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District Court’s Decision to Revoke FSS Sanctions

2020.01.23

Kim & Chang successfully represented a former CFO of a life insurer (the “Plaintiff”) at a district court, who received disciplinary sanctions (the “Sanction”) from the Financial Supervisory Service (the “FSS”).  The court revoked the Sanction as the court found that the Plaintiff was not a direct “actor” of the alleged illegal act.1  The Sanction was requesting the insurer (i.e., employer) to render a disciplinary measure equivalent to a salary reduction to punish the Plaintiff for the alleged wrongful conduct based on the ground that the former CFO had prepared and submitted inaccurate financial statements for the fiscal year of 2011.  

The insurer had an acquisition cost amortization system for its variable insurance products whereby it ceased amortizing its deferred acquisition costs (“DAC”) during the period of suspension of premium payment for these policies.  The insurer resumed amortizing acquisition costs once the suspension period had ended.  The FSS believed that this system had caused the insurer to overstate its DAC in its financial statements, and therefore the Plaintiff, as the CFO having the final authority to approve the settlement of accounts at the end of each fiscal year, was ultimately responsible for submitting the FY2011 financials in which the DAC of approximately KRW 39.2 billion were overstated.  

Nonetheless, Kim & Chang was successful in convincing the Seoul Administration Court to revoke the Sanction, whereby the court ruled that the Plaintiff was not the “actor” who actually prepared and submitted the overstated financial statements.  Following is a brief summary of the rationale for the court’s decision:

1.    The Plaintiff had already left the company before the financial statements for FY 2011 were prepared.

According to the regulations then in force, the term “actor” refers to “a person who actually led the process of illegal or wrongful work.”  However, the Plaintiff resigned from the company in March 2012, which is prior to the time the financial statements for FY2011 were prepared.  Thus, the Plaintiff could not possibly have “led” or directed the process of preparing and submitting the financial statements for FY2011.


2.    The figures in the monthly reports were distinct from the figures in the financial statements.

Although the Plaintiff approved the monthly report on final accounts every month in FY2011, the DAC in the monthly reports on final accounts were not necessarily identical to the DAC finalized in the process of preparing financial statements after the closing of books.  Considering that the DAC in the financial statements were finalized after going through a verification process by the company’s actuaries and an independent audit by external auditors, it is unreasonable to conclude that the Plaintiff “led” the preparation and submission of the financial statements for FY2011.


3.    The Plaintiff neither ordered any person to stop the amortization of acquisition cost during the suspension period nor was grossly negligent about it.

Around May 2004, the company introduced a system on deferral and amortization of acquisition costs for its variable insurance products.  For a long time since then, the company had been suspending the amortization of DAC pursuant to the system.  Further, there was no evidence showing that the Plaintiff actively instructed anyone to suspend the amortization or knowingly permitted suspension of amortization during his service at the company from December 2009 until March 2012.  The head of the Management Actuary Team was responsible for reviewing and verifying whether the DAC were fairly amortized.  Because the CFO was responsible only for signing off on the finalized outcome, the Plaintiff was not aware of the detailed method of amortization and the Plaintiff was not grossly negligent for not being aware of such practice.


In this case, Kim & Chang successfully litigated an administration lawsuit filed to overrule a disciplinary sanction imposed by the FSS.  This case is meaningful because it sets a precedent for cases where sanctions are imposed on a CFO for the contents of a company’s financial statements that are prepared in accordance with the company’s long-standing policy.  In the course of litigation, Kim & Chang reviewed the legal principle under the Insurance Business Act, along with the roles and responsibilities expected from a CFO and the company’s appointed actuaries.  By presenting a compelling argument to the court, Kim & Chang successfully convinced the court to overrule the Sanction imposed on the Plaintiff.

 


1  Seoul Administration Court Decision 2019GuHap54443, January 16, 2020

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