Transparency of the Regulatory System
As a member of the WTO and a country that has concluded FTAs with 52 countries, the ROK is improving the transparency of its policies to ensure its laws are non-discriminatory. The foreign business community remains concerned with the rapid increase in the number of Korea-unique (i.e., found nowhere else in the world) rules and regulations, however. Approximately 80 percent of regulations are introduced and passed by the National Assembly without a regulatory impact assessment (RIA) due to a loophole that requires only regulations written by ministries to undergo RIAs. While these regulations may have well-intended social aims, such as consumer protection or the promotion of SMEs, they often have unintended consequences for the economy by creating new trade barriers.
Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently. Regulatory authorities often issue oral or internal guidelines or other legally enforceable dictates that many firms find burdensome and often difficult to follow. The former ROK government’s deregulation plan sought to eliminate the use of oral guidelines or subject them to the same level of regulatory review as written regulations. On March 17, 2016, the Prime Minister’s Office re-emphasized the need for government officials to enforce regulations more transparently and proactively, and said that those failing to hold regulatory reviews would be held strictly accountable. The KORUS FTA also includes provisions designed to address such issues.
The ROK constitution allows both the National Assembly and the executive branch to introduce bills. The legal norm is for regulations to be introduced in the form of an act. There are subordinate statutes (presidential decree, ministerial decree, and administrative rules) for matters that are delegated by acts and matters needed to enforce acts. Ministries are in charge of drafting such subordinate regulations. Acts and their subordinate regulations can all be relevant for foreign businesses. Administrative agencies shape policies and draft bills on matters under their respective jurisdictions. Drafting ministries are required to clearly set policy goals and complete RIAs. When a ministry drafts a regulation, it is required to consult with other relevant ministries before it releases the regulation for public comment. The constitution also allows local governments to exercise self-rule legislative power to draft ordinances and rules, but they should be within the scope of federal acts and subordinate statutes.
The enactment of acts and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures. These procedures should be in accordance with the “Regulation on Legislative Process” enacted by the Ministry of Legislation. Since 2011, all publicly listed companies are required to follow International Financial Reporting Standards (IFRS, or K-IFRS in South Korea). The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS. According to the Administrative Procedures Act, proposed laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation. Regulations are sometimes promulgated with only the minimum required comment period, and with minimal consultation with industry. Guidelines and regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods. As a result, 80 percent of all new regulations are written and passed through the National Assembly without rigorous quality control and solicitation of public comments.
When notifications of proposed rules are made public, they appear online in the Official Gazette. The draft acts and regulations are also posted on the websites of relevant ministries and the National Assembly, with executive summaries. These postings, however, are only in Korean; thus, much of the 40-day comment period can be exhausted translating complex documentation. The Ministry of Legislation reviews whether laws and regulations are in conformity with the constitution and monitors whether the government adheres to the “Regulation on Legislative Process.” All laws and regulation also undergo review by the Regulatory Reform Committee for restrictive elements. The Regulatory Reform Committee aims to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness.
The Office of Regulatory Reform in July 2015 launched Sinmungo , an online portal through which companies can comment in English on existing legislation and regulations, as well as enter complaints about regulatory impediments to business. As a result, the Regulatory Reform Committee can take the initiative to address concerns of foreign firms doing business in the ROK by receiving and acting on complaints on a timelier basis.
Business regulation in the ROK often lacks empirical cost-benefit analysis or impact assessment on the basis of scientific and data-driven assessment because regulations are finalized without sufficient stakeholder consultation or passed by the National Assembly without a regulatory impact assessment. When ministries draft regulations, they must submit their RIA to the Regulatory Reform Committee for its determination on whether the regulation restricts rights or imposes excessive duties. These RIAs are usually not publicly available for comment, and public comments received by regulators are not made public.
The ROK government enforces regulations with penalties (either fines or criminal charges) in the case of violations of the law. The government’s enforcement actions can be challenged through an appeal process or administrative litigation.
International Regulatory Considerations
The ROK is not part of a regional economic bloc. The ROK is working to harmonize its standards with international standards, including those of the United States and the EU. It still, however, has many Korea-unique rules and regulations that make it more difficult for foreign companies to operate domestically. The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations.
Legal System and Judicial Independence
The ROK legal system is based on civil law. Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency. The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act. There are only three specialized courts in the ROK: the patent, family, and administrative courts. In civil cases, courts deal with disputes surrounding the rights of property or legal relations. The ROK court system is independent and not subject to government interference in cases that may affect foreign investors. Efforts are being made to ensure the judicial process is more fair and reliable. Foreign court judgments are not enforceable in the ROK. Rulings by district courts can be appealed to higher courts and the Supreme Court.
