being done around the world, followed by the solutions.


So what is a financial crime? There isn’t a definite or distinguishable definition set by the studies but generally speaking, we define financial crime as “crimes that used financial companies or board of directors of the companies as intermediaries that brought great disorder in the financial market sectors” and such financial crimes talked about here should be fraudulent accounting or manipulating stock quotations.


Indeed all the financial supervisory services around the world are putting a lot of effort on prevention of financial crimes but among them, United Kingdom seems to be putting extra effort than the others. United Kingdom has set one of the 4 main goals of FSA (Financial Services Authority) as downsizing the rate of financial crimes in U.K. In U.K’s capital markets act, the law strictly elucidates that if a financial crime is related to the following three deeds, than the action is considered as a financial crime.

The followings are

  1. Financial fraud or dishonesty
  2. Making an improper use of information related to the financial sectors
  3. Handling of the proceed derived from the financial crimes


2)        Cases (Foreign and Korea)

  1. International Cases

On the day of February 2005, one of the world’s most renowned investment banks, Barings went bankrupt. It was all because of Nick Leeson. Nick Leeson felt strong interest in the derivative securities which eventually led him to join Barings. In the year of 1993, Leeson alone earned 20% of Baring’s revenue which earned him considerable credit from the board of directors (BOD). With more power in his hand, in the year of 1995, he gambled on Japan’s Nikkei Stock Average Index. However, his sole decision left 1.3 billion dollars loss behind because of an earthquake in Kobe, Japan and the change of American bank-rate policy. Leeson was sentenced 6 years of imprisonment under the charge of fabrication of financial documents and frauds. Finally, the 232 years of Barings Bank was sold at a dollar to ING Corporation.

The financial experts indicate several problems from the Barings’ case.

1)      Failure of internal control

2)      Conflict of segregating the function duties

3)      Failure in regulating an excessive position

4)      Lack of cognition of the board of directors


  1. Domestic Cases (Korea)

On November 11, 2010, directors from Deutsche Bank’s Hong Kong and Korea branches have plotted conspiracy to earn unfair profits. This incident is called the “Option Shock” or “11.11 Option Shock”. So how did they earn excessive profits? A director from Korean branch and three directors from the Hong Kong branch, under mutual consent, have agreed to sell the securities holdings right before the closing session of the trading. As a result, 2.79% of price index of stocks dropped temporarily. This is not the end; the Hong Kong branch purchased put-options and exerted these put-options to earn 448 million won.


The situation of Busan Savings Bank

In February 2011, 15 Korean savings banks including the Busan Savings Bank underwent suspension of business. Since this report is focusing on financial crimes, let us take a look at the financial crimes done by the savings bank, especially the case of Busan Savings Bank.

  1. Evading the bounds of credit grants and investor’s loan regulation by establishing SPCs (special purpose companies)

–          The bank has established a number of SPCs, by borrowing the names of their acquaintances and employees. These SPC with its subsidiaries, have granted loan of 4.6 trillion won.

  1. Establishment and expenditure of watered stock.

–          The bank has spent 130~150 million won annually under the pretext of operating expenses and wages of BODs affiliated with the SPC.

  1. They have concentrated on 120 development and constructional industry-based businesses rather than focusing on their inherent banking business.

–          Have invested 4300 million won building a new airport in Cambodia

–          Have invested 3000 million won in a resort and shipbuilding industry.

–          Illegally loaned 1200 million won to a charnel house without a proper business license.


3)        Conclusion / Evaluation

There are numerous other cases related to financial crimes such as the account book fabrication of Enron. But even from the cases mentioned before, you probably have already felt the importance of internal control and supervisory regulation of the banks. In order to prevent these crimes, we need to have a better understanding and recognition to detect loopholes and weaknesses of the derivative securitized products and the market. The financial supervisory agencies around the world should become more vigilant.

Financial Services Commission’s executive meeting on 25 June about household debt


<Household debt/GDP>


(Source: The Bank of Korea)

     Recently, a new concern over the national economy’s structural issue has been raised, which is a notable problem in household debt. Problems of household debt have been continued since the financial crisis. As you may have noticed from the graph above, the ratio of household debt to GDP was continuously going up, which was at 87% in 2010. If the household debt isn’t efficiently managed, it will become an incubus on our economy. Not surprisingly, the relevant authorities, including the Bank of Korea, have been trying to figure out the appropriate response to household debt problems. 

1. Efforts to respond to the household debt

     The DTI (Debt to Income) regulation was reinforced in March 2011, which is based on the bond of sympathy developed between the government authorities. DTI is the percentage of the annual debt repayments proportionate to consumer’s monthly gross income. FSC took a proactive approach to deal with household debt issues. They provided comprehensive countermeasures for the Micro-credit and a framework for the efficient management on household debt through ‘soft landing’ comprehensive measures. There are 4 measures suggested to manage the household debt.

