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South Korea

3. Legal Regime

Transparency of the Regulatory System

ROK regulatory transparency has improved in recent years, due in part to Korea’s membership in the WTO and negotiated FTAs.  However, the foreign business community continues to face numerous Korea-unique rules and regulations.  Approximately 80 percent of regulations are introduced and passed by the National Assembly without a regulatory impact assessment (RIA) due to a loophole that requires only regulations written by ministries to undergo RIAs.  While these regulations may have well-intended social aims, such as consumer protection or the promotion of SMEs, they often have unintended consequences for the economy by creating new trade barriers that disadvantage foreign companies.  Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently.  Written guidelines are often issued by ministries to advise implementation of regulations, yet these non-legally binding guidelines provide a strong basis for legal interpretation in ROK courts.  Regulatory authorities often issue oral or internal guidelines or other legally enforceable dictates that prove burdensome and difficult to follow for foreign firms.  Intermittent ROKG deregulation plans intended to eliminate the use of oral guidelines or subject them to the same level of regulatory review as written regulations have not led to concrete changes.  Despite KORUS FTA provisions designed to address these issues, they remain persistent and prominent.

The ROK constitution allows both the legislative and executive branches to introduce bills.  The legal norm is for regulations to be introduced in the form of an act.  Subordinate statutes (presidential decree, ministerial decree, and administrative rules) largely govern matters promulgated by acts and are drafted by ministries.  Acts and their subordinate regulations can all be relevant for foreign businesses.  Administrative agencies shape policies and draft bills on matters under their respective jurisdictions.  Drafting ministries are required to clearly set policy goals and complete RIAs.  When a ministry drafts a regulation, it is required to consult with other relevant ministries before it releases the regulation for public comment.  The constitution also allows local governments to exercise self-rule legislative power to draft ordinances and rules within the scope of federal acts and subordinate statutes.  The enactment of acts and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures in accordance with the Regulation on Legislative Process enacted by the Ministry of Legislation.  Since 2011, all publicly listed companies have been required to follow International Financial Reporting Standards (IFRS, or K-IFRS in South Korea).  The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS.  According to the Administrative Procedures Act, proposed laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation.  Regulations are sometimes promulgated with only the minimum required comment period, and with minimal consultation with industry.

Regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods.  As a result, 80 percent of all new regulations are written and passed through the National Assembly without rigorous quality control and solicitation of public comments.  The Korean language text of draft acts and regulations accompanied by executive summaries are published online in the Official Gazette and simultaneously posted on the websites of relevant ministries and the National Assembly.  This is required under the ROK’s public notification process that includes a 40-day comment period.  Foreign firms’ analyses and responses are often delayed because of the need to translate complex documentation.  The Ministry of Government Legislation reviews whether laws and regulations conform to the constitution and monitors government adherence to the Regulation on Legislative Process.  All laws and regulations also undergo review by the Regulatory Reform Committee to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness.

In January 2019, Korea introduced a “regulatory sandbox” program intended to reduce the regulatory burden on companies that seek to test innovative ideas, products, and services.  The program is managed by either MOTIE, the Ministry of Science and ICT, or the Financial Services Commission, depending on the business sector in which a particular proposal falls.  The program is open to Korean companies and to any foreign company with a Korean branch office.  Websites and applications are only offered in Korean.  Despite its limited nature, the initiative is a welcome effort by regulators to spur innovation.

The ROKG enforces regulations through penalties (either fines or criminal charges) in the case of violations of the law.  The government’s enforcement actions can be challenged through an appeal process or administrative litigation.  The CEOs of local branches can be held legally responsible for all actions of their company and at times have been arrested and charged for their companies’ infractions.  Foreign CEOs have cited this as a significant burden to their business operations in Korea.

Business regulation in the ROK often lacks empirical cost-benefit analysis or impact assessment on the basis of scientific and data-driven assessment because regulations are finalized without sufficient stakeholder consultation or passed by the National Assembly without a regulatory impact assessment.  When ministries draft regulations, they must submit their RIA to the Regulatory Reform Committee for its determination on whether the regulation restricts rights or imposes excessive duties.  These RIAs are usually not publicly available for comment, and comments received by regulators are not made public.  The ROK’s public finances and debt obligations are generally transparent, with some lingering concerns related to state-owned enterprise debt.

International Regulatory Considerations

Though not part of any regional economic bloc (pending finalization of and accession to RCEP), the ROK has revised various local regulations to implement commitments under international treaties and agreements including FTAs.  Treaties duly concluded and promulgated in accordance with the Constitution and the generally recognized rules of international law are accorded the same standing as domestic laws.  ROK officials consistently express a desire to harmonize standards with global norms by benchmarking the United States and the EU.  The U.S., U.K., and Australian governments exchange regulatory reform best practices with the ROKG to encourage ROK regulators to incorporate more regulatory analytics, increase transparency, and improve compliance with international standards; however, Korea-unique rules and regulations continue to pose difficulties for foreign companies operating in the ROK.  The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations.  The ROK is also a signatory to the Trade Facilitation Agreement (TFA).  The ROK amended the ministerial decree of the Customs Act in 2015, creating a committee charged with implementation of the TFA.  The ROK is a global leader in terms of modernized and streamlined procedures for the transportation and customs clearance of goods.  Industry sources report the Korea Customs Service enforces rules of origin issues largely in compliance with free trade agreements.

