Dunamu CEO Lee Sirgoo attends the annual general meeting of the Federation of Korean Industries (FKI) at FKI Tower in Seoul, Feb. 20. Yonhap

Dunamu, the operator of Korea's largest cryptocurrency exchange, Upbit, has hinted at filing an administrative lawsuit against financial authorities after facing sanctions for violating financial laws, industry officials said Wednesday.

While the sanctions are unlikely to affect Dunamu CEO Lee Sirgoo's position directly, they have severely damaged both his reputation and the company's. Furthermore, officials said a possibly hefty fine in the future could significantly burden its business operations.

"We are carefully reviewing various ways to clarify our position, including potential legal action," a Dunamu official said.

The Financial Intelligence Unit (FIU) under the Financial Services Commission (FSC) said Tuesday that Upbit had failed to comply with anti-money laundering obligations, citing transactions with unregistered overseas virtual asset service providers and violations of customer due diligence requirements in hundreds of thousands of cases.

As a result, the FIU imposed a three-month partial business suspension, prohibiting new customers from transferring virtual assets — both deposits and withdrawals. It also issued a "reprimand warning" to Lee and handed down sanctions on eight other executives and employees.

In financial institutions, a reprimand warning is classified as a heavy sanction since it restricts executives from being reappointed and bars them from holding executive positions at financial firms for three years.

However, Dunamu is not classified as a financial institution, and therefore, unlike executives at financial firms, virtual asset exchange executives are not subject to the rule, even if they receive such a sanction.

Lee is unlikely to face significant restrictions on maintaining his position, potential reappointment or future employment in the virtual asset industry. His current term runs until December next year.

"This appears to be essentially a symbolic sanction aimed at pressuring Lee," a virtual asset industry official said.

The Act on Reporting and Using Specified Financial Transaction Information stipulates that individuals who have received criminal penalties for violating financial-related laws are prohibited from registering as a virtual asset service provider for five years.

Since Lee received an administrative sanction rather than a criminal penalty, this provision does not apply to him.

Nevertheless, virtual asset service providers are required to disclose all past sanctions when submitting their registration, meaning that even if the FIU does not impose a direct restriction, Lee could still face a reputational penalty that may have indirect consequences.

Additionally, under the Act on Corporate Governance of Financial Companies, individuals who receive criminal penalties or administrative sanctions for violating financial laws are prohibited from serving as executives at financial institutions for five years.

Based on this regulation, if Lee's sanction is finalized, he is likely to face difficulties in securing an executive position at a financial institution in the future.

The FIU has yet to determine the key component of Upbit's sanctions — the fine — which will be decided at a later date. The potential imposition of a hefty fine, which could place a burden on the company's operations, is another reason why Dunamu is considering legal action.

In its official statement, Dunamu said, "Some of the grounds for the measures and the severity of the sanctions were determined without fully considering the specific circumstances and relevant factors. We will sincerely clarify our position in accordance with the procedures set forth in the applicable regulations."

This suggests that the FIU's sanctions are not final. While Dunamu is not legally classified as a financial institution, it is still subject to direct oversight by financial authorities, making this an unusually strict action based on industry precedents.

Officials are seen inside the Financial Services Commission at the Government Complex Seoul in this Dec. 2, 2019, file photo. Korea Times file

However, filing a lawsuit against financial authorities could trigger even greater repercussions.

Authorities have historically responded to institutions challenging their examination results with even stricter oversight.

When Woori Bank contested the Financial Supervisory Service's findings on inappropriate loans, arguing it had no obligation to report the matter under the implementation rules, the financial watchdog swiftly issued a rebuttal and immediately launched an additional inspection of the bank. It also moved up a regularly scheduled examination by a full year.

If the lawsuit proceeds, it is also expected to impact most matters requiring regulatory approval.

As Upbit's partnership with Kbank is set to expire in October, Hana Bank and Woori Bank are reportedly considering new agreements with the exchange. This process could be affected by the legal dispute.

Regarding the issue, an FSC official said, "We pointed out legal violations in accordance with our duty of care and that filing an administrative lawsuit is the company's decision. We will respond according to principles."