By Choi Kyong-ae



The Seoul branch of the U.S. investment bank Goldman Sachs is at the center of an ongoing probe by the Financial Supervisory Service (FSS) into alleged violation of local laws.



After receiving a tip from a branch employee who was unhappy with "unfair profit sharing," the financial regulator began a two-week-long inspection on Aug. 28 into the direct sales of foreign bonds to Korean investors, an FSS official told The Korea Times by telephone.



Separately from the tip-off, "we have also spotted (alleged) wrongdoings during monitoring," said the official who declined to be identified due to the sensitivity of the matter.



The official said Goldman Sachs employees in Seoul and Hong Kong were engaged in a dispute over sharing commissions from sales of Malaysian government-backed bonds to local institutional investors such as pension funds and insurance companies.



Under local laws, foreign banks are not allowed to sell bonds issued by non-Korean companies to local investors directly from their overseas offices. Such bonds can only be sold through their local branches in Korea.



The financial regulator is also investigating the Korean branches of Credit Suisse Seoul Securities and Royal Bank of Scotland, for similar behavior. The FSS official said the probe into the three banks was part of a "spot examination," not a comprehensive one.



"If any violations are found at the banks, they could face punishment ranging from a regulatory warning to business suspension or financial penalties," said the official. "Violations are subject to a review by the Financial Services Commission, which will decide on any punishment by the end of this year."



The Seoul-based spokesmen for Goldman Sachs and Credit Suisse declined to comment, while RBS was not immediately available.



Goldman Sachs Seoul branch operates three business entities in Seoul: a brokerage, a commercial bank and an asset management division. But the latter is being closed after it suffered slow sales amid tougher competition with local firms such as Mirae Asset Securities.



"The three heads of Goldman Sachs Seoul seemingly to have not fully collaborated with each other. As a result, they failed to take a full control over the business entity leading to an insider to report wrongdoings," a person familiar with the securities business told The Korea Times.



In recent years, Korean companies have made aggressive investments in structured fixed-income products, or derivatives, in a hunt for yields amid record-low interest rates around the world. During the financial crisis, Woori Bank and the National Agricultural Cooperative Federation suffered heavy losses from their investment in derivatives, industry sources say.



An official at an investment bank cautioned the ongoing investigation may be the start of a broader examination into foreign banks including Deutsche Bank and Bank of America Merrill Lynch as they sold a lot of derivatives such as collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) in Korea.



CDOs, a type of structured asset-backed security, was originally developed for the corporate debt markets and over time evolved to encompass the mortgage and mortgage-backed security markets. A CLO is a type of CDO.



However, the FSS official said the agency don't have a plan to expand the ongoing probe into other foreign banks at the moment.



In the most recent investigation into unfair practices conducted by foreign financial companies in late August, the FSS slapped BNP Paribas, the Development Bank of Singapore, and Australia and New Zealand Banking Group with a combined 150 million won ($138,000) fine for their "prior consultation" on the price of Kimchi bonds.



