Ever-Rampant Foreign Currency Laundering Drains National Wealth

A man who wants to be identified only by an initial, P, was arrested as a foreign exchange trafficker in May of this year. He has trafficked in a total of 130 billion won in about 25,000 separate foreign currency laundering schemes through bank accounts in Korea and Australia in the past three years. As of July of this year, the volume of currency laundering schemes was more than 10-fold compared to the same period of last year.

Foreign currency laundering refers to foreign currency transactions that illicitly take place out of official foreign currency-dealing financial institutions. A wire transfer of more than $10,000 (about 12 million won) through one of these institutions will be automatically reported to the National Tax Office, which will in turn closely watch the transaction.

Foreign currency laundering, whose fees are higher than legal transactions and which could incur criminal charges, is used to facilitate illegal transfers of properties offshore and money laundering, regulators concluded.

The money sent offshore as a result of legal loopholes or in breach of law is often spent to buy real estate assets or on shopping sprees, which would result in a drain of national wealth and a shrinking of domestic spending.

As of July of this year, there have been 305 currency laundering cases involving about 1.12 trillion won, up by 99 percent in the number of cases year-on-year, and up by 1,027 percent in amounts involved.

A total of illegal transactions in foreign currencies which include laundering, reached 1,013, up 20 percent year-on-year. The amount involved with them is 2.75 trillion won, up 153 percent.

The volume of the illegal transactions has already surpassed last year’s entire volume of 2.2 trillion won, and is the largest since 2002 when the volume was 5.25 trillion won.

On average, about 144.7 transactions were brought in for charges, up 30 percent compared with 109.3 last year.

“With ongoing domestic low interest rates, the gap between local and international rates has narrowed. The Korean won has become less volatile. This increases the number of people who want to send funds abroad,” said a researcher at the Korea Institute for International Economic Policy on the condition of anonymity. Bae Sang-geun, a researcher at the Korean Economic Research Institute, said, “The increase in currency laundering is due to the lack of domestic investment outlets and antipathy against the rich.

However, the major reason for the increase is due to the anxiety that the rich feel. As long as they feel anxious, an offshore drain of capital will continue anyways, said financial experts.

Pundits said an environment that will encourage them to invest and spend domestically must be instituted.

The prosecution, the Ministry of the Economy and Finance, the National Tax Office, and the Korea Customs Office and the Financial Supervisory Service will start joint probes into illegal outflows of foreign exchanges. They have launched probes into the financial sources of those arrested for the illegal transactions.

The prosecution is running taskforces, which include some staff from the Financial Supervisory Service, to investigate into currency laundering cases in Busan and other cities.

Separately, financial regulators are considering rewriting regulations to dampen illicit transactions in foreign exchanges.

Jae-Seong Hwang jsonhng@donga.com