[why & next] 4 Trillion Won Foreign Currency Remittance Mystery... From Kimpeu-Targeted Hawala to North Korea Involvement Theories...

High Possibility of Using 'Gimpeu' for Illegal Money Transfers
North Korea Targets Cryptocurrency After Sanctions... Possible Attempts to Cash Out Domestically
Regarding North Korea Remittances and Illegal Political Funds, "Low Likelihood"

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Je-hoon] There continues to be much speculation surrounding the over 4 trillion won foreign currency remittance incident that occurred at commercial banks. While the most plausible theory points to currency arbitrage targeting the ‘Kimchi Premium,’ recent investigations by the prosecution and the National Intelligence Service have begun to uncover the facts, leading to rampant conjecture ranging from mere speculation to illegal money laundering and even remittances to North Korea.

According to the financial sector on the 5th, suspicious foreign exchange remittance transactions amounting to $3.37 billion (approximately 4.1 trillion won) occurred over about 17 months starting from February last year at Shinhan Bank and Woori Bank. This far exceeds the initially reported 2.5 trillion won by the two banks. The funds, withdrawn in Korean won from domestic asset exchanges, moved through multiple personal accounts to corporate accounts of 22 trade corporations (excluding duplicates), and were then transferred overseas to subsidiaries in four countries (Hong Kong, Japan, the United States, and China) via commercial banks under the pretext of remitting import payments.

There are many suspicious points in the transaction process that fuel doubts. First, these 22 corporations sent foreign currency remittances 1,238 times over 17 months through 11 branches at Shinhan Bank, and 931 times over 13 months through 5 branches at Woori Bank. This is difficult to consider as typical import payment transactions.

The profiles of the companies involved in the transactions also raise suspicions. The 22 remitting companies were engaged in various industries such as precious metals, cosmetics, travel, and retail, but most were small startups too small to remit funds in the trillion won range. One company was established in April last year with a capital of only 10 million won. Some even listed their addresses as shared offices or apartment complexes. Cases were found where one person served as the representative or executive of multiple corporations, or where remittances were made to companies with related parties as representatives.

Notably, most of these companies sent funds hundreds of times using a ‘prepayment’ method that allows remittance with only invoices, without letters of credit. A former foreign exchange transaction officer at a commercial bank said, “If it were tens of billions of won per transaction, it might not be highly suspicious. Even if suspicious, at the branch level, Relationship Managers (RMs) are dispatched, but this is not mandatory and it is practically difficult to verify physical documents on site.”

The incident appears likely to expand further. Including Shinhan and Woori Banks, suspicious transaction reports filed by all domestic banks to the Financial Supervisory Service (FSS) total $5.37 billion (about 7 trillion won). The FSS plans to review these cases and conduct inspections if necessary. As the issue grows, not only financial authorities but also the Seoul Central District Prosecutors’ Office’s International Crime Investigation Division and the National Intelligence Service have begun fact-finding investigations.

However, the path to uncovering the truth is expected to be difficult. A virtual asset industry insider said, “To identify the source of funds, investigations must target the overseas subsidiaries that received the foreign currency and their backers, but they likely laundered the funds again through various methods, making tracking difficult. Moreover, unless it is a direct threat like terrorism, cooperation with other countries is slow, especially since most funds flowed into regions like Hong Kong and China, where investigative cooperation is limited.”

◆ Currency Arbitrage Targeting the ‘Kimchi Premium’?

The most plausible scenario regarding these suspicious funds is ‘currency arbitrage.’ It is interpreted that virtual assets brought in from overseas were cashed out at domestic exchanges by exploiting the ‘Kimchi Premium’?the gap between domestic and overseas virtual asset prices?and then disguised as trade transactions to be transferred abroad.

South Korea has very high liquidity, with daily virtual asset trading volumes reaching about 14 trillion won, resulting in frequent occurrences of the Kimchi Premium where cryptocurrency prices are higher than in other countries. Furthermore, since the taxation system on virtual assets is deferred until 2025, giving it a quasi-legal status, it is assessed that overseas speculative forces aiming for both price arbitrage and currency arbitrage likely participated.

Industry experts also support this view. Kim Dong-hwan, Director at Blitz Labs, said, “When the Kimchi Premium approached 50% in 2017 and reached 20% last year, there were many currency arbitrage cases both domestically and internationally. The currency arbitrage theory is quite plausible; the problem is that despite repeated occurrences, there were no means to prevent it.”

Professor Hong Ki-hoon of Hongik University’s Business Administration Department also sees a high possibility of cashing out and currency arbitrage by Chinese funds. He explained, “Since last year, China banned virtual asset trading and mining to prevent foreign currency outflow, leading to a significant increase in cashing out attempts through third countries. South Korea, with daily virtual asset trading volumes reaching 14 trillion won and the presence of the Kimchi Premium, was a very attractive target for these forces.”

