[Seungseop Song's Financial Light] Increasingly Stringent Anti-Money Laundering Regulations

[Image source=Yonhap News]

[Asia Economy Reporter Song Seung-seop] The Financial Supervisory Service (FSS) has instructed all banks to inspect and report on their foreign currency transaction operations. This directive comes after large-scale foreign exchange transactions were detected at Woori Bank and Shinhan Bank. The FSS, having initiated an inspection, plans to investigate whether there is any involvement in money laundering. Money laundering is a sensitive issue for banks, as it can lead to severe sanctions depending on the circumstances.

Money laundering refers to the process of concealing illegally obtained funds and disguising them as legitimate. In Korea, it means falsifying the acquisition or disposal of illegal assets or hiding the assets themselves. It is also defined as money laundering if the acquisition or disposal of assets is concealed for tax evasion purposes.

Financial institutions, which serve as channels for money flow, are obligated to comply with anti-money laundering (AML) procedures. This is to timely detect and prevent illegal money laundering activities conducted both domestically and internationally. It is a comprehensive management system encompassing legal and institutional measures as well as judicial, financial, and international cooperation. In Korea, the Financial Intelligence Unit collects and analyzes financial information related to suspicious transactions involving money laundering and provides it to law enforcement agencies.

The problem is that adhering to the AML system is extremely challenging. Financial companies follow the "Regulations on Anti-Money Laundering and Prohibition of Financing of Terrorism." This regulation consists of 150 provisions, including those related to establishing internal controls to prevent money laundering. It requires the roles and responsibilities of management and reporting officers, as well as education methods, audit systems, and procedure establishment.

Risk of US Sanctions for Failing to Prevent Money Laundering

Above all, the most important aspect of AML is the level of sanctions imposed by US financial authorities. The US imposes strict sanctions not only on its domestic banks but also on foreign banks involved in money laundering. The US has applied its own sanctions against countries such as North Korea and Iran, believing that other foreign banks have served as conduits for illegal funds. Consequently, the level of sanctions has been increasing every year, with continuous emphasis on establishing internal control systems.

Last year, the US Congress passed the "Anti-Money Laundering Act of 2020," a bill aimed at completely eradicating money laundering. According to the bill, the US Department of Justice and the Treasury Department have significantly expanded their authority to demand comprehensive submission of financial transaction information for AML investigations. The requested materials include information related to violations of criminal law, the Bank Secrecy Act, and other laws. The financial institutions subject to this law include "all foreign banks" holding foreign exchange transaction accounts with US banks, which effectively applies to most major domestic banks.

What happens if a financial institution fails to comply with these stringent AML regulations? The US can prosecute the institution for contempt of court, imposing fines of up to $50,000 per day continuously. If a foreign bank refuses to comply with information submission requests, it can be forced to terminate all transaction relationships with US financial institutions. This could cause serious damage to the international financial transaction market due to money laundering incidents occurring domestically.

There have been actual cases of penalties. In 2011, Company A, which was engaged in intermediary trade between Iran and third countries, withdrew about 1 trillion won through an account opened at Industrial Bank of Korea and dispersed the funds to multiple countries. Subsequently, the US federal prosecutors found that the Industrial Bank of Korea’s New York branch had inadequate AML programs. Due to this incident, Industrial Bank of Korea had to pay a fine of $86 million (approximately 100 billion won).