Will the Amendment to the Specific Financial Transactions Act Lead to Capital Outflow Rather Than Strengthening AML?

There are mounting concerns that the proposed amendment to the Specific Financial Information Act, aimed at strengthening anti-money laundering (AML) for virtual assets, could instead lead to a "regulatory backlash." Experts believe that the potential for capital outflow and increased burdens on users outweighs the practical benefits of anti-money laundering.

Intended to strengthen AML, but effectiveness questionable

At a seminar held at the National Assembly on the 12th titled 'US Stablecoin AML Regulatory Framework and Tasks for Reforming Korea's Specific Financial Transactions Act,' Han Seo-hee, an attorney at Law Firm Kwangjang, stated, "Although the system was introduced for the purpose of preventing money laundering, it is difficult to view it as necessarily favorable for AML."

The Financial Services Commission announced a legislative notice for an amendment to the Enforcement Decree of the Act on Reporting and Use of Financial Transaction Information (Special Financial Transactions Act) last March. The amendment includes: expanding the scope of application of the Travel Rule; mandating automatic reporting of Suspicious Transaction Reports (STRs) for transactions of 10 million won or more; refusing transactions if information is not provided; and restricting deposits and withdrawals from personal wallets.

While this is a measure intended to revise the system in accordance with FATF standards, experts view it as a concern that it could lead to side effects during actual operation.

"Automatic reporting based on 10 million won threshold could actually encourage regulation evasion"

A particularly controversial aspect is the 'automatic STR reporting based on amount.' One lawyer pointed out that this measure could conflict with the FATF recommendations and the 'reasonable grounds' principle required by the Specific Financial Transactions Act.

If transactions exceeding a certain amount are collectively deemed suspicious, there is a high likelihood that 'smurfing,' where users split transactions to evade regulations, will increase. For example, this involves splitting transfers into units of 9.9 million won to avoid the 10 million won threshold.

In this case, there is also an analysis suggesting that not only will the burden of fees increase due to the rise in the number of transactions, but tracking could actually become more difficult.

Concerns over 'regulatory reversal' as funds move to overseas exchanges

There are also concerns about a "regulatory reversal" phenomenon, where assets flow overseas as domestic regulations tighten. This means there is a growing possibility that funds will move to overseas exchanges or individual wallets where regulations are relatively lax.

This could result in funds flowing out of the scope of supervision by domestic financial authorities, contrary to the policy intent of strengthening the AML system.

Jeong Sang-hoon, Vice President of Jeonbuk Bank, and Hwang Seok-jin, a professor at Dongguk University, also pointed out that excessive regulations could lead to the infringement of property rights beyond user inconvenience.

FIU holds further discussions with exchange… Attention focuses on whether regulations will be supplemented

Financial authorities also appear to be aware of the controversy. The Financial Intelligence Unit (FIU) plans to hold a meeting to gather opinions with the Digital Asset Exchange Association (DAXA) and domestic exchanges on May 13.

The government has been promoting the advancement of the AML system since the 2019 FATF evaluation, and introduced the virtual asset business operator reporting system in 2021, currently managing 27 operators.

However, the key variable in this amendment to the Act on Reporting and Use of Financial Transaction Information is how to strike a balance between the goal of "anti-money laundering" and "market realities." Attention is focused on the direction of future improvements, as a failure to ensure the effectiveness of the regulations could lead to adverse effects such as market contraction and capital outflow.