Financial Crime World

Korea Cracks Down on Money Laundering: Customer Due Diligence Regime and Reporting Requirements

In the Republic of Korea, financial institutions are required to adhere to stringent Customer Due Diligence (CDD) regulations to combat money laundering and terrorist financing. This commitment is part of the Act on Real Name Financial Transactions and Guarantee of Secrecy (Real Name Financial Transactions Act) and the Financial Transaction Reports Act (FTRA).

Overview of CDD Regulations in Korea

The Real Name Financial Transactions Act, enacted in 1993, outlines the fundamental CDD measures. The FTRA, expanded in 2006, broadened the scope of CDD requirements to various financial transactions and customer identification information.

When is CDD Required?

Financial institutions in Korea must verify the identity of their new customers upon opening an account. Establishing business relations is considered a financial transaction under the FTRA, necessitating CDD for several financial transactions, including:

  • Occasional cash transactions above KRW 20 million
  • Receiving or paying cash without the use of an account
  • Cashing checks
  • Purchasing or selling traveler’s checks
  • Safeguard deposits
  • Wire transfers

Penalties for CDD Violations

The Korean government amended the FTRA in 2012, imposing administrative fines of up to KRW 10 million for any individual or institution that breaches CDD obligations.

Essential CDD Measures

Under Korean law, financial institutions must:

  1. Identify and verify customer identification information
  2. Check the authority of agents acting on behalf of individuals or legal entities
  3. Verify the existence and ownership of legal entities
  4. Obtain information on the intended nature of the business relationship

Suspicious Transaction and Currency Transaction Reports (STRs and CTRs)

Financial institutions and casinos are mandated to report any financial transactions they suspect to be money laundering or terrorist financing to the Korea Financial Intelligence Unit (KoFIU) as a Suspicious Transaction Report (STR). Reporting entities must include:

  • Name of the reporting entity
  • Grounds for suspicion
  • Information about the customer
  • Description of the transaction
  • List of data related to the reported transaction

Additionally, reporting entities must file a Currency Transaction Report (CTR) when any cash transactions exceed KRW 10 million per trading day and are devoid of any subjective judgment. The KoFIU analyzes these reports, disseminating them to law enforcement agencies for further investigation.

Securities and Collective Investment Corporation Regulations

After analyzing ML/TF risks between March 2009 and March 2010, the Korean government concluded that securities corporations and collective investment corporations dealing with the general public should not be exempted from these obligations. This finding will be reflected in regulation amendments at a later date.

Conclusion

Financial institutions in Korea must strictly adhere to CDD regulations to ensure effective prevention and detection of money laundering and terrorist financing activities. Penalties for non-compliance are severe, making it essential for businesses to prioritize the implementation of these measures.