President Park Geun-hye said the case had exposed “wrong practices” within the National Intelligence Service (NIS).
NIS chief Nam Jae-joon promised a “bone-crushing overhaul” of the agency.
The NIS is accused of falsifying documents, including Chinese immigration records, to prosecute a North Korean defector.
On Monday one of the agency’s deputy heads, Suh Cheon-ho, resigned to take responsibility for the case. Three NIS officials are also facing charges in connection with the scandal.
It relates to the case of Yoo Woo-seong, a former Seoul government official who defected from North Korea in 2004.
He was charged with providing information to Pyongyang about more than 200 North Korean defectors, but subsequently acquitted.
When prosecutors appealed, they submitted Chinese immigration records on Yoo Woo-seong’s visits to the North – some of which were later found to have been forged.
“Regrettably, wrong practices of the NIS and holes in its management system have been revealed,” the South Korean president told her cabinet, according to Yonhap news agency.
“The NIS must make excruciating efforts to overhaul itself to make sure this kind of incident won’t repeat itself.”
The NIS has faced controversy in the past, including allegations that its agents took part in an online campaign to discredit the opposition candidate during the 2012 presidential election.
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