Legal Review of Arbitrage Trading via Kimchi Premium and Cross-Border Remittances

Client Information

Corporate / Principal
 

Case Details

The client planned to execute foreign remittances worth several hundred billion KRW monthly.

Such large-scale remittances are subject to rigorous monitoring by regulatory authorities, and failure to adhere to proper procedures can result in penalties under the Foreign Exchange Transactions Act. Historical precedents have shown that substantial capital movements based on falsified documents have led to severe penalties by financial authorities, including criminal sanctions depending on the scale of the transactions.

To ensure compliance, the client sought a legal review of their proposed large-scale foreign currency remittances.

The arbitrage business leveraging the "Kimchi Premium" operates by capitalizing on the price differences between cryptocurrency markets in Korea and abroad. The typical process involves transferring foreign currency from Korea to purchase cryptocurrency overseas, which is then resold domestically at a premium for profit.

This business model is subject to numerous legal and regulatory requirements under the Foreign Exchange Transactions Act, and the obligations differ depending on whether the business entity is an individual, a sole proprietor, or a corporation.

[Individual]
- Annual Remittance Limit: Individuals are restricted to an annual limit of USD 50,000 for remittances. Exceeding this limit requires supporting documentation and must be reported to the National Tax Service (NTS) and other authorities.
- Penalties for Violations: Any unauthorized excess remittance may result in fines or criminal prosecution.

[Sole Proprietor]
- Supporting Documentation: Sole proprietors can remit funds exceeding the standard limit if supported by evidence of trade or capital transactions.
- Regulatory Obligations: Profits derived from arbitrage must be reported to the NTS. Failure to do so can lead to legal liabilities.

[Corporation]
- Enhanced Scrutiny: Corporations are subject to stricter requirements for large-scale remittances. Each transaction must clearly state its purpose, such as trade or capital transactions, and must be substantiated with appropriate documentation.
- Risks of Non-Compliance: Non-compliance or submission of falsified documents can lead to penalties under the Foreign Exchange Transactions Act, including fines and charges of business interference.