Reimplementation of the FSS Comprehensive Audit and Amendment of Korean Anti Money Laundering Laws

I Revival of Comprehensive Audit

1. Significance

The
reinstatement of a comprehensive audit of all issues (as opposed to a special
audit that is instigated when a particular issue has arisen) (“Comprehensive
Audit”) by the Financial Supervisory Service (“FSS”) means that the selected
financial institutions will need to be better prepared for the increased
breadth and depth of the upcoming Korean regulatory audits. Impacted entities
include: (i) Korean Financial institutions including banks, securities
companies, insurance companies, and asset management companies; and (ii) local
Korean branches and subsidiaries (including banks, securities, insurance and
asset management) of foreign financial institutions.

The
following takeaways are noteworthy:

1.  

   1. Reimplementation of the
      Comprehensive Audit

On
February 20, 2019, the FSS announced the reinstatement of the then 2015
abolished Comprehensive Audit. The FSS will resume the Comprehensive Audit
effective on January, 2019. Comprehensive Audit means that for the selected
institutions, the FSS will conduct a lengthy review of all issues (financial or
non-financial). The FSS explained that, after consultation with the Financial
Services Commission (“FSC”), it came to recognize the need for the
Comprehensive Audit to create a safer and sounder environment for financial
services consumers, financial soundness of relevant institutions, and more
robust internal controls.

The
FSC and the FSS recognize the negative aspects of traditional Comprehensive
Audits. Therefore, going forward, FSS announced that it plans to conduct the
Comprehensive Audit by:

1. establishing
   a criteria for selecting institutions for the Comprehensive Audit; and

2. pursuing
   a more focused review of predetermined target business areas so as to identify
   and reform the weaknesses of the selected institution.

1.  

   1. Comprehensive Audit
      Implementation Plan

The
FSS will:

1. by
   the end of March 2019, establish the criteria for selecting institutions to be
   subject to the Comprehensive Audit in 2019;

2. by
   April 2019, select institutions based on the established criteria; and

3. resume
   the Comprehensive Audits in the first half of 2019.

Broadly,
the FSS announced four criteria for selecting institutions to be subject to the
Comprehensive Audit: (i) consumer protection, (ii) financial soundness, (iii)
internal control and management structure, and (iv) market influence.

The
FSS is expected to begin its selection process and publicly announce the
selected institutions (most likely will be institutions whose weaknesses are
already known) beginning as early as April. 
Request for information from the selected institutions, and actual
on-site audit will soon begin thereafter. Korean branches and subsidiaries of
foreign financial institutions are also subject to the selection criteria, but
it is uncertain whether they will actually be selected for a Comprehensive
Audit in 2019.

In
addition, the FSS announced that it will not conduct any other special audit on
the financial institution subject to the Comprehensive Audit three months prior
to and three months after the Comprehensive Audit. We will provide you further
information once all financial institutions have been evaluated by the FSS and
the list of the selected financial institutions are confirmed.

1.  

   1. Anticipated Audit Points

The
FSS has recently highlighted the stability of the financial system and the
protection of consumer rights as the purposes of financial supervision.
Accordingly, the reinstated Comprehensive Audit is expected to focus on
investigating unsound business activities by financial institutions. For
example, it is expected that:

1. with
   respect to banks, the FSS may examine consumer coercion practices such as
   approving loans subject to purchase of financial products as well as incomplete
   disclosures regarding sales of various financial products such as
   bancassurance, fund or derivative linked securities;

2. with
   respect to the insurance companies, the FSS may focus on the frequency of
   policy holder complaints and the claim rejection rate; and

3. with
   respect to financial investment companies, the FSS may review improper sales
   practices and financial soundness of relevant institutions.

If
such activities are intentional and/or negatively impacted numerous consumers
then the related penalties are expected to rise accordingly.

Also,
as part of establishing public order in the financial market, anti-competition
activities such as large financial companies’ abuse of superior bargaining power,
insider trading by major shareholders, and improperly favoring of subsidiaries
will be subject to higher penalties.

In
addition to the above, the below amendment should be on the watch list for
Korean regulatory audits.

1. Amendments
   to the Korean Anti Money Laundering Law

Amendments
to the Act on Reporting and Using Specified Financial Transaction Information
(the “Specified Financial Information Act”) will become effective on July 1,
2019 (the “Amendments”). The Amendments reflect the heightened focus on anti-money
laundering (“AML”) and counter-terrorism financing (“CFT”).

The
following takeaways are noteworthy:

1. Strengthening
   Prevention of Anti-Money Laundering and Counter-Terrorism Financing

The
Specified Financial Information Act requires financial companies a) to
designate persons responsible for suspicious transaction reporting and currency
transaction reporting, b) to prepare and implement relevant procedures and work
guidelines for management and employees, and c) to educate and train management
and employees to prevent money laundering and terrorism financing
(collectively, “Internal Control Obligation”).

The
Amendments obligates the institution to:

1. include
   a process to identify, analyze and assess money laundering and terrorism
   financing;

2. establish
   an independent department which reviews and assesses the appropriateness and
   effectiveness of the Internal Control Obligation;

3. supervise
   its management and employees to comply with the procedures and work guidelines;

4. retain
   records related to AML and CFT review including suspicious transaction
   reporting, currency transaction reporting, customer due diligence, and
   information on the originator and recipient of wire transfer, all for a minimum
   of 5 years from the date of the relevant financial transaction; and

5. certain
   other matters to be determined by the Presidential Decree in order to
   efficiently prevent money laundering and terrorism financing.

1. Increasing
   the Maximum Administrative Penalty

   The Amendments raised the maximum administrative fine imposed on
   a violation of AML or CFT to KRW 100 million from KRW 10 million. An
   institution which fails to take measures to meet Internal Control Obligation or
   fails to comply with and/or interfere with a regulatory order, direction or
   audit is now subject to this penalty. The administrative fine for failure to
   meet suspicious transaction reporting and currency transaction reporting is
   raised to KRW30 million from KRW 10 million.