current situation and countermeasures against money laundering: focusing … · 2018. 8. 1. · 352...

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RESOURCE MATERIAL SERIES No. 58

* Senior Prosecutor, Seoul High Prosecutors’ Office,Republic of Korea

CURRENT SITUATION AND COUNTERMEASURES AGAINSTMONEY LAUNDERING:

FOCUSING ON THE EXPERIENCE AND LEGAL POLICIES OFTHE REPUBLIC OF KOREA

Chae, Jung-Sug *

I. INTRODUCTION

Since late in the 20th century, people haveenjoyed the benefits of industrializationand globalization that the development oftransportation and communicationtechnology has brought to the world. Atthe same time, this economic and socialchange has also brought about changes tothe form, technique, and scope of crime.The consequences are that criminals arecrossing borders with an ease unknown inthe past and are expanding the area of theiractivity, and that they are becoming evermore intelligent and specialized.

The expansion of the influence oforganized crime has reached such pointthat it poses great threat to the safety ofinternational community. According to therecent statistics, crime groups arecommitting trafficking in drugs and illicitfirearms, and counterfeiting of currencyand credit card, which involve dirty moneytotaling 3000 billion US dollars. Theinternational community has come torecognize that corruption serve as the soilfor the growth of organized crime. And theanti-corruption round initiated with thisrecognition has become an eloquentinternational movement.

It is diff icult to give a uniformexplanation about the purpose of organizedcrime and corruption, but the most

important purpose and motivation isfinancial profits. Therefore, in order tocombat organized crime and corruptioneffectively, we need to deprive offenders oftheir financial gains. To attack themfinancially is to cut off the Achilles tendonof organized crime groups.1 But, criminalsare cutting off the link between crimes andcriminally-derived money, by launderingdirty money taking advantage of allmethods and mechanisms imaginable.

We call the series of transactions turningdirty money into clean money, moneylaundering. In the following, I’ll first lookinto what money laundering is, and thecurrent situation of money laundering inthe international community.

II. DEFINITION OF MONEYLAUNDERING AND THE CURRENT

SITUATION

A. Definition of Money LaunderingMoney laundering is the process by

which one conceals the existence, the illegalsource, or illegal application of income, andthen disguises that income to appearlegitimate.2 In other words, money

1 R. Peter, Money Laundering and Its Current Statusin Switzerland: New Disincentive for FinancialTourism, 11 Northwestern Journal of InternationalLaw & Business 104(1990), p. 108

2 The President’s Commission on Organized Crime,Interim Report to the President and AttorneyGeneral, The Cash Connection: Organized Crime,Financial Institutions and Money, 1984. 10.

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117TH INTERNATIONAL SEMINARVISITING EXPERTS’ PAPERS

laundering refer to a series of transactionstransforming criminally-derived funds intolegitimate funds through financialinstitutions, for the purpose of concealingthe illicit nature and origin of the propertyfrom government authorities.

Money laundering negatively impactseconomic growth and society at large. Itdistorts economic order, shields criminalactivities, which are associated with crimeproceeds, from exposure, and corruptspublic officials and our society on the whole.

B. Characteristics of MoneyLaundering

Money laundering is performedsystematically and secretly, making itdifficult to identify exactly how muchmoney is laundered and what methods areemployed. And, it is difficult to criminalize,regulate or crackdown on moneylaundering with the traditional legal notionand system.

Criminologically, money laundering canbe characterized as borderless economiccrime or organized crime. Recently, withthe rapid development of internet andcommunication technology, crime proceedscan be moved from one country to anotherin a matter of hours, by using wiretransfers. These factors make theregulation of money laundering moredifficult.

C. Current Situation of MoneyLaundering Worldwide

As pointed out, the exact amounts oflaundered money are so difficult to assess.However, we can give a rough estimate, bysynthesizing various informations.According to Financial Action Task Force(FATF), it is estimated that the amountsof money laundered annually worldwidefrom the illicit drug trade alone rangebetween 300 billion US dollars and 500billion US dollars in 1998. Since this

estimate only regards the amountassociated with exposed drug crimes, theamounts of illicit money actually launderedworldwide could be five or six times larger.

There have been a number of moneylaundering cases worldwide. The mostfamous one is “The Pizza Connection” case.And, one of the most well known moneylaundering cases that are not associatedwith drug crime is “Bank of Credit andCommerce International (BCCI)” case.These two cases revealed that moneylaundering is performed comprehensively,systematically, professionally, diversely3

and without the check of national borders.

In “The Pizza Connection” case, we couldsee how various crime groups in differentparts of the world formed a networkassociated with major banks of the UnitedStates and Switzerland, and see thelinkage between poppy fields of SoutheastAsia and the Pizza parlours of the UnitedStates. In “BCCI” case, it was revealed thatfinancial experts were deeply involved inmoney laundering, taking advantage oftheir expert knowledge, discrepancybetween financial systems of individualcountries, and financial secrecy protectionsystem. From this case, it was reaffirmedhow difficult it is to investigate andregulate money laundering.

3 The Canadian police authorities, after examining150 cases of money laundering, concluded that thereare various methods used to launder money fromvery simple ones to elaborate ones, and that thelimit of these methods are only set by the capacityof criminal group’s imagination. (Margaret E.Beare & Stephen Schneider, Trading of IllicitFunds: Money Laundering in Canada, WorkingPaper No.1990-5, Ministry of the Solicitor General,p.XI)

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III. CURRENT SITUATION OFMONEY LAUNDERING

REGULATION

A. International EffortsIn early 1980’s, the international

community formed a consensus that apriority should be given to the regulationof money laundering. The efforts of theinternational community were exertedthrough the United Nations and otherinternational organizations, and onregional and national level.

1. Before the Conclusion of the 1988Vienna Convention

It was the Committee of Ministers of theCouncil of Europe4 of June 27, 1980 thatmoney laundering problem was firstdiscussed on international dimension. TheCommittee of Ministers adopted therecommendation (R 80/10) regardingMeasures Against the Transfer ofSafekeeping of Funds of Criminal Origin,urging European countries to take interestin the regulation of money laundering.

After that, the United States and theUnited Kingdom established domestic lawsmaking money laundering criminaloffense. The United Nations adopted theUnited Nations Convention Against IllicitTraffic in Narcotic Drugs and PsychotropicSubstances on December 19, 1988. AsSpain ratified the Convention on August13, 1990, becoming the 20th country toratify it, the Convention came into forceon November 11, 1990.5

The Convention provides the conversionand transfer of crime proceeds and theconcealment and disguise of the nature ororigin of crime proceeds as criminal offense

in Article 3, Paragraph 1(b). And, theConvention provides obtaining, possessingor using of crime proceeds with knowledgeas criminal offense in Article 3 Paragraph1(c). The Convention requires that StatePart ies must implement Art ic le3Paragraph 1(b) and that regarding Article3 Paragraph (c), State Parties should takemeasures to criminalize it under thedomestic law to the extent that it complieswith the principles of the Constitution andthe basic concepts of the legal system. ThisConvention has a historic meaning in thatit criminalizes money laundering activity.I will go on to the international efforts afterthis Convention.

2. After the Conclusion of the 1988Convention

On November 18, 1990, the Council ofEurope adopted the Convention onLaundering, Search and Confiscation of theProceeds from Crime. This Conventionaimed at strengthening internationalcooperation in investigation, search andseizure of proceeds derived from majorcrimes (felony) such as drug crimes andterrorism which are known to yield largeprofits. As the finance market of EC(European Community) countries took thecourse for unification, efforts to countermoney laundering through the authorityof EC arose in Europe. And as a part ofthis effort, EC enacted the CouncilDirective on Prevention of the Use of theFinancial System for the Purpose of MoneyLaundering on June 10, 1991.

The prevention of money laundering wasalso discussed at the summits of G7countries. At the Toronto summit in 1988,G7 declared the necessity of regulatingmoney laundering.6 At the Arshur summitin 1989, they made a declaration, inviting

4 It is a European inter-governmental organization,with 26 member states. It has adopted manyconventions in the area of international criminaljustice.

5 The Republic of Korea deposited the instrument ofratification of the Convention on December 28,1998.

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8 United Nations General Assembly Resolutions 45/107, 45/123

9 Resolution 1/2

all countries to join G7’s cooperative effortsto combat drug trafficking and launderingthe proceeds7 and resolved to establish theFinancial Action Task Force (FATF).

The FATF was participated by 16countries and organizations including theG7, the council of European Communityand Sweden, etc. The first report of theFATF was made on February 2, 1990, andwas released in each participating countryon April 19 of the same year. The report ismade up of three parts, the first part aboutthe scale and the mechanism of moneylaundering, the second part about themeasures made to counter moneylaundering, and the third part, includingr e c o m m e n d a t i o n s . T h e f o r t yrecommendations of the third partpresented a comprehensive blueprint forthe international community in preventingmoney laundering, having a continuousinfluence in the international effort tocounter money laundering.

The FATF went on to enhance itsact iv i t ies as more countr ies andorganizations joined it. The fortyrecommendations are being modifiedcontinuously. Since OECD functions as thesecretariat of FATF, it has also transformedinto a gathering of expert groupsindependent from other internationalorganizations, and has played a veryimportant role in countering moneylaundering.

