CONTENTS
- 1. Foreign Exchange Transactions Act | Basic Concept and Purpose
- - Major Types of Illegal Foreign Exchange Transactions
- 2. Foreign Exchange Transactions Act | Foreign Exchange Procedures and Reporting Obligations
- - Mandatory Requirements for Import and Export Foreign Exchange Transactions
- 3. Foreign Exchange Transactions Act | Korea Customs Service Foreign Exchange Investigation Work
- - Scope of Korea Customs Service Inspection
- 4. Foreign Exchange Transactions Act | Examples of Violations and Levels of Punishment
- - Levels of Punishment and Administrative Sanctions for Violations of the Act
- 5. Foreign Exchange Transactions Act | Korea Customs Service to Conduct Regular Foreign Exchange Inspections
- - Foreign Exchange Transactions Act Violation Checklist
1. Foreign Exchange Transactions Act | Basic Concept and Purpose
The Foreign Exchange Transactions Act is a statute that sets the standards for transactions in foreign currency, or in means of payment circulated abroad, between Korea and foreign countries in connection with trade, overseas travel, study abroad, overseas investment, and the like.
This law aims to promote a balanced balance of payments and a stable currency value, and to facilitate external transactions.
The Foreign Exchange Transactions Act applies broadly to the following three areas.
- Transactions in foreign exchange within Korea
- Transactions in foreign exchange between Korea and abroad
- Cases where a resident of Korea engages in foreign exchange transactions abroad
In short, it applies broadly not only to import and export companies but to all external transactions involving foreign exchange, including overseas direct investment, overseas real estate acquisition, overseas remittance, and set-off transactions.
Major Types of Illegal Foreign Exchange Transactions
- Carrying foreign currency, checks, or other means of payment out of or into the country without declaring them to customs
- Sending foreign currency out of the country by disguising, on paper only, the payment of import proceeds without any actual import of goods
- Intentionally underreporting the export price and then recovering and concealing the actual difference locally overseas
- Concealing export proceeds overseas or using them locally instead of bringing them back to Korea
- Carrying criminal funds, such as proceeds from smuggling sales, out of the country
- Carrying funds out of the country to raise criminal funds through smuggling and the like.
2. Foreign Exchange Transactions Act | Foreign Exchange Procedures and Reporting Obligations
Under the Foreign Exchange Transactions Act, export proceeds may be received freely, but depending on the method of receipt, the foreign exchange transaction must be reported to the Governor of the Bank of Korea.
If the amount for which the reporting obligation is violated exceeds the amount set below within the range of 500 million won or more, the violator may face imprisonment for up to 1 year or a fine of up to 100 million won.
An administrative fine of up to 100 million won may also be imposed.
The foreign exchange, securities, real estate, and the like obtained through this are confiscated as a matter of course, and where they cannot be confiscated, an equivalent value is collected.
Mandatory Requirements for Import and Export Foreign Exchange Transactions
1) Set-off between claims and obligations
If a company wishes to settle its export proceeds by setting them off against import payments, claim (damages) amounts, various fees, and the like that it already owes, rather than receiving the proceeds directly in cash, it must report this in advance to the head of the foreign exchange bank.
When a multinational company sets off the claims and obligations of multiple transactions on a lump-sum basis or carries out complex set-offs among multiple transaction parties, it must separately report this to the Governor of the Bank of Korea, and the statutory minimum retention period for set-off-related supporting documents is 5 years.
2) Long-term settlement (settlement beyond the deadline)
In principle, export proceeds must be settled within a set period before or after the goods are shipped, but a reporting obligation arises when proceeds above a certain amount go unsettled for a long time.
Specifically, for export proceeds exceeding USD 100,000 per contract, a company that wishes to receive payment more than 1 year before the goods are shipped must report this in advance to the Governor of the Bank of Korea.
3) Payment or receipt of proceeds through a third party
Prior reporting is also required when a third party who is not a party to the import or export transaction pays or receives the proceeds on its behalf.
A typical example is where a domestic importer pays a foreign counterparty not directly but through a third domestic counterparty, or, conversely, where another domestic or foreign company pays the export proceeds on behalf of the original party to the transaction.
4) Direct payment not passing through a foreign exchange bank
When paying the consideration for a current transaction, such as import payments, in an amount exceeding USD 10,000, the payment must be remitted through a foreign exchange bank.
If you must carry cash out and pay it directly, reporting is mandatory.
3. Foreign Exchange Transactions Act | Korea Customs Service Foreign Exchange Investigation Work
In connection with the Foreign Exchange Transactions Act, the Korea Customs Service handles foreign exchange transactions under the Act, the investigation of illegal foreign exchange transactions, and money laundering investigations, among others.
[Companies Subject to Foreign Exchange Investigation]
① Companies conducting foreign exchange transactions above a certain scale
② Companies with a record of foreign exchange transactions
③ Companies engaged in capital transactions and overseas direct investment
④ Transaction parties such as money exchange operators
Scope of Korea Customs Service Inspection
Foreign Exchange Transactions | -Whether procedures for imports, exports, and service transactions are complied with -Whether foreign currency is illegally diverted through price manipulation or the like -If a foreign exchange business institution or the like refuses, obstructs, or evades an inspection, revocation of authorization, suspension of operations within a six-month period, or the like, or an administrative fine of up to 100 million won |
Illegal Foreign Exchange Transactions | -Investigation of illegal import and export offenders -Non-declaration or false declaration when means of payment are imported or exported |
Money Laundering Investigation | -Investigation of types such as acquisition and disposal of criminal proceeds and disguising the cause of their generation -Investigation of illegal import and export offenders and customs offenders under the Customs Act, the Foreign Trade Act, and the Foreign Exchange Transactions Act |
4. Foreign Exchange Transactions Act | Examples of Violations and Levels of Punishment
Violations of the Foreign Exchange Transactions Act can occur often in practice, regardless of company size.
