Rich Koreans Withdrawing Huge Amounts of Won from Banks

A lot of wealthy people in Korea have been withdrawing billions won from banks recently, a so-called “exodus of money.” This money exodus started one or two years ago, and has been proven by the statistics of the Bank of Korea.

According to the statistics of Bank of Korea, individual or corporate accounts with amounts greater than 500 million won (US$484,470) in commercial banks have constantly increased, to a total of 79,940 accounts in 2011. The amount, however, started to decrease from 2012, and there were only 72,400 such accounts last year. The total balance of those accounts increased by 80 trillion won (US$77.5 billion) within one year of 2010, but decreased by 13.7 trillion won (US$13.2 billion) last year.

Wealthy people have three major reasons for this withdrawal trend. The first one is that the Foreign Account Tax Compliance Act (FATCA), started by the U.S. government in July, is effective in Korea as well. FATCA requires financial companies to report the names and account balances of overseas financial accounts, if U.S. citizens or permanent residents have them, to the U.S. tax authority. As the automatic exchange of tax information between Korea and the U.S. was concluded, Korean financial institutions should report the list of U.S. clients with more than US$50,000 (51.6 million won) in assets to the US government. If unreported overseas assets are revealed, the U.S. government imposes multi-million dollar fines. Accordingly, rich US citizens and permanent residents who live in Korea have moved their assets to gold or commercial real estate.

The second reason is that the targets of aggregate taxation on financial income expanded to people who have more than 20 million won (US$19,397) of financial income annually (originally 40 million won, US$38,726). The maximum tax rate of aggregate taxation on financial income is 41.8 percent.

Considering the current one year interest rate of a savings account is around 2.7 percent, deposits of 800 million won (US$775,152) or more are imposed with an aggregate taxation on financial income. Many wealthy people are withdrawing their deposits in order to avoid taxes.

The third reason is the “prohibition of borrowed name financial transaction act” coming into effect in November. This act targets people who put their money under the names of other people (including family) to avoid taxes and hide assets by hitting them with criminal penalties (imprisonment under five years or fines under 50 million won, or US$48,494). Before this act officially starts, wealthy people who have their money under borrowed names are moving their money out.

Then where does all the money go? Bankers assume that many rich people have their deposits in the form of checks, or invest in insurance or commercial real estate including shopping malls. A representative at a commercial bank said, “VIP clients with U.S. citizenship surged into banks during May and June. Two thirds of clients withdrew their deposits into checks in order to temporarily avoid risks.” Many people would have changed their cash into gold. According to Korea Gold Exchange, the gold bars sold during the first half of last year totaled 292kg, but this increased by 47.6 percent to 431kg during the first half of this year.

Banks are worried about a second deposit exodus before November when the prohibition of borrowed name financial transaction act becomes effective, even though the first deposit withdrawal crisis stabilized recently.