Insufficient Information Summary

At the time of the International Monetary Fund's (IMF) 2003 Financial System Stability Assessment, it was noted that South Korea had an effective legal framework. In addition, both the accounting and actuarial professions were in place. The IMF report concluded that South Korea had achieved a high degree of compliance with the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October 2000. However, the insurance sector remained financially weak with a large number of undercapitalized life insurance companies. Shortcomings further remained with regards to government intervention in the direct insurance business, listing of insurance entities on the stock exchange, price and product liberalization, and capital requirements for insurance companies. On February 29, 2008 the Financial Supervisory Commission, which integrated the Insurance Supervisory Board with three other financial sector regulators in 1998, merged with the Financial Policy Bureau of the former Ministry of Finance and Economy to become the Financial Services Commission (FSC). The Financial Supervisory Service (FSS) - the implementing body of the FSC - acts as Korea's integrated financial regulatory and supervisory authority. Given the change in the regulator in 2008, and the revision of the ICPs and Methodology by the IAIS in October 2003, there is insufficient information publicly available regarding South Korea's compliance with these more stringent principles. However, several recent FSS and third party reports elaborate upon the FSS’s efforts to enhance supervision, notably in the areas of risk based capital regime, financial reporting and disclosure, fraud prevention, and anti-money laundering.

General Overview

The insurance industry in South Korea is relatively young, and started taking root only in the 1960s, when three key insurance sector laws were enacted. These acts, promulgated in 1962, were consolidated in 1977 into the Insurance Business Act. It was then wholly amended by the Insurance Business Act No. 6891 of 2003 and subsequently revised in March 2008. This act is now the central insurance law in the country. The insurance sector was regulated and supervised by the Insurance Supervisory Board (ISB) until 1999. Even with the legal framework in place and a dedicated insurance supervisor, a 2008 FSS’s Financial Supervisory (FS) System report observes that the insurance industry did not develop to an appreciable extent mainly due to barriers to entry and over-regulation. The Korea Insurance Development Institute (KIDI) essentially set the insurance premium rates until 1998 for the non-life insurance sector and until 2000 for the life insurance sector, when these sectors were respectively deregulated. The KIDI, nonetheless, still reviews premium rates on an annual basis. After years of consultation since the 1980s to unify financial sector supervision and as a direct response to the Asian financial crisis of 1997, the Korean government created in April 1998, the Financial Supervisory Commission, after consolidating the four financial supervisory authorities, namely the Insurance Supervisory Board (ISB), the Office of Bank Supervision, the Securities Supervisory Board, and the Non-bank Supervisory Authority. In 1999, the ISB was dissolved as a result of the consolidation. In 2008, the Ministry of Finance and Economy and the Ministry of Planning and Budget merged into the Ministry of Strategy and Finance (MoSF). On February 29, 2008 pursuant to the 2008 amendment to the Act on the Establishment of Financial Services Commission, the Financial Supervisory Commission was integrated with the Financial Policy Bureau of the former Ministry of Finance and Economy to become the Financial Services Commission (FSC).

The Financial Supervisory Service (FSS), formerly established under the Financial Supervisory Commission, is the implementing body of the FSC, and acts as Korea's integrated financial regulatory and supervisory authority. The FSS is a member of the International Association of Insurance Supervisors (IAIS). The FSS’s Life Insurance Service Department, per a 2009 report published jointly by the Financial Action Task Force (FATF) and the Asia/Pacific Group (APG), has 133 supervisory personnel, and has designated teams for ongoing monitoring as well as on-site inspections. Supervision by the FSS is conducted on a consolidated and risk basis and inspections are planned on an annual basis with quarterly reviews in the light of changing circumstances and demands of the industry, the FATF/APG report finds.

In March 2003, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment of South Korea, including an assessment of the country's compliance with the Insurance Core Principles (ICPs) issued by the IAIS in October 2000. The report concluded that South Korea had achieved "a high degree of compliance" (p. 16) with the IAIS ICPs. In addition, an effective legal framework, as well as the accounting and actuarial professions, appeared to be in place in South Korea. However, the insurance sector remained financially weak with a large number of undercapitalized life insurance companies. Shortcomings further remained with regards to government intervention in the direct insurance business, listing of insurance entities on the stock exchange, price and product liberalization, and capital requirements for insurance companies.

