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Korea’s Experience of Introducing the Real-Name Financial System
Woochan Kim
December, 2015
List of Chapters



Chapter 1



Chapter 2
An Overview of Real-Name Financial System

1. Its Meaning and Objectives

  1.1. The Meaning

  1.2. Motives to Hide Real Name

  1.3. The Objectives

2. Political Economy and Side Effects of Real-Name Financial System

  2.1. The Political Economy

  2.2. Side Effects

3. Assurance of Confidentiality and the Limits of RNFS

  3.1. The Importance of Confidentiality

  3.2. Real-Name Financial System is No Panacea

3.3. Interaction with Other Reform Measures·


Chapter 3
Attempts Made Prior to 1993

1. Attempt by the Chun Doo-hwan Administration

  1.1. Background

  1.2. The Key Players

  1.3. From the 7.3 Measure to Legislation

  1.4. Evaluation

  1.5. Policy Implications

2. Attempt by the Roh Tae-woo Administration

  2.1. Background

  2.2. The Key Player and the Preparation

  2.3. Evaluation

  2.4. Policy Implications


Chapter 4

The 1993 Introduction of Real-Name Financial System


  1.1. Change in Technical and Political Conditions

  1.2. Accumulated Research on Real-Name Financial System

2. The Preparation and the Implementation of RNFS

  2.1. The KDI-MoF Joint Working Group

  2.2. The Key Issues

  2.3. The Implementation Team and the Coordination Committee

3. The Emergency Order and the Consolidated Income Tax System

  3.1. Proclamation of the Presidential Emergency Order

  3.2. Details of the Presidential Emergency Order

  3.3. Government’s Follow-Up Measures

  3.4. Consolidated Income Tax System


  4.1. The Achievements Made

  4.2. Its Impact on Financial Market and Economy

  4.3. The Limitations of the 1993 Reform and Its Retreat

5. Policy Implication·


Chapter 5

The Limitations of the 1993 Reform and Remedies

1. The Borrowed-Name Accounts and Illegal Slush Funds

  1.1. The Limitations of the 1993 Reform

  1.2. Series of Illegal Slush Fund Scandals

2. Movements to Fix the Problem

  2.1. The Introduction of Real-Name Real Estate System

  2.2. Bills to Amend the Real-Name Financial System

3. The 2009 Supreme Court Decision and the 2014 Amendment

  3.1. The 2009 Supreme Court Decision

  3.2. The 2014 Amendment

  3.3. The Effect of the 2014 Amendment





Real-name financial system (RNFS) is a set of regulations or practices that mandates financial asset owners to hold and transact financial assets only under their own real name.
By enhancing the transparency of a country’s financial system, it helps to achieve a number of policy objectives, such as promoting equitable distribution of tax burden, increasing tax revenue, curbing corruption, legalizing underground economy, and providing information infrastructure necessary for other reform measures. The mode of adoption, however, may vary across countries. In some, it is mandated by law while in others, it is adopted voluntarily by market participants. Whatsoever the mode, its adoption can be considered as an indispensable step necessary to level up a country’s economic system, to foster national unity, and to make economic development more sustainable.


 When it comes to the adoption of the real-name financial system, Korea went through a number of twists and turns. Its first attempt to adopt the system dates back to 1982 when the Chun Doo-hwan Administration succeeded in legislating the Real-Name Financial Transactions Act against the backdrop of a major financial scandal. Its implementation, however, was postponed to a later date that was to be determined by the President any time after 1986. Eventually, this date was never set by the President. In 1989, the Roh Taewoo Administration pushed for the introduction of real-name financial system again. But, its adoption was indefinitely postponed in the midst of worsening economic conditions. It
was not until 1993, the first year of the Kim Young-sam Administration, that the real-name financial system was finally introduced. However, this was feasible only by adopting it in an exceptional manner through the issuance of a Presidential Emergency Order. From 1996, the Administration also started to tax financial income on a consolidated basis with other incomes. This was different from the previous system in which Korea taxed financial income at a flat rate separately from other types of income. Amidst the crisis in 1997, however, the National Assembly replaced the Presidential Order with an Act that considerably weakened the system. It allowed the issuance of bonds that could be held anonymously and ceased to tax financial income on a consolidated basis, which was restored only three years later. Since the late 1990s, Korea also witnessed a series of corporate scandals that involved slush funds typically held under a borrowed name. No doubt, such scandals called for the prohibition of borrowed-name financial transactions. In an effort to prohibit such transactions, the National Assembly amended the Real-Name Financial Transactions Act
and Confidentiality in 2014.