Authorities also regard this possibility highly. On the 27th of last month, Eom Il-yong, Director of the Foreign Exchange Supervision Bureau at the Financial Supervisory Service, said in response to reporters’ questions about the sudden increase in suspicious foreign exchange transactions, “Looking at cases like last year’s sanctions on Hana Bank, it happened when the Kimchi Premium increased and arbitrage profits grew.”

◆ Money Laundering? ... Even Theories of Remittances to North Korea

There is also an interpretation that illegal gambling funds, illicit political funds, and other ‘black money’ from domestic and overseas sources were laundered. This case resembles ‘Trade-Based Money Laundering (TBML).’ TBML is a crime that exploits the characteristics of trade transactions involving multiple countries and stakeholders to launder money. Due to jurisdictional divisions among countries and institutions, and the division of labor among exporters, importers, transporters, and banks, there are many gaps in Anti-Money Laundering (AML), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) processes, making TBML a commonly used money laundering technique.

This case is similar. Assuming virtual assets were brought back into domestic exchanges from overseas, they were cashed out hundreds of times, withdrawn in Korean won, and then moved out again under the guise of trade payments through small or shell corporations. Professor Hwang Seok-jin of Dongguk University’s Graduate School of International Information, a member of the People Power Party’s Virtual Asset Special Committee, said, “TBML crimes were once globally prevalent, and this case appears similar. Banks and financial institutions conduct extensive reference checks on trade payments coming from overseas, but since virtual assets, which are still outside the legal framework, are involved, it seems somewhat complicated.”

Related to this, although still in the realm of ‘assumptions,’ theories linking the case to North Korea have also been raised. It is interpreted that North Korea may have cashed out virtual assets mined or stolen via individuals or companies in China and then recovered the funds domestically. The National Intelligence Service’s recent involvement in investigating this suspicious transaction case supports such suspicions.

Questions about this were also raised during a recent National Assembly Political Affairs Committee briefing. On the 27th of last month, People Power Party lawmaker Yoon Han-hong asked Financial Supervisory Service Governor Lee Bok-hyun whether the National Intelligence Service was investigating suspicions that overseas remittance amounts may have been transferred to North Korea.

North Korea, blocked from earning foreign currency due to economic sanctions, has reportedly been intensifying virtual asset mining and theft over the past several years. Chainalysis, a U.S. blockchain analysis firm, estimates that North Korea illegally acquired virtual assets worth $1.5 billion (about 1.96 trillion won) over five years since 2017, with a significant portion cashed out through overseas virtual asset exchanges.

Lim Soo-ho, Senior Research Fellow at the Korea Institute for Defense Analyses, explained, “Since North Korea is subject to UN sanctions, it has turned to virtual assets, which are difficult to trace. Previously, cashing out was done through China, but as China banned virtual asset trading and mining to prevent offshore capital outflow, the activity has shifted to other countries. Overseas research shows many authoritarian and Southeast Asian countries are involved, and some cases even involved exchanges in the U.S.”

The problem is that banks mediating such remittances could be subject to the U.S. secondary boycott sanctions against North Korea. The U.S. secondary boycott, introduced in 2016, prohibits not only North Korea but also third-country individuals and entities dealing with North Korea from transacting with U.S. partners. Banks caught in this could face existential threats.

An insider familiar with the matter said, “No concrete evidence or suspicious points have emerged, but one financial institution currently under inspection is reportedly very sensitive, repeatedly confirming with the FSS whether there are any North Korea-related suspicions.” He added, “Of course, this is only one possibility, and even if true, given North Korea’s inability to conduct account transactions due to sanctions, it is likely the funds were converted into physical currency, making tracking difficult.”

However, there are many skeptical views regarding the money laundering theories, including North Korea involvement. Professor Hong said, “If the intent was to launder illegal funds, it is possible, but the cost-effectiveness is very low. Faster options like futures trading exist, and even if virtual assets are used, it would be more stable to conduct such activities overseas, such as in Southeast Asia, rather than domestically.”

Separately, conspiracy theories about remittances to North Korea and illicit political funds have spread on social media, but their likelihood is considered low. A ruling party official dismissed them as “too far-fetched,” and a financial sector official said, “It would be different if North Korea exchanged its own coins through China and brought them domestically, but that seems unlikely. Since the Travel Rule (which requires virtual asset service providers to report sender and receiver identity information for transactions over 1 million won) was introduced in March, it is difficult to conceal transaction flows domestically.”