There have been many efforts onregional level as well. The Organizationof American States (OAS), which haddiscussed measures against drug problems,adopted the Model Regulations ConcerningLaundering Offences Connected to IllicitDrug Trafficking and Related Offences atthe 11th meeting of Inter-American Drug

Abuse Control Commission (CICAD) onMarch 10, 1992. Through this, it wasaffirmed that in order to combat drug crimewhich is one of the most formidableproblem in American continent, regulationof the proceeds and instrumentality shouldbe conducted in parallel. In Asia, the Asia/Pacific Group on Money Laundering (APG)was established in February 1997. TheAPG works to enhance cooperation in theregion, by conducting studies about theprevention of money laundering in Asia/Pacific region, and issuing evaluations onanti-money laundering measures of Asia/Pacific countries.

On the level of the United Nations, the8th United Nations Congress on thePrevention of Crime and the Treatment ofOffenders held in Havana, Cuba in Augustand September 1990 adopted “Basic Rulesfor the Control and Prevention ofOrganized Crime”. On December 14, 1990,the General Assembly, through twoResolutions8, urged states for their actionsto facilitate seizure and confiscation ofcrime proceeds and to develop effectivemeasures to counter money laundering.

In this atmosphere, the 1st session ofCommission on Crime Prevention andCriminal Justice (CCPCJ) was held in April1992 in Vienna. At the 1st session ofCCPCJ, the participating countriesrecognized that the regulation of moneylaundering and flow of crime proceeds ismore important than anything to countercrime and that the CCPCJ should place itspriority on the discussion of strategy tocounter money laundering.9 In July 1992,the United Nations Economic and SocialCouncil, accepting the recommendation ofthe CCPCJ, set countering moneylaundering as the priority of the work of

6 Political Declaration, paragraph 167 Economic Declaration, paragraph 52

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12 Resolution 51/12013 Resolution 52/8514 Resolution 53/111

CCPCJ and the UN Crime Prevention andCriminal Justice Programme for fourconsecutive years.10 As a consequence, theCCPCJ has had uninterrupted discussionof the prevention of money laundering andflow of crime proceeds since the 2nd sessionof Commission in 1993 and made reportsof the result of the discussions, urging thecriminalization and strong regulation ofmoney laundering.

On December 4, 1994, the GeneralAssembly adopted a Model Treaty onMutual Assistance in Criminal Matters. Atthat time, the General Assembly alsoadopted the Protocol to the Model Treatyon Mutual Assistance in Criminal Mattersconcerning the Proceeds of Crime, whichprov ides the f ramework f o r theinternat ional cooperat ion in theconfiscation and forfeiture of crimeproceeds.

3. Conclusion of the Convention AgainstTransnational Organized Crime

In an effort to combat transnationalorganized crime which poses threat to thesafety of the international community, theUnited Nations held the MinisterialConference on Organized TransnationalCrime in November 1994 in Naples of Italy.This conference adopted an internationaldocument entitled the Naples PoliticalDeclaration and Global Action Plan againstOrganized Transnational Crime. TheNaples Political Declaration called on theCCPCJ to collect opinions from individualgovernments regarding the content and theeffect of a convention against transnationalorganized crime. The United NationsGeneral Assembly urged each state partyto promptly implement the Naples PoliticalDeclaration and Global Action Plan.11

In December 1996, the GeneralAssembly, taking notice of a draftconvention against transnationalorganized crime proposed by Poland, calledupon the CCPCJ to give priority to theconsideration of the finalization of the draftconvention.12 In December 1997, theGeneral Assembly decided to establish anopen-ended meeting for the inter-governmental expert group for the draft ofa comprehensive international conventionagainst transnational organized crime.13 InDecember 1998, the General Assemblycalled for the establishment of the Ad HocCommittee to take over the achievementmade regarding the draft convention andto finish the project.14

The Ad Hoc Committee, after having theinformal preparatory meet ing inSeptember 1998 in Buenos Aires, held thefirst session in January 1999. Through tensessions of meetings, the Conventionagainst Transnational Organized Crimewas adopted in September 2000. Amongthe three supplementary protocols beingdiscussed, the “Protocol to Prevent,Suppress and Punish Trafficking inPersons, Especially Women and Children”,and the “Protocol against the Smugglingof Migrants by Land, Sea and Air” wereapproved at the 11th session held in October2000. The approval of the Protocol againstthe Illicit Manufacturing of and Traffickingin Firearms, Their Parts and Componentsand Ammunition was reserved for morediscussions on some issues which have notbeen agreed on.

At the back of the UN’s positive actionsand achievements, there were regionalconferences and declarations. They are theBuenos Aires declaration, the Dakardeclaration and the Manila declaration.

10 Resolution 45/107, 45/12311 United Nations General Assembly Resolution of

December 23, 1994 49/159

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The Buenos Aires declaration was adoptedat the regional ministerial workshop ofNovember 1995 which was a follow-upmeeting to the Naples Political Declarationand Global Action Plan. The Dakardeclaration was adopted at African regionalministerial workshop held in July 1997 inDakar of Senegal. The Manila declarationwas adopted at Asian regional ministerialworkshop regarding transnationalorganized crime and corruption, held inMarch 1998 in Manila, the Philippines.

Since the contents of this Convention arethose that have recently been discussedand agreed on by the internationalcommunity, they include relatively strongmeasures to combat money laundering.Article 6 of the Convention criminalizes awide range of activities related with moneylaundering, and requires state parties toinclude all major crimes provided in theConvention as the predicate offense. Thisis a step forward from the 1988 Conventionwhich provided for the punishment ofmoney laundering only in case it isassociated with drug crimes. Article 7provides diverse and systematic measuresto regulate money laundering, includingreporting of suspicious transaction. Article13 also touches upon the efforts to enhanceinternational and regional cooperationamong justice, enforcement and regulationagencies of state parties, to implementthese measures. Article 12 of theConvention provides confiscation of crimeproceeds, usage of records including bankrecords for the confiscation of crimeproceeds, and power to freeze or seizureproceeds. Article 13 provides forinternational cooperation for confiscation,and Article 14 provides for the disposal ofconfiscated assets.

4. C o n c l u s i o n o f C o n v e n t i o n o nCombating Bribery of Foreign PublicOfficials in International BusinessTransaction

At the outset, money laundering problemwas discussed in association with drugcrimes. The discussion about moneylaundering was developed in such directionthat countering money laundering isimportant to counter not only drug crimesbut also organized crimes, especiallytransnational organized crimes. Recently,the international community perceives thatthe predicate offenses for the regulation ofmoney laundering should not be restrictedto drug crimes and organized crimes, butshould be extended to corruption crimes aswell. Corruption crimes are not a domesticproblem of an individual country. Itundermines fair competition of enterprisesin the global market place, and providessoil for the growth of transnationalorganized crimes. The internationalcommunity has begun its work to combatcorruption.

With this background, OECD finalizedthe Convention on Combating Bribery ofForeign Public Officials in InternationalBusiness Transaction. This Conventionrequires state parties to take legislativemeasures to criminally punish the act ofoffering bribes to foreign public officials,and to give assistance to each other ininvestigation and extradition associatedwith such case. This Convention wasadopted at OECD in November 1997, wassigned by 34 countries in December 1997,and came into force on February 15, 1999.

In the process of the discussion of thisConvention, there was a consensus ofopinion that prevention of moneylaundering and control of crime proceedsis essential for countering corruption.Article 7 of the Convention provides thateach state party which has made briberyof its own public official a predicate offense

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15 Pub. L. No. 91-508, 401(a), 84 Stat.1114(1970)16 Pub. L. No.99-570, 1351-1367, 100 Stat. 3207-

3208. This Act is a part of the Anti-Drug Abuse Actof 1986, and is provided in 18 U.S.C. and 33 U.S.C.

for the purpose of the application of itsmoney laundering legislation shall do soon the same terms for the bribery of aforeign public official, without regard to theplace where the bribery occurred. Article8 of the Convention provides that stateparty shall take measures regarding themaintenance of books and records,financial statement disclosures, andaccounting and auditing standards, toprohibit the establishment of off-the-booksaccounts, the making of off-the-books orinadequately identified transactions, andshall provide civil, administrative orcriminal penalties.

B. Efforts Made by IndividualCountries

Countries worldwide have devotedefforts to respond to money launderingproblem voluntarily or as they wereencouraged by the aforementionedinternational conventions . Theyestablished domestic laws to make moneylaundering criminal offense, to confiscateproceeds assoc ia ted wi th moneylaundering, and to require financialinstitutions to report cash transactionsover a certain sum. This move was led bycommon law countries, at the head of whichwas the United States.

The United States enacted and enforcedthe Bank Secrecy Act of 197015 as early as1970. In the same year, the United Statesestablished the Racketeering Influencedand Corrupt Organizations Act of1970(RICO Act) and the ControlledSubstances Act of 1970, providingmeasures to confiscate certain illicit assetsor proceeds. In 1986, the MoneyLaundering Act of 198616 was established.

I n 1 9 8 6 , t h e U n i t e d K i n g d o mestablished the Drug Trafficking OffencesAct of 1986, providing for the confiscationof certain illicit proceeds, and criminalizingmoney laundering activities. The UnitedKingdom is continuing its work tostrengthen related laws. Australiaestablished the Proceeds of Crime Act in1987, criminalizing money laundering andproviding for the confiscation of criminallyderived assets. In 1988, Australia enactedthe Cash Transaction Reports Act of 1988.