At the time of the IMF's 2003 report, it was noted that supervisory authorities had achieved a high level of compliance in their insurance regulatory regime. The IMF suggested that Korean authorities strengthen the operational independence of the Financial Supervisory Commission and the FSS by allowing laws in the financial sector to be implemented by regulation. The former Ministry of Finance and Economy was further encouraged to refrain from interpreting and reviewing decrees, regulations, and rules, which could hinder the operational independence of the Financial Supervisory Commission and the FSS. In addition, it was recommended that legislation be amended to give supervisors protection for actions performed while discharging their duties in good faith. Given the change in the regulator in 2008, and the revision of ICPs and Methodology by the IAIS in October 2003, there is insufficient information publicly available regarding South Korea's compliance with these more stringent principles.

Following the onset of the 1997-1998 financial crisis, 9 life insurers were dissolved, and five life insurers were merged as part of the financial structural and stabilization reforms. The insurance business in South Korea is divided into life, non-life, and a third-sector (i.e. insurance having characteristics of both life and non-life insurance), the FSS’s 2008 FS System report notes. As of December 2008, according to the same FSS report, South Korea had 22 life insurance companies and 30 non-life insurance companies. Of the 22 life insurance companies, 14 were domestic insurers, 7 were foreign firms, and 1 was a branch of a foreign insurance company. Of the 30 non-life insurance companies, 20 were property and liability insurance companies, 9 were reinsurance firms, and 1 was a guarantee insurance company. The non-life insurance companies included 2 foreign companies, and 14 branches of foreign companies. A 2009 FSS report entitled “Financial Supervisory Service 2009” (hereafter referred to as FSS 2009 report) states that, due to the effects of the current global financial crisis, assets of companies clocked a growth of 8.5 percent (Korean Won -KrW- 391.9 trillion) at the end of 2008, which was slower than that recorded in 2007. The report attributed it to a fall in premium income, spikes in policy cancellations, and low investment yields in the year when the global financial crisis took its toll around the world.

The Principles

IIICP 1 Conditions for effective insurance supervision

The legal framework for insurance supervision is mainly based on the Insurance Business Act No. 6891 of 2003, which was subsequent revised in March 2008. According to the IMF's 2003 report, an effective legal framework appeared to be in place. In addition, both the accounting and actuarial professions were well established in South Korea. The IMF noted that as actuaries were less present than accounting and auditing professionals, the KIDI became more involved in extensive research projects, undertaken by the actuarial profession in normal circumstances. The IMF report advised that the actuarial profession "make greater use of more sophisticated financial techniques" (p. 40). Despite the information provided above, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 2 Supervisory objectives

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 3 Supervisory authority

As mentioned earlier, in April 1998, the Korean government created the Financial Supervisory Commission, after consolidating the four financial supervisory authorities, namely the Insurance Supervisory Board, the Office of Bank Supervision, the Securities Supervisory Board, and the Non-bank Supervisory Authority. The Insurance Supervisory Board, which was responsible for the regulation of the insurance market, was dissolved in 1999 as a result of the consolidation. In 2008, the Ministry of Finance and Economy and the Ministry of Planning and Budget merged into the MoSF. On February 29, 2008, pursuant to the 2008 Amendment to the Act on the Establishment of Financial Services Commission, the Financial Supervisory Commission was integrated with the Financial Policy Bureau of the former Ministry of Finance and Economy to become the FSC. The FSS, formerly established under the Financial Supervisory Commission, is the implementing body of the FSC, and acts as Korea's integrated financial regulatory and supervisory authority.

At the time of the IMF's 2003 report, it was noted that supervisory authorities had achieved a high level of observance in the insurance regulatory regime. The IMF suggested that Korean authorities strengthen the operational independence of the Financial Supervisory Commission and the FSS by allowing laws in the financial sector to be implemented by regulation. The former Ministry of Finance and Economy was further encouraged to refrain from interpreting and reviewing decrees, regulations, and rules that could hinder the operational independence of the Financial Supervisory Commission and the FSS. In addition, it was recommended that legislation be amended to give supervisors protection for actions performed while discharging their duties in good faith. Following the shift in the regulators in South Korea in 2008, there is insufficient information publicly available addressing South Korea's compliance with this principle.

IIICP 4 Supervisory process

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS. However, in a February 2010 newsletter, the FSS states that it will make concerted efforts to improve the transparency of its supervisory process and activities so as to “enhance the public’s trust in financial supervision” (p. 6). The actions that the FSS intends taking include more open communication with the market participants, independent third-party evaluation of its supervisory performance by experts, information dissemination through media outlets, and new partnerships with the financial services industry, among others. The FSS also stated its plan to pursue staff specialization and organizational innovation on a larger scale in the newsletter.

