SOUTH KOREA
Summary

Sanctions

None

FAFT AML Deficient

No

Higher Risk Areas

Not on EU White list equivalent jurisdictions

Medium Risk Areas

 

US Dept of State Money Laundering assessment

Corruption Index (Transparency International & W.G.I.)

Failed States Index (Political Issues) (Average Score)

 

 

ANTI-MONEY LAUNDERING

 

FATF Status

South Korea is not on the FATF List of Countries that have been identified as having strategic AML deficiencies

 

Compliance with FATF Recommendations

At its June 2014 meeting, the FATF Plenary recognised that Korea had made sufficient progress in addressing the deficiencies identified in its 2009 mutual evaluation report, and could be removed from the regular follow-up process.

In June 2009, when Korea’s mutual evaluation report was adopted, the FATF Plenary concluded that Korea did not yet meet all of the FATF’s membership criteria. The key element for membership is a sufficient level of compliance with the FATF Recommendations.

Korea adopted an action plan to address the deficiencies of its MER and strengthen its AML/CFT measures so that it would meet FATF’s requirements. Consequently, at its October 2009 meeting, the FATF Plenary welcomed Korea as a member of the FATF, and placed the country in the follow-up process as a result of the partially compliant and non-compliant ratings for certain key and core Recommendations in its mutual evaluation report.

Korea reported back to the FATF Plenary on a regular basis on the progress it had made in implementing the action plan. In June 2014, the FATF Plenary decided that it had taken sufficient measures to bring its AML/CFT system in line with the FATF Recommendations. The follow-up report contains a detailed description and analysis of the actions taken by Korea in respect of all of the Recommendations rated partially compliant and non-compliant.

 

APG Yearly Typologies Report - 2015

Emerging Trends; Declining Trends; Continuing Trends (INCSR)

Economic crimes such as tax evasion and embezzlement continue to be the most challenging issues. Utilizing tax havens and paper companies to evade tax and illegally moving assets overseas continue to pose problems.

Declining trends are not currently identified by the Korean law enforcement agencies.

Continuing trends include: -

- tax evasion and utilizing tax havens and paper companies,

- association of ML with corruption, embezzlement and bribery of state funds,

- foreigners or individuals associated to foreigners opening accounts in different/multiple banks and

- funds received were withdrawn in cash and via ATM at various locations immediately upon receipt, leaving low balances in the accounts.

 

US Department of State Money Laundering assessment (INCSR)

South Korea was deemed a Jurisdiction of Concern by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR).

Key Findings from the report are as follows: -

The Republic of Korea (South Korea) has an advanced economy that is dominated by large industrial companies. It is not an offshore banking center. While organized crime does not have a large profile, it is linked to the Japanese yakuza. There also are reports that Korean criminals tried to connect with counterparts in the Chinese triads and Nigerian gangs. Most money laundering in South Korea is associated with domestic criminals, official corruption, and ethnic Koreans living abroad. Drug smuggling in South Korea has increased in recent years. In 2015, $174.8 million of banned substances were confiscated, up 42 percent from a year earlier.

South Korean officials have uncovered numerous underground banking systems being used by South Korean nationals, North Korean defectors, and foreign national workers from China and Southeast Asian and Middle Eastern countries. Reports indicate North Korean defectors living in South Korea are remitting more than $10 million per year to family members in North Korea through illegal banking systems between South Korea and China.

Gambling is legal but highly regulated and limited to non-citizens. The country has eight free economic zones (FEZs), with Incheon International Airport wholly incorporated into one of the zones. While companies operating in FEZs enjoy certain tax and tariff privileges, they are subject to the same general laws on financial transaction reporting as companies operating elsewhere in the country. Korea mandates extensive entrance screening to determine companies’ eligibility to participate in FEZ areas, and firms are subject to standard disclosure rules and criminal laws.

 

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SANCTIONS

There are no international sanctions currently in force against this country.

 

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BRIBERY & CORRUPTION

 

Index

Rating (100-Good / 0-Bad)

Transparency International Corruption Index

53

World Governance Indicator – Control of Corruption

70

 

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INVESTMENT CLIMATE - Executive Summary (US State Department)