Laws and Regulations on Foreign Direct Investment
Laws and regulations that have been completed within the past year:
- Allow non-bank finance firms to operate foreign currency businesses;
- Simplify and integrate ineffective and redundant laws and regulations relevant to foreign investment;
- Allow joint law firms to be established between ROK firms and U.S. and EU firms;
- Lower the limits for real-estate investment from KRW 700 million (USD 620,000) to KRW 500 million (USD 450,000);
- Suspend changes made to the declaration form, when foreign firms establish branches in the ROK, for one year;
- Establish more flexible standards to evaluate global education institutions when they establish branches in the ROK;
- Introduce an omnibus account system, making it possible for foreign offshore institutional investors to handle orders from their clients in one account;
- Reduce regulations for foreign firms when they do their initial public offering;
- Reduce regulations that required eco-friendly certificates only from domestic agencies; and
- Eliminate regulations that limited the ratio of foreign employees to 20 percent for small start-ups with foreign investors.
Pending laws and regulations:
- Simplify procedures for foreign investors when they report their investment to the ROK government;
- Address discrimination against foreign financial firms embedded in licensing requirements for financial investment businesses;
- Relax the firewall system requirement inside financial companies;
- Permit re-hypothecation of sovereign bonds to enhance the liquidity of assets; and
- Expand entities exempt from an actual ownership check for financial transactions, including foreign branches of foreign financial companies.
There is no single website for investment-relevant laws and regulations. However, more information is available at the following websites: https://www.better.go.kr/ , https://www.fsc.go.kr/ , http://motie.go.kr /
Competition and Anti-Trust Laws
The Monopoly Regulation and Fair Trade Act authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related and consumer safety matters. KFTC has been active in investigating global information and communications technology (ICT) companies. A number of U.S. companies in the ICT sector have reported concerns about the KFTC, particularly regarding the agency’s practices with respect to procedural fairness and case selection and under Chapter 16 (Competition-Related Matters) of the KORUS FTA.
Expropriation and Compensation
The ROK follows generally accepted principles of international law with respect to expropriation. ROK law protects foreign-invested enterprise property from expropriation or requisition. If private property is expropriated, it can be taken only for a public purpose and only in a non-discriminatory manner, and claimants are afforded due process. Property owners are entitled to prompt compensation at fair market value. There are many cases of expropriation in the ROK, but mainly for public reasons like developing new cities, building new industrial complexes, or constructing roads. These are done in a non-discriminatory manner, and claimants are compensated at fair market value or above. U.S. Embassy Seoul is not aware of any cases alleging a lack of due process.
ICSID Convention and New York Convention
The ROK has been a member of the International Center for Settlement of Investment Disputes (ICSID) since ratifying the convention in 1967. It has also acceded to the New York Convention. There are no specific domestic laws providing for enforcement. South Korean courts have made rulings based on the ROK government’s position acceding to the convention, however.
Investor-State Dispute Settlement
The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency. ROK courts may ultimately be called upon to enforce an arbitrated settlement. When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association. U.S. companies should seek local expert legal counsel when drawing up any type of contract with a South Korean entity.
The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK that contains general provisions pertaining to business relations and investment. The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012.
There have been few serious investment disputes involving foreigners in South Korea. In November 2012, U.S.-based Lone Star Funds, a worldwide private equity firm, brought an investor-state dispute arbitration against the South Korean government before ICSID, in Washington DC, under the investment chapter of the KORUS FTA, and this case is still pending. The private equity firm blamed the ROK government for sharp declines in stock prices, claiming that it delayed the acquisition of Korea Exchange Bank without cause. The ICSID is expected to make a ruling in 2017. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. There is no history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Although commercial disputes can be adjudicated in a civil court, foreign businesses often feel that this is not a practical means to resolve disputes. Proceedings are conducted in Korean, often without adequate interpretation. ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in South Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in the ROK. During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached. Legal proceedings are expensive and time-consuming, and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship. ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency. The ROK has specialized courts, including family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues.
Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following steps in the arbitration process: 1) parties may request the KCAB to act as informal intermediary to a settlement; 2) if unsuccessful, either or both parties may request formal arbitration, in which case the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if unsuccessful, an arbitration panel consisting of one to three arbitrators is assigned to decide the case. If one party is not resident in the ROK, either may request an arbitrator from a neutral country. If foreign arbitral awards or foreign courts’ rulings meet the requirements of Article 217 of the Civil Procedure Act, then those are enforceable by local courts. The U.S. Embassy is not aware of statistics involving state-owned enterprise investment dispute court rulings.
The Debtor Rehabilitation and Bankruptcy Act stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment. The procedure commences after a filing by a debtor, creditor, or a group of creditors and determination by the court that a company is bankrupt. The court will designate a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts. Creditors may be granted voting rights in the creditors’ group, as identified by the Custodial Committee. Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms. The World Bank ranked the ROK’s policies and mechanisms in place to solve insolvency fourth among 190 economies in its 2017 Doing Business report. Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt. Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties.