[Public Voices] Four Key Points for Companies to Prepare for 'Foreign Exchange Transaction' Inspections

Obligation to Collect Overseas Receivables Disappears
Reporting Procedures Take Precedence Over Actual Collection

As the sharp rise in the exchange rate continues, the government has introduced measures to stabilize the currency. The government attributes the instability in the exchange rate to the insufficient inflow of foreign currency compared to export volumes. Authorities have announced that they will conduct foreign exchange transaction inspections on companies where there is a significant gap between the reported export amount and the amount of foreign currency received. This is a declaration of intent to examine the status of overseas receivables collection from foreign clients.

Can the government directly enforce the collection of receivables from foreign clients? To answer directly, while it was possible in the past, it is no longer the case today.

Previously, external receivables of USD 500,000 or more per transaction had to be collected within three years after maturity. Prior notification to the Bank of Korea was mandatory for waiving collection or extending the collection period. However, this system was abolished in 2017. While it may have been justified during periods of chronic foreign currency shortages in the past, it no longer fits today’s globalized and advanced economic reality. Unless a financial crisis on the scale of the foreign exchange crisis occurs again, there is no way to enforce this under normal circumstances. The obligation to report in cases where goods are shipped to overseas headquarters or branches first and payment is received three years later was also abolished in early 2025.

Companies should focus, before any customs inspection, on whether they have fulfilled their reporting obligations during the process of addressing long-term uncollected receivables, rather than just on whether receivables have been collected. There are four key points to be mindful of.

First, when overseas trade receivables are converted into long-term loans. If trade receivables from overseas subsidiaries remain uncollected for an extended period, causing a burden on both the headquarters and the overseas subsidiary, this may be done to improve the financial structure. Legally, this is referred to as a "monetary quasi-consumption loan contract." This is a type of monetary loan, and monetary loans are classified as capital transactions subject to reporting under the Foreign Exchange Transactions Act. However, since there is no actual movement of funds and the origin is in current transactions such as goods or services, there is debate as to whether it is subject to reporting.

Second, when receivables from foreign clients are transferred to another overseas company for various reasons. The sale of receivables is a capital transaction subject to reporting under the Foreign Exchange Transactions Act. Unless the transfer payment is received immediately into a domestic account, it is highly likely to be subject to reporting.

Third, when a dispute arises with a foreign client during the collection process and a settlement is reached. Legally, this is called a "settlement agreement." Settlement agreements are also capital transactions subject to reporting under the Foreign Exchange Transactions Act. The Act includes procedures to verify that the receivable, which should have been collected, was not simply abandoned under the guise of a settlement.

Fourth, collecting receivables without going through a domestic foreign exchange bank. This may occur if payment is received into an overseas account or if an overseas subsidiary receives payment on behalf of the company. The same applies if goods or services are received instead of cash. Receiving payment in stablecoins also falls under this category. As this constitutes a significant exception circumventing the current foreign exchange transaction management system, prior notification to the Bank of Korea is required.

The work mentioned in these four points may have been handled without considering the Foreign Exchange Transactions Act, as it does not involve the actual payment or receipt of foreign currency. Normally, when foreign currency payment or receipt is involved, it is standard procedure for the treasury department and the bank to discuss the process under the Act, but if not, such procedures are often skipped. Even if companies believe that the recent government announcement is unrelated to illegal activities such as overseas asset flight, it would be wise to use this as an opportunity to review internal processes.

Hwang Inwook, Attorney at Law, DR&AJU LLC