IIEffective Insolvency and Creditor Rights Systems
A Seo et al. contribution to the Asia-Pacific Restructuring and Insolvency Guide 2006 mentions that, overall, the South Korean insolvency regime is systematic and efficient for the liquidation of businesses and the restructuring of debt. The 2006 Act on Rehabilitation and Bankruptcy of Debtors, also known as the Unified Insolvency Law, consolidates the Corporate Reorganization Act, the Composition Act, the Bankruptcy Act, and the Act on Rehabilitation of Individual Debtors, to establish more systematic procedures for the rehabilitation and liquidation of insolvent companies and individuals. The South Korean principles on bankruptcy were adopted from the German legal system, whereas the principles on rehabilitation are largely modeled on the U.S. federal law. The 2006 consolidated Act appears to be the outcome of the comprehensive review and reform of South Korea's insolvency law undertaken in the aftermath of the 1997 Asian financial crisis with the Asian Development Bank, the International Bank for Reconstruction and Development, and World Bank assistance. There is, however, room for improving some aspects of South Korea's insolvency regime, as Seo et al. observe. These include excessive prioritization of claims in insolvency proceedings, inadequate protection of loans provided to the insolvent company during an informal rescue, inconsistent decisions by the court judges and regulatory officials, and the potential inconsistencies in the Uniform Insolvency Law. The Financial Services Commission (FSC) and the Financial Supervisory Services (FSS) in December 2008, also introduced a new corporate restructuring scheme which would allow creditor financial institutions to implement restructuring processes in a more expedited and systematic manner. Nevertheless, there is insufficient information publicly available regarding South Korea's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.
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IDInternational Financial Reporting Standards
A 2004 World Bank assessment of Korean accounting and auditing practices highlights the need for strengthening the monitoring and enforcement of established accounting requirements. The assessment also recommended achieving full convergence by eliminating the differences between national and international standards. In line with the World Bank’s recommendations, the Korean Accounting Standards Board (KASB) announced its "Roadmap Toward IFRS Adoption in Korea" in March 2007. As part of the implementation of the new strategic direction, in 2008 the translation of International Financial Reporting Standards (IFRSs) into the Korean language was finalized, per a Korean Accounting Institute (KAI)/KASB Annual Report published in that same year. The new standards known as Korean-International Financial Reporting Standards (K-IFRSs), as pointed out in a February 2008 update on the Deloitte IAS Plus website, are a "word-for-word translation" of the International Accounting Standards Board's (IASB) standards, guidance, and interpretations. All listed companies and certain unlisted financial institutions will be required to prepare their annual financial statements in accordance with K-IFRSs in 2011. Other companies will be permitted to use IFRSs. Non-financial listed companies are permitted early adoption from 2009. As far as the non-public entities (NPEs) are concerned, the KASB website indicates that the Board plans to issue new accounting standards to be applied by the NPEs, which will be based on the existing Statements of Korea Accounting Standards (SKASs). SKASs, although based on IFRSs, differ in many respects from their international counterparts. In the long-term, the KASB plans to converged SKASs with IFRS for SMEs.
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ENPrinciples of Corporate Governance
A 2009 report by the Global Legal Group states that there has been a “slow but distinct” trend toward greater transparency in South Korean corporate governance since the late 1990s. The Code of Best Practice for Corporate Governance was published in 1999 by the Korean Committee on Corporate Governance, and was last revised in 2003. The International Monetary Fund's 2003 Financial System Stability Assessment notes that the Code, the Securities and Exchange Act of 1962, and the Commercial Code provide a solid foundation for corporate governance. On February 4, 2009, the rules in the Securities and Exchange Act concerning corporate governance were moved to the Commercial Code, as a result of the enactment of the Financial Investment Services and Capital Markets Act. The corporate ownership structure in South Korea has been characterized by the predominant presence of large chaebol groups - conglomerate family-controlled firms with strong government ties - as well as cross-ownership among firms. The IMF's 2003 assessment states that close ties between chaebol groups and the government have further exacerbated failures of corporate governance. In its 2003 Report on the Observance of Standards and Codes on Corporate Governance, the World Bank stressed the need for improvements with regards to corporate governance practices in line with international best practices, and further collaboration with other members of the Organization for Economic Cooperation and Development (OECD). In its assessment, none of the OECD’s Principles was rated lower than “partially observed’ however, indicating that while the legal and regulatory framework complied with the Principles, practices and enforcement diverged. Following the IMF and World Bank reports, South Korea has seen the emergence of large privately-held non-chaebol corporations, which are transparent, follow international accounting standards, and are majority foreign-held, as stated in the 2007 study by E Han Kim and Woochan Kim.
