FSS cracks down on Koreans posing as foreigners

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FSS cracks down on Koreans posing as foreigners

The Financial Supervisory Service said yesterday it will crack down on Korean stock punters who disguise themselves as foreign investors to evade paying taxes and skirt other kinds of regulations.

The financial watchdog said 7,626 of 38,437 foreign investors registered with the authority as of April are corporations in tax havens, and many are believed to be Korean individuals disguising themselves as foreign companies. Most of the companies are paper or shell companies used to avoid market reporting rules, evading taxes and parking money overseas, the FSS said. In total, registered foreign investors held 46.7 trillion won ($45.7 billion) in local shares as of April, accounting for 11 percent of the total market, the authority said.

When individuals register to invest in Korea, they are required to prove their nationalities with passports. Companies don’t have to, so Korean individuals with shell companies overseas can register them as foreign institutions.

“Foreign institutional investors are exempt from a number of regulations and receive more benefits compared to local individuals, so they are taking advantage of that,” said an FSS official.

According to the FSS, a Korean investor set up multiple shell companies in various tax havens and applied for purchases of stocks in an initial public offering in the Korean market under the foreign companies’ names. By law, that investor is exempt from prepaying 50 percent of the price of the IPO, which Korean retail investors would have to. Another benefit exclusive to foreign institutional investors is that while retail investors have a limit on their initial offered equity purchases, foreign institutional investors have no such limits.

Given the perception that foreign investors frequently lead the market, Koreans disguised as foreign institutions could also possibly try to manipulate the market, the authority said.

“The FSS will impose fines on those investors if they operate shell companies abroad holding large amounts of local shares to avoid domestic rules,” the official said. “Those found with illegal transactions will be sued.”

There are 62 tax-haven countries designated by the Korea Customs Service, including Greece, the Netherlands, Luxemburg, Monaco, Britain, Hong Kong and the Philippines.

BY SONG SU-HYUN [ssh@joongang.co.kr]

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