Corporate USD Deposit: Cash Withdrawal, Conversion, and Non-Resident KRW Account
Korea Textile Co. holds a USD 3,000,000 foreign currency deposit at a Korean bank branch. It asks the branch to: (1) withdraw USD 150,000 in cash to pay suppliers in Vietnam; (2) convert USD 500,000 into KRW and credit its KRW account; (3) open a KRW account for its Vietnamese buyer, a non-resident, who will deposit KRW 200,000,000 from export proceeds and later convert part to USD. The company also wants to pledge the remaining USD deposit as collateral for a KRW 1,000,000,000 loan. The branch manager notes the bank maintains the BOK-prescribed foreign currency reserve requirement on FC deposits and that the deposit is callable on demand. The buyer has no Korean office. The bank's AML system flags the USD 150,000 cash request.
1. For each of the three requests, identify the key foreign-exchange and AML checks the bank must perform before executing, and state whether prior reporting to the Bank of Korea is required.
Read the worked answer
USD 150,000 cash withdrawal: The bank must verify the customer's identity, source of funds, and purpose. Cash is unusual for commercial supplier payments; the bank should ask for contracts/invoices and consider whether a remittance is more appropriate. If the cash is to be carried abroad, the USD 10,000 customs declaration threshold applies, and the bank should warn the customer. A large cash withdrawal should trigger enhanced AML review and, if suspicion exists, an STR. No prior BOK report is generally required for withdrawing cash from a resident's own FC deposit, but the bank's verification and customs rules apply.
USD 500,000 conversion to KRW: This is a current-account conversion by a resident. The bank verifies that the deposit is legitimate and the conversion is for a bona fide purpose; it executes at the market rate. No prior BOK report is normally needed for a current transaction, but the bank records the transaction and applies AML monitoring.
Non-resident KRW account: A non-resident may open a KRW account. The bank should verify the buyer's identity, export documents, and the source of the KRW 200,000,000. Deposits from export proceeds are current transactions; no prior BOK report is generally required. Later KRW-to-USD conversion must be supported by bona fide current or capital transactions, and capital transactions need reporting. The bank should not promise unlimited conversion.
2. Can the bank accept the USD deposit as collateral for a KRW loan? Explain the FX and prudential issues, including what happens if the borrower defaults and the bank converts the USD deposit.
Read the worked answer
Yes, a resident customer can pledge a foreign currency deposit as collateral for a KRW loan, but the bank must document a valid pledge, control the deposit, and set a margin. The loan is KRW, while the collateral is USD, so the bank is exposed to USD/KRW movements: if the won depreciates, the KRW value of the collateral rises; if the won appreciates, it falls. The bank should apply a haircut and monitor the loan-to-value ratio.
The FC deposit remains a liability of the bank and is subject to the BOK-prescribed reserve/liquidity rules; pledging it does not make it “free” funding. On default, the bank can enforce the pledge, convert USD to KRW, and apply the proceeds. That conversion creates a market transaction and may affect the bank's FX position and liquidity. The bank should also confirm that the customer's FC deposit is not already restricted and that the loan purpose is permitted. AML checks apply to both the deposit and the loan.
3. The buyer asks why it cannot simply keep the KRW 200,000,000 in the account indefinitely and convert to USD whenever the exchange rate is favorable. What should the bank explain about non-resident KRW accounts and speculative conversion?
Read the worked answer
The bank should explain that a non-resident KRW account is a settlement account, not an unlimited speculative vehicle. The buyer may hold KRW, but conversions must be linked to bona fide current or capital transactions and supported by documents. Keeping a large KRW balance indefinitely and converting only when the rate is favorable may be treated as a capital or speculative transaction, depending on the facts, and may require reporting or verification.
The bank should also explain that it must apply AML/CFT monitoring, including source-of-funds checks and possible suspicious-transaction reporting. The buyer's export proceeds should be documented; if the buyer later wants to convert KRW to USD for a capital purpose, the bank will ask for the relevant report or permission. The practical message is that FX conversion is permitted for genuine transactions, but the bank cannot guarantee immediate or unlimited conversion at the customer's preferred time.