IIICP 5 Supervisory cooperation and information sharing

At the time of the IMF's 2003 report, it was noted that "consultation with home supervisors is practiced" (p. 42). On the other hand, foreign companies were allowed to operate with only limited requirements in South Korea. In this regard, the IMF report recommended restricting the ability of insurance companies "to write business in South Korea from other jurisdictions without limitation" (p. 42). According to the 2008 FSS annual report, the FSS organized the IAIS Tri-annual Meetings and Global in June 2008 in Seoul, and also participated in meetings of the International Organization of Pension Supervisors (IOPS). This was in line with the FSS’s objective of fostering international cooperation with foreign insurance regulators. The FSS’s February 2010 newsletter reiterates the regulator’s resolve to “step up its engagement with foreign supervisors and participation in global standard-setting discussions…in recognition of the heightened importance of cross-border cooperation and coordination in financial regulation and supervision” (p. 5). Nevertheless, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 6 Licensing

At the time of the IMF's 2003 report, it was noted that the supervisory authorities "operate a sound licensing regime which addresses all the IAIS criteria" (p. 40). The IMF report recommended abolishing restrictions on licensing approvals which were time based. However, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 7 Suitability of persons

The IMF's 2003 report noted that while fit and proper tests were already applied to board members in a formal manner, they should also be formally applied to senior management. In this context, the 2009 FATF/APG report finds that under the Insurance Business Act, during the licensing process, the FSS “must examine the qualifications of shareholders and management to help the institution to establish sound management” (p. 137). Major shareholders as well as managers are also subject to intense examination as to their qualification on an ongoing basis. Major shareholders, as well as shareholders having a special relationship with other major shareholders, or a financial institution with control/influence over the firm’s management, must have qualifying investment capacity, financial position, social reputation, and are also tested for violations of law or proper business conduct and the legitimacy and propriety of their investment funds. As for the suitability of the company’s management, examinations test for knowledge and experience, prior disqualifications, and safety to the public interest, apart from general considerations, such as age, competency, legal capability, solvency, imprisonment or criminal confinement, past disciplinary action, responsibility for the repeal of a company’s business license in the last five years, etc. Importantly, “any persons who fall on the categories…may not become, or should be disqualified if any of these factors arise after commencement of appointment” (p. 137), the FATF/APG report states. Executives of insurance entities are also barred from working full-time in other for-profit organizations. Further, as the FATF/APG report notes, appointment and dismissal of executives by insurance companies are also subject to FSS review. Despite the above description, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 8 Changes in control and portfolio transfers

Korean authorities were considering the requirement for approval of changes in control at the time of the IMF's 2003 report. However, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 9 Corporate governance

With regards to audit committees, according to the IMF's 2003 report, the requirements were in place but have not reached "a full cycle to ensure that the desired results are being achieved" (p. 41). The IMF report recommended separating the roles between the chairman, the chief executive, and actuaries with official responsibilities. It was further suggested to establish a mechanism for filling casual vacancies of non executive directors. A 2009 report by Global Legal Group (GLG) states that there has been a “slow but distinct” trend toward greater transparency in South Korean corporate governance. The report observes that this trend has been predominantly more of a result of “evolving disclosure and procedural habits of companies, rather than changes in law per se” (p. 89). According to a 2009 article entitled “South Korea: Bucking the Trend”, by Tae Park and Steven Hahn, the Financial Investment Services and Capital Markets Act, or FSCMA, became effective on February 4, 2009 and consolidated six different laws, including the Securities and Exchange Act. A 2009 report by H.J. Kim states that the rules in the repealed Securities and Exchange Act that governed corporate governance of listed companies, were moved to the Commercial Code. The enactment of the FSCMA therefore resulted in a simultaneous amendment to the Korean Commercial Code. In addition to this, the 2009 report by GLG states that further amendments to the Commercial Code were passed in April 2009. The amendments will permit certain types of electronic communication between companies and shareholders, as well as relax certain restrictions for smaller listed companies. Furthermore, the GLG report also takes note of several other future amendments in the pipeline. Nevertheless, there above information does not directly address South Korea's compliance with this principle.