Civil law countries were slower thancommon law countries in coming up withmeasures to counter money laundering.Japan ratified the 1988 Vienna Conventionin 1989 and enacted the implementing lawsin 1991, which came into force in 1992.These implementing laws are “LawConcerning Special Provisions for theNarcotics and Psychotropics Control Law,etc. and Other Matters for the Preventionof Activities Encouraging Illicit Conductsand Other Activities Involving ControlledSubstances through InternationalCooperation”(the so-called New Drug Lawor Anti-Drug Special Law) and “ActRevising Parts of the Hemp Control Act,the Stimulant Control Act and the OpiumAct”. The New Drug Act criminalizesmoney laundering, and provides for theconfiscation and forfeiture of illicitproceeds, freezing procedure, internationalassistance, and reporting of suspicioustransactions. However, this Act, whichpunishes money laundering associatedwith only drug-related crimes, could not bean effective medium to respond toorganized crimes.

With this recognition, Japan established,in 1999, the “Law Concerning thePunishment of Organized Crime and theControl of the Proceeds of Crime (so calledAnti-Organized Crime Act)”. This Actprovides for stronger punishment oforganized crime, and provides for extended

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control of money laundering. Under thisAct, the predicate offenses for moneylaundering regulation include drug-relatedcrimes, major crimes (felony) which carrya certain degree of statutory penalty, whichare likely to produce large illicit proceeds,and include crimes like prostitution andpossession of deadly weapons though theycarry lower statutory penalty. The Act alsoprovides punishment for the behavioraimed at managing the business of acorporation by using illicit proceeds derivedfrom the above predicate offenses, and theconduct of disguising, concealing andobtaining the proceeds of crime. The Actalso provides measures for the confiscationand forfeiture of the proceeds of crime. TheAct requires banks and other financialinstitutions to report to relevantauthorities, suspicious transactions if theyare suspected of being derived from illicitproceeds. The Act aims at increasing theefficacy of the control of money launderingby providing mechanisms for internationalassistance process regarding confiscationand forfeiture.

In Germany, the discussion of moneylaundering problem began in early 1990’s.In 1992, the offense of money launderingwas newly included in the criminal law.And an organized crime act called Gesetzz u r B e k ä m f u n g d e s i l l e g a l e nR a u s c h g i f t h a n d e l s u n d a n d e r e rErscheinungsformen der OrganisiertenKriminalität (OrgKG, vom 15.7.1992) wasestablished to make money launderingactivities associated with organized crimesand drug crimes, a criminal offense.

Switzerland was rather late incriminalizing money laundering due to itslong-standing policy of giving strongprotection to bank secrecy. However,Switzerland underwent a series of majordrug-related cases including the Turkey-Lebanon connection case in 1987, and waspressured by the United States and the

European Community to take measuresagainst money laundering. In 1990,Switzerland revised its criminal law tocriminalize money laundering.

I n 1 9 8 7 , F r a n c e p r o v i d e d t h epunishment of money laundering activity(blanchiment de capitaux) in its publicsanitation law called le code de la santpublique. Italy had controlled moneylaundering activity as a part of the controlof organized crimes, but did not have legalprovisions directly setting out thepunishment of money laundering. Moneylaundering was controlled through themajor crime (felony) prevention law of1978, but this was an indirect way. Afterratifying the 1988 Vienna Convention, Italyestablished the Act against MafianOrganized Crime in March 1990, whichprovides improved measures againstmoney laundering.

In the past, Hong Kong did not have acentral bank, and a policy controlling theexchange of currency. Besides, Hong Kongadopted a complete bank secrecy protectionsystem. For these reasons, Hong Kong wascriticized for providing a financial havenfor the laundering of drug money. In 1989,however, Hong Kong established the DrugTrafficking (Recovery of Proceeds)Ordinance, and has become active incracking down on drug crimes andcontrolling money laundering.

IV. CURRENT STATUS OF MONEYLAUNDERING IN THE REPUBLIC

OF KOREA

A. The Characteristics of MoneyLaundering in the Republic ofKorea

The economic development and themethod of financial transactions in Koreadiffer from the West and the earlydeveloped nations, which are societies thatconduct business based on credit.

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Therefore, the investigation authoritiesand tax authorities in Korea are faced withcases of money laundering activity that aredifferent to what foreign authorities face.In general , fore ign invest igat ionauthorities in the West handle money-laundering cases that involve thesmuggling of drug and weapons. Incontrast, Korean investigation authoritiesmostly investigate money-launderingactivit ies that involve bribery ofgovernment officials and politicians,embezzlement or breach of trust in the bigcompanies and public funds, and corruptfinancial dealings. The investigationsrevolve around the issues concerning howthe funds were transferred to one accountto another or how the illicit funds werelaundered.

In bribery cases, the people who bribethe officials are usually corporateexecutives, and the source of the illicitfunds is the company’s slush funds. Thus,the creation of illicit funds is orchestratedbetween a company and a financialinstitution, which make the investigationsvery difficult. Furthermore, the people whoare bribed are mostly politicians or high-ranking government officials who use theirpower to ensure that the funds aretransferred in great secrecy. This alsohampers the investigation.

Recently, money laundering techniqueshave become more sophisticated andoperate on an international scale due toactive economic trade, massive capitalinvestments from abroad, widespread useof electronic money transfers, internationaltravel, and the liberalization of the foreignexchange market. The sophisticatedtechniques used by money launderersaggravate the difficult situation.

B. The Real Name FinancialTransaction System and MoneyLaundering

Money laundering in Korea is connectedto the enforcement of the Real NameFinancial Transaction System in August12, 1993. Before the enforcement of theReal Name Financial Transaction System,most criminals were able to open a bankaccount under an anonymous name anduse that bank account for moneylaundering activities. After the money islaundered, the bank account is discarded.But after the Real Name FinancialTransaction System (hereafter referred toas the “system”) was enforced, criminalswere no longer able to open bank accountsunder anonymous names. Thus, fake bankaccounts were not used for moneylaundering activities anymore. But, therehave been instances where criminals wereable to open accounts using the identitiesof his or her relatives or co-workers in orderto launder money through these bankaccounts. In other cases, criminalslaundered money by making bank accountsusing forged identities by enlisting the helpof directors or employees who worked atfinancial institutions.

Although this may sound paradoxical,the investigation authorities have facedmore difficulty in tracking money-laundering activities due to this system.Before, most money laundering wascentered on bank accounts registered undera fake name. Now, money laundering hastaken on a new form, where money isdelivered in cash or bank accounts areregistered under the criminal’s relative orthe real identity of an accomplice. Becausethese types of transactions are legal anddo not appear as irregular financialdealings on paper, the money launderinggoes unnoticed and the bank accounts aremore difficult to trace.

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C. The Size of the UndergroundEconomy and Illegal Funds in theRepublic of Korea

The size of the underground economy inKorea is very difficult to measure. Noofficial government institution has everannounced an official estimate of the sizeof the underground economy. However,several private research institutions haveattempted to estimate the size of theunderground economy by using severaleconomic indicators and data.

The Korea Development Institute hasestimated that the underground economyin Korea accounts for 15% of the nation’sGNP.17 This estimate was based onanalyzing annual household spending in1994. This analysis was conducted afterthe enforcement of the Real NameFinancial Transaction System. The KoreanTax Research Institute and KoreaUniversity’s Economic Research Institutewere contracted by the Korean governmentto analyze the size of the undergroundeconomy in March 1995. The twoorganizations estimated that the size of theunderground economy during 1993 wasabout 22% of the nation’s GNP. And theKorea Development Institute and otherorganizations est imated that the

underground economy was closer to37%~42% of the GNP in 1993. Theseestimates suggest that the size of theKorean underground economy wasbetween $56.25 billion18 and $138.75 billionin 1993.

The Korea Institute for InternationalEconomic Policy said in a recent report thatthe size of the underground economyaccounts for 11%~33% ($39.8 billion ~$121.8 billion) of the nation’s GNP in 1998.The dollar/won exchange rate on December31, 1998 was 1 U.S. Dollar per 1207 KoreanWon.

How much money is needed to supportthe activities in the underground economyof this size? Since the Real NameTransaction System took effect across thenation on August 12, 1993, every citizenwas required by law to use their real namesfor opening a bank account. BetweenAugust 13, 1993 and October 12, 1993, allKorean citizens were given a time periodto transfer their money to real name bankaccounts. Bank accounts opened underfake names were forbidden. Citizens andemployees of financial institutions, who didnot comply with the laws were fined andpenalized. Thus, it was natural thatirregularities and misuse of bank accountssurfaced.

Table 1 shows that 31,000 bank accountswhich were opened under fake names andhad deposits that totaled $53.8 millionremained without transference to realname accounts, while 26 million bankaccounts which were opened under real

17 As for the United States, many experts haveestimated that the underground economy in theUnited States accounts for 10~15% of the nation’sGNP. According to the material submitted to theHouse of Representatives Committee onAppropriations in May 1995, 83% of overall peoplevoluntarily reported their income taxes, whereasonly 36% of small business owners did so. Evenless, 11 % of small business owners who mainly usecash transactions (the so-called informal traders)voluntarily report their income taxes. It is alsoestimated that the yearly revenue of prostitutionbusiness in the United States amount to 1.2 billionUS dollars. This is more than the trading profitsof Toyota. The underground economy in Italy isestimated to account for 30% of the nation’s GNP.

