Expansion of Customs Service's Jurisdiction

Streamlining Customs Procedures
Increased Jurisdiction
Comment

Streamlining Customs Procedures

Various revisions to the customs laws and regulations, including the Customs Act, were announced by the government towards the end of 2005. These revisions became effective as of January 2006. Generally, the revisions are designed to streamline customs procedures in Korea, as well as to grant increased administrative powers to the Korean Customs Service. Among other revisions, the most notable is the expansion of the Customs Service's jurisdiction over foreign exchange transactions. As revised, the jurisdiction of the Customs Service has been expanded to include "capital transactions" relating to export/import transactions.

The Judicial Police Management Act grants certain government bodies (including the Customs Service) investigative and enforcement powers over certain areas, including foreign exchange transactions. The foreign exchange transactions over which the Customs Service has jurisdiction (ie, which it has the right to investigate and enforce) are prescribed in the Foreign Exchange Transaction Act. The act is designed to monitor and regulate foreign exchange transactions and to prevent the illegal and unauthorized flow of funds out of Korea. In line with this aim, the act grants the Customs Service the authority to investigate foreign exchange transactions and to impose sanctions, including criminal sanctions.

Increased Jurisdiction

Previously, the Customs Service's jurisdiction was limited to foreign exchange matters involving "export/import transactions and related service transactions". For example, the Customs Service was authorized to investigate whether a payment made by a Korean resident to a non-resident in connection with the sale of goods (or provision of services) was in accordance with the Foreign Exchange Transaction Act. Following the recent revision, the Customs Service's jurisdiction has been expanded to cover "capital transactions" relating to export/import transactions as well.

Under the act and the related regulations, the term 'capital transactions' encompasses the following types of transaction:

• bank deposits and trust transactions;
  
  
• loan transactions (including provision of guarantees);
  
  
• third-party payments, accounts receivable and other similar transactions relating to the sale of goods and provision of services;
  
  
• issuance and acquisition of securities;
  
  
• derivatives transactions;
  
  
• real estate transactions; and
  
  
• payments between a foreign parent and its Korean subsidiary.

The list is broad and general. Therefore, until the Customs Service issues detailed guidelines on the scope of its revised investigatory and enforcement powers, it is not clear which specific capital transactions would be subject to the Customs Service's scrutiny. However, as the distinction between goods/service transactions and capital transactions is becoming increasingly blurred, it appears that the main purpose of this expansion of the Customs Service's jurisdiction is to cover various foreign exchange transactions that were previously outside the scope of the service's investigation. For example, in order to hedge foreign exchange risks, a Korean exporter of goods may enter into a hedging transaction with its accounts receivable from a foreign buyer as the underlying asset. In this case, there is a possibility that the exporter may try to transmit funds out of Korea without proper approval or authorization; in the past, such illegal transmission of funds would not have been subject to investigation by the Customs Service.

Comment

The expansion of the Customs Service's jurisdiction is part of the government's efforts to strengthen its ability to monitor foreign exchange transactions in light of Korea's foreign exchange laws and regulations, which are becoming more liberalized.

For further information on this topic please contact Jay Shim or Sangmoon Chang at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5228) or by email (jjshim@wooyun.co.kr or smchang@wooyun.co.kr).