The Republic of Korea (ROK) has made tremendous economic gains, transforming itself from a recipient of foreign assistance to a high technology manufacturing powerhouse and donor country in a generation. Thanks to fiscal stimulus and the beginning of a global recovery, South Korea’s export-oriented economy grew at a 3 percent rate in 2013, up from 2 percent in 2012; most economists predict GDP growth around 4 percent in 2014. Growth is expected to remain moderate in coming years, due to the ROK’s relatively developed economy, an aging population, and inflexible labor markets. Nonetheless, the ROK has so far weathered the global economic uncertainty and remains a generally favorable destination for foreign investment. Following the 1997-98 Asian financial crisis, South Korea made significant progress in reforming its financial institutions and capital markets. In addition, the Korean government took steps to strengthen its competitiveness, enacting measures to boost foreign investment incentives and allow non-Koreans to own land and real property. Korea took a major step forward in March 2012, when the high-standard U.S.-Korea Free Trade Agreement (KORUS FTA) entered into force. As it is fully implemented, the KORUS FTA should improve the climate for U.S. investors in Korea, and provide the foundation for an expanding bilateral economic partnership with the United States. President Park has committed to fully and faithfully implement the KORUS FTA, and to ensure a positive business climate for foreign investors. The U.S. government maintains active engagement with the Korean government to ensure full implementation of the letter and spirit of the KORUS FTA to promote economic growth in both our countries.

Many foreign and domestic firms alike continue to express concern with what is seen as an overly burdensome regulatory environment, including frequent issuance of “voluntary” guidelines which have the effect of regulations. President Park Geun-hye publicly acknowledged that the regulatory environment was an obstacle to investment and launched a three-year “economic innovation” plan that: 1) normalizes practices, including public sector reform; 2) spurs a creative, innovative economy through support for entrepreneurship and more female participation in the workforce; and 3) boosts the domestic economy by targeting five service sectors for deregulation: education, healthcare, finance, tourism and software. President Park stated that deregulation will be one of the ROKG’s primary economic goals over the next four years and personally led a seven-hour interministry publicly-televised meeting on deregulation. ROKG officials have welcomed the recommendation of foreign business associations in the deregulation process. However, a tragic April 16 ferry sinking resulting in the loss of hundreds of lives, many from a single high school, has raised domestic questions about the adequacy of Korea’s workplace and public safety culture. President Park has vowed to “remake from scratch the whole safety system.” While sector-specific deregulation plans are expected to stay on track, undoubtedly, there will be a tightening of regulations related to workplace and public safety.

Inbound foreign direct investment (FDI) fell to USD 14.5 billion in 2013, down 11 percent from 2012, which was a record high year for capital inflow. Foreign investment in all industries except the service sector slightly decreased last year, in part due to uncertainty surrounding the economic policy direction of the new President. The Park administration took steps to ameliorate those concerns by announcing what is widely viewed as a foreign investment-friendly three-year economic plan. The ROK’s sovereign debt rating remains high, ranking only behind Japan and Taiwan. The high ranking reflects the ROK’s strong fiscal fundamentals, increasing current account surplus, its ability to withstand domestic risks and external shocks, and the continuation of a status quo in North-South Korea geopolitics. These factors serve to burnish the ROK's reputation as a generally favorable destination for foreign investment, despite continuing concerns about household debt.

The United States retains the largest single-country share of FDI in Korea, totalling USD 53.3 billion or 24.5 percent of Korea's total stock of FDI since the 1960's. Japan has invested USD 35.5 billion (16.3 percent of the total), followed by the Netherlands with USD 22.3 billion (10.2 percent). EU countries have invested USD 72.2 billion or 33.1 percent of the total. The United States contributed the largest share of FDI in 2013, at USD 3.53 billion, a 4 percent decrease from the previous year. Japan recorded USD 2.69 billion of FDI in 2013, a 41 percent reduction from the USD 4.54 billion recorded in 2012, largely due to the yen’s depreciation against the Korean won. ROK FDI into Japan increased 53 percent over the same period. Investments from the EU increased over 76.9 percent from 2.7 billion in 2012 to 4.8 billion in 2013, due to continued quantitative easing policies. IT, auto parts, logistics, and other service sectors are expected to absorb the majority of FDI in Korea in the near future, largely through mergers and acquisitions (M&A), in line with global trends. Due to the importance to the Korean economy of FDI from the United States, Japan, and EU, President Park has held two investment-related meetings with the foreign business community in the last year, at which representatives of the American Chamber of Commerce in Korea, the Seoul Japan Club, and the EU Chamber of Commerce in Korea were featured prominently.

In recent years, foreign portfolio investment has fluctuated, influenced by external factors such as the U.S. Federal Reserve’s tapering of its quantitative easing policy, slowing of the Chinese economy and the yen’s depreciation. At the end of 2013, foreign shareholders owned 35.3 percent of Korean Stock Exchange stocks and 9.9 percent of the tech-heavy KOSDAQ Index shares. In response to the global financial crisis, foreign investors significantly increased the purchase of Korean bonds. Economic analysts attribute this surge to investors’ recognition of the ROK’s generally sound economic fundamentals.