18 The exchange rate was 794 won to the dollar as ofJanuary 3, 1993 and 808 won as of December 31,1993. For the sake of convenience in calculation,the rate of 800 won to the dollar is applied to therest of the text if not specified otherwise.

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names and had total deposits of $11.38b i l l i o n a l s o r e m a i n e d w i t h o u treconfirmation by real name in June 1995.The owners of the 31,000 bank accountsopened under fake names were neveridentified and the money remains in thebanks. There were also strong suspicionthat the money transferred from fake namebank accounts to real name bank accounts

In other words, until recently, proof ofmoney laundering was used as courtevidence to convict the criminal of a felony.The money-laundering evidence was notused to confiscate the proceeds of crimesand the criminal assets or to impose a fine.Therefore, unless the criminal broke anybanking laws during the money launderingprocess, he or she could not be pressed withcriminal charges for money laundering. Inaddition, the illicit money could not beconfiscated or be used as criminal evidenceto impose a fine except the money whichwas directly offered to the criminals.

was illicit money. Thus, experts estimatedthat the amount of the illicit funds rangefrom $11.43 billion(C+E) to $19.37billion(B+C+D+E). This estimate does notinclude the amount of cash that the citizenspossess in their homes. Taking intoconsideration that Koreans yet prefer tostore cash in their homes instead of savingit in the bank, the amount of illicit moneyis probably far larger than the officialestimate.

Table 1 Current Status of The Real Name Financial Transaction Act(Dated on June 30, 1995)

(Unit: US dollars)

Real NameBank Accounts

Fake NameBank Accounts

Total amount in bankaccountsReal Name BankAccountsBank Accounts openedunder another person’snameBank Accounts withoutan ownerTotal amount in bankaccountsTransferred to RealName Bank AccountBank accounts that werenot transferred

506.8 billion (175 millionbank accounts)491 billion (146 millionbank accounts)4.38 billion (2,969,000 bankaccounts)

11.38 billion (26 millionbank accounts)3.54 billion (631,000 bankaccounts)3.49 billion (600,000 bankaccounts)53.8 million (31,000 bankaccounts)

V. EFFORTS TO COMBAT MONEYLAUNDERING IN THE REPUBLIC

OF KOREA

A. General OutlookUntil recently, the Republic of Korea did

not possess any direct restrictions thatpunished criminals engaging in moneylaundering activities. However, the needfor measures to identify money-launderingactivity came to light during the processof investigating financial crimes, bribery,drugs, and organized crime. Theseinvestigations involved the tracking downof illicit funds.

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But after the signing of the 1988 ViennaConvention, which spread awareness ofm o n e y l a u n d e r i n g a c t i v i t y, t h einternational community graduallyrealized that seizure of illicit profits fromcriminal activity was necessary in order toprevent the spread of crime. These eventscoincided with Korea’s campaign againstabuse of power and graft. On January 5,1995, the Special Act on Confiscationrelated with Crimes of Public Officials wasenacted. If a public official is found to haveaccepted bribes, his or her profits andassets attained from the illicit dealingsshal l be conf iscated by this law.Furthermore, any money or assets receivedin exchange for special favors shall also beconfiscated. This special law was aprogressive development but since it didnot punish criminals engaged only inmoney laundering and not in other criminalactivities, it had severe limitations.

After the 1988 Vienna Convention tookeffect, the Republic of Korea accepted theprovisions in the convention and enactedthe Special Act on the Prevention of IllegalTrafficking in Narcotics, PsychotropicSubstances and Hemp on December 6, 1995and included the provision allowing thepersecution of criminals engaging in moneylaundering activity.19 This special law fullyfollowed the agreements in the 1988Vienna Convention. Yet, this special lawalso had limitations. Only criminalsengaging in money laundering activitiesthat are connected to drug trafficking(psychotropic drugs, other illegal drugs)could be punished.

Through administrative efforts after theenforcement of the Real Name FinancialTransaction System, the Bank SupervisoryAgency ordered20 the directors orpresidents of all Korean financialinstitutions that any employee caughtengaging in any kind of money launderingdirectly or indirectly will be discharged andpunished severely.21

As a person in charge of criminalinvestigations, I would like to shed lighton the problems we face. Although the RealName Financial Transaction Systemprevent money laundering, the system hasstrengthened the protection of bank secrecyand has made the investigation of illicitfunds more di f f icult . Before theenforcement of the system, it has beenrelatively easy to trace bank accountrecords with the support of the BankSupervisory Agency or the submission ofofficial administration documents to allfinancial institutions. But now, thepossession of official administrationdocuments, only allows us to confirm theexistence of a specific bank account.Without a warrant, we cannot investigatethe bank transaction statement and bank-related documents, nor can we trace thebank accounts related to the suspiciousaccount or bank checks.

In the next section, I would like toexplain the legis lat ion act iv i t iessurrounding the direct restriction onmoney laundering.

20 Bank Supervisory Agency, Guideline for thePrevention of Financial Accident, Article 7

21 Bank Supervisory Agency, Internal Regulation ofFinancial Institutions, Article 9

19 Korea enacted the Special Act on the Prevention ofIllegal Trafficking in Narcotics, PsychotropicSubstances and Hemp in January 1995. Korearatified the 1988 Vienna Convention years later in1998, due to controversy over some provisions ofthe Convention, relating to internationalassistance.

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B. Legislations for DirectlyRestricting Money Laundering

As the invest igat ion o f moneylaundering is more closely linked tofinancial crimes and abuse of power andgraft rather than drug-related crimes inKorea, legislation activity has focused onpass ing a comprehens ive moneylaundering prevention law that willdirectly restrict money-laundering activity.These efforts have paid off through theselection of the “Act on the Reporting andUsage of Specific Financial TransactionInformation” and the “Act on theRegulation and Punishment of ConcealingCrime Proceeds” as government bills thatwere submitted to the regular session ofthe National Assembly for approval onNovember 21, 2000. Unfortunately, thebills were not reviewed during the regularsession of the National Assembly, but thechances of passing the bill in early 2000 isfavorable.

The legislation process for strongermoney laundering laws was expedited bythe request from abroad, that is, thepressure from the United Nations andOECD, domestic policies focused exposingabuse of power and graft, and opening ofthe foreign exchange market that allowedinflows of illicit funds and capital flightoverseas. The following paragraphs brieflyoutline the major provisions of the proposedbill.

1. Act on the Regulation and Punishmentof Concealing Crime Proceeds

First, let us examine the “Act on theRegulation and Punishment of ConcealingCrime Proceeds”. This law was establishedto eliminate financial funds that supportcriminal activities and to maintain publicorder. This law restricts money launderingof illicit profits gained from criminalactivity and allows special power of law toconfiscate and trace illicit profits.22

This law applies broadly to certaincriminal activities which are broadlyse lec ted as i t f o l l ows the FATFrecommendations substantially.23 Thepredicate offenses of this law are certaincrimes that involve smuggling, bribery,illegal capital flight and criminal activitiesthat are antisocial in nature and are majorcrimes (felonies). (Crimes related to drugsare covered by the Special Act on thePrevention of Illegal Trafficking inNarcotics, Psychotropic Substances andHemp)

FATF Recommendation [4] : Eachcountry should take such measures asmay be necessary, including legislativeones, to enable it to criminalise moneylaundering as set forth in the ViennaConvention. Each country shouldextend the offence of drug moneylaundering to one based on seriousof fences . Each county woulddetermine which serious crimes wouldbe designated as money launderingpredicate offences.

There are generally two approaches inthe way to categorize the predicate offensesof money laundering offense. In England,Germany, and France a “lump sum”approach is used to broadly categorizepredicate offenses according to the lengthand severity of the statutory penalty. Inthe United States, Japan, Singapore, andother countries, predicate offenses arecategorized according to a “case-by-case”approach. The lump sum approach hasshortcomings because it is prone to includetoo many crimes as predicate offenses.Therefore, the “case-by-case” approach wasadopted for this law.

22 Article 1, Act on the Regulation and Punishmentof Concealing Crime Proceeds

23 Article 2 Paragraph 1 of the Act on the Regulationand Punishment of Concealing Crime Proceeds

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The statutory penalty of moneylaundering crimes is a 5-year prisonsentence or less. After selecting majorcrimes (felonies) that carry a maximum 5-year prison sentence or more, life sentenceor death penalty, these felonies were ratedaccording to the severity of the crime,involvement of organized crimes,probability of large illicit profiteering, needfor international cooperation, and theimpact on the national economy. Crimesthat carry a maximum 5-year prisonsentence or less but fund organized crimeactivities was included in this rating. 35predicate offenses were selected as a result.

The 35 kinds of predicate offenses aredivided into five categories.

(i) Felonies: Manslaughter, Theft andBurglary, Organized cr imemember (Criminal Law Act, Article114, Paragraph 1), etc.

(ii) Crimes that involved organizecrime on a professional or repeatedbasis : Blackmail , Violence,Smuggling (import tax evasionexceeding the amount of US$41,700)24, etc.

(iii) Illicit profiteering of a largeamount of money around legalbusiness activities: Violating theAct on the Aggravated Punishmentof Certain Economic Crimes.(Article 3: Illicit profits that exceedUS $416,700; fraud, blackmail,breach of trust) and violation of theSecurities Exchange Law, etc.