Typical cases of violation under the Foreign Exchange Transactions Act are as follows.
① Payment or receipt based on supporting documents that differ from the facts
Submitting a false invoice to a bank and remitting funds to the United States by disguising funds for purchasing virtual currency such as Bitcoin as trade payments
② Set-off of claims and obligations
A company undergoing rehabilitation proceedings disposed of its equity in a local subsidiary in Hong Kong and set off the shares against the claims of a non-resident company, but did not report this to the Governor of the Bank of Korea
③ Paying an amount exceeding 5,000 dollars to a third party who is not a party to the transaction
Importing goods from U.S. Company A and paying the goods proceeds to a third party designated by Company A
④ Payment not made through a foreign exchange bank
Importing goods from Taiwan and paying part of the import proceeds directly to the representative of the Taiwanese exporter who had entered Korea
⑤ Carrying currency, checks, securities, bills, and the like in or out without a customs declaration
-Exporting goods to Iran and carrying out the commission to be paid to the broker without declaring it to the head of customs
-A U.S. permanent resident bringing in foreign currency checks of 20,000 dollars or more without declaring them to the head of customs
⑥ Overseas direct investment not reported to the foreign exchange bank
-Acquiring equity in a local subsidiary in Japan without reporting the overseas direct investment to the head of the foreign exchange bank
-After reporting a two-year loan investment in a foreign corporation, recovering the investment funds without filing a report of change to the overseas direct investment
Levels of Punishment and Administrative Sanctions for Violations of the Act
▶Types of Violations of the Foreign Exchange Transactions Act and Levels of Punishment
Type of Violation of the Foreign Exchange Transactions Act | Level of Punishment |
| Making a payment, receipt, or transaction despite a foreign exchange transaction suspension order | Imprisonment for up to 5 years or a fine of up to 500 million won (if three times the value of the object of the violation exceeds 500 million won, the fine may be up to three times that value) |
| Violating the duty to maintain confidentiality of foreign exchange transactions | Imprisonment for up to 2 years or a fine of up to 200 million won (the two may be imposed together) |
| Violation of the reporting duty or false reporting | Imprisonment for up to 1 year or a fine of up to 100 million won (if three times the value of the object of the violation exceeds 100 million won, the fine may be up to three times that value) |
▶Types of Violations of the Foreign Exchange Transactions Act and Administrative Sanctions
| Type of Violation of the Foreign Exchange Transactions Act | Administrative Fine |
| Continuing foreign exchange or capital transactions despite false reporting and refusal to accept the report | Administrative fine of up to 100 million won |
| Failure to report the method of payment or receipt, or refusal, obstruction, or evasion of an inspection | Administrative fine of up to 30 million won |
| Failure to submit foreign exchange investigation materials or false submission | Administrative fine of up to 10 million won |
5. Foreign Exchange Transactions Act | Korea Customs Service to Conduct Regular Foreign Exchange Inspections
Under the Foreign Exchange Transactions Act, beginning in 2025, the Korea Customs Service will conduct regular foreign exchange inspections of companies that engage in foreign exchange transactions above a certain scale.
This represents a paradigm shift. The previous approach conducted foreign exchange investigations only when an illegal transaction was suspected, whereas the new approach emphasizes advance prevention and effective management.
[Companies Subject to Regular Inspection]
- Companies with a record of foreign exchange transactions above a certain scale
- Companies engaged in overseas direct investment
- Companies conducting capital transactions
- Companies conducting high-risk transactions such as set-off, third-party payment, or payment beyond the prescribed period
If a violation of the Foreign Exchange Transactions Act is detected, the company may be investigated by the Financial Supervisory Service, the Korea Customs Service, the police, and others, and a serious violation may lead to criminal proceedings, so advance prevention and a prompt response by the company are important.
Foreign Exchange Transactions Act Violation Checklist
A violation of the Foreign Exchange Transactions Act may not stop at an administrative disposition but may have a critical effect on a company's credibility, including restrictions on trade finance, collection of equivalent value, and criminal punishment.
For a small or medium-sized export-import company, tailored consulting on compliance with the Foreign Exchange Transactions Act suited to its import-export activity, along with regular risk review, is highly advisable.
Daeryun provides consulting that blocks, in advance, risks related to the Foreign Exchange Transactions Act that may arise at companies' trade sites, with practitioners in specialized fields, such as customs attorneys and customs specialist advisors, working together.
▶Review of the legality of foreign exchange transactions : Confirming whether the procedures for paying and receiving import-export proceeds comply with the Foreign Exchange Transactions Act ▶Reporting and notification guide : A guide to the reporting duties and procedures under the Act & the correct methods for items that are frequently omitted ▶Improvement of internal management systems : Building a data management system for foreign exchange transactions and strengthening internal control systems to prevent foreign exchange transaction risks in advance ▶Education and information provision : Providing information on the latest regulations and supplying checklists and guidelines to improve self-inspection capabilities |
If you need legal advice in connection with the Foreign Exchange Transactions Act, please request a 🔗tax attorney legal consultation appointment.
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