Prosecutors clear banks in KIKO dispute of criminal liability

SEOUL, July 19 (Yonhap) -- Prosecutors on Tuesday cleared local banks of criminal liability in their controversial sale of a risky foreign currency derivative to small and medium-sized companies years ago.
The Seoul Central District Prosecutors' Office said it won't seek criminal punishments for about 90 employees of 11 commercial banks, who have been under a fraud probe for their sale of currency option derivatives, called "Knock-in, Knock-out (KIKO)" contracts, to their corporate clients in 2008 and before.
The prosecutors' decision, coming on the heels of the local court's acquittal of the 11 banks from KIKO-related civil liability, is expected to trigger strong backlash from the concerned small businesses that suffered huge foreign exchange losses after the onset of the global financial crisis three years ago.
The KIKO currency derivatives were sold by about a dozen banks to a range of small and medium-sized local exporters that took the instruments to hedge against volatile currency swings. With the onset of the global credit crunch in 2008, however, the Korean currency tumbled 25.7 percent to the U.S. dollar in that year alone, causing heavy losses to the KIKO buyers.
A series of court rulings since last year have exempted the sellers of the speculative currency products from paying compensation to the buyers. In November, a Seoul district court ruled against 99 out of 118 domestic companies that sought to nullify the agreements and demanded reparation from the lenders.
"It is difficult for the banks to predict that the won would weaken against foreign currency," said Lee Sung-yun, a senior prosecutor.
"Though expected profits for the lenders exceeded those for the buyers in general, a large part of such returns depend on the terms of individual contracts which each company can choose," the prosecutor said. "No evidence that would show the lenders' intention to deceive the firms was found."
"The banks' profit margin from the KIKO contracts ranged from 0.3 to 0.8 percent, which is not very high compared to the interest on other financial transactions," the prosecutor added.
A prosecution source said firms that purchased the KIKO currency derivatives before the global financial crisis "enjoyed profits, so it is safe to say that their heavy losses were not due to the products but were caused by the financial meltdown."
Following the decision, an association for the plaintiff companies expressed anger and disappointment, vowing to continue their move to punish the lenders over "an unfair agreement heavily biased toward the banks."
"Most of the victimized companies failed to get enough information about potential risks of the products before purchasing them," said an official of the plaintiffs' association. "We will stand against the flatly wrong decision and employ all possible means to continue our fight for compensation we deserve."
graceoh@yna.co.kr