(iv) C r i m e s r e l a t e d t o m o n e ylaundering and crimes listed onInternational Treaties: Bribery ofgovernment officials, forgery andalteration of currency, forgery andalteration of official documents,forgery and alteration of securities,

bribing foreign public officials, etc.(v) Illegal capital and asset flight with

specific focus on taking advantageof the liberalization of the foreignexchange market: Violating the Acton the Aggravated Punishment ofCertain Economic Crimes. (Article4: Assets and capital flight toforeign country), Violation of theForeign Trade Law (Article 54:Manipulation of import price), etc.

(vi) Crimes that carry a maximum 5-year prison sentence or less butfund organized crime activities:Gambling, Prostitution, Violationof the the Customs Act (Article 179,P a r a g r a p h 3 : S m u g g l i n gactivities), etc.

Especially, the details of sub-paragraph(vi) is shown in Table 2.

24 As of December 2000, won is traded at the exchangeof 1,200 won to the dollar.

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Table 2 Predicate Offenses Whish Carry a Statutory Penalty (of Under)Five-Year Prison Sentence

For details of the predicate offenses,please refer to Appendix A and AppendixB.

In the course of selecting the predicateoffenses, inclusion of some offenses was acontroversial issue. First, some suggestedthe exclusion of Article 8 [tax evasionexceeding 200 million won (US $ 167,000)a year] of the Act on AggravatedPunishment of Certain Offenses from the

Designation of the offenseAdvance acceptance of bribe

Acceptance of bribe in return formediationPreparation/conspiracy ofcounterfeiting of valuablesecurities, etc.Making false medical certificate

Habitual gambling

Opening gambling place

Interference with an auction ora bidSmuggling goods abroad

Prohibition of similar activities(Opening of racing track withoutpermit)Operating business withoutpermission

Prohibition of similar activities(Opening of racing track withoutpermit)Circulation of funds by disguis-ing sales

ProvisionArticle 129(2) of theCriminal CodeArticle 132 of the CriminalCodeArticle 224 of the CriminalCode

Article 233 of the CriminalCodeArticle 246(2) of theCriminal CodeArticle 247 of the CriminalCodeArticle 315 of the CriminalCodeArticle 179(3) of theCustoms LawArticle 24 of the Bicycleand Motorboat Racing Act

Article 30(1) of the SpecialAct on the Regulation andPunishment of SpeculativeActs, etc.Article 50 of the KoreanHorse Racing AssociationActArticle 70(2)(3) of theSpecialized CreditFinancial Business Act

Penalty3 years and below

3 years and below

2 years and below

3 years and below

3 years and below

3 years and below

2 years and below

3 years and below

3 years and below

3 years and below

3 years and below

3 years and below

predicate offenses. However, it wasincluded in the predicate offenses as theoffense of tax evasion of huge sum is aserious crime and considering that it wasa predicate offense in the government’sdraft of 1997 for an anti-money launderingact.

Secondly, whether to include Article 30[illicit fund raising] of the Political FundAct was a problem. With regard to this,

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various elements like the essential purposeof the Act on the Regulation andPunishment of Concealing Crime Proceeds,the examples of foreign legislation, and thestandard for the scope of predicate offenseswere considered. Moreover, there wereconcerns that inclusion of Article 30 of thePolitical Fund Act would undermine thepolitical neutrality of the financialintelligence organization. And the PoliticalFund Act itself contains provisions settingout the acceptance of unauthorized politicalfund as criminal offense, and themandatory confiscation of the illicitproceeds. For these reasons, Article 30 wasnot included in the scope of predicateoffenses. However, this issue could giverise to heated arguments as the eradicationof political corruption is an importantassignment for the anti-corruption round.

Thirdly, there were suggestions toinclude foreign aggression, insurrection,violation of the National Security Act andviolation of the Military Secret ProtectionAct in the scope of predicate offenses.However, th is was not accepted ,considering the essential purpose of the Acton the Regulation and Punishment ofConcealing Crime Proceeds and theexamples of foreign laws.

Fourthly, it was suggested that all of theoffenses of embezzlement, breach of trustand fraud be included in the predicateoffenses. Considering that this couldexcessively curb economic activities,economic offenses exceeding 500 millionwon ( US $ 416,700) were included in thepredicate offenses. This limit was set toprevent economic activities from beingoverly restricted, while at the same timeto ensure the achievement of the essentialpurpose of the Act on the Regulation andPunishment of Concealing Crime Proceeds.The discussion left a room for consideringthe extension of the scope of economicoffenses to be included in the predicate

offenses in the future.

In the following, I would like to explainsome provisions characteristic of this Act.When a predicate offense and anotheroffense which is not a predicate offense arecommitted concurrently, the law providesthat the latter offense is included in thescope of predicate offenses as well. It isbecause in such a case as this, it is verydifficult to identify the exact origin of thecrime proceeds. It was noticed that the lawcould be construed as being incapable ofpunishing money laundering activities orconfiscating proceeds of crime, when theoffense which is associated with moneylaundering and crime proceeds is notidentified for reasons of conflict withanother offense not covered by the law.(The Special Act on the Prevention of IllegalTrafficking in Narcotics, PsychotropicSubstances and Hemp has a similarprovision in Article 2 Paragraph 2.)

The law also criminalizes the act oflaundering the proceeds of crime in Korea,which originated from the criminalactivities committed by foreigners outsideKorea.25 This is aimed at preventing Koreafrom becoming a financial haven forcriminal organizations, and to join theinternational effort to counter and preventmoney laundering. The law clearly sets outthat although a criminal activity which isincluded in the predicate offenses wasinitiated in a foreign country, it is coveredby the law when it is included in thepredicate offenses if it is occasioned inKorea and when it is also a criminal offensein the foreign country.

Globalization of international financeand crime has facilitated the movement ofillegal funds from country to country. Insuch circumstance, if Korea implements its

25 Article 2 Paragraph 1, Act on the Regulation andPunishment of Concealing Crime Proceeds

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26 The United Kingdom, Australia, Canada and Japanhave similar provisions.

27 Article 3 Paragraph 1, Act on the Regulation andPunishment of Concealing Crime Proceeds


29 Article 2 Sub-paragraph 2, 3 and 4, Act on theRegulation and Punishment of Concealing CrimeProceeds

second phase plan for liberalizingrestrictions on foreign exchange marketwithout measures to prevent the flow ofillegal funds into the country, Korea couldbecome a financial haven for moneylaunderers. In order to prevent this, Koreahas worked to create a f inancialintelligence unit which would check theflow of illegal funds in and out of thecountry, and made the Act on theRegulation and Punishment of ConcealingCrime Proceeds to cover of fensescommitted by foreigners outside Korea.26

But, the law requires dual criminalityfor its application to crimes committedoutside the country, in order to ensure legalstability for nationals of foreign countries.It would be unreasonable if a foreigner ispunished under a Korean law forlaundering funds derived from an activitycommitted in another country where thatactivity does not constitute a criminaloffense.

In the following, I will explain what ispunishable under the Act on the Regulationand Punishment of Concealing CrimeProceeds, and the penalty provided by theAct.

Under the Act, a person who disguisesthe fact that he or she obtained or disposedof the proceeds of crime, conceals theproceeds of crime or disguises the factsregarding the origin and cause of theproceeds of crime shall be punishable withimprisonment of five years and below or afine not exceeding 30 million won (US$25,000).27 A person who knowingly acceptsor receives the proceeds of crime shall bepunishable with imprisonment of not morethan three years, and a fine not exceeding

20 million won (US $16,700).28

Under this Act, the proceeds of crimeinclude assets derived from the commissionof predicate offenses, or assets obtained asthe remuneration for the commission ofsuch offenses, funds or assets associatedwith offenses listed in Appendix B likeflight of assets out of the country, assetsderived from the proceeds of crime, andassets which is a mixture of the precedingassets and other assets mingled together.Assets derived from the proceeds of crimeinclude assets obtained as the fruit derivedfrom the proceeds of crime, assets obtainedat the price of the proceeds of crime, assetsobtained at the price of the precedingassets, and other assets obtained throughthe possession or disposal of the proceedsof crime.29 For example, they includemoney obtained by renting the landreceived as remuneration for the murderfor hire (an example of the fruit derivedfrom the proceeds of crime), money earnedby selling the land (an example of theassets obtained at the price of the proceedsof crime), stocks purchased with the moneyreceived by selling the land (an example ofthe assets obtained at the price of thepreceding assets), and money earned byselling the stocks (other assets obtainedthrough the possession or disposal of theproceeds of crime).

The Act on the Regulation andPunishment of Concealing Crime Proceedsrequires certain employees of financialinstitutions to report suspicious financialtransactions. Employees of financialinstitutions as set out under the Act on theReporting and Usage of Specific FinancialTransaction Information, which will be

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explained in the next section, shouldimmediately report to the competentinvestigative authorities when they comeby the fact that assets received throughfinancial transactions are the proceeds ofcrime, or the fact that their clients areconcealing or disguising the proceeds ofcrime. The employees should not discloseto the clients or other persons associatedwith the suspicious financial transactions,the fact that they made such reporting tothe investigative authorities. Anyemployee who violated these obligations ispunishable by imprisonment of not morethan two years, or a fine not exceeding 10million won (US $8,300).30

In many cases, money laundering isperformed by legal persons includingcorporations, or by agents. Regardingthose cases where a representative of alegal person, or an agent, employee orservant of a legal person or an individualviolates its provisions in relation to thebusiness of that legal person or individual,the Act provides fines for that legal personor individual as well as punishment for theactual performer of the offense.

