Mandatory Reporting Procedures and Penalties for Receiving Trade Payments via Virtual Assets under the Foreign Exchange Transactions Act Released

We will explain in detail the mandatory reporting procedures under the Foreign Exchange Transactions Act and the penalties for omission when receiving trade payments via virtual assets instead of through a foreign exchange bank. While virtual assets are gaining attention as an innovative payment method, it is crucial to accurately understand relevant regulations to utilize them safely and legally within the current legal framework.

1. Obligation to 'Report on Method of Payment' under the Foreign Exchange Transactions Act

Korea's Foreign Exchange Transactions Act regulates all foreign exchange transactions between residents and non-residents. In particular, transactions through foreign exchange banks are the principle rule. For specific transaction methods that deviate from this, a reporting obligation is imposed to allow the government to manage and compile statistics on the inflow and outflow of foreign exchange.

As mentioned in the question, receiving trade payments via virtual assets instead of through a bank falls under this 'specific transaction method.' As clearly stipulated in Article 16, Item 4 of the Foreign Exchange Transactions Act and Article 5-11, Paragraph 3 of the Foreign Exchange Transactions Regulations, if a resident intends to pay or receive funds to settle claims or debts with a non-resident (including cases arising from the provision of goods, services, or transfer of rights) without going through a foreign exchange bank, they must file a 'Report on Method of Payment' to the Governor of the Bank of Korea.

Here, 'Method of Payment' encompasses all atypical methods of settling claims and debts such as offsetting, payment in kind, and virtual assets, excluding general settlement methods like remittance or collection conducted through foreign exchange banks. Since virtual assets are classified as 'assets' rather than foreign currency under current law, receiving payments through them is considered a settlement method that bypasses foreign exchange banks, thus becoming subject to reporting.

The key point is that the act of receiving trade payments in virtual assets itself is not an illegal act prohibited by law. However, failing to file the required 'Report on Method of Payment' to the Governor of the Bank of Korea during this process constitutes a violation of the Foreign Exchange Transactions Act.

2. Details of the Reporting Procedure

The 'Report on Method of Payment' must principally be made to the Bank of Korea before the transaction occurs. While there are exceptions for small amounts or specific conditions where post-transaction reporting is allowed under the regulations, it is essential to thoroughly prepare for prior reporting in cases like trade payments, which often involve relatively large amounts and potential regularity.

• Reporting Party: The resident who is a party to the foreign exchange transaction (i.e., the company or individual intending to receive trade payments in virtual assets).
• Reporting Institution: The Governor of the Bank of Korea (usually reported directly to the Bank of Korea or via a foreign exchange bank).
• Timing of Report: In principle, before the performance of the transaction.
• Required Documents and Information:
  • Report on Method of Payment (Bank of Korea prescribed form)
  • Party Information (Name/Trade Name, Address of Resident and Non-resident)
  • Details of Transaction (Supporting documents such as Export/Import Contracts, Service Agreements)
  • Transaction amount and the type/quantity of virtual assets to be used
  • Reason for settlement via virtual assets instead of a foreign exchange bank
  • Other data deemed necessary by the Bank of Korea

Through this reporting procedure, the Bank of Korea reviews the legality of the transaction and collects necessary information for purposes such as anti-money laundering and monitoring capital flows. Once the report is accepted, trade payments can be legally received via virtual assets.

3. Penalties for Omission of Reporting

Failure to fulfill the 'Report on Method of Payment' constitutes a violation of Article 16, Item 4 of the Foreign Exchange Transactions Act. The resulting penalties vary depending on the scale of the omitted amount and the presence of intent.

• Administrative Fines: For relatively minor violations or small unreported amounts, an administrative fine may be imposed under Article 32 of the Foreign Exchange Transactions Act. Fines are applied differentially based on the type of violation and amount, generally calculated as a certain percentage of the unreported amount. This is an administrative sanction and is distinct from criminal punishment.
• Criminal Penalties: For serious violations, such as when the omitted amount exceeds a certain scale or there is intentional avoidance, the act may be subject to criminal punishment. Articles 27 and 28 of the Foreign Exchange Transactions Act specify penalty clauses for violations of reporting obligations, which may result in imprisonment or fines. For example, if the unreported amount exceeds a certain threshold, the violator may face imprisonment or a fine equivalent to several times the violation amount. This remains as a criminal record and can severely impact the creditworthiness of the company or individual.
• Other Disadvantages: Beyond legal penalties, detection of violations may lead to additional investigations by tax authorities, expanding into detailed reviews of virtual asset transaction history and taxation issues. Furthermore, companies may face indirect disadvantages such as a decline in external credibility and restrictions on transactions with financial institutions.

4. Additional Considerations and Expert Advice

Utilizing virtual assets for trade payments is still in its early stages, and relevant laws and systems are continuously evolving. Therefore, the following additional matters should be considered:

• Price Volatility of Virtual Assets: Virtual assets have high price volatility, creating a risk of value fluctuation between the time of payment receipt and actual liquidation. This is a different type of asset value risk compared to exchange rate risk, requiring clear agreement upon contract execution.
• Tax Issues: If trade payments received in virtual assets are liquidated for a profit, this becomes subject to corporate tax or income tax. Additionally, taxation issues related to the transfer of virtual assets themselves may arise, so consultation with a tax expert is crucial.
• Anti-Money Laundering (AML) & Countering the Financing of Terrorism (CFT): Due to anonymity, virtual assets are under strict international surveillance for potential misuse in money laundering. Transparent transaction history management and thorough verification of the counterparty are essential.
• Possibility of Regulatory Changes: As laws regarding virtual assets are changing rapidly, one must continuously monitor the latest legal and regulatory amendments.

In conclusion, while receiving trade payments via virtual assets signifies a transition to a new payment method, you must thoroughly fulfill the 'Report on Method of Payment' obligation under current law to proceed with transactions without legal issues. To avoid unnecessary legal risks and maintain stable international trade, it is strongly recommended to consult with a customs broker or foreign exchange expert to verify and prepare all procedures in advance.