[Public Voices] Four Key Points for Companies to Prepare for 'Foreign Exchange Transaction' Inspections

Obligation to Collect Overseas Receivables Disappears
Reporting Procedures Take Precedence Over Actual Collection

As the sharp rise in the exchange rate continues, the government has announced measures to stabilize the currency. The government sees the cause of exchange rate volatility as the lack of foreign currency inflows in proportion to exports. It has stated that it will conduct foreign exchange transaction inspections on companies with significant discrepancies between their reported export amounts and the amounts of foreign currency actually received. This is a declaration to look into the status of overseas receivables collection from foreign trading partners.

Can the government directly enforce the collection of receivables from overseas trading partners? In short, while such enforcement was possible in the past, it is not possible now.

Previously, any external receivable of USD 500,000 or more had to be collected within three years after maturity. To abandon collection or extend the collection period, it was mandatory to file a prior report to the Bank of Korea. However, this system was abolished in 2017. While this may have been justified during the era of chronic foreign currency shortages, it does not fit the realities of today’s globalized and advanced economy. Unless a crisis on the scale of the foreign exchange crisis occurs again, there is no way to enforce such measures under normal circumstances. The obligation to report in cases where goods are shipped first to overseas branches or subsidiaries and payment is received three years later was also abolished in early 2025.

Before undergoing customs inspections, companies should focus not so much on whether receivables have been collected, but rather on whether they have fulfilled reporting requirements during the process of addressing long-term uncollected receivables. There are four key points to keep in mind.

First, consider the case of converting overseas trade receivables into long-term loans. If accounts receivable from overseas subsidiaries remain uncollected for a long time, causing a burden for both the head office and the overseas subsidiary, such a conversion may be made to improve the financial structure. In legal terms, this is called a 'monetary quasi-consumption loan contract.' A monetary quasi-consumption loan contract is a type of money lending, and money lending is considered a capital transaction subject to reporting under the Foreign Exchange Transactions Act. However, there is debate as to whether reporting is required in these cases, since no actual funds are transferred and the underlying cause is a current transaction involving goods or services.

Second, in some circumstances, a company may transfer its receivables from an overseas trading partner to another overseas entity. The sale of receivables constitutes a capital transaction subject to reporting under the Foreign Exchange Transactions Act. Unless the transfer price is received immediately into a domestic account, such a transaction is highly likely to require reporting.

Third, disputes may arise with an overseas trading partner during the receivables collection process, resulting in a settlement. In legal terms, this is called a 'settlement agreement.' A settlement agreement is also a capital transaction that must be reported under the Foreign Exchange Transactions Act. The Act includes procedures to verify that the company is not simply abandoning receivables that should rightfully be collected, under the pretext of reaching a settlement.

Fourth, consider the collection of receivables without going through a domestic foreign exchange bank. This may occur when funds are received into an overseas account or when an overseas subsidiary collects payment on behalf of the company. The same applies when goods or services are received instead of cash, or when payment is received in the form of stablecoins. Since this constitutes a significant exception that bypasses the current foreign exchange management system, it is subject to prior reporting to the Bank of Korea.

The work described in these four points may have been handled without consideration for the Foreign Exchange Transactions Act, since it does not involve the payment or receipt of foreign currency. Typically, when foreign currency payments or receipts are involved, the finance department works with the bank to ensure compliance with the Act. However, if no such transactions occur, this process is often skipped. Even if companies believe the recent government announcement is unrelated to illegal activities such as overseas asset flight, they should take this opportunity to review their internal procedures.

Hwang Inuk, Attorney at Law at DaeryukAju Law Firm

This content was produced with the assistance of AI translation services.