The Act also provides an exception toArticle 48 of the Criminal Code regardingthe confiscation of the proceeds of crime.31

Whereas the Criminal Code limits thescope of the proceeds of crime subject toconfiscation to original articles, the Act onthe Regulation and Punishment ofConcealing Crime Proceeds expands thescope to the proceeds of crime and assetsderived from the proceeds of crime. Underthis Act, the property subject to confiscationincludes not only corporeal property suchas immovable and movable property butalso all profits that are generally accepted

as economically valuable. If the propertyobtained from the commission of offense isconverted, it is still confiscable as long asit could be identified and traced.

This Act provides for discretionaryconfiscation as does Article 48 of theCriminal Code. Whether to confiscate ornot is determined by the judgment of thecourt. Whereas the Special Act on thePrevention of Illegal Trafficking inNarcotics, Psychotropic Substances andHemp adopts mandatory confiscation forreasons of the pressing necessity for theprevention of drug-related crime and forthe international cooperation, and theprobability of the reinvestment of the illicitproceeds into crimes, this Act adoptsdiscretionary confiscation as the predicateoffenses of this Act embrace various kindsof offenses. It would be reasonable todetermine on whether to confiscate or notregarding specific cases.

And this Act provides another exception,other than the provision on confiscationsystem, to the Criminal Code. The Actprovides discretionary collection of thecorresponding value to be confiscated.32

Under the Criminal Code, the collection ofthe corresponding value is allowed onlywhen the article subject to confiscationcannot be confiscated. This Act providesadditional circumstances in which thecollection of the corresponding value canbe conducted. Those circumstances arethose when it is determined unreasonableto confiscate certain asset considering thenature of the asset, the situation of itsusage, and the existence of the conflictingrights over the asset.

This Act also contains special provisionson the international cooperation. This Actprovides the requirements and restriction


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on the international assistance given byKorea regarding the execution of a finaljudgment on confiscation and the freezingof assets for confiscation at the instance ofa request made by a foreign country.33

Unlike the Special Act on the Preventionof Illegal Trafficking in Narcotics,Psychotropic Substances and Hemp whichrequires the relevant treaty to give suchinternational assistance (Article 64Paragraph 1), this Act allows internationalassistance provided on the assurance ofreciprocity, concerning the predicateoffenses listed in the Act and the offensesprovided under Article 3 and 4 of the Act.It should be noticed that the Special Acton the Prevention of Illegal Trafficking inNarcotics, Psychotropic Substances andHemp is Korea’s implementing law for theUnited Nations Convention Against IllicitTraffic in Narcotic Drugs and PsychotropicSubstances of 1988, where as the Act onthe Regulation and Punishment ofConcealing Crime Proceeds is not. Theneed to promote international cooperationwas considered in this Act.

In the next section, I will explain the Acton the Reporting and Usage of SpecificFinancial Transaction Information.

2. Act on the Reporting and Usage ofSpecif ic Financial TransactionInformation

This Act is aimed at providing the legalframework for the reporting and usage ofinformation on financial transactions,which are necessary for the prevention ofmoney laundering activities throughfinancial transactions, thereby deferringcrimes and establishing transparentfinancial order.34

This Act provides the establishment ofthe Financial Intelligence Unit (FIU) underthe Minister of Finance and Economy.35

Under this Act, the FIU is authorized todeal with the following tasks:

(i) Arrangement, and analysis ofinformation reported by financialinstitutions, and provision of suchinformation

(ii) Regulation and inspection ofbusinesses performed by financialinstitutions

(iii) Cooperation and exchange ofinformation with foreign FIUs

(iv) Other related tasks as designatedby the presidential decree

The Act requires certain financialinstitutions to immediately report to thehead of the FIU in the fol lowingcircumstances.36

(i) If there is sufficient reason tobelieve that the financial assetobtained in relation to a financialtransaction is illegal asset, or thatthe c l ient o f the f inancia ltransaction is performing moneylaundering activity, and if the sumof the financial transaction inquestion is above certain amount( t o b e d e s i g n a t e d b y t h epresidential decree)

(ii) If there is sufficient reason tobelieve that the client is dividingup the financial transaction inorder to avoid the application of theabove provision, and if the totalsum of the divided financialtransactions amount to a certainamount (to be designated by thepresidential decree)

(iii) If it made a report concerning afinancial transaction to the


34 Article 1, Act on the Reporting and Usage of SpecificFinancial Transaction Information

35 Article 34, Act on the Reporting and Usage ofSpecific Financial Transaction Information


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competent investigative authorityunder the Act on the Regulationand Punishment of ConcealingCr ime Proceeds (Art i c le 5Paragraph 1)

Furthermore, the Act on the Reportingand Usage o f Spec i f i c F inanc ia lTransaction Information ensures theconfidentiality of financial information, byprohibiting the employees of financialinstitutions and the officials of theinvestigative authorities from leaking thesecrets concerning financial transactions,and from using the information forpurposes other than the ones providedunder the law.37 The Act also places theFIU under the obligation to providerelevant information to law enforcementauthorities including the ProsecutorGeneral, the Commissioner of the NationalTax Service, the Commissioner of theC u s t o m s S e r v i c e , t h e F i n a n c i a lSupervisory Commission, and the Head ofthe National Police Agency.38

VI. AN EXAMPLE OF KOREA’SMONEY LAUNDERING CASE:

INVESTIGATION OF SECRET FUNDOF EX-PRESIDENT ROH TAE WOO

The following is a description of FormerPresident Roh Tae Woo’s secret fund casewhich is one of the most well-knowns u c c e s s e s i n m o n e y l a u n d e r i n ginvestigation in Korea.

A. Background to the Launch of theInvestigation

After the Real Name FinancialTransaction System came into effect inKorea on August 12, 1993, there was arumor going around that an enormous

amount of secret funds in the stock marketand private financial businesses needed tobe transferred to real name, and that agreat deal of money was used to lobbypoliticians and high-ranking public officialsin relation to the secret funds. And theKorean prosecutors’ office had kept its eyeon this report.

In August 1995, the then Minister ofGovernment Administration accidentallymentioned that he had been contacted bythe ex president’s people, who asked himto transfer the secret funds totaling 400billion won (500 million US dollars) to realnames. On October 19 of that year, acongressman of the opposition partydisclosed at a National Assembly sessionthat Former President Roh Tae Woo’ssecret fund totaling 400 billion won (500million US dollars) was broken up intoportions and deposited in several differentbank accounts under various borrowednames. The evidence produced to back theclaim was a bank record of a Shinhan Bank(Seosomun Branch Office) account underthe name of Wooil Corporation, in which10 billion won (12.5 million US dollars) wasdeposited. On that date, the Director ofLoan Department of the Shinhan Bankconfirmed that Seosomun Branch Office ofhis bank held three accounts underborrowed names including the account inWooil’s name and that a total of 30 billionwon (37.5 million US dollars) weredeposited in these accounts.

The Korean prosecutors ’ o f f i ceimmediately initiated the investigationinto this case with recognition that thiscase is an unprecedented incidentassociated with corrupt accumulation ofwealth by an ex president. The Koreanprosecutors’ office was determined toconduct thorough and strict investigationinto this case, and to bring the ex presidentto justice for any corruption substantiatedby the investigation, in order to ensure

37 Article 9 Paragraph 1, Act on the Reporting andUsage of Specific Financial Transaction Information


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social justice and to cut off the corrupt tiebetween the politicians and the businesses.

B. Outline of the InvestigationOn October 20, 1995, the Central

Investigation Department of the SupremeProsecutors’ Office obtained the warrantsof seizure regarding the suspected bankaccounts, and began the tracing of funds.The Korean Supreme Prosecutors’ Officeinterrogated the Director o f thePresidential Security Service and theperson who took charge of the FinancialDivision under the President SecurityService when Mr. Roh Tae Woo was inoffice. They stated that Mr. Roh raised andused secret funds while in office and thatas he retired from his office, the left-overof the funds was deposited into theaccounts opened in the borrowed names.A total of 74 billion won (92.5 million USdollars) had been deposited into theseaccounts, and the remaining sum at thetime was 36.5 billion won (45.63 million USdollars).

The investigation was extended toadditional accounts of borrowed namesopened in four banks (including theCommercial Bank) for the same purpose.Through the investigation of the bankofficials, and the track of funds by thewarrants of seizure regarding the accounts,the Prosecutors’ Office identified 37accounts in which Mr. Roh’s secret fundswere deposited. It also disclosed that asmany as 500 bank accounts were involvedin this case, as means to launder the funds.Parts of the funds were given as loans tothe involved corporations and to purchasereal estates.

On November 16 of the same year, Mr.Roh was placed under detention for chargesof bribery (the violation of the Act onAggravated Punishment of CertainOffenses). The former Director of thePresidential Security Service was arrested

for complicity in the crime. Since then, theProsecutors’ Office also investigated asmany as 60 persons associated in this case,including the incumbent and formermembers of the National Assembly, theformer Head Secretary for Economy in thePresidential Office, the officials of banksand the persons who lent their names tobe used in opening the bank accounts.

