South Korea’s financial watchdog said Tuesday it will take legal actions against Samsung Securities for failing to operate with due internal standards for safe electronic financial transactions, which had resulted in a dividend fiasco last month involving the trade of unauthorized shares worth tens of billions of won.

Such flaws are respectively violations of the Act on Corporate Governance of Financial Companies and the Electronic Financial Transactions Act, according to the Financial Supervisory Service. 

Measures will be taken against the fourth-largest brokerage house in net asset value, after the level of punishment is decided by the relevant government agencies, including the regulator Financial Services Commission and the Securities and Futures Commission. But the level of punishment has yet to be determined, according to the FSS.

The watchdog will also hold 21 employees responsible for deliberately attempting to sell unauthorized stocks delivered to them as dividends. The employees are expected to face criminal charges of embezzlement and breach of trust.

According to findings of a three-week probe, Samsung Securities’ internal system for dividend payment for employees allowed stocks unauthorized by financial authorities to be issued and traded unobstructed, without oversight by the Korea Securities Depository, a subsidiary of FSS.

In addition, through the electronic system, money was transferred into accounts by employees without withdrawal of the money from an account held by the company.

“In every financial transfer, money is withdrawn from one account and then delivered to the other,” said the FSS’ Senior Deputy Gov. Won Seung-yeon during a press conference. “In this (Samsung Securities) internal system, the mechanism worked the opposite way.”

“The accident came from (Samsung Securities’) failure to meet the basic principles in electronic money transfer,” Won added. 

The findings also indicate the same incident is highly likely to reoccur, implying that “counterfeit stocks can be created without authorization and remain unnoticed until the market closes,” according to Won.

The announcement came after consecutive extensions of the deadline of the probe on Samsung Securities that began on April 11.

On April 6, Samsung Securities made slipshod dividend payments over 40,000 times larger than intended, when an employee erroneously input “stocks” instead of “the Korean won.” The brokerage failed to detect or correct the error with the existing internal control system.

In addition to the systemic flaws, the FSS pointed to alleged unfair business practices between Samsung Securities and Samsung SDS.

Some 72 percent of bids by Samsung conglomerate’s brokerage arm regarding building its internal computerized system were claimed by Samsung SDS, another arm of the conglomerate.

Of all the bids, over 90 percent were made privately between Samsung Securities and Samsung SDS.

The FSS will notify the Fair Trade Commission of the details of the findings regarding unfair business practices this week.

The target of inspection by the FSS will expand to the internal system of all Korean securities firms, as part of a monthlong probe starting Wednesday. 

By Son Ji-hyoung
(consnow@heraldcorp.com)