[Exclusive] Securities Firms Violating Foreign Exchange Management Act... Multiple Cases Detected by Financial Supervisory Service

Repeated Prosecutor Notifications for Violations
Acquisition of 10% Stake in Overseas Funds, etc.
Need for Improved Awareness of Foreign Exchange Management

[Asia Economy Reporter Park Jihwan] Financial authorities have uncovered multiple violations of the Foreign Exchange Transactions Act by major domestic securities firms. Starting with Mirae Asset Daewoo in early last month, violations involving NH Investment & Securities and Shinhan Financial Investment have been confirmed, and either reported to the prosecution or are in preparation for reporting. All of them are suspected of violating the Foreign Exchange Transactions Act by failing to report in advance to financial authorities when investing over 1 billion KRW in overseas funds with more than 10% equity stakes.

According to the financial investment industry on the 18th, the Financial Supervisory Service (FSS) recently notified the prosecution of NH Investment & Securities for violating the Foreign Exchange Transactions Act related to prior reporting of overseas fund investments. The FSS is currently conducting an internal review to notify the prosecution of Shinhan Financial Investment for the same violation. Earlier, on the 7th of last month, the FSS confirmed that Mirae Asset Daewoo had remitted 10 billion KRW overseas without prior reporting for direct investment in an Indian fund in the first half of last year and reported the matter to the prosecution.

According to the Foreign Exchange Transactions Act, domestic financial firms must report in advance to the FSS if their investment amount in an overseas financial company exceeds 10% of the total assets of that overseas financial company. A typical example is acquiring more than 10% equity in an overseas fund. If the report is not made, the level of punishment varies depending on the unreported amount. If an amount exceeding 1 billion KRW is invested overseas without prior reporting to authorities, the case is referred to the prosecution and may result in imprisonment of up to one year or a fine of up to 100 million KRW. Amounts under 1 billion KRW are subject to fines.

An NH Investment & Securities official explained, "We purchased overseas funds to hedge during the issuance process of derivative-linked securities (DLS), but it was difficult to frequently check the fund’s equity ratio," adding, "As soon as we confirmed that the fund’s equity ratio exceeded 10%, which requires reporting, we voluntarily reported to the FSS." An FSS official explained, "When investments are made through securities firms’ overseas proprietary accounts in overseas fund equity, it is considered a direct investment and subject to prior reporting." However, since the prosecution’s judgment on intentionality remains uncertain, it is unclear whether legal penalties will actually be imposed on these securities firms.

Although the violations are similar across the three firms, Mirae Asset Daewoo suffered a greater impact. Unlike NH Investment & Securities and Shinhan Financial Investment, which currently have no plans to enter new businesses, Mirae Asset Daewoo’s ambitious issuance business, which has been in preparation since 2017, is likely to face setbacks. A financial authority official said, "This violation could cause issues regarding the suitability of major shareholders, which is an important factor in the review of the issuance business," adding, "There is a regulation that if a major shareholder is sentenced to imprisonment or a fine under financial-related laws, it is considered a disqualification, and the Foreign Exchange Transactions Act is included among these financial laws."

A senior FSS official pointed out, "Banks and securities firms handle foreign exchange services for customers, and while banks generally manage foreign exchange well, securities firms often miss their own reporting obligations," adding, "There appears to be a need for overall improvement in foreign exchange management awareness." On the other hand, the industry expressed regret over the significant difference in punishment levels depending on the violation amount. A financial investment industry official said, "Even for the same reporting violation, criminal penalties apply if the amount exceeds 1 billion KRW, while fines are imposed otherwise," and argued, "It is necessary to consider the specific nature of the legal violation when deciding sanctions."