On December 7, the Prosecutors’ Officebegan investigation regarding 200 personsincluding the leaders and officials ofcorporations such as Samsung, Hyundai,Jinro, LG, and Daewoo, for having offeredbribe to Mr. Roh. Regarding the moneylaundering activities in this case, theProsecutors’ Office investigated 200persons including the Chairman ofDongbang Oil Corporation and Mr. Roh’sbrother.

92 public officials including prosecutors,investigators, and the officials of theNational Tax Service and the FinancialSupervisory Service were put into theinvestigation of this case.

C. Outcome of the Investigation1. Size of the Secret Funds

Judging from the investigation of Mr.Roh and other persons involved, the actualsum of the secret fund raised through thecontribution of corporations is believed toamount to as much as 460 billion won (575million US dollars). However, the sum ofthe secret funds substantiated or provedby the Prosecutors’ Office was 283.8 billionwon (354.9 million US dollars). Mr. Rohwas indicted for receiving, from the leadersof 35 corporations, bribes ranging from 500million won (625,000 US dollars) to 25billion won (31.25 million US dollars),totaling 283.8 billion won (354.9 million USdollars).

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2. How the Fund was RaisedMr. Roh was the President of Korea for

five years from February 25, 1988 toFebruary 24, 1993. As the President,empowered to establish and implementgovernmental policies, and direct andsupervise the head of governmentalministries, he was able to influence theactivities of corporations in relation to theselection of the provider of government-runservices, the licensing of importantbusinesses, financial assistance, andtaxation. He had private meetings withthe chairmen or presidents of corporationspretending as if he was interested in thebriefing of the operation of the corporationsand in hearing the opinion of the businessleaders. He received enormous amount ofmoney from these corporations, by hintingthat he might exercise his powers toinfluence their business.

The followings are some of the examplesof the way how he collected the funds fromthe corporations.

(i) In May 1991, the then PresidentRoh received 10 billion won (12.5million US dollars) from ChairmanKim of Daewoo Corporation, at hispresidential office. He received atotal of 24 billion won (30 millionUS dollars) from Chairman Kimthrough seven transactions. Themoney was given to President Rohin return for his influence inawarding the contract for theconstruction of Jinhae NavySubmarine Base to DaewooCorporation, and with request forhis influence in another bidding forthe construction of Wolsung AtomicPower Plant III and IV.

(ii) In August 1991, President Rohreceived 10 billion won (12.5million US dollars) from ChairmanChoi of Dongah Corporation, at anoffice in his presidential house. Hereceived a total of 23 billion won

(28.75 million US dollars) fromChairman Choi through sixtransactions. The money wasgiven to Mr. Roh in return forawarding the contract for theconstruction of Asan Bay NavyBase, and with request for hisinfluence on another bidding forthe construction of Uljin AtomicPower Plant III and IV.

(iii) In late November 1990, PresidentRoh received 10 billion won (12.5million US dollars) from ChairmanChung of Hanbo Corporation, at asecret place near his presidentialhouse. He received a total of 15billion won (18.75 million USdollars) from Chairman Chungthrough four transactions. Themoney was given to Mr. Roh withrequest for his influence on theirSuseo apartment-constructionbusiness.

(iv) President Roh also received a totalof 25 billion won (31.25 million USdollars) from Chairman Lee ofSamsung Corporation in return forhis influence in Samsung’s autom a n u f a c t u r i n g b u s i n e s s ,construction business and others.He also received 25 billion won(31.25 million US dollars) fromHyundai Corporation and 21billion won (26.25 million USdollars) from LG Corporation, byhinting, at private meeting withthe leaders of these corporations,that he could give favorable orunfavorable consideration abouttheir businesses.

3. Management of the Fund and MoneyLaundering

Mr. Roh made Director Lee of thePresidential Security Service to supervisethe overall management of the secret fund,

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and made the Director of the FinancialDivision of the Presidential SecurityService to directly manage the deposit intoand withdrawal from the accounts.

(i) Money Launder ing ThroughFinancial Institutions

The fund was either deposited into thebank accounts opened under borrowednames or used to purchase the certificateof deposit (CD) in order to conceal the originor the actual owner of the fund. A total of37 accounts were opened under borrowednames in 8 branch offices of 5 banks. 12other accounts under borrowed names wereused to move and launder the funds. Theypurchased the certificates of deposit worth118.3 billion won (147.88 million USdollars). They were re-sold betweenDecember 1992 and February 1993 anddeposited into six bank accounts openedunder the borrowed names.

While, in October 1993 when the RealName Financial Transaction System wasin force, they opened a real name account,using the identity of an owner of a dormantaccount in collaboration with a managerof a branch office of a bank. 520 millionwon (650,000 US dollars) was depositedinto this account, and then was withdrawnfrom it.

(ii) Money Laundering by PurchasingReal Estates

They also employed the method ofpurchasing real estates to launder thefunds. Parts of Mr. Roh’s secret funds wereused to purchase real estates in the nameof his relatives. 23 billion won (28.75million US dollars) was given to theChairman of Dongbang Oil Corporation(father-in-law of his son) to purchase abuilding in downtown Seoul and toconstruct a new building. 12.979 billionwon (16.22 million US dollars) was usedby his brother in purchasing a building inSeoul and a house in the city of Daegu. 2.35billion won (2.94 million US dollars) was

used to purchase luxurious mansions inSeoul, which was registered under thename of a third person.

(iii)Lending Funds to CorporationsMr. Roh faced difficulties in using and

managing his secret funds deposited atfinancial institutions, as the Real NameFinancial Transaction System becameeffective. He made his brother-in-law,Keum Jin Ho (former Minister ofCommerce and Industry) to launder thefunds as follows.

(a) In September 1993, he lent 60.62billion won (75.78 million US dollars)to Chairman Chung of HanboCorporation at the yearly interest of8.5% to be repaid after 5 years. Thisfund had been deposited in sixaccounts opened at Kookmin Bank.Chairman Chung pretended as if hewas the owner of the fund, anddeposited the fund into accountsopened under his real name.

(b) In October of the same year, helaundered 36.28 billion won (45.35mi l l i on US do l lars ) throughC h a i r m a n L e e o f D a e w o oCorporation. The fund had beendeposited in twelve fake nameaccounts opened at Seosomun Brancho f S h i n h a n B a n k . D a e w o oCorporation transferred this fund toaccounts opened under its real name,pretending as if it was the true ownerof the fund. Mr. Roh lent this fund toDaewoo Corporation.

The bank officials conspired with Mr.Roh or remained silent in this process.

(iv) Concealing of The Fund in ForeignCountry

The Korean Prosecutors ’ Off iceinvestigated into the allegation that Mr.Roh collected a great sum of secret fundthrough Yulgok project (an armamentbuild-up project) and concealed the fund by

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depositing at the Bank of Switzerland. InFebruary 1990, it was exposed that Mr.Roh’s daughter and son-in-law managedseveral accounts (each holding 10,000 USdollars or below) at various banks, totaling200,000 US dollars. The Prosecutors’ Officeinvestigated the suspicion that the fundmanaged by Roh’s daughter was a portionof his secret fund.

On November 4, 1995, Korea made arequest to the U.S. authorities for provisionof information regarding the flow or originof the above fund managed by Roh’sdaughter. Two days later, Korea requestedthe Swiss government to officially confirmwhether Mr. Roh’s family or relatives heldbank accounts at the banks in Switzerland.Because of the limitation of internationalassistance in criminal investigation, andthe difficulty of obtaining evidence in suchcase as this, the investigation regardingwhether Mr. Roh concealed his fund inforeign countries did not yield concreteevidence.

4. How the involved persons wereprocessed

On December 5, 1995, Mr. Roh, theformer director of the Presidential SecurityService, and the former director of thefinancial division of the PSS were indictedand placed under detention. TheProsecutors’ Office also indicted 12 personsincluding leaders of corporations. 3 bankofficials were prosecuted for summaryproceedings.

The prosecution claimed that Mr. Rohshould be subjected to life imprisonmentand confiscation totaling 283.896 billionwon (354.87 million US dollars) for chargesof bribery and insurrection. According tothe Special Act on Confiscation related withCrimes of Public Officials, the prosecutionrequested for the freezing of Mr. Roh’sentire assets for the purpose of executingconfiscation.

On April 17, 1997, after two appealstrials, Mr. Roh was finally sentenced toimprisonment of 17 years and confiscationor collection of 262.896 billion won (328.62million US dollars) by the Supreme Court.

5. Secret fund of Ex President Chun DooHwan

After the investigation was initiatedregarding Mr. Roh’s secret funds, it wasexposed that another former President,Chun Doo Hwan, who held the office fromFebruary 25, 1981 through February 24,1988, had secretly collected funds throughsimilar methods as Mr. Roh used.

At the result of the investigation by theProsecutors’ Office, Mr. Chun was finallysentenced to life imprisonment andconfiscation or collection of 220.5 billionwon (275.63 billion US dollars) for chargesof bribery and insurrection on April 17,1997 by the Supreme Court.

VII. CONCLUSION:COUNTERMEASURES IN THE

FUTURE

A. Providing Legal FrameworkAs crime becomes more organized,

globalized, and specialized, it is no longera domestic problem within an individualcountry, but it is becoming a serious threatto the safety of the internationalcommunity, perhaps the human race. Themost effective countermeasure againstthese crimes is depriving the perpetratorsof the crimes of all economic profits.