IIICP 10 Internal control

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS. The 2009 FATF/APG report, nonetheless, notes that the Insurance Business Act requires insurance entities to establish and maintain internal control policies and procedures. The institutions are also required to appoint at least one compliance officer to monitor the internal control function and possible breaches of its policies/procedures. However, it does not require that the compliance officer be of a managerial level. An audit committee under the board of directors is mandated to be established to which the compliance officer reports. The appointment of the members of the audit committee is strictly regulated by the Insurance Business Act to ensure their independence. However, the source of their compensation is not regulated, the FATF/APG observe.

IIICP 11 Market analysis

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 12 Reporting to supervisors and off-site monitoring

At the time of the IMF's 2003 assessment, it was reported that "financial reporting to the FSS is satisfactory and all information is systematically analyzed off-site and subject to verification as part of the on-site inspection processes" (p. 42). According to the 2008 FS System report, the FSS undertakes off-site monitoring through a surveillance system that checks the soundness of supervised entities. Off-site monitoring also involves assessing and analyzing entities’ reports and documents. Per the report, off-site monitoring is used to recommend improvements, preparing for future on-site examinations of entities’ weaknesses, as well as adjusting evaluation ratings of management status. As for reporting and accounting standards, the report mentions the FSS roadmap for the adoption of International Financial Reporting Standards (IFRS), under which reporting will be made mandatory for all listed companies starting 2011. In this regard, the February 2010 newsletter by the FSS documents the FSS’s plans to make concerted efforts to “ensure a smooth commencement” (p. 6) of IFRSs. In the insurance sector, the FSS, per its 2008 annual report, conducted an impact analysis of the IFRS implementation on the insurance sector, as well as the latter’s readiness to adopt them. The FSS also held explanation sessions for insurance companies and designed a guidebook for them to “make the switch from the ’three-factor’ premium computation to the more widely used cash flow pricing model and began initial testing” (p. 41). Despite the above description, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 13 On-site inspection

At the time of the IMF's 2003 assessment, it was reported that "the legal basis for on-site inspections is set out in the law" (p. 42). It was further noted that inspections dealt with global as well as specific matters. The IMF recommended clarifying the ability of the supervisor to formally conduct inspections of outsourced service providers. In this respect, the 2009 FATF/APG report finds that the FSS regulation on Examination and Sanctions Against Financial Institutions (as amended through 2006) governs on-site inspections by the FSS and stipulates global consolidated supervision. Therefore, the home country supervisor and the company headquarters must be notified of sanctions for violations taken by the FSS on a foreign branch or subsidiary in South Korea. The regulation “establishes: procedures and requirements for off-site surveillance; authority and responsibility of examiners; procedures for on-site examinations; process and content of reports of examination results; the notification to financial institutions of rectification measures to be taken; and, sanctions for any illegal or improper acts of examiners” (p. 139), the FATF/APG report states. The 2008 FS system report states that the on-site inspections are divided in two parts; regular on-site inspections and targeted examinations. On-site inspections, per the FS system report, focus on “soundness of assets, regulatory compliance, adequacy of internal control systems, evidence of fraud, embezzlement, and other irregularities, accuracy of numerical data and reports submitted to the FSS, and other information collected” (p. 93).Nevertheless, the above cited sources do not directly address South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 14 Preventive and corrective measures

The IMF's 2003 report noted that the Korean authorities had established "a regime of prompt corrective action requirements" (p. 42). However, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 15 Enforcement or sanctions

According to the IMF's 2003 report, the Financial Supervisory Commission and the FSS had a range of sanctions at their disposal, including the denial or revocation of licenses, and the dismissal and replacement of boards of directors and management. In addition, the IMF report noted that the Financial Supervisory Commission and the FSS had the authority "to issue fines, limit business activity, force dealing with assets, and require the transfer of assets and liabilities to others or impose conservatorship" (p. 42). As mentioned earlier, as of February 29, 2008, the FSS, the implementing body of the FSC, acts as Korea's integrated financial regulatory and supervisory authority. Following the change in the regulator in South Korea in 2008, there is insufficient information publicly available addressing South Korea's compliance with this principle. However, as the 2009 FATF/APG report mentions, the Regulation on Examination and Sanctions against Financial Institutions (as amended through 2006) introduces a common supervisory regime for the imposition of disciplinary measures and sanctions across financial sector entities. Sanctions range from civil and administrative to penal and encompass financial entities as well as their managers and employees, the FATF/APG observe.