 From this 30-year experience with the real-name financial system, one can draw a number of policy implications, which can be grouped into three areas: (i) political economy, (ii) adoption strategy/legislative procedure, and (iii) technical matters. First, on political economy, it is very important to have a conducive political environment and a head of state
with a strong will to fight for its adoption. In spite of many interest groups who may oppose the introduction of the real-name financial system, politicians are the only group of people that have the power to block it. As members of the legislative body, they are the ones that have the authority to approve or disprove bills. Nevertheless, there may be an exception to this. For example, Korea issued a Presidential Emergency Oder that had an effect of immediately implementing the system without prior approval from the National Assembly.

Excluding such cases, long and difficult negotiation with politicians is an inevitable yet crucial step. In this regard, one should pursue the introduction of real-name financial system only when assured that one can successfully persuade the politicians. The attempt made by the Chun Doo-hwan Administration failed because it came short of overcoming
the oppositions from the ruling party (Democratic Justice Party), the senior secretaries at the Presidential Office, and cabinet members. The attempt made by the Roh Tae-woo Administration failed for a similar reason. It could not overcome the oppositions coming from the incumbent party, the size of which significantly grew following the three-party
merger in January 1990. The retreat of the real-name financial system in 1997 resulting from the replacement of Presidential Emergency Order with the Act on Real-Name Financial Transactions and Confidentiality is also a good example. President Kim Young-sam, who was stigmatized as a failed president after the crisis, did not have the political power nor was in the position to resist such retreat.

 It is also very important that the head of state have a strong will to fight for its adoption. In case of President Roh, not only did he lack the will but he also did not have much to gain from the real-name financial system. The lack of President Roh’s will is partly based on the fact that ruling party politicians, including President Roh himself, were interested in keeping the confidentiality of their slush funds. Accordingly, he quickly leaned toward postponing its adoption when economic conditions weakened. As a result, with his decision to postpone, Korea lost the chance of adopting the real-name financial system through a normal procedure. Contrary to President Roh, his successor, President Kim had a strong will for the adoption of real-name financial system. In contrast to the first and the second attempts to introduce
the system during previous administrations that were led either by a cabinet member (Kang Kyung-shik, Minister of Finance) or by a senior secretary at the Presidential Office (Moon Hee-kap, Senior Secretary for Economic Affairs), the third attempt was practically led by the president himself. President Young-sam Kim kept his plan as a secret even from his own Senior Secretary for Economic Affairs, who was against its introduction. When drafting the Presidential Emergency Order, he always opted for the strictest and the most comprehensive approach. Such strong will was based on his strong interest in learning about the financial status of his political rivals both in the ruling party and opposition. By making it difficult for his political opponents to raise funds through anonymous or false-name accounts, he was expecting to see his position strengthen in the ruling party. Without a doubt, he had much to gain from its introduction.

 Second, one can draw a number of implications on adoption strategy and legislative procedure. As mentioned earlier, the real-name financial system can be introduced in two ways: through a rule voluntarily agreed upon among financial market participants (e.g., U.S., or U.K.) or through legislation (e.g., Germany). However in case of Korea, the system was
adopted by issuing a Presidential Emergency Order in preference to the two. This unusual approach was taken after its bitter experience of two consecutive failures in adopting the system by legislation. Even so, this does not mean that Korea had no other choices. It could have tried again with the standard approach of getting National Assembly’s approval before the implementation of real-name financial system. It is also true that not all the countries allow their presidents to issue emergency orders. Moreover, the 2014 reform to ban borrowed-name financial transactions was accomplished through a regular legislative process, not extraordinary measures. Given such considerations, the path taken by Korea in 1993 may not be an appropriate path for other countries that are contemplating to introduce
the system. Nevertheless, Korea’s approach has a number of benefits, especially in a country with strong political resistance.


