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Lesson 4: Government Preparation and Policy Effectiveness

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Lesson 4: Government Preparation and Policy Effectiveness06



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Title Lesson 4: Government Preparation and Policy Effectiveness
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Material Type Report
Date 2015
Language Korean
File Type Theme
Subject Economy < Financial Policy
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Abstract

Lesson 4 | Government Preparation and Policy Effectiveness



A successful introduction of the real-name financial system requires considerable amount of time and effort on its preparation by the government. It also needs to have a certain level of computerization in the government sector and in the financial sector. In this respect, the first attempt in 1982 by the Chun Doo-hwan Administration lacked such preparations. The 7.3 Measure that outlined the government’s plan to introduce the real-name financial system was prepared in less than a week. No doubt, the government was unprepared for any side effect. Needless to say, ##3D_LAYER##financial markets were in turmoil##3D_TEXT:On July 6, just three days after the announcement, 35 stocks hit the lower price limit and 202 firms experienced a share price drop (in 1982, there were 334 firms listed on the stock exchange). Also, in a single day, 40 billion won was withdrawn from short-term investment finance companies, where most of the accounts were held anonymously. Not to mention, the private loan market was completely frozen. On the day of the announcement, Korean won also depreciated by 35 won in the black market to 830 won per dollar. Precious metal market, the prices of which were rising since the 6.28 economic stimulus package, started to flourish with the 7.4 Measure. Commercial banks also lost deposits in their saving accounts.##3D_LAYER_END## upon the announcement of the 7.3 Measure. To make matters worse, the government did not seriously consider how the National Tax Service and the financial sector were prepared in terms of computerization. Such unpreparedness was an open invitation to the disadvantaged politicians to oppose the real-name financial system. This led the Roh Tae-woo Administration to take a very different approach when it prepared for the introduction of the real-name financial system in 1989. The government set up the ##3D_LAYER##Preparation Team##3D_TEXT:The Ministry of Finance launched the Preparation Team for the Implementation of Real-Name Financial System (hereafter “Preparation Team”) in April 1989 and created the Real-Name Financial System Coordination Committee (hereafter “Coordination Committee”) in July. It also established lower-level preparatory organizations at each financial business sector level and also at the individual company level. The Coordination Committee was composed of 25 members representing various government ministries and financial business sectors. It was chaired by the Vice Minister of Finance. Its key function was to coordinate on various tasks that needed to be taken care of in preparation of the real-name financial system. The National Tax Service and each financial business sector, such as banking, securities, and short-term investment finance, also had to establish their own preparatory organizations.##3D_LAYER_END## for the Implementation of Real-Name Financial System that studied various aspects of introducing the system over a sufficiently long period of time.



