[Tax Story] The Gatekeeper of Taxation Information and the Financial Intelligence Unit

Baek Jeheum, Lawyer at Kim & Chang

Although somewhat unfamiliar, the Korea Financial Intelligence Unit (KoFIU) is a major provider of taxation information. KoFIU is an independent central administrative agency under the Financial Services Commission, established in 2011 based on Article 3 of the Act on Reporting and Using Specified Financial Transaction Information, with the purpose of preventing money laundering of criminal funds through financial institutions. KoFIU receives hundreds of thousands of reports daily from domestic and international financial institutions, making it no exaggeration to call it a "treasure trove of information." In 2018, KoFIU provided 38,023 pieces of financial information at the request of domestic law enforcement agencies, of which 36,562 (96%) were for the National Tax Service. It has been found that the taxes collected using KoFIU information in tax investigations over the past five years have averaged more than 2.4 trillion won annually. The contribution of the anti-money laundering agency to the tax sector is truly outstanding.

Money laundering originated in the 1920s when American organized criminals like Al Capone disguised gambling and illegal liquor sales proceeds as legitimate cash income from laundromats operated by Italians. The establishment of international standards for anti-money laundering is overseen by the Financial Action Task Force (FATF), founded in 1989. FATF includes 39 countries such as South Korea and the United States, and one of its core recommendations is the establishment of financial intelligence units (FIUs). From the early 1990s, FIUs began to be established in various countries, and in 1995, the informal Egmont Group was formed to initiate international cooperation. As part of international cooperation, conventions to suppress terrorist financing, prevent international organized crime, and combat corruption were successively concluded by the mid-2000s.

FIUs in each country receive reports of suspicious financial transactions from financial companies and analyze them before forwarding the information to law enforcement agencies or FIUs of other countries. FIUs can be categorized by their nature into administrative type, law enforcement type, and quasi-judicial type. KoFIU is classified as an "administrative type," similar to the U.S. Department of the Treasury’s FinCEN (Financial Crime Enforcement Network) and Japan’s JAFIC (Japan Financial Intelligence Center) under the National Public Safety Commission. The administrative type acts as a buffer between financial institutions and law enforcement agencies, making it easier to obtain cooperation from financial institutions.

Currently, KoFIU is organized into two offices and four divisions: the Planning and Administration Office, the Examination and Analysis Office, the System Operation Division, and Examination Operation Divisions 1 to 3. It also has a separate Information Analysis Deliberation Committee that decides whether to provide information. The committee consists of the head of KoFIU, the head of the Examination and Analysis Office dispatched from the prosecution, and three judges with over ten years of experience. Financial companies are obligated to report information on large cash transactions (Currency Transaction Report, CTR) and suspicious transactions (Suspicious Transaction Report, STR) to KoFIU. CTR refers to cash deposits or withdrawals exceeding a certain amount in a single transaction day, with the threshold lowered from an initial 50 million won to 20 million won in 2010, and further to 10 million won last year.

STR refers to illegal transactions suspected of money laundering, initially set at 20 million won or more, lowered to 10 million won in 2010, and the threshold was removed in 2013. Additionally, last year, the reporting obligation was expanded to certain lenders and electronic financial service providers. Before 2013, the National Tax Service only received STR information related to tax criminal cases, but since then, it has also been provided for general tax audits, including CTR information. This marks an era of broad-spectrum taxation information provision.

The extensive information sharing between KoFIU and the National Tax Service undeniably contributes significantly to securing tax revenue. However, since FIU information provision is premised on criminal relevance, its use for tax audits does not align with the legislative intent of anti-money laundering laws and may even suppress legitimate financial transactions. It is also necessary to reconsider the relationship with the constitutional right to financial information protection derived from the right to informational self-determination and the principle of warrant requirement. While strict standards are applied for issuing warrants to investigative agencies for financial information to protect privacy, allowing administrative agencies to use such information for taxation purposes without court control could lead to the side effect of covert and unlimited information collection by administrative bodies.

There are criticisms that setting the threshold for financial transaction reporting by presidential decree may violate the constitutional principle of legal reservation, and proposals to establish KoFIU’s organization and personnel by law to enhance neutrality have merit. Furthermore, to prevent the risk of leakage of taxpayers’ private information, technical safeguards and strengthening of penal provisions should also be considered. Given the irreversible nature of information, once it is provided or leaked, any countermeasures become merely a postmortem remedy. We also look forward to KoFIU’s role as the "gatekeeper" of information in the treasure trove of taxation information.