Amendment of Korean Anti Money Laundering Laws
I. Revival of Comprehensive Audit
The reinstatement of a comprehensive audit of all issues (as opposed to a special audit that is instigated when a particular issue has arisen) (“Comprehensive Audit”) by the Financial Supervisory Service (“FSS”) means that the selected financial institutions will need to be better prepared for the increased breadth and depth of the upcoming Korean regulatory audits. Impacted entities include: (i) Korean Financial institutions including banks, securities companies, insurance companies, and asset management companies; and (ii) local Korean branches and subsidiaries (including banks, securities, insurance and asset management) of foreign financial institutions.
The following takeaways are noteworthy:
1.Reimplementation of the Comprehensive Audit
On February 20, 2019, the FSS announced the reinstatement of the then 2015 abolished Comprehensive Audit. The FSS will resume the Comprehensive Audit effective on January, 2019. Comprehensive Audit means that for the selected institutions, the FSS will conduct a lengthy review of all issues (financial or non-financial). The FSS explained that, after consultation with the Financial Services Commission (“FSC”), it came to recognize the need for the Comprehensive Audit to create a safer and sounder environment for financial services consumers, financial soundness of relevant institutions, and more robust internal controls.
The FSC and the FSS recognize the negative aspects of traditional Comprehensive Audits. Therefore, going forward, FSS announced that it plans to conduct the Comprehensive Audit by:
a) establishing a criteria for selecting institutions for the Comprehensive Audit; and
b) pursuinga more focused review of predetermined target business areas so as to identify and reform the weaknesses of the selected institution.
2.Comprehensive Audit Implementation Plan
The FSS will:
a) by the end of March 2019, establish the criteria for selecting institutions to be subject to the Comprehensive Audit in 2019;
b) by April 2019, select institutions based on the established criteria; and
c) resume the Comprehensive Audits in the first half of 2019.
Broadly, the FSS announced four criteria for selecting institutions to be subject to the Comprehensive Audit: (i) consumer protection, (ii) financial soundness, (iii) internal control and management structure, and (iv) market influence.
The FSS is expected to begin its selection process and publicly announce the selected institutions (most likely will be institutions whose weaknesses are already known) beginning as early as April. Request for information from the selected institutions, and actual on-site audit will soon begin thereafter. Korean branches and subsidiaries of foreign financial institutions are also subject to the selection criteria, but it is uncertain whether they will actually be selected for a Comprehensive Audit in 2019.
In addition, the FSS announced that it will not conduct any other specialaudit on the financial institution subject to the Comprehensive Audit three months prior to and three months after the Comprehensive Audit.
We will provide you further information once all financial institutions have been evaluated by the FSS and the list of the selected financial institutions are confirmed.
3. Anticipated Audit Points
The FSS has recently highlighted the stability of the financial system and the protection of consumer rights as the purposes of financial supervision. Accordingly, the reinstated Comprehensive Audit is expected to focus on investigating unsound business activities by financial institutions. For example, it is expected that:
a) with respect to banks, the FSS may examine consumer coercion practices such as approving loans subject to purchase of financial products as well as incomplete disclosures regarding sales of various financial products such as bancassurance, fund or derivative linked securities;
b) with respect to the insurance companies, the FSS may focus on the frequency of policy holder complaints and the claim rejection rate; and
c) with respect to financial investment companies, the FSS may review improper sales practices and financial soundness of relevant institutions.
If such activities are intentional and/or negatively impacted numerous consumers then the related penalties are expected to rise accordingly.
Also, as part of establishing public order in the financial market, anti-competition activities such as large financial companies’ abuse of superior bargaining power, insider trading by major shareholders, and improperly favoring of subsidiaries will be subject to higher penalties.
In addition to the above, the below amendment should be on the watch list for Korean regulatory audits.
II. Amendments to the Korean Anti Money Laundering Law
Amendments to the Act on Reporting and Using Specified Financial Transaction Information (the “Specified Financial Information Act”) will become effective on July 1, 2019 (the “Amendments”). The Amendments reflect the heightened focus on anti-money laundering (“AML”) and counter-terrorism financing (“CFT”).
The following takeaways are noteworthy:
1. Strengthening Prevention of Anti-Money Laundering and Counter-Terrorism Financing
The Specified Financial Information Act requires financial companies a) to designate persons responsible for suspicious transaction reporting and currency transaction reporting, b) to prepare and implement relevant procedures and work guidelines for management and employees, and c) to educate and train management and employees to prevent money laundering and terrorism financing (collectively, “Internal Control Obligation”).
The Amendments obligates the institution to:
a)include a process to identify, analyze and assess money laundering and terrorism financing;
b)establish an independent department which reviews and assesses the appropriateness and effectiveness of the Internal Control Obligation;
c) supervise its management and employees to comply with the procedures and work guidelines;
d retain records related to AML and CFT review includingsuspicious transaction reporting, currency transaction reporting, customer due diligence, and information on the originator and recipient of wire transfer, all for a minimum of 5 years from the date of the relevant financial transaction; and
e) certain other matters to be determined by the Presidential Decree in order to efficiently prevent money laundering and terrorism financing.
2. Increasing the Maximum Administrative Penalty
The Amendments raised the maximum administrative fine imposed on a violation of AML or CFT to KRW 100 million from KRW 10 million. An institution which fails to take measures to meet Internal Control Obligation or fails to comply with and/or interfere with a regulatory order, direction or audit is now subject to this penalty. The administrative fine for failure to meet suspicious transaction reporting and currency transaction reporting is raised to KRW30 million from KRW 10 million.