1) Management of the total liabilities.

2) Improvement of ability to repay the debt through the job creation.

3) Reinforcement of financial soundness.

4) Strengthening Micro-credit.

2. Evaluations

     The rate of increase in household debt has been slowing down, as a result of the efforts by the financial authorities. However, there are still a number of concerning factors to be addressed regarding the management of household debt. The self-employed people, namely entrepreneurs, have relatively high ratio of debt to their income, compared to other regular employees. Also, low-income earners do not have sufficient disposable income for potential expenditure during economic downturn. The other concern is that baby boomers face tight burdens of debt payment after their retirement. Comprehensive and strategic planning on the basis of careful analysis is in urgent need for these problems. FSC should primarily focus on managing specific and microscopic sectors and strengthening household debt’s financial soundness.

     The chairman of FSC, Seok-dong Kim, passed the following request at the executive meeting in June. He urged that the FSC should actively cooperate with government ministries in order to make a good foundation for the Macro-economic condition. This is because it is difficult to respond to the microscopic sectors without help from the government authorities such as the Bank of Korea. He suggested that the T/F should be reorganized to operate flexibly in support of household debt. Also, the macroeconomic conditions, such as management of the total liabilities and job creation, should be backed up to provide a real solution to the fundamental household debt problems.

                                                                                                                         Dohee Im (

Moody’s Credibility Degradation of World’s Renowned IBs.


Moody’s is one of the world’s most credible and renowned credit-rating agencies. Their reports indeed, are not conclusive or definite but are quite trustworthy and also have spread effect in the world of finance. Before getting into the point, let us take a look at brief information about Moody’s and their elaborate rating system grids. Not a lot of people would have known, the Moody’s corporation we usually talk about has its genuine name which is Moody’s Investor’s Service (MIS). Moody’s Investor’s Service is the actual division that does the bond credit rating and so on. They also provide international financial research on bonds and credits issued both in commercial entities and governments. Moody’s is considered one of the world’s big three credit rating agency with Standard & Poor and the Fitch Group.


The Credit Rating Grid of Moody’s Investor’s Service    

 According to Moody’s, the purpose of the rating grid system is to provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged. The numerical modifiers show the creditworthiness of each securities. Lower the number, the higher-end the rating. The Credibility Degradation On the day of 23, June, 2012the global financial world was drained in chaos. Moody’s Investor Service has announced 15 investment banks’ credibility to be dropped. The renowned banks such as Goldman Sachs, Citigroup, Deutsche Bank, Credit Suisse Bank, Royal Bank of Canada and Bank of America is also included among the list. Credit Suisse’s credibility has dropped 3 phases from Aa1 to A1 and Goldman Sachs and other 10 banks have dropped 2 phases, and lastly Bank of America showed radical depreciation of 4 phases. So what would be the core reason of these massive and firm-looking banks’ credibility degradation? Moody’s official stance of radical degradation seems to be quite reasonable but at the same time, hard to believe. Their official reason is that as the 15 banks mentioned, have been investing in a random way in the capital markets, which have lead them to excessive riskiness. In addition, due to the European financial crisis that rooted from Greece, their long-term profitability and growth are depreciated. But the biggest problem coming up-head is that Moody’s emphasized that the degradation process is not yet finished. This means that there can be more degradation done, depending on the sudden changes and situations the banks and financial markets will undergo.

Jack Ablin from Harris Private Bank has left a message for the investors around the world. In his massage, he strongly recommends to avoid investing in banks, until you will be able to see stability in economic sectors. But by evaluating the current situation, it will take quite a long time for both the banks and the financial markets (especially the EU crisis) to be recovered. Evaluation / Conclusion Ever since Merrill Lynch and few other worlds’ renowned banks went bankrupt, there had been numerous warnings on banks that they should be very precise and rationale on their investments. The IBs are following short term interests rather than looking for investment stability in a long-run. In case of Korea, as the revised proposal of the Capital Markets Act by FSC gets legislated, Korean commercial banks will be able to turn into an investment bank as they suffice certain level of capital ratio. FSC (Financial Services Commission), in cooperation with Financial Supervisory Service (FSS) is providing numerous capital regulations and policies to make prudential financial companies.

The government decided to offer cross-sales loans between saving banks and banks



     Due to the aftereffects of restructuring weak saving banks, the asset size has been sharply shrunk. In fact, according to a recent study, total asset size in March 2012 was down to 63 trillion won and LTD ratio (loans-to-deposits ratio) has also decreased by 8% comparing to that in 2010. If this downswing goes on, a gap of small-loan between the bank and the business loan is expected because of Korean finance system. Therefore, the government planned to expand cross-sales loans between saving banks and banks for smooth supply of small-loan.


