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Prevention and Management of Large Scale In-House Financial Crimes


A recent surge in the number of large scale in-house fraud and financial crimes committed at major companies as well as public and private institutions has sent shockwaves throughout Korean society.  Some of these crimes include cases of employee fraud and embezzlement amounting to millions and billions of Korean Won.  For example, there have been high profile embezzlement cases at large financial institutions.  This and other similar events have underscored the added importance for companies and institutions to proactively monitor and implement internal checks and controls to prevent such crimes from happening.

Effective Prevention Systems

While it is important for a company to respond appropriately after financial misconduct has taken place, it is even more important for the company to implement an effective internal compliance system that can prevent such financial crime from being committed in the first place.  An effective internal compliance system should include (i) conducting periodic and regular inspections, including sampling tests; (ii) confirming the physical existence of assets; (iii) ensuring that the expense approval and expense reporting functions are separated; and (iv) preventing irregular withdrawals and transfers of funds.

Appropriate Responses After Criminal Conduct

If a crime has been committed despite prevention efforts, it is imperative to properly respond to the crisis by taking remedial measures to prevent further damage by conducting internal investigations, managing all aspects of criminal and civil investigations and litigation, enabling financial and asset recovery, advising on internal disciplinary procedures as well as managing public relations. 

Initiating a Criminal Investigation by Filing a Complaint

One of the first considerations will be how to file a complaint with the relevant law enforcement agencies.  Companies must consider a variety of factors when preparing a complaint.  They must first carefully gather all the relevant evidence, review the legal elements of potential charges, and decide on the appropriate format as well as the law enforcement agency’s jurisdiction.  The company must also weigh the prospect of financial and asset recovery and the legal tools that are available to enable this.  In navigating this process, the company may need to seek the advice of experts as any perceived failures or missteps could increase the risk of exposing its senior management to further liabilities. 

The importance of gathering evidence and information immediately following the detection of criminal activity cannot be overemphasized.  Once a crime has been committed, companies should start with review of their financial statements and utilize digital forensic tools to preserve and collect relevant evidence.  By doing so, when the company files a complaint with the relevant law enforcement agency, it will be able to facilitate the ensuing criminal investigation by providing necessary information and evidence to the law enforcement agency.

After the company files the complaint, it should next move to identify the amount of actual damage and assess the possibility of potential further damages.  In doing so, the company will need to review what legal remedies or tools are available to them and determine their effectiveness and practicality. 

Financial Recovery Through Preservation Order

As a consequence, where there is a real possibility of the wrongdoer or accomplices concealing assets, one must, first and foremost, make a motion to freeze those assets via preservation orders under the Civil Code.   Such motions can be filed against the wrongdoers themselves or other third party individuals or entities that may have received the illicit funds or assets, and for any types of assets such as real estate, savings, insurance, or securities.  As the key elements to successfully obtaining a preservation order are speed and agility, preparing a concise yet effective application with the court becomes important.   It should also be noted that there are different applications for different types of assets, and it will therefore be important to have someone who understands the distinction and is aware of how to properly request it based on the types of assets that need to be frozen initiate the civil remedy effectively. 

Prior to initiating relevant civil or criminal proceedings, it is important for companies to first carry out an internal investigation to understand how the crime was committed, ascertain whether there are any accomplices, gather necessary evidence, and find out if there are any concealed assets that have not been identified.  Furthermore, since the employee(s) who commit financial fraud would not have a list of one’s current or stolen assets, it will be imperative to review all of the employee’s work materials as well as to conduct close review of laptops, computers, and hard drives that were under the employee’s control to gather evidence and information.  This type of work requires advanced skills and prior experience to effectively and swiftly identify what is needed, what to look for and who to speak with.  Moreover, as the nature of such investigation potentially involves prying into personal lives and dealing with personal data, the company will need expertise in privacy laws and handling personal information in compliance with applicable laws. 

Responding Appropriately with Expert Guidance

In cases involving large scale embezzlement or other large-scale financial crimes, a company must also consider what actions should be taken to comply with its obligations in relation to external audit, disclosure requirements, qualification as a listed company, as well as taking appropriate disciplinary measures and responding to the media.  When a financial crime has been committed, the most important factor is for the company to understand how to respond appropriately with the guidance of relevant experts.