The term “hwanchigi” in South Korea means an illegal act of transacting funds between Korea and overseas without proper reporting to the banks and the customs office, where all transactions overseas over US$5,000 need to be reported. In the recent three to four years, these illegal transactions have started utilizing virtual currencies to make their affairs even more cryptic. Now this crypto-backed “hwanchigi” has reached a new record — with the amount of illegally transacted money growing nearly 40 times from last year.

According to South Korean lawmaker Song Jae-ho’s report on violations of foreign exchange transactions act, with data from the Korea Customs Service, the amount of detected illegal foreign transactions using virtual assets has hit 812.2 billion Korean won, or around US$684 million. This is only the accumulated number from January to August. Last year’s amount was 20 billion won, while the previous high record was in 2018, with 784 billion won. 

Lawmaker Song says that “the volatile prices of virtual assets have endorsed a crypto investment fever, where speculative forces have also been on the rise,” explaining that the increase in illegal foreign transactions is a byproduct from the growth of the virtual asset market.

Many of these unlawful cases try to take advantage of the “kimchi premium” — a nickname given to the difference in prices of cryptocurrencies between the Korean market and elsewhere, since crypto prices tend to be higher in Korea. In one case, a broker received funds in foreign currency from remittance clients who wanted to transfer money from overseas to Korea. With the funds, the broker purchased virtual assets on overseas virtual asset exchanges then went on to selling them on Korean exchanges at a higher price.

Another case includes a CEO of a trading company that forged trade proceeds and remitted about 355 billion won worth of funds overseas over the past three years in the name of relay trade payments, while the money was used to purchase virtual assets overseas, and subsequently sold to domestic exchanges.

Oh Moon-sung, professor of tax and accounting at Hanyang Women’s University, says there are two major reasons why these people resort to illegal foreign transactions. “One is that there are no remittance fees. Another is that there is no annual limit to the amount of money you can send abroad,” Oh said. South Korea currently requires any transactions over US$50,000 to be examined under strict standards and approved by the head of respective banks to prevent excessive outflow of funds overseas.

Oh says that illegal foreign transactions using crypto are harder to detect. “If they are done peer-to-peer, it’s almost impossible to track down because you can’t tell if these transactions were done domestically or internationally,” Oh said, adding that all these reasons make virtual assets a good tool for illicit brokers handling large amounts of capital. In fact, the accumulated amount of US$684 million this year is from only nine cases in violation of the foreign exchange transactions act. Despite being a small number of cases, these transactions could potentially fund tax evasion, illegal gambling, or even drug smuggling — which is why lawmakers and experts call for action against them.

“It will not be easy to find a way to perfectly eradicate these transactions utilizing virtual assets. Obviously, this is something that Korea needs to invest in finding the solution,” Oh said.