Legal System and Judicial Independence

The ROK legal system is based on civil law.  Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency.  The ROK has a written commercial law, while matters regarding contracts are covered by the Civil Act.  There are only three specialized courts in the ROK: the patent, family, and administrative courts.  In civil cases, courts deal with disputes surrounding the rights of property or legal relations.  The ROK court system is independent and not subject to government interference in cases that may affect foreign investors.  Foreign court judgments are not enforceable in the ROK.  Rulings by district courts can be appealed to higher courts and the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Laws and regulations enacted within the past year include:

  • In January 2019, the government amended the premium pricing policy for global innovative drugs following discussions that took place as part of the negotiations that led to revisions in the KORUS FTA. However, the policy’s criteria are extremely narrow, and industry expressed concern the new policy will have little impact on improving the reimbursement value of global innovative drugs.
  • In March 2019, the National Assembly enacted a Low Emission Vehicle (LEV)/Zero-Emission Vehicle (ZEV) mandate, which would require a certain percentage of a manufacturer’s Korean fleet to be composed of low- and zero-emission vehicles. In April 2020, Korea issued a draft implementing regulation that removed concerns by U.S. automobile manufacturers that the parameters of the LEZ/ZEV mandate may constitute a non-tariff barrier to trade.
  • In July 2019, a ban on workplace harassment took effect following an amendment of the Labor Standards Act. Under the law, if retaliatory or discriminatory measures are taken against victims or those who report abusive conduct, CEOs could face a maximum three-year jail term and a fine of up to USD 25,000.  The law does not stipulate the punishment for the perpetrator of the bullying, however, and is ambiguous about what constitutes workplace bullying.
  • In December 2019, the Ministry of Education (MOE) announced a ministerial decree on Facility Standards for Distance Learning. Although the Ministry of Interior and Safety (MOIS) had amended its guidelines to allow educational institutions to use global public cloud services, the MOE decree requires global providers to obtain a Korea-unique Cloud Security Certificate.  This undermines competition between global and domestic companies.
  • In January 2020, the National Assembly passed the “Data 3 Act” (consisting of amendments to the Personal Information Protection Act of 2011, the Act on Promotion of Information and Communications Network Utilization and Information Protection of 2001, and the Credit Information Use and Protection Act of 2008). Industry welcomed the updates, which alleviate regulatory hurdles and allow for new uses of data in the healthcare, financial services, and ICT industries.  The amendments clarified the criteria for assessing anonymous information, develop the concept of pseudonymization, and strengthen personal information processor responsibilities.

Key pending/proposed laws and regulations as of April 2020 include:

  • On August 30, 2019, the Ministry of Science and ICT announced plans to increase the value limitation on the sale of insurance products by the state-run Korea Post, which could disadvantage global insurance companies.
  • There is no single website for investment-relevant laws and regulations. However, more information is available at the following websites: https://www.better.go.kr/ , https://www.fsc.go.kr/ , and http://motie.go.kr/ .

Competition and Antitrust Laws

The Monopoly Regulation and Fair Trade Act (KFTC Act) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related and consumer safety matters.

KFTC has a broad mandate that includes promoting competition, strengthening consumers’ rights, creating a competitive environment for SMEs, and restraining the concentration of economic power.  In addition to its authority to conduct investigations, including authority to review corporate and financial restructuring, KFTC can levy sizeable administrative fines for violations of the laws it enforces as well as for failure to cooperate with investigators.  Decisions by KFTC are appealable to the Korean court system.  As part of KORUS implementation, KFTC instituted a consent decree process in 2014, which it continues to refine.

A number of U.S. firms have raised concerns that KFTC has targeted foreign companies with aggressive enforcement efforts. U.S. firms also expressed concerns that KFTC’s procedures and practices do not comply with Korea’s obligations under KORUS because they interfere with the ability of companies to adequately defend themselves during investigatory proceedings and hearings. The United States has continued to have extensive discussions with Korea regarding the right of companies to reasonably access and rebut evidence upon which the KFTC determination may be made.  This matter was the subject of the first ever formal consultations under the KORUS Competition chapter in July 2019.

In December 2018, Korea’s government proposed a significant amendment to the Monopoly Regulation and Fair Trade; revisions passed the National Assembly on April 29, 2020.

Expropriation and Compensation

The ROK follows generally accepted principles of international law with respect to expropriation.  ROK law protects foreign-invested enterprise property from expropriation or requisition.  Private property can be expropriated for a public purpose – like developing new cities, building new industrial complexes, or constructing roads – and claimants are afforded due process.  Property owners are entitled to prompt compensation at fair market value.  There have been many cases of private property expropriation in the ROK for public reasons and these were conducted in a non-discriminatory manner and claimants were compensated at or above fair market value; Embassy Seoul is not aware of any cases alleging a lack of due process.  The ROKG allotted USD 20 billion in its 2019 budget for land expropriation, a 38 percent increase from the previous year.

