By John Revill
ZURICH (Reuters) - Swiss engineering group ABB <ABBN.S> on Wednesday said it fell victim to a "sophisticated criminal scheme" at its South Korean subsidiary, with the chief suspect an executive responsible for ethics training.
The executive, named by a source in South Korea as Oh Myeong-se, was treasurer and one of two integrity ombudsmen for ABB Korea - to whom staff were supposed to report any ethical concerns - according to an online company magazine available on ABB's Korean website.
He was also the head of compliance at ABB in Korea until 2010, said a source familiar with the investigation, a role that carries responsibility for maintaining legal and ethical integrity.
The executive is suspected of forging documents and colluding with third parties to steal funds, ABB said, estimating it would take a pre-tax charge of about $100 million for the affair, which analysts said raised concerns about its corporate oversight.
Oh disappeared on Feb. 7 and ABB subsequently discovered significant financial irregularities, the company said.
Oh, in his late 50s, left for Hong Kong on Feb.4, four days before the company filed a complaint against the executive with the South Korean police, a police official said on Thursday.
The company claimed that he embezzled a combined 35.7 billion won ($31.31 million) in 73 transactions, the official said, adding that police were investigating the man's accounts.
Group Chief Executive Ulrich Spiesshofer described the alleged fraud as "shocking news", which he said could harm the power equipment and industrial firm's reputation.
"The entire ABB group - all 132,000 of us - will have to live with the consequences," Spiesshofer told staff in a letter after the company said it had uncovered significant embezzlement and misappropriation of funds at its South Korean subsidiary.
ABB, which already faces an investigation into suspected bribery and corruption in Britain, has been under shareholder pressure due to a shrinking order book, although Spiesshofer won some breathing space when the firm reported the first uptick in new business in nearly two years in the fourth quarter of 2016.
Separately, ABB said it had nominated Lars Forberg, managing director of Cevian Capital, for election to its board. A call by Cevian, ABB's second-largest shareholder, to spin off its power grids business, was rejected by ABB last year.
The Swiss company said the alleged theft was limited to South Korea, where it employs around 800 people and generated sales of $525 million in 2015.
"The treasurer of the South Korean unit is suspected of forging documentation and colluding with third parties to steal from the company," ABB said.
The company's South Korean subsidiary declined to comment.
"On Feb. 9 we became aware of suspected financial irregularities in South Korea and we immediately launched an investigation," ABB spokesman Saswato Das said.
"Given the size of the scheme, the investigation may expand to third parties inside and outside of ABB in South Korea."
Analysts at Zuercher Kantonlbank estimated the loss was equivalent to roughly 4 percent of ABB's 2016 net profit of $1.96 billion and raised questions about corporate governance at ABB.
ABB's stock drifted lower after news of the potential charge, but traders also welcomed the nomination of Cevian's Forberg to the board.
(Additional reporting by Ruppert Pretterklieber in Zurich and Hyunjoo Jin in Seoul and Tom Bergin in London; Editing by Susan Fenton and Stephen Coates)