By Jack Kim and Ju-min Park

SEOUL (Reuters) - A culture of cozy personal ties that can blur the lines between businesses and those regulating them, of profit over safety, and soft courts is in focus as South Korea demands answers over the sinking of a ferry with the loss of more than 300 lives, mainly high school students.

Prosecutors are investigating two shipping trade organizations responsible for vessel safety checks and for certifying ships that operate in domestic waters.

Two officials at the Korea Shipping Association (KSA) have been arrested on charges of obstructing justice for destroying documents related to a probe into lobbying government officials. A third official was arrested for alleged influence peddling and embezzlement. Prosecutors are also investigating Korean Register (KR), which tests and certifies ships.

Trade groups wield enormous power in South Korea's shipping industry - and in other sectors, too - as lobby groups and as business interests that can outsource inspection contracts to smaller companies, said an official at a shipbuilding company.

"Korean Register has so many officials who come from the Maritime Ministry," said the official, who is based in the port city of Mokpo and who did not want to be named due to the issue's sensitivity and the ongoing criminal investigations.

"There are many interests that co-exist and business has been done to protect each other for so many years, you have to wonder if something like inspections can be done right."

The KSA is responsible for routine shipping inspections, such as the loading of cargo and safety gear intended for use by passengers. The body, which is paid for by passenger and cargo ship operators, also represents shipping companies.

Prosecutors investigating the ferry crew members - 15 of whom are charged with negligence related to the April 16 sinking of the 6,800-tonne Sewol - said they had testified to having received no formal training on emergency evacuation.

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Since the KSA was founded, 10 of its 12 chairmen were former officials at the Maritime Ministry, as were eight of the dozen Korean Register chiefs since 1960.

"MARITIME MAFIA"

As tensions run high, many South Koreans are demanding change to the way the government and parts of society have conducted business for years on the basis of cozy personal ties rather than applying standards and objective oversight.

Local media have dubbed shipping industry officials and the government agencies that oversee them as a "maritime mafia", guarding relationships built up over decades to guarantee jobs for each other and turn a blind eye to negligence.

This potential conflict of interest has fed a culture where safety can be overlooked, and where corners are cut to get things done quickly and to maximize profit, say experts and officials, including South Korean President Park Geun-hye.

The practice of trade groups filled with former government officials who retired from oversight posts has been central to previous scandals in South Korea - such as the discovery of widespread forgery of safety certificates for parts for nuclear plants that provide about a third of the country's power.

Similar lax oversight has resulted in questionable decisions in the banking and insurance sector, construction and government procurement.

"It's hard to stop," said Kwon Oh-in from the civic group Citizens' Coalition for Economic Justice, which researches corruption and irregularities in government and big business.

"The biggest problem is government officials turning into lobbyists working for industry trade groups," he said. "It's been going on for decades since South Korea experienced economic development and growth."

"EVIL PRACTICES"

President Park this week promised to clean up the "accumulated evil practices" in government to make the country safer. Tending his resignation at the weekend, Prime Minister Chung Hong-won said the ferry accident was the result of longstanding malpractices.

"There are too many irregularities and malpractices in parts of society that have been with us too long, and I hope those are corrected so that accidents like this will not happen again," he said.

"South Korea has lots of cases like the Korea Shipping Association, where a lobby group that represents members' interests also conducts safety checks and industry supervision," said Park Jhung-soo, public policy professor at Ewha Women's University in Seoul. "The government says this is the efficient way to do things, but it actually lacks objectivity."

Chon Young-kee, a rare case of a long-time technical expert rising to the top job, resigned as Korean Register chairman and CEO on Monday, saying his decision did "not suggest any wrongdoing, negligence or any other deficiency by KR associated with this very tragic accident."

"We are confident that we have performed our duties diligently and in strict accordance with the relevant national and international regulations as well as our rules," KR said in a brief statement, adding it would do all it can to assist the authorities with the accident investigation.

The KSA declined to comment, citing the ongoing investigations.

More Korean Register and KSA executives and staff may face investigation for negligence and embezzlement of public funds, prosecutors have said.

COURT LENIENCY

Punishment for those convicted in South Korea of causing damage and loss of life appears lenient when set against other developed democracies.

After a 1999 fire killed 19 kindergarten children staying at a privately-run resort where their lodging had not been inspected and was found to contain flammable materials, the operator was sentenced to 18 months in prison, and later went on to operate a similar facility.

In 1970, after 326 people died on a sinking ferry, the ship's captain was given a 3-year jail term and the owner of the ferry operator was jailed for 18 months. Another ferry accident, in 1993, killed 292 people. Inspectors at the port authority who were held responsible were handed prison terms of 6-8 months.

"There's definitely a tendency of leniency by the courts in these accident cases," said Kim Hyun, an attorney specializing in maritime law. He said official sentencing guidelines dictate a 5-year maximum prison term for negligence convictions - even in the event of mass casualties.

Where grievous faults are proved, such as flight and gross negligence, that maximum can be increased to a life term, Kim noted.

"For the Sewol case, those faults will be applied."

(Additional reporting by Kahyun Yang and Sohee Kim; Editing by Ian Geoghegan)