To make it possible, we need the legalf ramework to cr iminal ize moneylaundering, and to confiscate illicitproceeds as thoroughly as possible. Thereare several approaches for providing suchlegal framework: 1) adding the provisionin the criminal code, 2) including theprovision in a special law such as a drug-

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related special law, 3) including theprovisions both in the criminal code and as p e c i a l l a w, a n d 4 ) e n a c t i n g acomprehensive money launderingcontrolling law. Each individual countrywould choose a pattern based on its legalcircumstances.

In order for strong control of moneylaundering activities, the law should covera wide scope of predicate offenses, allowextensive confiscation and providemeasures to freeze the assets subject toconfiscation. The law should provide forstrict regulation of financial institutionsand should invite their voluntarycooperation. It should also include specificprovisions for international cooperation(such as extradition and mutual assistancein criminal matters). If we take these intoaccount, the enactment of a comprehensivemoney laundering law is the most desirableway.

B. Efforts of Law EnforcementAuthorities to StrengthenCriminal Punishment

The enactment of law alone does notensure the eradicat ion o f moneylaundering. Only when the prosecutors,police officers, tax officials and other lawenforcement officials commit themselves tothorough tracking down the flow of illicitproceeds and the perpetrators, the effortsto provide legal framework would lead tosuccessful suppression of crime.

However, the law enforcementauthorities are facing increased difficultiesin tracing the flow of illicit proceeds forvarious reasons. The financial institutionsare strengthening the protection of banksecrecy. The businesses that the financialinstitutions deal with are becoming morec o m p l e x a n d m u l t i f o l d . T h ecomputerization also becomes the cause forincreased difficulty in obtaining evidence.And electronic trading and cash-less

transactions, and the liberalization offinancial policy have increased themovement of enormous sum of money fromcountry to country.

To effectively cope with this situation,more persons and resources should be putinto the law enforcement authorities, foremployment and training of experts anddevelopment of scientific investigativetechniques. The budget for the suppressionof crime should be considered as aninvestment for social welfare.

C. Establishment of Credit-basedSociety, Development of NewTaxation Techniques andIncrease of Public Awareness

Money laundering would not be fullycontrolled only through the judicial andadministrative regulation. We need tofundamentally eradicate money launderingby establishing a credit-based societywhere dirty money is not tolerated.

We need to develop taxation techniquesto prevent the evasion of tax. And at thesame time, credit dealings should be morewidely accepted than cash transactions.Especially, in developing countries, effortsshould be made to increase publicawareness regarding the tax evasion.

In Korea, the use of credit card hasincreased dramatically in recent years, andcredit dealing is being accepted as aneffective means for trade. Korea isplanning to implement a comprehensivetaxation system for financial incomestarting from February 1, 2001. When thissystem is applied in Korea, it willcontr ibute great ly to prevent ingtransactions made under the borrowed orstolen names, which are universally usedas a method of laundering money.

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D. Strengthening InternationalCooperation

Illegal proceeds tend to flow from astrictly controlled place to a place with lessregulation. Therefore, the efforts of one ortwo countries cannot sufficiently addressmoney laundering problem. We need toconclude multilateral and bilateral treatiesto facilitate international cooperation incriminal matters, and make domestic lawto back up these treaties.

And domestic laws to implementmultilateral conventions should bemonitored. The monitoring team shouldbe enabled to urge a state party to faithfullyimplement the convention by makingreports on the result of the monitoring. Themonitoring on the implementation ofOECD anti-bribery convention is a goodexample of such monitoring.

Furthermore, the internationalcommunity including the United Nationsshould continue to make efforts to stop theexploitation of tax haven and offshorebanking centers or states.39

In this regard, I believe that UNAFEI’srecent seminars and studies regarding

money laundering are very timely anddesirable. I believe that its work willcontribute to the establishment of a safeglobal community through the suppressionof crime not only in Asia region but also inthe whole world.

Appendix AMajor Crimes (regarding Article 2

Paragraph 1)1. The offenses provided in the

following provisions of the CriminalCode(a) Article 114 Paragraph 1, Part II

Chapter 5 Crimes injurious topublic security

(b) Article 129 through Article 132,Part II Chapter 7 Crimesconcerning the duties of publicofficials

(c) Article 207, Article 208, Article212 (attempts to commit thecrimes specified only in Article207 and 208) and Article 213,Part II Chapter 18 Crimesconcerning currency

(d) Article 214 through Article 217,Article 223 (attempts to committhe crimes specified only inArticles 214 through 217) andArticle 224 (preparation andconspiracies with intent tocommit the crime only in Articles214 and 215), Part II Chapter 19Crimes concerning valuablesecurities and postage andrevenue stamps

(e) Article 225 through Article 227-2, Article 228(1), Article 229(excluding Article 228 Paragraph2), Articles 231 through 234 andArticle 235 [attempts to committhe crimes specified only inArticles 225 through 227-2,Article 228(1), Article 229(excluding Article 228 Paragraph2), Articles 231 through 234],Part II Chapter 20 Crimes

39 They include Bahamas, Bermuda, Channel Islands,Gebraltar, Panamas, British Virgin Islands,Lebanon, Lichtenstein and others.(Ingo Walter, TheSecret Money Market, New York: Harper Business,1990, pp. 210

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concerning documents(f) Article 246 Paragraph 2 and

Article 247, Part II Chapter 23Crimes concerning gambling andlotteries

(g) Article 250, Article 254 (attemptsto commit the crimes specifiedonly in Article 250) and Article2 5 5 ( p r e p a r a t i o n a n dconspiracies with intent tocommit the crime only in Article250), Part II Chapter 24 Crimesof homicide

(h) Article 314 and Article 315, PartII Chapter 34 Crimes againstcredit, business and auction

(i) Articles 323 through 324-5,Article 325 and Article 326, PartI I Chapter 37 Cr imes o fobstruct ing another fromexercising his right

(j) Articles 329 through 331,Articles 333 through 340, Article342 (excluding attempts tocommit the crimes specified inArticle 331-2, Article 332 andArticle 341) and Article 343, PartII Chapter 38 Crimes of larcenyand robbery

(k) Article 350 and Article 352(attempts to commit the crimespecified only in Article 350),Part II Chapter 39 Crimes offraud and extortion

(l) Article 355 [provided that thisarticle was violated by a personprovided in Article 2 Sub-paragraphs 1, 2 and 4 (onlyincluding those persons whoassist the persons providedunder Sub-paragraphs 1 and 2and deal with a part of thatpersons’ task) of the Act on theResponsibility of AccountingEmployees, in relation to hisduties and task, knowing thatthe national treasury or a localgovernment would sustain loss

as a result of that violation], PartI I Chapter 40 Cr imes o fembezzlement and breach oftrust

(m) Article 362, Part II Chapter 41Crimes concerning stolenproperty

2. Articles 23, 24 26 and 27 of theBicycle and Motorboat Racing Act

3. Art ic le 179 and Art ic le 182Paragraph 2 (attempts to commit thecrime specified only in Article 179)of the Customs Act

4. Article 54 Sub-paragraph 3 of theForeign Trade Act

5. Article 111 of the Lawyers Act6. Article 5 of the Illegal Check Control

Act7. Article 30 Paragraph 1 of the Special

A c t o n t h e R e g u l a t i o n a n dPunishment of Speculative Act, etc.

8. Article 622 and 624 (attempts tocommit the crime specified only inArticle 622) of the Commercial Code

9. Article 93 of the Trademark Act10. Article 95-8 of the Futures Trading

Act11. Article 40 Sub-paragraph 1 and

Article 42 of the Child Welfare Act12. Article 70 Paragraph 1, Paragraph

2 (3) and Paragraph 5 of theSpecial ized Credit FinancialBusiness Act

13. Article 24, and Article 25 Paragraph1 Sub-paragraphs 1 and 2 of thePrevention of Prostitution Act

14. Article 29 Paragraph 1 of the SoundRecords, Video Products and GamesAct

15. Article 207-2 of the SecuritiesTransaction Act

16. Article 46 and Article 47 Sub-paragraph 1 of the EmploymentSecurity Act

17. Article 70 of the Act on the Controlof Firearms, Swords, Explosives, etc.

18. Article 3, 5 and 7 of the Act on theAggravated Punishment of Certain

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Economic Crimes19. Articles 2, 3, 5, 5-2, 5-4, 6 and 8 of

t h e A c t o n t h e A g g r a v a t e dPunishment of Certain Crimes

20. Articles 366, 368 and 370 of theBankruptcy Act

21. Articles 2 through 4, Article 5 (1) andArticle 6 [attempts to commit thecrimes specified only in Article 2,Article 3, Article 4 Paragraph 2(excluding the crimes specified inArticle 136, 255, 314, 315, 335, 337(the latter part), 340 Paragraph 2(the latter part) and 343 of theCriminal Code) and Article 5Paragraph 1] of the Act on thePunishment of Violence, etc.

22. Articles 50, 51, 53, 54, 58 and 60 ofthe Korean Horse Racing AssociationAct

Appendix BPredicate Offenses under Article 2

Sub-paragraph 2 (B)

• Article 25 Paragraph 1(3) of thePrevention of the Prostitution Act

• Article 5 Paragraph 2 and Article 6of the Act on the Punishment ofViolence, etc.

• Article 3 Paragraph 1 of the Act onPreventing Bribery of Foreign PublicOfficials in International BusinessTransactions

• Article 4 of the Act on the AggravatedPunishment of Certain EconomicCrimes

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