IIICP 16 Winding-up & exit from the market

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 17 Group-wide supervision

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 18 Risk assessment and management

The IMF's 2003 report noted that the Korean authorities had established a comprehensive set of prudential rules following the 1997-1998 Asian financial crisis. According to the 2009 FSS report, the FSS conducts an assessment of supervised entities’ risk management systems. Nevertheless, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 19 Insurance activity

According to the IMF's 2003 report, Korean authorities had established a comprehensive set of prudential rules following the 1997-1998 Asian financial crisis. Per the same report, the supervisor was responsible for assessing "reinsurance recoveries being claimed against gross provisions" (p. 41). Nevertheless, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 20 Liabilities

The IMF's 2003 report noted that the Korean authorities had established a comprehensive set of prudential rules following the 1997-1998 Asian financial crisis. Per the same report, the supervisor was responsible for assessing "the adequacy of liabilities and technical provisioning through off site analysis and on site inspections" (p. 41). The KIDI also provided technical information to insurance companies. Nevertheless, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 21 Investments

The IMF's 2003 report noted that the Korean authorities had established a comprehensive set of prudential rules following the 1997-1998 Asian financial crisis. Per the same report, "asset rules provide for asset management, financial derivatives, the mixture and diversification of assets, credit risk limits, and the treatment of particular types of assets" (p. 41). According to the 2009 FSS report, investment income suffered as a result of the current global financial crisis. As of March 2009 (end of 2008 Fiscal Year), the value of long-term stock investments reduced the income of life insurance companies by KRW 600 billion, and that of the non-life insurance sector by KRW 200 billion, compared to 2007. However, the above cited information does not directly address South Korea’s compliance with this principle.

IIICP 22 Derivatives and similar commitments

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 23 Capital adequacy and solvency

According to the IMF's 2003 report, Korean authorities had established a comprehensive set of prudential rules following the 1997-1998 Asian financial crisis. The IMF report suggested further enhancing capital adequacy requirements. Korean authorities were advised to "address capital levels through regulatory change and sanction but also through administrative incentives" (p. 43). At the end of March 2008, the solvency margin ratio of life and non-life insurance companies reached 237.9 percent and 288.4 percent, respectively. The FSS's 2008 report underlined that these ratios were "well above the recommended guidelines" (p. 5). According to the 2008 FS System report, the FSC/FSS adopted the EU based solvency margin ratio as its benchmark for financial soundness of insurance companies. The ratio was computed as a ratio of actual solvency margin to statutory solvency margin. As regards capital, the FS System report mentions that the FSS uses the CAMEL (Capital adequacy, Asset soundness, Management, Earnings, and Liquidity) system to assess insurance companies. This system is different from the CAMEL system used to evaluate banks and securities companies. The 2008 FSS annual report states that Korean authorities completed the implementation for a risk-based capital for insurance companies in November 2008 and this went into force on April 1, 2009, thereby voiding the solvency margin ratio regime previously in effect. The new regime, per a 2009 Korea Non-life Insurance Association (KNIA) report, requires insurance companies to compute the equity capital required on the basis of their overall risks, including insurance risk, interest risk, credit risk, operating risk, etc. as well as underwriting-based loss ratio, risk management by insurance type, risk management reflecting characteristics of invested assets, etc. The KNIA report remarks that the new risk-based capital (RBC) system “is expected to enable risk management in advance by quantifying all potential risks faced by insurance company” (p. 53). However, the above cited information does not directly address South Korea’s compliance with this principle.

IIICP 24 Intermediaries

There is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 25 Consumer protection

According to the 2008 FSS annual report, insurance sellers are required to comply with certain codes of conduct developed by the Korean authorities to ensure professional conduct and improve consumer protection. Per the report, in 2008, the FSS regularly conducted public consumer information services to help consumers better understand the insurance products. In addition, the FSS initiated steps to improve consumers’ understanding of insurance contracts. According to the 2009 FSS report, Korean authorities amended disclosure regulations for insurance products, thereby requiring insurance companies to issue explanations to accompany “highly technical terms and conditions of insurance contracts” (p. 21) for consumers. In addition, per the same report, on April 1, 2009, South Korea introduced more stringent expense and disclosure fee requirements on savings-type variable insurance. Insurance companies are required to disclose detailed information on expense charges and fees placed on policy holders of savings-type variable insurance. The FSS’s aim is to ensure and promote the business transparency of insurance companies, as well as to see customer complaints lowered, the report elaborates. Yet another focus of the FSS in the area of consumer protection is the prevention of unfair business practices that harm consumers, and as mentioned in its February 2010 newsletter, the FSS plans to sanction false or misleading advertisements for insurance products or services. Consumer complaint management and consumer finance education will also be stepped up. Complaint resolution by the FSS will be speeded up and consumer feedback will be responsively handled to enhance customer service, the newsletter adds. Despite the above description, there is insufficient information directly addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 26 Information, disclosure & transparency towards the market

