Justice Secretary Leila de Lima said Cho Yang-Eun, 63, was arrested by immigration agents, saying he was the leader of a South Korean crime syndicate.
She said in a statement that Cho was "head of the Korean mafia, responsible for extorting and threatening fellow Koreans as per info (from the) embassy". She did not elaborate.
Immigration Bureau spokeswoman Angelica Pedro told reporters that Cho had allegedly founded the Yangeuni Family, one of the biggest gangs in South Korea, in 1978.
A South Korean embassy representative said "he is indeed the Korean mafia head and he spearheaded many fraudulent cases in Korea and the Korean government continuously requested his deportation".
Cho, who is facing charges for allegedly embezzling $2.5 million from a South Korean bank, was arrested while leaving a casino in Angeles City, about 75 kilometres (46 miles) north of Manila, the immigration bureau said.
He entered the country as a tourist in 2011, but never renewed his visa. South Korea revoked his passport in March 2012, making him an undocumented alien and paving the way for his deportation.
Pedro said they do not know if the South Korean had committed any crimes in the Philippines.
South Korea has become the top source of foreign tourists to the Philippines in recent years, with over 822,000 coming to the Southeast Asian archipelago in first eight months of 2013, government figures say.