[비즈한국] Kim Yong-beom, Vice Chairman of Meritz Financial Group138040, has been selected as a witness for the Financial Supervisory Service (FSS) national audit. If Vice Chairman Kim attends, questions are expected to focus on Meritz Financial's real estate project financing (PF). Given that the prosecution recently raided the headquarters over issues of inadequate internal controls, the group's overall risk management and management responsibility are also highly likely to be put on the table.
Joint PF Operations Across Securities, Fire & Marine, and Capital Affiliates
The National Assembly's National Policy Committee has finalized the list of witnesses and references for this year's national audit. Vice Chairman Kim Yong-beom of Meritz Financial Group has been included on the witness list. It is reported that Vice Chairman Kim has been requested to appear as a witness at the FSS audit scheduled for the 21st regarding the practice of joint and several guarantees in real estate project financing (PF). Should he attend, questioning is expected to center on the structure of joint PF investments among Meritz Financial affiliates and the group's risk management system.
In August, the Financial Services Commission (FSC) issued a legal interpretation that the practice of subcontractors guaranteeing the debts of prime contractors in real estate PF projects may violate the 'Financial Consumer Protection Act.' Financial authorities announced they would investigate cases of joint and several guarantees by subcontractors and launch inspections into certain project sites. Following this, warning lights turned on for PF joint guarantee practices across the market, and Meritz Financial, which has operated such structures at the group level, has emerged as a key target for scrutiny.
Meritz Financial is considered a prime example of a firm that has actively utilized PF financial structures involving joint investments and joint guarantees, primarily through non-banking affiliates such as securities, fire & marine, asset management, and capital. When the FSS began inspecting the financial investment industry for real estate PF last year, affiliates including Meritz Fire & Marine, Meritz Securities, and Meritz Capital were all subject to inspection simultaneously. This is interpreted as being due to the frequent practice of having fire & marine and capital affiliates participate alongside investment projects identified by Meritz Securities.
While such a structure is evaluated as a strategy to increase group-level asset value and diversify revenue sources, it also raises concerns about increasing the risk of contagion between affiliates. In particular, Meritz Financial's PF exposure is among the highest in the industry. Its subsidiary, Meritz Securities, faces criticism for high dependence on real estate finance, with its real estate financial exposure reaching 127% of its equity as of the end of June.
Korea Investors Service (KIS), in its 'Meritz Financial Group Credit Rating Report' released in September, evaluated that "Meritz Financial Group has significant exposure to domestic real estate PF and overseas real estate, and is exposed to high earnings volatility alongside the synchronization of operating performance due to joint investments by affiliates." Consequently, the upcoming national audit is expected to focus on whether the group-level risk management system regarding PF structures is functioning properly.
Will the Internal Control Failure Controversy Reignite?
Amid growing concerns over PF risks, Meritz Financial is also facing another controversy regarding internal control failures. As the Meritz Financial headquarters was recently raided by the prosecution over insider trading allegations, the company's internal control weaknesses and management responsibility are likely to be brought to the forefront during this national audit.
Last month, the prosecution initiated a compulsory investigation to confirm allegations of stock trading using undisclosed information by former and current Meritz Financial Group executives. Previously, the FSC's Securities and Futures Commission referred a former CEO of Meritz Fire & Marine, referred to as 'A', and an executive-level official to the prosecution in July for violating the Capital Markets Act by using undisclosed material information.
They are accused of obtaining information about the merger between Meritz Financial Group's subsidiaries, Meritz Fire & Marine and Meritz Securities, in November 2022, purchasing stocks through family-named accounts, and selling them after the stock price soared following the announcement to gain hundreds of millions of won in profits. This incident has amplified calls pointing out the structural vulnerabilities in Meritz Financial's internal control system.
In response, a Meritz Financial official stated, "We have already completed personnel actions regarding the individuals involved and have taken the best possible measures," adding, "There is no separate official statement regarding this."
Meritz Financial has faced continuous criticism regarding internal control failures. Similar controversies have occurred at its affiliate, Meritz Securities. In December of last year, Meritz Securities' headquarters was raided by the prosecution in connection with the issuance of bonds with warrants (BW) by the E-Group (formerly Ewha Group). The prosecution is investigating whether Meritz Securities employees used internal information or intervened in unfair transactions during the E-Group's 170 billion won BW issuance process in 2021.
Meritz's internal control issues were also raised during the 2023 national audit. Addressing the then-Meritz Securities CEO Choi Hee-moon, who appeared as a witness, former People Power Party lawmaker Choi Seung-jae noted, "One-third of all internal control violation cases among the top 10 domestic securities firms occurred at Meritz Securities," and added, "The level of disciplinary action, limited to reprimands or pay cuts, is excessively lenient compared to other firms."
With internal control risks across the Meritz Financial Group surfacing repeatedly, attention is also turning to whether Vice Chairman Kim will attend the national audit. Although Vice Chairman Kim has been selected as a witness regarding the real estate PF joint guarantee controversy, his attendance has not yet been finalized. A Meritz Financial official stated regarding his attendance, "Nothing has been confirmed at this time."