Trade and Project Financing in South  Korea

The South Korean financial system is frequently hard-pressed to meet the demand for financing and capital for international commercial transactions. Foreign companies in a start-up operation with a South Korean partner often invest financial resources for the joint venture, while their South Korean partner makes an investment in kind, i.e., land or facilities, as the South Korean share of equity. Joint-venture companies and foreign firms often work with branches of foreign banks for local-currency financing, although the branches of foreign banks control a small portion of South Korean Won availability. Other potential sources of South Korean Won financing include domestic nationwide commercial banks, regional banks, and specialized banks, including the South Korea Development Bank, the National Agricultural Cooperative Federation, the Industrial Bank of South Korea and the South Korea Housing Bank.

There are three documentary practices for settling import payments: (1) sight and issuance Letters of Credit, (2) Documents against Acceptance (D/A) and Documents against Payment (D/P); and, (3) Open Account Transactions. D/A and usance L/Cs are forms of extended credit in which the importer makes no payment for the goods until the date called for in the credit; however, the importer may clear the goods from customs prior to payment. D/P is similar to D/A except that the importer cannot clear the goods from customs prior to making payment. In some cases an importer can clear goods prior to payment under a sight L/C. L/C transactions generally follow standard international Uniform Customs and Practice (UCP) codes. Limitations on the use of deferred payment terms for imports, D/A and usance L/Cs have been abolished.

South  Korean Visa Commercial Section recommends that global companies consider dealing on a confirmed L/C credit basis with new and even familiar customers. A confirmed L/C through a U.S. bank is recommended because it prevents unwanted changes to the original L/C, and it places responsibility for collection on the banks rather than on the seller. This may cost a bit more, but may be well worth it.

To reduce risk of nonpayment, global companies may contact credit rating agencies, which can provide fee-based corporate information to evaluate financial credibility of South Korean companies. Dun & Bradsteet South Korea, the South Korea Investors Service, and the South Korea Information Service at: http://www.kisinfo.com/eng/index.asp are known to provide fee-based credit rating services in South Korea. South  Korean Visa Commercial Section can also provide valuable information, including a company’s credit standing, through its International Company Profile service. The South Korean Commercial Arbitration Board (KCAB) at: http://www.kcab.or.kr/servlet/kcab_adm/memberauth/5000 and private collection agencies can provide arbitration and collection services. The KCAB is staffed with counselors who advise U.S. companies on contract guidelines.

The Commodity Credit Corporation (CCC), U.S. Department of Agriculture, administers export credit guarantee programs for commercial financing of U.S. agricultural exports to South Korea. Under the GSM-102 Export Credit Guarantee Program for South Korea, CCC underwrites credit extended by the private banking sector in the United States to approved South Korean banks using dollar-denominated, irrevocable letters of credit to pay for food and agricultural products sold to South Korean buyers.

How Does the Banking System Operate

South Korea’s financial system consists of banking and non-bank financial institutions. The Financial Supervisory Commission ( http://www.fsc.go.kr/eng/) and the Financial Supervisory Service (FSS), its regulatory arm, are responsible for supervising and examining all banks, including specialized and government-owned banks, as well as securities and insurance companies. The FSC has played a key role in financial restructuring and has strengthened the regulatory and supervisory framework governing the entire financial sector. Oversight standards are improving but they will need more time to meet international standards. The South Korean branches of international accounting firms generally perform audits. Although audit quality is improving, it is still far behind global standards.

Foreign-Exchange Controls

South Korea has liberalized foreign exchange controls in line with OECD benchmarks.

A foreign firm that invests under the terms of the Foreign Capital Promotion Act (FCPA) is permitted to remit a substantial portion of its profits, providing it submits an audited financial statement to its foreign exchange bank. To withdraw capital, a stock valuation report issued by a recognized securities company or the South Korean Appraisal Board must also be presented. Foreign companies not investing under the FCPA must repatriate funds through authorized foreign exchange banks after obtaining government approval. Although South Korea does not routinely limit the repatriation of funds, it reserves the right to do so in exceptional circumstances, such as in situations which may harm its international balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of its domestic financial markets. To date, the South Korean government has had no instances of limiting repatriation for these reasons, even during and after the 1997-98 financial crisis.

The Bank of South Korea (http://eng.bok.or.kr/) has detailed information about foreign-exchange control policies in South Korea.

U.S. Banks and Local Correspondent Banks

Project Financing

Web Resources for South  Korea Finance