South Korean Bribes, AML Issues and Whistleblowers

April 24, 2020 5 minute read

South Korea has been told to tighten up on bribes following presidential downfalls, EY’s whistleblower wins big in court and New York fines Industrial Bank of Korea for payments to Iran.

We share our financial regulatory highlights from the week of 20 April 2020.

Bribes in South Korea

South Korea has been told to step up its approach to tackling bribes. The nation’s money laundering controls have been deemed too weak to handle the issue by FATF. However, the global body did note that South Korea has made significant improvements since its last Mutual Evaluation Report (MER) in 2008.

Bribery is a difficult issue in South Korea. Past Presidents have been embroiled in bribery scandals. Former President Park Geun-hye was jailed for 24 years following a corruption scandal involving a suspected cult and billions of won of taxpayer money.

The scale of the scandal shows how weak controls create an open goal for bad actors who seek to exploit the financial system. South Korea faces little to no problems with terrorism financing, but a key issue of concern for the global watchdog is the nation’s limited capability on freezing assets of blacklisted entities, including those of terrorists.

South Korea also needs to increase its oversight on preventing designated non-financial businesses and professions (DNFBPs) from becoming entangled in money laundering and terrorist financing. It’s a more recent standard to be set but nations should have been preparing for it for some time already.

How South Korea manages to move the needle on this particular issue will no doubt have an impact on its next MER.

EY Whistleblower’s Golden Payout

EY has been ordered to pay $11 million to a whistleblower who revealed the firms’ part in a money laundering scandal.

The whistleblower drew attention to a money laundering operation at gold refinery Kaloti, in the United Arab Emirates. Amjad Rihan first brought discrepancies he discovered in 2013 to the attention of his superiors at EY but claimed he was then forced out of the company.

A UK High Court ruled that EY had obscured Rihan’s audit of Kaloti. The audit discovered that Kaloti’s business operation paid out billions of dollars for gold without authenticating its origin, and bought gold disguised with a silver coating from Morocco to circumvent export restrictions.

It should be no surprise that some of the gold in the UAE is of suspect origin. Dubai, in particular, is infamous for being a waypoint for smuggled African gold before entering Western markets. A fifth of the UAE’s GDP is dependent on gold.

In 2014, Rihan resigned. He leaked his findings from EY to the press and focused attention on the gold industry for its part in financing organized crime and terrorism. The gold concerned in this case was revealed to be owned by a criminal gang working to launder money for British drug dealers following a BBC Panorama investigation last year. 27 members of the money laundering gang also worked for Renade International, a French company, they were jailed in France in 2017.

EY is contesting the court order, commenting: “It was the work of an EY Dubai assurance team that uncovered serious irregularities and reported them to the proper authorities.”

In the judgment from the High Court, Rihan was awarded $10.8 million due to the loss of past and future earnings. Accountants rarely have an easy time of finding work once they become whistleblowers. The ruling also stated: “The EY organisation was supposed to have a written whistleblowing policy, though I have no evidence that it had one.”

The big four accounting firms of EY, KPMG, PWC and Deloitte may appear to be unassailable from the outside. But if EY keeps coming under fire for scandals of this nature, then the City refrain of “No-one was ever fired for hiring…” may no longer include EY.

Industrial Bank of Korea’s $86 Million Settlement

The New York branch of the Industrial Bank of Korea (IBK) agreed to pay a total of $86 million to the state of New York and the US Department of Justice to settle a criminal probe into the bank’s AML failures, authorities announced on Monday.

The two-year deferred-prosecution agreement requires the South Korean bank to pay a civil forfeiture of $51 million and a $35 million penalty levied by the NY Department of Financial Services. Another condition of the agreement: it must take steps to improve its AML processes.

The bank’s failure to establish effective transaction monitoring procedures dates back to 2010. The New York branch had implemented a manual review process for the transactions it processed in 2006. Even though that process was deemed inadequate in 2010 and 2011, requests to invest in automated tools, training, and additional personnel were repeatedly ignored. This led to a significant backlog of transactions to review and compliance gaps that were not remediated until at least 2014.

As a result of those failures, IBK was found to have allowed transactions totaling over $1 billion to Iran in violation of the Bank Secrecy Act and US sanctions. These transactions were initiated in 2011 by one of the bank’s US customers, Kenneth Zong, as part of a sanctions-evasion scheme. Zong is accused of having faked contracts and invoices to draw funds from a special account at the IBK — one of the few avenues still open for South Korea to do business with Iran without running afoul of US sanctions. This money was then transferred to various accounts controlled by Zong and his co-conspirators: three Iranians and another US citizen.

The bank has cooperated with both the investigation into its shortcomings and the investigation into Zong. It has also worked with regulators to implement sufficient controls to prevent future exploitation. That the penalties were perhaps more lenient as a result should not detract from the reminder that financial institutions would do well to move away from manual processes and toward automated solutions to help fulfill compliance obligations.