Improvement in the consistency of the ROK Government’s (ROKG) interpretation, transparency, and timeliness in the application of FDI regulations would enhance the investor climate in Korea. Unclear and opaque regulatory decision-making remain a significant concern, which can discourage FDI by creating uncertainty for investors. Investors are also concerned about small but significant interest groups that pressure the government to protect the South Korean market from what is perceived as foreign domination. Foreign and domestic businesses in South Korea increasingly report that Korean regulators issue verbal or informal guidance to industry that is commonly understood to carry the same force as formal regulation. In some cases, this practice appears to be used to avoid subjecting regulatory initiatives to the scrutiny of the normal rulemaking process, including the public comment periods required by the KORUS FTA and by Korean law.

The KORUS FTA, which entered into force on 15 March 2012, is a major step forward in enhancing the legal framework for U.S. investors in South Korea. All forms of investment are protected under the KORUS FTA, including enterprises, debt, concessions and similar contracts, and intellectual property rights. With very few exceptions, U.S. investors are treated the same as South Korean investors (or investors of any other country) in the establishment, acquisition, and operation of investments in Korea. In addition, these protections are backed by a transparent international arbitration mechanism, under which investors may, at their own initiative, bring claims against the government for an alleged breach of the investment. Submissions to investor-state arbitration tribunals as well as their hearings will be made public.

 

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FURTHER REPORTS

 

Extracted from IMF Report - Republic of Korea: Financial Sector Assessment Program-Detailed Assessment of Compliance on the Basel Core Principles for Effective Banking Supervision (Oct 2014)

 

Korea’s anti-money laundering (AML) legislation comprises the Financial Transaction Reports Act (FTRA) and the Proceeds of Crime Act (POCA). According to Articles 3 and 11 of FTRA, Korea Financial Intelligence Unit (KoFIU) is Korea’s AML authority. The KoFIU, which is part of the Financial Services Commission (FSC), is the lead agency in Korea for AML/CFT matters.

 

While KoFIU is responsible for AML/CFT supervision, it may delegate responsibility for supervision to the FSS. In practice, the FIU has delegated responsibility to conduct the onsite examination of banks compliance with AML/CFT legislation to the Financial Supervisory Service (FSS). In practice, the FIU and FSS share the responsibility for supervision: FIU predominantly offsite supervision and FSS onsite examination of banks.

 

The FIU will receive regular reporting by the banks at a quarterly frequency such as Suspicious Transaction Reports (STR) and Counter Terrorist Reports (CTRs). The FIU will also receive exception reports from the banks in the instance of financial irregularities. Based upon the reported data, the FIU will establish the direction and often influence the scope of the onsite examinations conducted by the FSS and the FIU developed the examination manual used by the FSS to conduct onsite examinations. However, the FIU does not have a well developed risk-based methodology to identify higher risk banks for enhanced supervision. In practice, the banks to be selected for onsite examination will be determined by the FSS as part of their supervisory cycle. In the event the FIU detects specific irregularities through bank reporting, it has the power to suggest and, if needed, instruct the FSS to examine a specific bank. The FIU is however, in the process of exploring a risk based methodology for implementation in the near-term after the appropriate due diligence is completed.

 

The FSS performs onsite examinations based on a two year frequency for full scope onsite examinations and partial examinations performed annually, but on a thematic basis. In establishing its onsite supervision plan, the FSS will liaise with the FIU and will adjust the scope of its supervision depending upon the policy direction set by the FIU.

 

Banks are required to appoint an executive within the bank as a compliance officer responsible for AML/CFT as per Article 5 FTRA and Enforcement Decree. South Korea is a member of both the Financial Action Task Force (FATF; the AML/CFT standard setter), and of the Asia/Pacific Money Laundering Group (APG; the FATF-style regional body for Asia).

 

South Korea was last assessed against the AML/CFT standard in November 2008 by a joint team of the FATF and the APG, and the mutual evaluation report was adopted in 2009. South Korea is tentatively scheduled to undergo its next full assessment in 2016.

Since the last mutual evaluation report in 2009, Korea has made progress in addressing the main deficiencies identified, in particular by taking legislative and regulatory measures, and improving the implementation of the AML/CFT framework.

 

The sanctions regime, nevertheless continues to raise some concerns because (i) the primary targets are not the financial institutions, but rather their employees and officials; and (ii) sanctions applied are mostly non-pecuniary sanctions. Pursuant to the action plan established after the adoption of the assessment report, Korea was to abolish the threshold for the reporting of suspicious transactions and to explicitly require financial institutions to file reports on attempted transactions, but, in 2012, Korea was behind schedule on both actions.

 

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Extract from 2013 Asia Pacific Group on Money Laundering Yearly Typologies Report: -

Trends:

Unlike many other countries where drugs, terrorism, organized crime and human trafficking pose serious threats to the AML/CFT system, South Korea finds economic crimes such as tax evasion and embezzlement more challenging issues. Utilizing tax havens and paper companies to evade tax and illegally move assets overseas has become a social issue lately in South Korea. The money laundering threat is not such a great in general in South Korea, however, there is a potential threat arising from economic crimes.

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