Morgan Stanley's Seoul branch and two of its officials have been reprimanded for engaging in financial business without the establishment of an adequate system to operate it, South Korea's financial watchdog said Thursday. 

According to the Financial Supervisory Service (FSS), the Seoul office of the U.S. banking group examined the financial status and viability of purchasing bad loans in 2011 in cooperation with Morgan Stanley Income Securities Inc.'s Seoul branch and Morgan Stanley's Hong Kong office. 

But the Seoul office was not equipped with a system to conduct credit examination, manage the business or to screen out improper investments, watchdog officials said.  The company lost 3 billion won (US$2.9 million) over the purchases.   Earlier, the FSS found that Seoul branches of foreign banks and financial institutions, including BNP Paribas, HSBC, Barclays and Deutsche Bank were engaging in illicit derivatives transactions. 

A Seoul branch of the Bank of China was also reprimanded for violating the local foreign exchange law in early April.   Meanwhile, a fresh case of irregularities committed by local bank officials came to light.   

The FSS said that officials at the state-run Industrial Bank of Korea (IBK) had misappropriated some 150 million won from the bank.   

The IBK said all the suspected officials were dismissed.   The watchdog has been closely monitoring local banks as the country's financial industry is under fire for several incidents of misconduct and wrongdoing.  

An official at Kookmin Bank is under investigation for the suspected embezzlement of 10 billion won, while the bank's Tokyo office is being probed for illegal loan extensions and operation of slush funds. 

The FSS is also probing Woori Bank's Tokyo office for illegal lending. (Yonhap)