Lastly, one must not place overconfidence over the effect of the real-name financial system on its intended policy objectives. In some cases, it may have only a minimal effect or an effect inferior to other measures. A good example of the latter includes series of ##3D_LAYER##policy measures introduced to promote the usage of credit cards##3D_TEXT:In September 1999, the Korean government introduced a policy that made credit card payments income deductible. In other words, it introduced a scheme that aimed to encourage taxpayers to actively use credit cards, and thereby allow the tax office to get access to the actual transaction history. As a result of this policy, the fraction of credit card payments (excluding corporate procurements and cash services) in total private consumption increased from 14.7% in 1990 to 57.0% in 2010. Accordingly, the tax base increased as it exposed greater amount of retail income to the tax office. Subsequently, the revenues from consolidated income tax and value-added tax also increased.##3D_LAYER_END## during the Kim Dae-joong Administration. When it comes to legalizing the underground economy by discouraging undocumented commercial transactions, this policy measure is considered to have been more effective than the introduction of the real-name financial system. In other cases, the real-name financial system can have a meaningful effect only when combined with other policy measures. As an illustration, in 1993, the Public Service Ethics Act was amended to expand the scope of public officials subject to property registration and to disclose the registered properties of high-ranking officials in public. To ensure that the complete list of properties be registered, it was crucial for such properties be held under one’s real name. If it were not for this amendment to the Public Service Ethics Act, the real-name financial system alone could not have achieved its policy goal of reducing corruption and the conflict between public and private interests faced by public officials. Other similar examples include the ##3D_LAYER##Public Official Election Act##3D_TEXT:The Public Official Election Act (formerly known as the Act on the Election of Public Officials and the Prevention of Election Malpractices) was first legislated in 1994. To ease the financial burden of election expenses (limited to presidential election and elections for the proportional representative members either at the National Assembly or at local councils) regarding campaign posters, joint speech meetings, and many others are borne by the State and the local governments for candidates that obtained at least a certain level of votes. Also a cap was imposed on the total amount of election expense, the violation of which can result in an imprisonment sentence of the accountant in charge, and an invalidation of the election. Moreover, any receipt or disbursement of political funds must go through the deposit account registered at the election commission, and the accounting books concerning the revenue and the expenditure of political funds must be disclosed through the election commission (this and related provisions moved to the Political Funds Act in 2005). In other words, the real-name financial system and the Public Official Election Act are complements to each other to achieve the common goal of realizing elections that are clean and less financially burdensome.##3D_LAYER_END##, the ##3D_LAYER##Political Funds Act##3D_TEXT:According to the Political Funds Act, political parties, supporter associations, and their equivalents must appoint an accountant who would be in charge of the accounting of political funds. They must also file the name of this accountant with the election commission. The Political Funds Act also has provisions on party membership fees, supporters’ associations, entrustment of political funds, government subsidies, and political contributions.##3D_LAYER_END##, the ##3D_LAYER##Act on Reporting and Using Specified Financial Transaction Information##3D_TEXT:In 2001, Korea adopted the Act on Reporting and Using Specified Financial Transaction Information to regulate money laundering and the financing of terrorism. The real-name financial system and this Act are complements to each other in achieving the common goal of preventing crime and promoting transparency in financial transactions. According to this Act, financial institutions must immediately report to the Commissioner of the Korea Financial Intelligence Unit if reasonable grounds exist in suspecting that an asset given or received in relation to any financial transaction is illegal or the other party to a financial transaction engages in money laundering or financing of terrorism. Also, financial institutions must report to the Commissioner of the Korea Financial Intelligence Unit within 30 days if it has paid to, or received from the other party to a financial transaction, cash (excluding foreign currencies) or other cash-equivalents greater than the amount (within 50 million won) prescribed by the Presidential Decree. If deemed necessary for further investigation, the Commissioner of the Korea Financial Intelligence Unit can provide relevant information to the Public Prosecutor General, the Commissioner of the National Tax Service, the Commissioner of the Korea Customs Service, the National Election Commission, or the Financial Services Commission.##3D_LAYER_END##, and the ##3D_LAYER##Act on the Regulation and Punishment of Criminal Proceeds Concealment.##3D_TEXT:In 2001, Korea adopted the Act on the Regulation and Punishment of Criminal Proceeds Concealment to regulate activities that disguise the acquisition of criminal proceeds. The real-name financial system and this Act are complements to each other in achieving the common goal of preventing crime and promoting transparency in financial transactions. According to this Act, a person who disguises the acquisition or disposition of criminal proceeds, a person who disguises the origin of criminal proceeds, a person who conceals criminal proceeds for the purpose of encouraging specific crimes or disguising criminal proceeds as legitimately acquired are punished by imprisonment for less than five years or by a fine that does not exceed 30 million won. A person who knowingly accepts the criminal proceeds is also punished by imprisonment for less than three years or a fine less than 20 million won. Also, an employee of a financial company must report to the competent law enforcement authorities without delay when he or she becomes aware of the fact that properties he or she accepts with respect to the financial transactions are criminal proceeds. When the concerned counter-party of the transaction commits an act that falls under the crimes prescribed in this Act, this fact must also be reported. No person employed by a financial company can disclose the details of the report to the concerned counter-party of the transaction or anyone related to the above party. In case of violation, the employee must be punished by imprisonment for less than two years or by a fine less than ten million won. Proceeds of crime or any other property derived from criminal proceeds can be confiscated by the government.##3D_LAYER_END## In sum, the real-name financial system is a basic reform measure that may not sufficiently achieve its intended policy goals alone, but assuredly serves as a necessary condition for other policy measures to effectively achieve such goals.