Editor’s note: Jipyong’s Finance Group is in the process of putting together a Finance Handbook of practical articles (in Korean and English) addressing key legal issues in real estate and financing transactions in Korea. This article has been prepared as a preview – please keep a look out for the upcoming Finance Handbook.
Many foreign investors of investment products in Korea are already familiar with requirements under ‘go-to’ foreign investment legislation such as the Financial Investment Services and Capital Markets Act (the “FISCMA”) and the Foreign Exchange Transactions Act (the “FETA”). However, less familiar or specific laws and regulations can also apply and pose unexpected issues.
For example, we recently advised a Cayman Islands entity (the “Investor”) that encountered issues under the Act on Reporting and Using Specified Financial Transaction Information (the “Financial Transaction Information Act”) and the Anti-Money Laundering and Countering the Financing of Terrorism Regulations, which are administrative rules of the Financial Transaction Information Act (the “AML/CFT Regulations”). The Investor planned to invest in a private equity fund structured as a trust under the FISCMA (the “Fund”), which involved acquisition of beneficiary certificates of the Fund. To acquire the beneficiary certificates, the Investor was required to open (i) non-resident foreign currency and Korean won accounts with a foreign exchange bank in Korea and (ii) an investment account with a Korean financial institution involved in the sale of the beneficiary certificates of the Fund.
Having already opened non-resident foreign currency and Korean won accounts (collectively, the “Existing Non-Resident Accounts”) with a foreign exchange bank in Korea (“Foreign Exchange Bank A”) for a previous investment made in January 2021, the Investor hoped to use the Existing Non-Resident Accounts for its investment in the Fund. New non-resident bank accounts were required, but since the Investor had undertaken the ‘know your customer’ and related client identification procedures required by Foreign Exchange Bank A in accordance with the Financial Transaction Information Act when opening the Existing Non-Resident Accounts, Foreign Exchange Bank A confirmed that the Investor could open its new non-resident bank accounts with Foreign Exchange Bank A without repeating such procedures. Foreign Exchange Bank A’s response was welcome news for the Investor, since ‘know your customer’ document requests and procedures typically vary between different foreign exchange banks and are often burdensome.
However, the investment account (the “Investment Account”) the Investor hoped to open with a securities company involved in the sale of the beneficiary certificates of the Fund (“Securities Company B”) was a different matter. Securities Company B took the position that the Financial Transaction Information Act and AML/CFT Regulations required Securities Company B’s managing director to provide special approval of the opening of the Investment Account. Such kind of approval had never been issued, and would thus be virtually impossible to obtain in practice.
It should be noted at this juncture that the Cayman Islands was grey-listed as a Non-Compliant Jurisdiction (as defined below ) by the Financial Action Task Force (“FATF”) in February 2021. The FATF identifies and publishes a list of ‘High-Risk Jurisdictions subject to a Call for Action’ (or “High-Risk Jurisdictions”) and ‘Jurisdictions under Increased Monitoring’ (or “Non-Compliant Jurisdictions”) up to 3 times per year. Iran and the Democratic People’s Republic of Korea together with a number of tax haven countries are examples of blacklisted High-Risk Jurisdictions. Countries with serious deficiencies in their economic systems were grey-listed as Non-Compliant Jurisdictions as of December 2021, and the Cayman Islands was added in February 2021, as previously noted (it is further worth noting that a country grey-listed as a Non-Compliant Jurisdiction may be subsequently removed from the grey-list if the FATF is satisfied that such country has taken necessary steps and implemented sufficient measures to counter its money laundering issues).
Under the Financial Transaction Information Act and AML/CFT Regulations, financial institutions are required to (i) take a stricter approach and (ii) implement internal policies with respect to their ‘know your customer’ or similar client identification procedures when dealing with clients from (or incorporated in) High-Risk Jurisdictions and Non-Compliant Jurisdictions identified and published by the FATF; however, the AML/CFT Regulations are silent in terms of specific policies and procedures (including the forms thereof) that may be adopted by the financial institutions. Unsurprisingly, each financial institution’s documentary requests thus differ in form, content, and level of inquiry in accordance with the financial institution’s own interpretation of what constitutes so-called ‘rigorous and enhanced client identification procedures’.
Ultimately, we resolved the issue by advising the Investor to open the Investment Account with another securities company involved in the sale of the beneficiary certificates of the Fund (“Securities Company C”); this was because Securities Company C had comparatively relaxed (albeit still enhanced) client identification procedures.
As demonstrated by the Investor’s experience above, foreign investors should be aware that their investment projects in Korea can be impacted by lesser-known procedural laws and regulations and Korean financial institutions’ interpretations of how such requirements should be applied in practice, depending on the foreign investor’s nationality or other transaction-specific issues that may not be readily apparent under over-arching laws such as the FETA.
Joon Hyuk LEE
Bo Seul KIM
Genny S. KIM