 Most importantly, one can circumvent the whole process of persuasion and negotiation with politicians who are often the strongest opponents to the real-name financial system.
Since all the provisions in the Emergency Order go into effect immediately after its proclamation, there is no time for politicians to raise their voice against its introduction.
That being so, this approach is especially helpful in times of poor economic conditions as they are often used as excuses for opposition. For the same reason, issuing a presidential emergency order also has the benefit of blocking sudden withdrawal of deposits. A major benefit is prohibiting withdrawals from anonymous or false-name accounts that have not yet been converted into real-name accounts. Another is mandating bankers to notify the National Tax Service of large cash withdrawals. By minimizing the possibility of sudden withdrawals, these provisions made it possible to adopt a stricter version of the system.

To the contrary, when the Roh Tae-woo Administration took a gradual approach of going through the whole legislation process with prior notice, special exceptions were inevitable. To be specific, there was a fear that the imminent introduction of the system might trigger a massive withdrawal from anonymous or false-name financial accounts if special exceptions were not allowed. For example, any law violation uncovered in the process of conversion into a real-name financial account had to be pardoned. Also, financial accounts newly converted to be under a real name had to be exempt from investigation by the tax office on its funding source regardless of the account holder’s age. However, the stance taken by the Kim Young-sam Administration, was starkly different. In principle, every financial account that went through a real name conversion was subject to investigation by the tax office for its funding source. Furthermore, if not converted under a real name within a certain period, government had to authority to levy penalty on the principal amount and to tax any interest or dividend income from such assets at a rate of 90 percent.


 Third, one can draw a number of implications on technical matters. This includes the factors that determine the extent of side effect at the time of introduction, the influence of general economic conditions or the level of government preparation on the likelihood of introduction, and the extent of its effect that gets amplified as it interacts with other reform measures. On the extent of side effect at the time of introduction, it is influenced by a number of factors including the magnitude of financial assets not under a real-name before the introduction, the approach taken by the government to introduce the system, the scope of financial institutions and assets subject to the real-name system, the incentives given to induce real-name conversion, and the existence of countervailing measures taken by the government. If the scope of financial institutions and assets subject to the realname system is not comprehensive enough, it is inevitable to experience a sudden shift of funds from sectors subject to the system to sectors that are not. This will also happen, if investigation by the tax office on funding source is strictly applied without any exception, or if tax rate on financial income is too high. With the introduction of the real-name financial system, it is not hard to foresee that small-and medium-sized enterprises that are heavily dependent upon private loans would greatly suffer. One can also expect that there could be speculation over real assets such as real estate, overseas capital flights, and cash hoardings that can lower the amount of money in circulation. Countervailing measures taken by the government can minimize such side effects. In 1982 when Chun Doo-hwan Administration tried to introduce the real-name financial system, the amount of financial assets under nonreal name accounts, as a fraction of total financial assets, was over 50 percent. This made many critics express concern over possible side-effects as such high fraction of financial assets in anonymous or false-name accounts also meant that government had to double its effort to countervail side-effects.


 A country’s economic condition can be a reason or an excuse for postponing the introduction of the real-name financial system. Examples abound. During the Roh Tae-woo Administration, its introduction was postponed with the 4.4 Measure that was basically an economic stimulation package announced in the midst of worsening economic conditions.
A similar decision took place in 1997 when Korea was struck with a major economic crisis. Back in 1996, the real-name financial system was already blamed for low savings rate, conspicuous consumption, and companies’ financial distress by those that were disadvantaged by it. It was, however, immediately after the crisis that the National Assembly
replaced the Presidential Emergency Order with an Act that considerably weakened the system. This Act allowed the issuance of bonds that could be held anonymously, expanded the scope of financial account holders that were exempt from funding source investigation by the tax office and ceased to tax financial income on a consolidated basis, which was
restored only three years later. These examples are in contrast to what happened in 1993 when the Presidential Emergency Oder was issued despite the poor economic conditions at the time of its issuance.

 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, financial markets were in turmoil 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 Taewoo 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 Preparation Team 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 policy measures introduced to promote the usage of credit cards 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.
Also, 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 Public Official Election Act, the Political Funds Act, the Act on Reporting and Using Specified Financial Transaction Information, and the Act on the Regulation and Punishment of Criminal Proceeds Concealment. In sum, real-name financial system is a basic reform measure that may not sufficiently achieve its intended policy goals alone, but serves as a necessary condition for other policy measures to effectively achieve such goals.

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