Police said Wednesday that they believed a financial watchdog official was implicated in a massive loan fraud involving an affiliate of the country’s No. 2 mobile carrier KT Corp.

Last month, police launched an investigation into employees of KT ENS Co., a subsidiary of KT, for illegally borrowing 1.83 trillion won from 16 local banks using forged documents between May 2008 and January 2014. The loans were extended to a special purpose company set up by KT ENS’ subcontractors, with fabricated receivables as collateral.

The investigation into the case has now expanded to the use of the loans and tracing a suspect believed to have orchestrated the scam.

The Seoul Metropolitan Agency said in its interim report that seven people, including the lead suspect surnamed Jeon, the head of the special purpose company, have been booked without detention.

Eight others, including a 51-year-old former KT ENS employee, have been arrested.

The SMPA issued a red notice to Interpol for the arrest of Jeon, who reportedly fled to Hong Kong last month after a mid-ranking official of the Financial Supervisory Service tipped him off about the probe.

The FSS official, surnamed Kim, who was recently dismissed by the agency, allegedly accepted bribes including overseas golf trips from Jeon, police said.

According to the officials, Jeon flew from Hong Kong to New Zealand, where he bought a return ticket to Hong Kong via the Republic of Vanuatu in South Pacific Ocean. Police confirmed Jeon’s departure but said he did not enter Hong Kong.

The SMPA said it would widen the investigation to higher ranking officials at the watchdog for their possible involvment in the crime.

During the initial stage of the investigation, KT ENS and local banks had been playing the blame game on who is accountable for the crime.

Police revealed new evidence in its latest report suggesting KT ENS’ lax enforcement of security measures is mainly to blame, as it turns out that the official company stamp used on loan applications was freely used by employees.

Police also said the 16 banks processed the loans without checking the authenticity of hundreds of documents submitted in the past seven years.

KT ENS, meanwhile, filed for court receivership on March 12 after failing to pay its outstanding promissory notes. Last month the company paid the lenders about 45.3 billion won for the notes.

But the move has sparked protests from the lenders, which claim KT ENS is trying to avoid paying back the debt by exploiting loopholes in the related laws.

By Suk Gee-hyun (monicasuk@heraldcorp.com)