     Then, how will these cross-sales loans be expanded in detail? First of all, each bank will act on behalf of the business loan by signing outsourcing contracts and promoting the loans of saving bank.

As seen in this picture, when a financial consumer is rejected the loan from the bank, he or she does not need to receive private money lending services. Instead, the bank will connect the customer to the saving banks which have far cheaper lending rate. Any consumers, including small and medium-sized businesses and individuals, who were resisted lending money from the bank can apply for these cross-sales loans. In addition, banks will act as loan solicitors and receive necessary documents for loans. However, playing the essential role of the saving bank such as approving the loans will not be allowed and this plan is restricted to the bank in the same place with the saving bank.


     This new policy for cross-sales loans will bring about two major expected effects. First, financial consumers can enjoy lower lending fee and broadened choices of loans since everyone can have information about the loans only by visiting the bank. This is so-called ‘One-stop service.’ Moreover, the saving banks can also be favored by this plan because the loan broker fee would be steeply lowered. Therefore, the previous high-cost system will be improved. Eventually, a new market demand for saving banks will be created.


     If nothing particular happens, this plan will have an effect from July this year and will be used to provide more operating power to saving banks to increase the asset size. When it is implemented with full explanation, both consumers and the saving banks will enjoy benefits.


K-IFRS is taking root

When Korea accepted IMF bail-out package in 1997 to overcome severe financial crisis, Korea carried out a large scale of intense restructuring. As a part of reforming, Korea Generally Accepted Accounting Principles (K-GAAP) was made out to enhance accounting creditability. K-GAAP, however, was not enough to coincide with international standard, so Korean companies used to be derided with backwardness of accounting standards. As a result, Korea International Financial Reporting Standards (K-IFRS) was phased in from 2009, and the year 2011 was the first year for listed companies and financial companies to write the financial reports in accordance with K-IFRS, as a mandatory requirement.

Accordingly, Financial Supervisory Services (FSS) conducted to examine 2011 financial reports. Total 1,600 financial reports which consist of 655 listed on Korean Composite Stock Price Index (KOSPI) and 945 listed on Korea Securities Dealers Automated Quotation (KOSDAQ) were examined with 121 items.

The result of assessment is meant to be satisfactory. The major incompleteness which can affect users to misunderstand accounting information is not found. Compared to the first quarterly report in 2011 when the major incompleteness was found in 111 reports, this result deserves to be admirable. As a matter of fact, average number of errors per company committed was found only 4.5. The number of financial reports without any errors was as many as 288. The following table is a summary of the examination result.



Volume of Capital (Billion KRW)



Less than 100



Over 2000

Average error/company







Total No. of company







According to the table, the smaller sized companies tend to make more errors than the bigger sized companies. Therefore, FSS will keep giving advices and instruction for those imperfect companies continuously. To modify the found errors, FSS is noticing privately for the companies to encourage modifying their own record.

Furthermore, there is an increasing trend that even not listed companies voluntarily make financial reports in conformity with K-IFRS voluntarily. Generally, adopting K-IFRS from 2011 is mandatory only for the listed companies and financial companies. However, despite of needlessness, 1,142 unlisted companies wrote their financial reports with using K-IFRS in 2011, and additional 261 companies are prospected to adopt K-IFRS in 2012. The major reasons for such trends to adopt K-IFRS voluntarily, notwithstanding the high converting cost, are the accordance of accounting standard between the holding company and the subsidiary company, preparation for the list, enhancing of accounting transparency and improvement of company image.

Korean financial authorities have made endeavours to achieve the competitiveness of accounting system. These endeavours are resulting in the improvement of accounting creditability of Korean companies. Also, it is positive sign for many unlisted companies to adopt K-IFRS spontaneously. At this rate, it is matter of time for IFRS to become established in Korea.

Chaehack Suh (

The Basel III agreement and the effects it wlll have on the banking sector

1. What is the Basel agreement

The Basel III is an international standard established by the BCBS (Basel Committee on Banking Supervision) which is a BIS (Bank for International Settlement) affiliated organization.

The BCBS was formed in 1974 to establish global standards related to bank supervision. The members consist of 44 institutions of 27 countries, including the US, England, Canada, China and Korea, and the Vice-president of each country’s central bank, and financial supervisory institution attends it.

The BCBS so far has established the Basel I, Basel II and the Basel III for the stability of the global financial market. When the BCBS releases a regulation, countries adopt it at the appropriate timing in regard to their situation.

The most important point of all the supervisory standards of the BCBS is the BIS capital adequacy ratio. [BIS capital adequacy ratio = equity ÷ RWA (Risk weighted assets) * 100] The RWA is an asset value that is calculated depending on the risk. It  is produced by classifying the banks asset according to its credit rating and then applying the risk to it.

