[Investment] Have you checked these things before investing your company overseas?

On April 2, 2019, the Financial Supervisory Service announced ‘Status of Violations of the Foreign Exchange Transactions Act in 2019 and Consumer Precautions.’ Among the 1,103 total violations, violations related to Foreign Direct Investment accounted for 602 cases, or 54.6%.

Furthermore, a review of violations of mandatory requirements reveals that failure to report new registrations accounted for 51.5% of the total, indicating that transaction parties are not fully aware of the reporting obligations.

Due to a lack of knowledge of the reporting and reporting obligations under the Foreign Exchange Transactions Act, there are many cases where individuals receive penalties or warnings, or even face prosecution, due to violations of the Foreign Exchange Transactions Act. Therefore, special attention is required from consumers.

STEP 1. Confirm the content of reporting and reporting obligations

Under the current Foreign Exchange Transactions Act, individuals and corporations (parties to foreign exchange transactions) must report to the Governor of the Bank of Korea or the President of a foreign exchange bank in advance when making overseas investments or other foreign exchange transactions.

In the case of Foreign Direct Investment, reporting obligations exist for each stage of the transaction (acquisition, disposal, etc.) even after the initial reporting, so caution is advised.

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STEP 2. Confirm precautions based on whether the transaction goes through a bank

When making capital transactions through a bank, you should inform the bank of the purpose and content of the transaction and receive accurate guidance on reporting and reporting obligations under the Foreign Exchange Transactions Act before proceeding with overseas remittances, etc.

Conversely, capital transactions that do not go through a bank, such as equity contributions, contract modifications, gifts, and offsets, often involve cases where there is no actual movement of funds, making it difficult to receive assistance from the bank's foreign exchange department. Therefore, special care is required.

STEP 3. Confirm major violation cases

1. Acquisition of Overseas Securities

Foreign investor A, several years ago, invested approximately 10 million won in a Korean company through a block trade and attempted to receive funds from the sale of the acquired shares at 80 million won, but the bank blocked the withdrawal due to the absence of reporting on the investment case.

→ Penalty imposed

▶ 「Foreign Exchange Transaction Regulation」 Article 7-32: A non-resident must report to the Governor of the Bank of Korea when acquiring securities from a resident.

▶ 「Act Promoting Foreign Investment」 Article 5 (Reporting of Foreign Investment) ① A foreigner (defined as including special relationships in accordance with Article 2, Paragraph 1, Clause 4(a)(2)) must, when making a foreign investment in accordance with the methods described in each item of Article 2, Paragraph 1, Clause 4, must previously report to the Minister of Trade, Industry and Energy in accordance with the rules prescribed by the Minister of Trade, Industry and Energy.

2. Foreign Direct Investment

Resident A remitted 30,000 USD to a local subsidiary in Vietnam without disclosing that it was funds for foreign direct investment to the President of a foreign exchange bank.

→ Penalty imposed

▶ 「Foreign Exchange Transaction Regulation」 Article 9-5: A resident must report to the President of a foreign exchange bank when making foreign direct investment.

For foreign investment companies or foreign investment enterprise, failure to properly complete the relevant reporting can lead to problems in proving investment funds. Law Firm Veat provides comprehensive advice, including advice on overseas investment, drafting related contracts, and obtaining legal approvals, based on its extensive experience in corporate investment advisory.

If you need help interpreting the Foreign Exchange Transactions Act, the Act Promoting Foreign Investment, etc., regarding foreign exchange transactions, please contact Law Firm Veat.

Thank you.

Law Firm Veat