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IDInternational Standards on Auditing
In a 2004 Report on the Observance of Standards and Codes on Accounting and Auditing, the World Bank commended the Korean authorities for making significant efforts in improving auditing standards and practices and strengthening the standard-setting institutions. Nonetheless, the World Bank recommended, amongst other things, the strengthening of sanctions against non compliance with auditing standards and the oversight of auditors of public companies. According to the World Bank report, the Korean Standards on Auditing (KSAs) are issued by the Korean Institute of Chartered Public Accountants (KICPA) and are in conformity with the International Standards on Auditing (ISAs) promulgated by the International Auditing and Assurance Standards Board (IAASB). However, the KSAs are based on the 1999 version of ISAs and the IAASB has been revising and amending the international standards on an on going basis. The KICPA in its 2009 action plan, prepared as a part of the International Federation of Accountants’ Member Body Compliance Program, indicates that it was planning to approve new KSAs in June 2009 to become effective in 2010. The new KSAs will be a Korean translation of the Clarified ISAs issued as a result of the IAASB Clarity Project. According to the KICPA, all changes made to KSAs will be in line with the IAASB’s Modifications Policy. As of March 2010, however, there is no information as to whether this plan has been implemented.
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IDAnti-Money Laundering/Combating Terrorist Financing Standard
In 2009, the Financial Action Task Force (FATF) and the Asia/Pacific Group on Money Laundering (APG) conducted a mutual evaluation of South Korea's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime against the FATF's 40 recommendations and 9 special recommendations. The results of the report show several shortcomings in South Korea's AML/CFT framework. Most importantly, the country receives only a partially compliant rating with three of the five core recommendations as stipulated by the FATF. The country is rated partially compliant with recommendation (R) 5, R 13, and special recommendation (SR) II, all of which require a largely compliant or compliant rating in order for a country to have an effective AML/CFT regime. In the view of the FATF/APG, while South Korea has explicitly outlawed money laundering and terrorism financing, the existing legislation does not go far enough in criminalizing these actions. Certain powers of enforcement are limited, customer due diligence laws are inadequate, and international treaties on AML/CFT remain to be signed or ratified. Despite these drawbacks, the United States Department of State affirms that overall, South Korea has been a cooperative partner in the fight against financial crimes. The FATF, in its 2008-2009 Annual Report, names South Korea (or the Republic of Korea) as one of the jurisdictions that have endorsed the FATF's 40+9 recommendations.
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IICore Principles for Systemically Important Payment Systems
A 2008 Financial Stability Report (FSR) by the Bank of Korea classified eight payment systems in the country, at the time, as being systemically important. They were BoK's BOK-Wire, Bill Clearing System, Interbank Funds Transfer System, Interbank Electronic Banking Network, Over the Counter Bond Market Settlement System, Securities Market Settlement System, KOSDAQ Market Settlement System, and the Futures Market Settlement System. Of these systems, the latter four are securities settlement systems and therefore not assessed against the Committee for Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). The 2008 FSR concluded that the three retail payment systems, namely the Bill Clearing System, Interbank Funds Transfer System and Interbank Electronic Banking Network, were appraised by the BoK and all proved to satisfy international standards for safety and efficiency. The assessment itself is not publicly available on the BoK website. Moreover, in April 2009, the BOK-Wire+ system came online replacing the old BOK-Wire system. As of March 2010, there is no available comprehensive assessment of the BOK-Wire+ system. Two assessments of the original BOK-Wire system by the International Monetary Fund and the BoK itself, while obsolete in most respects, are still valid for their examination of the legal foundation for South Korea’s payment systems. While these reports provide some insight, they do not represent a comprehensive evaluation of South Korea’s payment systems against the CPSIPS.
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