The prosecution has launched an investigation into the National Agricultural Cooperative Federation, or Nonghyup, for manipulation of net interest spread at some of its branches, raking in 2 billion won ($1.7 m) through the method.

According to the Central Investigation Division at the Supreme Prosecutors’ Office on Tuesday, about 30 provincial branches of Nonghyup were accused of making 10 billion won ($8.54 m) in profit by raising the net interest spread without notifying customers.

Net interest spread is the difference between the average lending rate and the average borrowing rate. Banks or other financial institutions are required to inform clients of the spread and obtain their consent before changing it.

The investigators said that many of the victims paid around 6-7 percent in interest, up 0.3-0.4 percentage point from the average.

“We are beginning the probe with large-sum cases, then expanding it to other smaller amounts. We will also see whether more branches were involved,” an investigator said.

Two of the cases were found in Gwangju Nonghyup, which earned a total of 1.9 billion won in profit by widening the net interest spread improperly for 1,324 of their clients over the past three years.

The irregularities were conducted in an apparent attempt to make up for the losses incurred from plummeting certificate of deposit interest rates. The Gwangju branches promised to pay back the inflated interest to the holders of deposit certificates.

Another branch in Gwacheon, Gyeonggi Province, was caught giving out 4.4 billion won in bonuses to its employees with funds raised by illegally expanding the net interest spread. Another branch also in Gyeonggi Province was found to have doctored accounting books to raise money for incentives for its workers.

Such irregularities came to light through the auditing body of central Nonghyup. Some of Nonghyup’s clients have filed complaints with the prosecution.

“The case is graver than mismanagement and wrongdoing by other financial institutions because most of Nonghyup clients are economically underprivileged farmers with very low income,” an investigator said.

“Many of the branches have managed to shun investigations so far, because they were under the control of the Ministry of Food, Agriculture, Forestry and Fisheries, not the Financial Supervisory Service. We have also received tip-offs that regional branch managers tried to bribe the central Nonghyup officials for favor. The investigation has just begun,” a prosecutor was quoted as saying to a local daily.

By Bae Ji-sook (baejisook@heraldcorp.com)