Dispute Settlement

ICSID Convention and New York Convention

The ROK acceded to the International Centre for Settlement of Investment Disputes (ICSID) in 1967, and the New York Arbitration Convention in 1973.  There are no specific domestic laws providing for enforcement; however, South Korean courts have made rulings based on the ROK’s membership in the conventions.

Investor-State Dispute Settlement

The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency.  ROK courts may ultimately be called upon to enforce an arbitrated settlement.  When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association.  U.S. companies should seek local expert legal counsel when drawing up any type of contract with a South Korean entity.  The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK that contains general provisions pertaining to business relations and investment.  The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012.  There have been several prominent investment disputes involving foreign investors in Korea in recent years.  In November 2012, U.S.-based Lone Star Funds, a worldwide private equity firm, brought an investor-state dispute lawsuit against the South Korean government with the ICSID in Washington under the investment chapter of the KORUS FTA, and this case is still pending.  The private equity firm blamed the ROK government for sharp declines in stock prices, claiming that it delayed the acquisition of the Korea Exchange Bank without cause.  The ICSID was expected to make a ruling in 2017, but the ruling has been repeatedly postponed.  Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK.  There is no history of extrajudicial action against foreign investors.  An arbitration panel under the United Nations Commission on International Trade Law (UNCITRAL) made a USD 68 million ruling against the ROKG in June 2018 in an investor-state dispute settlement filed by Entekhab, owned by Iranian investor Mohammad Reza Dayyani.  In July 2018, an American individual investor filed an investor-state dispute (ISD) lawsuit against the ROKG, claiming that the government had violated the KORUS FTA in expropriating her land.  The case was dismissed on jurisdictional grounds in September 2019.  Also in July 2018, U.S. activist fund Elliott Associates submitted a notice of arbitration over an ISD pertaining to the KORUS FTA.  Elliott Associates claimed they had suffered at least USD 770 million in financial losses due to the merger between Samsung C&T and Cheil Industries, stating the ROKG illicitly intervened by mobilizing the National Pension Service as a large shareholder in the process of approving the merger in 2015.  In September 2018, Mason Capital Management, another American investor, filed for arbitration seeking USD 200 million in compensation for losses incurred from the same controversial merger.  Both cases are pending before an UNCITRAL tribunal.

International Commercial Arbitration and Foreign Courts

Although commercial disputes can be adjudicated in a civil court, foreign businesses find this method impractical.  Proceedings are conducted in Korean, often without adequate interpretation.  ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in South Korean courts.  Civil procedures common in the United States, such as pretrial discovery, do not exist in the ROK.  During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached.  Legal proceedings are expensive and time-consuming, and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship.  ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency.  The ROK has specialized courts, including family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues.  Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB).  The Korean Arbitration Act and its implementing rules outline the following sequential steps in the arbitration process: 1) parties may request the KCAB to act as an informal intermediary to a settlement; 2) if informal arbitration is unsuccessful, either or both parties may request formal arbitration, in which the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if formal arbitration is unsuccessful, an arbitration panel consisting of one to three arbitrators would be assigned to decide the case.  If one party is not resident in the ROK, either may request an arbitrator from a neutral country.  If foreign arbitral awards or foreign court rulings meet the requirements of the Civil Procedure Act’s Article 217, then those are enforceable by local courts.  Embassy Seoul is not aware of statistics involving state-owned enterprise investment dispute court rulings.  Gale International (GI), a U.S. real estate development company, has had an ongoing investment dispute with Korean conglomerate POSCO since 2015.  GI claims it is owed USD 350 million and has filed criminal complaints in a Seoul court against POSCO alleging misappropriation of funds and approving documents with the GI seal without authorization.  The case is still pending, and GI has closed its office in the ROK.

Bankruptcy Regulations

The Debtor Rehabilitation and Bankruptcy Act (DRBA) stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment.  The procedure commences after a filing by a debtor, creditor, or a group of creditors and determination by the court that a company is bankrupt.  The court designates a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts.  Creditors may be granted voting rights in the creditors’ group, as identified by the Custodial Committee.  Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms.  The World Bank ranked ROK policies and mechanisms to address insolvency 11th among 187 economies in its 2020 Doing Business report.  Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt.  Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties.  Under the revised DRBA enacted in March 2017, Korea established the Seoul Bankruptcy Court (SBC) with nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide more effective, specialized, and consistent guidance in bankruptcy proceedings.  Any Korean company with debt equal to or above KRW 50 billion KRW (about USD 41 million) and 300 or more creditors may file for bankruptcy rehabilitation with the SBC.  Thirteen local district courts continue to oversee smaller bankruptcy cases in areas outside Seoul.

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