By Jhoo Dong-chan
Financial authorities are keeping a close watch on unlicensed foreign investment banks (IBs) as there are growing voices here that they are exploiting local loopholes to make money without paying taxes.
Over the past few years, an increasing number of domestic firms are choosing foreign IBs as organizers when issuing corporate bonds abroad, and nearly a dozen IBs are found to have engaged in the business without securities business licenses in Korea.
These unlicensed foreign IBs have yet to cause any financial issues, but experts point out that financial authorities have no legal basis to regulate these unlicensed foreign IBs even if they engage in irregularities.
"They haven't caused any problems so far, but we are closely monitoring the matter to see whether these businesses cross the red line," said an official from the Financial Supervisory Service, asking not to be named.
"These foreign IBs are allowed to engage in financial businesses if they submit the required papers with the Financial Services Commission beforehand. It's basically issuing bonds outside the border, not in Korea. It's impossible for us to tax them since they are headquartered abroad."
These IBs make more than 20 billion won ($17.6 million) worth of fee income every year by helping domestic firms issue foreign currency bonds, but are not subject to taxes here since they are headquartered abroad, mostly in Hong Kong or Singapore, and have no local offices in Korea.
According to the Korea Center for International Finance, domestic firms are expected to issue a total of 41.6 trillion won worth of foreign currency bonds in 2019. It is the highest figure since 2012.
Considering a securities firm takes a 0.5 percent service fee from bond issuance, it is estimated that the total fee income will reach 202.8 billion won.
Since these unlicensed foreign IBs account for around 10 percent of the total, their fee income is likely to reach 20.2 billion won this year.
Of unlicensed foreign IBs, German Commerzbank and Japanese Mitsubishi UFJ Financial Group have been the leading players engaging in helping domestic firms issue foreign currency bonds.
Singapore-based DBS Bank is also an unlicensed foreign IB, but included in the organizer list for the Korea Housing Finance Corp. that issues $500 million worth of foreign currency bond next month.
"These unlicensed foreign IBs send their officials here when helping domestic firms issue foreign currency bonds. A simple documentation process is good enough with financial authorities," said an industry insider who is familiar with the issue.
"This is different from traditional manufacturing businesses. It doesn't require a production plant or massive labor force. There is no reason for foreign IBs to set up a corporate body or get a license approval from financial authorities. It would only make their businesses more complicated."
More domestic firms also prefer these unlicensed foreign IBs as bond organizers since they don't have to undergo a complex screening process with the financial regulator.
An expert claims the practice is natural in the global capital market.
"This takes place all over the world. Even Korean brokerages introduce overseas investment products without establishing a corporate body in target countries," said the expert who asked not to be named.
"It's a natural capital flow. In the capital market, you don't have to set up a corporate body and hire a large number of workers for business. This isn't the manufacturing business. Korean firms also get necessary funds by issuing foreign currency bonds abroad."
According to the Korea Financial Investment Association, there are 22 foreign IBs who got licenses from the government for their financial businesses in Korea as of the end of last year.
Financial authorities are keeping a close watch on unlicensed foreign investment banks (IBs) as there are growing voices here that they are exploiting local loopholes to make money without paying taxes.
Over the past few years, an increasing number of domestic firms are choosing foreign IBs as organizers when issuing corporate bonds abroad, and nearly a dozen IBs are found to have engaged in the business without securities business licenses in Korea.
These unlicensed foreign IBs have yet to cause any financial issues, but experts point out that financial authorities have no legal basis to regulate these unlicensed foreign IBs even if they engage in irregularities.
"They haven't caused any problems so far, but we are closely monitoring the matter to see whether these businesses cross the red line," said an official from the Financial Supervisory Service, asking not to be named.
"These foreign IBs are allowed to engage in financial businesses if they submit the required papers with the Financial Services Commission beforehand. It's basically issuing bonds outside the border, not in Korea. It's impossible for us to tax them since they are headquartered abroad."
These IBs make more than 20 billion won ($17.6 million) worth of fee income every year by helping domestic firms issue foreign currency bonds, but are not subject to taxes here since they are headquartered abroad, mostly in Hong Kong or Singapore, and have no local offices in Korea.
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Considering a securities firm takes a 0.5 percent service fee from bond issuance, it is estimated that the total fee income will reach 202.8 billion won.
Since these unlicensed foreign IBs account for around 10 percent of the total, their fee income is likely to reach 20.2 billion won this year.
Of unlicensed foreign IBs, German Commerzbank and Japanese Mitsubishi UFJ Financial Group have been the leading players engaging in helping domestic firms issue foreign currency bonds.
Singapore-based DBS Bank is also an unlicensed foreign IB, but included in the organizer list for the Korea Housing Finance Corp. that issues $500 million worth of foreign currency bond next month.
"These unlicensed foreign IBs send their officials here when helping domestic firms issue foreign currency bonds. A simple documentation process is good enough with financial authorities," said an industry insider who is familiar with the issue.
"This is different from traditional manufacturing businesses. It doesn't require a production plant or massive labor force. There is no reason for foreign IBs to set up a corporate body or get a license approval from financial authorities. It would only make their businesses more complicated."
More domestic firms also prefer these unlicensed foreign IBs as bond organizers since they don't have to undergo a complex screening process with the financial regulator.
An expert claims the practice is natural in the global capital market.
"This takes place all over the world. Even Korean brokerages introduce overseas investment products without establishing a corporate body in target countries," said the expert who asked not to be named.
"It's a natural capital flow. In the capital market, you don't have to set up a corporate body and hire a large number of workers for business. This isn't the manufacturing business. Korean firms also get necessary funds by issuing foreign currency bonds abroad."
According to the Korea Financial Investment Association, there are 22 foreign IBs who got licenses from the government for their financial businesses in Korea as of the end of last year.
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