According to the 2008 FSC annual report, the FSS undertook inspections of supervised entities to assess their compliance level with disclosure requirements of their products. Nonetheless, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 27 Fraud

According to the 2008 FSC annual report, the FSS enhanced its computer insurance fraud recognition system, which increased the monitoring and inspection of fraud in insurance claims. This was part of the FSS’s initiative to curb insurance fraud. The February 2010 newsletter by the FSS also documents the upgrade of the insurance fraud database analysis system of the FSS that it shares with insurance companies to help detect insurance fraud on February 1, 2010. The upgrade not only enhances the data processing capacity but also the data verification functions of the system. Further, the newsletter reveals the FSS’s plan to take “strong enforcement action against…insurance fraud” (p. 6), and its intent to tighten financial reporting and disclosure requirements to facilitate fraud prevention and create a level playing field for all participants. Despite the above description, there is insufficient information directly addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.

IIICP 28 Anti-money laundering/ Combating the Financing of Terrorism

As stated on the Financial Action Task Force, or FATF, website, South Korea is a member of the Asia/Pacific Group on Money Laundering, a FATF-style regional body. South Korea became an FATF Observer in October 2006, and is working towards becoming a full member of the FATF. At the time of the IMF's 2003 assessment, the exchange of information between the insurance supervisors and the anti-money laundering authorities was at an early stage of development. According to the U. S. Department of State's (DoS) 2009 International Narcotics Control Strategy Report, South Korea is not an attractive haven for international financial crimes or terrorist financing. Pursuant to the Financial Transaction Reports Act (FTRA) of 2001, financial institutions are required to report suspicious transactions to the Korea Financial Intelligence Unit (KoFIU), established in November 2001, as well as conduct customer due diligence (CDD).. South Korea amended the FTRA in December 2007 and it became effective in December 2008. This, per the report, strengthened Korea’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime, by notably establishing suspicious transaction reporting obligations as regards terrorist financing.

In 2009, the FATF and the APG prepared a joint mutual evaluation report of South Korea’s AML/CFT regime. The report notes that the Korean AML/CFT regime applies to the insurance sector and is comprised chiefly of the FTRA (subsequently amended through 2007). Further, the KoFIU issued the AML Enforcement Guidelines in September 2008, which recommends important prudential measures that financial entities can take. However, this guideline is not enforceable since it does not carry the sanction of a law. The FSS, which supervises insurance companies, subjects them to “relatively frequent and in depth AML/CFT inspections” (p. 10), per the FATF/APG report. However, these inspections are also narrow and limited to checking for the entities’ compliance with their suspicious transaction reporting/currency transaction reporting (STR/CTR) and other reporting obligations. The customer due diligence (CDD) requirements for entities are risk based and include enhanced due diligence. The report finds that all entities are already incorporating a risk-based approach to CDD in their compliance programs. Nonetheless, the CDD and STR reporting measures, internal controls, as well as its supervisory oversight regime, are found deficient against the FATF recommendations. The report does find that STR/CTR by insurance entities has been steadily increasing over the years. The record keeping regime is also largely compliant with the FATF recommendations. By way of recommendation, the FATF/APG report suggests making AML/CFT inspections by the FSS broader, strengthening fit and proper testing of shareholders and management of insurance entities, making the Enforcement Guidelines mandatory, and reconsidering the exemption accorded to certain insurance transactions from CDD requirements. In terms of the criminalization of terrorist financing, the FATF/APG report notes that South Korea's "terrorist financing offence does not adequately cover provision/collection of funds for an individual terrorist or terrorist organization [and] terrorist financing is not a predicate offence for money laundering" (p. 211). Moreover, the FATF/APG assessors acknowledged that at the time of the report it was too soon to determine the effectiveness of the terrorist financing offence as it had come into force only on December 22, 2008. Despite the detailed reports, there is insufficient information publicly available addressing South Korea's compliance with this principle as revised in 2003 by the IAIS.