The Basel I was first introduced in 1988. Maintaining a minimum of 8% of equity towards the risk asset is the main point and was established to improve the stability of the global financial system and prevent unnecessary competition between international banks.

But even after the Basel I was established in the early 1990’s large banks started to fail in America and in 2000 the financial crisis hit countries in Southeast Asia, Japan, Russia and Central and South America. Through undergoing this experiences, large financial institutions felt a need for capital agreement, and soon the Basel II was established. In the Basel II, the risk assets included not only the credit risk and the market risk, but also the operational risk. Please refer to the following terms for the different kinds of risk;

-credit risk : risk that a borrower will default on any type of debt

-market risk : risk that the value will decrease due to the change in value of the  market risk factors

-operational risk : risk arising from execution of a company’s business functions

But later the Basel III was established because unexpected weaknesses, the excessive debts of the banks, weakness in liquidity and the degenerated quality of equity, were noticed after the financial crisis in 2008.

2. The main contents of the Basel III

After the financial crisis, countries agreed that there’s a need for a regulation for an increase of capacity to absorb loss, relaxation of pro-cyclicality, strengthening of capital, liquidity and leverage.

1) relaxation of pro-cyclicality ; Capital conservation buffer, Countercyclical capital buffer

Capital buffer must be saved during periods of growth to suppress the negative interaction between mark-to-market, leverage and maturity mismatch during a financial crisis.

-Capital conservation buffer : the improvement of the loss absorbing capacity for future risk, saved as capital stock-common when over 2.5%

-countercyclical capital buffer : 0% saved but up to 2.5% as capital stock-common on periods of credit growth

2) strengthening of the capital regulation

To increase the quality of capital and to secure transparency and consistency of the capital ratio, tier 1, tier 1 + 2, predominant form of tier 1 including capital stock-common and retained earnings should not exceed a certain percentage.

Substantially it is demanding to meet the following ratios:

stock capital-common : 7% (4.5% + capital conservation buffer 2.5%) ~ 9.5% (includes 2.4% countercyclical capital buffer during growth period)

tier 1 + tier 2 : 10.5% (8% + capital conservation buffer 2.5%) ~ 13% (includes 2.4% countercyclical capital buffer during growth period)

tier 1 : 8.5% (6% + capital conservation buffer 2.5%) ~ 11% (includes countercyclical capital buffer during growth period)


3) strengthening regulation of liquidity (maturity mismatch) ; liquidity coverage ratio, net stable funding ratio

The liquidity coverage ratio is a short-term indicator which is designed to ensure that financial institutions have the assets on hand to ride out short-term liquidity disruptions. Banks are required to hold an amount of highly-liquid assets, such as cash or Treasury bonds, equal to or greater than their net cash over a 30 day period (having at least 100% coverage).

The net stable funding ratio is a long-term indicator in which ‘Stable funding/weighed long term assets’ must be over 100%.

4) leverage regulation

The leverage regulation was introduced in which the leverage ratio must be over 3% of the Tier 1 and also a borrowing limit regulation is introduced to prevent imprudent foreign loans which will hold effect from 2018.

3. Prospects and ways we can deal with it

The banks of our country nowadays have a stable capital adequacy ratio. But because the calculation method changes through the introduction of the Basel III the ratio might drop even though the same asset and liability structure. Also because the minimum capital ratio went up we need to beware to satisfy its standards.

So what are some concrete ways banks can deal with it?

Simply said, they could extend their equity or reduce their RWA.

Therefore subordinated bonds, which were regarded as equity before but not anymore, are being issued in advance until the end of this year. Also when the additional 2.5% of the predominant form of tier 1 is not being satisfied no dividends and bonuses can be given and therefore it might result in cut backs of the dividends to save retained earnings.

The liquidity regulation might also result in degeneration of profitability for the banks, since the opportunity of the banks collecting short-term funds and investing it on longer terms might decrease. And also to satisfy the new liquidity ratio they have to increase the percentage of government bonds and blue chip corporate bonds. because the Basel III does not regard bonds issued by other banks as highly liquid assets. Only corporate bonds over the rating ‘AA-’ and  government bonds of the rating ‘A+’ are considered highly liquid.

To summarize, the Basel III is demanding to separate the capital adequacy ratio into common equity, tier 1 capital and total capital and to keep it over 4.5%, 6% and 8% each and to save additional capital according to the economic conditions or the risk level of each bank. So the banks should prepare to respond to any situation sufficiently and the supervisory authorities should monitor it properly not to spoil the purpose of this regulation. Lastly the FSC needs to find ways to apply it to us efficiently, considering the necessity of this regulation and the profitability of the bank industry.


Min-Kyoo Song (