Financial Crime World

Financially Speaking: Korea’s Crackdown on Money Laundering and Customer Due Diligence

In the financial industry of South Korea, customer due diligence (CDD) is a crucial aspect for financial institutions, given the regulatory environment. Compliance with the Act on Real Name Financial Transactions and Guarantee of Secrecy, and the Financial Transaction Reports Act (FTRA), have made CDD an integral part of risk management strategies.

Customer Due Diligence Regime in Korea: Overview

Introduced in 1993, South Korea’s Real Name Financial Transactions Act serves as the foundation for CDD measures. This act prohibits the opening or maintenance of anonymous accounts, making it mandatory for financial institutions to verify clients’ real names (1). In 2006, an amendment to the FTRA broadened the scope of CDD to encompass a wider range of financial transactions and identifiers (2).

Circumstances Triggering Customer Due Diligence

  1. New Accounts: When opening a new account, Article 5-2(1)1 of the FTRA demands customer identification in the form of a financial transaction contract between the client and the financial institution.

  2. Occasional Transactions: Clients must undergo CDD for domestic or foreign currency transactions, even if they do not have an account, when their transactions surpass the designated threshold. This applies to various financial activities, such as cash dealings, check issuance/cashing, prepaid cards, and wire transfers.

Sanctions and Administrative Fines

Failure to comply with CDD obligations can lead to severe consequences. Article 17 of the FTRA imposes administrative fines of up to KRW 10 million (USD 9,000) for violators.

Required Measures for Customer Due Diligence

  1. Customer Identification: Financial institutions must identify and verify specific information for different categories of clients, including natural persons, for-profit legal entities, non-profit legal entities, foreigners, and foreign organizations.

  2. Verification of Authority: Institutions validate the power and authority of individuals acting on behalf of natural and legal persons or organizations.

  3. Verification of Existence: Institutions confirm the existence of legal entities or arrangements through supporting documents.

  4. Verification of Ownership: Identify natural and legal persons who own or control a client.

  5. Verification of Intent: Obtain information on the purpose and intended nature of business relationships.

  6. Ongoing Client Due Diligence: Continuously monitor transactions, assess risk levels, and review existing CDD documentation.

Customer Refusal to Provide Information

If clients refuse to provide necessary identification information, financial institutions should not proceed with new transactions nor maintain existing business relationships. In some instances, they might consider making a suspicious transaction report.

Verification Timing

Financial institutions must fulfill their CDD obligations promptly after completing financial transactions, as per Article 10-5 of the Enforcement Decree and Article 23 of the Financial Transaction Reports and Supervisory Regulation.

Existing Customers and the Expanded Regime

For pre-existing business relationships, financial institutions must conduct CDD when transactions of significance occur or when changes in business operations necessitate updated customer information.

Scope Limitation

The Korean government analysis from March 2009 to March 2010 identified the need for securities corporations and collective investment corporations to comply with CDD requirements, which will be implemented through regulation amendments as needed.

Suspicious Transaction Reports (STRs)

A Suspicious Transaction Report (STR) is a key tool to combat money laundering and terrorist financing. Financial institutions and casinos are required to report potential suspicious transactions to the Korea Financial Intelligence Unit (KoFIU) with reasonable grounds based on their expertise and judgment.

Disclaimer: This article is intended for informational purposes only and should not be considered as professional advice. Financial regulations are subject to continuous revision and updating. For accurate and relevant information, please consult the original documents or consult with a legal expert.