[Duk-bae Park’s Window on Finance] To Win the War on Illicit Private Finance

[Etoday, November 20, 2023] Duk-bae Park (PERI Research Fellow/Real Estate · Regional Development)

[Duk-bae Park’s Window on Finance] To Win the War on Illicit Private Finance

Since the coronavirus pandemic, illegal fraudulent financial services have been on the rise as the economic difficulties of ordinary people have increased. In fact, the number of consultation reports through the Financial Supervisory Service’s ‘Illegal Private Finance Damage Report Center’ has increased rapidly during the coronavirus.

As murderous high interest rates and abusive collection practices became a social problem, the president himself recently declared a war on illegal private finance. By the first half of 2024, a special period of eradication has been set for illegal private finance, and relevant organizations such as the police, prosecutors, the Financial Supervisory Service, and the National Tax Service are busily preparing measures to strengthen crackdowns and punishments. The battle against illegal private finance is expected to begin soon.

Japan’s past experience shows that the social and economic effects of unchecked illegal money lending can be devastating.

In Japan, after the enactment of the Money Lending Act in 1983, money lenders served as financial institutions for the masses, but after several cuts in the top interest rate, money lending to the masses shrank significantly, leading to the emergence of the problem of illegal private finance. As a result, Japan was experiencing a deepening financial polarization, political and social changes, and the economy was facing considerable difficulties.

The government has achieved remarkable results in terms of the number of arrests and detentions and the amount of criminal proceeds recovered during the special crackdown on illegal private finance since the beginning of this year. If a full-scale war is launched in the future, punishments and crackdowns will be further strengthened, and illegal private finance may not be able to operate for a while, but it is necessary to soberly judge whether it can be completely silenced.

We have seen in human history that wars against drugs and sex trafficking, which have always been in demand, have actually encouraged it. In the 1970s, U.S. presidents waged a war against the Mafia and drugs that we know from the movie The Godfather.

As a result, they succeeded in destroying the mafia, but drug use became popularized by those who were afraid of the mafia and hesitated to deal with drugs. A similar story can be found in Korea.

In the early 2000s, Kim Kang-ja, then chief of the Jongam Police Station in Seoul, launched a major crackdown on so-called “Miari Texas” brothels. In the aftermath of the crackdown, brothels almost disappeared, but sex trafficking became more widespread, with all kinds of variants spreading to residential areas across the country in a balloon effect.

This war on illegal private finance may have the same result. The effect of strong crackdowns and punishments may be temporary, and as long as the demand for money from the masses persists, other forms of illicit finance may flourish like poisonous mushrooms.

Therefore, in order to win the war against illegal private finance from a sustainable perspective, we believe that in addition to strong crackdowns and punishments, the following measures should be implemented simultaneously.

First, we need to address the root causes of the increase in unauthorized financing during the pandemic. Although the maximum interest rate of registered money lenders has been lowered, their financing costs have increased significantly due to the rising interest rates since the pandemic. This has compelled them to reduce lending in order to maintain their balance sheets.

Therefore, the maximum interest rate, which is currently fixed at 20%, should be flexibly adjusted to meet the financial market conditions and actively seek ways to reduce the financing costs of registered lenders.

Secondly, we need to enhance the education of financial consumers regarding illegal fraud. While our society is currently actively promoting preventive measures against illegal financial activities such as voice phishing by the Financial Supervisory Service and the police, there is a lack of emphasis on illegal private finance, which has more victims and operates a larger scale.

It is necessary to actively educate those who have access to illegal private finance about caution and damage prevention when using such funds, in collaboration with social organizations such as the Korea Research Institute for Financial Inclusion and private counseling organizations.

Thirdly, loan users should be able to distinguish between legitimate registered loan companies and illegal loan sharks on their own. Currently, there are many cases where users are harmed by mistaking illegal fraudulent lenders for registered lenders.

We propose to change the name of excellent lenders to ‘convenience finance’. This term signifies that these lenders are easily accessible and convenient to use at any time, even though the interest rates are slightly higher than that of regular financial institutions. This is analogous to how we use convenience stores around us without complaint, even though they are slightly more expensive than supermarkets.

November 20, 2023

<Duk-bae Park, PERI Research Fellow> Professor of Kookmin University