[LAW TALK]FX deals: Monitoring to keep pace with liberalization
As part of continuous efforts to improve the conditions that would allow Korea to become a Northeast Asia financial hub, the Ministry of Finance and Economy announced a plan to "completely" liberalize foreign exchange transactions by 2009, a two-year acceleration.
The new plan will be implemented in two phases of two years each. In the first phase, many actions that currently require reporting to MOFE or the Bank of Korea will require only reporting to designated foreign exchange banks. Eventually, reporting will only be required for monitoring purposes.
Under the plan, during this year and the next Korean won will be permitted to be used in international transactions in most cases with no approvals - only reporting - required and limits on purchasing or investing in overseas real estate will greatly expand. The obligation to collect claims against foreign debtors - a method to keep hard currency in Korea - will also be softened as amounts of up to $500,000 will be exempt. Lastly, foreign exchange bank limits on foreign currency positions will be adjusted upward.
In 2008 and 2009 we will see fully liberalized regulations. The won will be more actively used in international transactions without reporting requirements, limits on the purchase of foreign real estate will be abolished and the duty to collect claims against foreign debtors will be eliminated.
As part of the "internationalization" of the won, since January whenever non-residents have borrowed one billion won or less from a foreign exchange bank they have not had to file a report with the BOK. Also, since April exporting and importing won worth up to $1 million has been generally permitted, although there are sill certain limitations and reporting requirements.
The purchase of overseas real estate by Koreans has also flourished since the limit was increased to $1 million in March. Thanks to deregulation, the amount of real estate purchased overseas went up from $9.3 million in 29 cases in 2005 to $140 million in 383 cases in the first half of this year.
With a great increase in FX transactions, we acknowledge that the monitoring system should keep pace. The Korea Financial Intelligence Unit reported 236 cases of suspicious foreign exchange transactions in 2003, 875 in 2204 and a hefty 2,844 from January to August 2005. But, monitoring should be accomplished while lessening the reporting hassle. Thus, it is good that the Financial Supervisory Service established a permanent monitoring system of foreign exchange transactions on July 1 by utilizing BOK data on foreign exchange transactions reported by or gathered from various sources. Liberalization provides more opportunity for illicit activities; thus, the FSS announced in July that it would crack down on unlawful FX transactions.
The recent Sea Story video gambling fiasco - the result of loosened regulations on the review of video games and also the issuance of gift certificates as winnings, like coins from a slot machine - reminds us of the significant potential for disaster when liberalization is done without the installation of a suitable monitoring system. Liberty is not free and it needs clean hands.
Cho Chi-hyoung is a partner and an attorney-at-law at Hwang Mok Park P.C., one of Korea`s leading law firms. HMP may be contacted at info@hmplaw.com or (02) 772-2700 - Ed.