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Dec 22, 2008

Financial Crisis: Doopey Hacks and Savvy Crooks

By Sean Hayes (Korea Times 12/11/08)

Discord in our financial institution is not caused by structured finance (securitization) or other ``complex" financial instruments, but dopey hacks and savvy crooks.

I had a conversation with an attorney from one of Korea's best known law firms. The attorney, to my surprise, was obviously not familiar with securitization and thus naively blamed the financial crisis on these ``complex schemes.''Securitization may be considered a complex scheme, but complex does not necessarily have to lead to tribulations.Chess is one of the most complex games man has made.

Few understand or can even spell Latvian Gambit or Alehine's Defense.However, chess and the complex tools (moves) used are not maligned because of complexity. However, a hack player leads to poor games and cursing by eccentric masters.

Likewise, the securitization tool in the hands of hacks leads to poor performing markets and cursing taxpayers. When we throw the crooks into the mix the situation is exasperated and leads to lawsuits, defaults, write-downs and eventually government bailouts.Securitization should not be maligned because of its players, since without it our access to capital would be stymied, interest rates would rise, and our growth rates would decrease.

In America, the advent of our modern structured finance, in the mortgage industry, began in the early 1970s by Ginnie Mae.Ginnie Mae, a government corporation, intended, through securitization, to create a secondary market for residential mortgages, thus, increasing liquidity. This increased liquidity led to an increase in homeownership.Securitization is not as complex as one would imagine.

Securitization, in short, is simply when a non-marketable asset is converted into a marketable security. This is accomplished, in the mortgage context, by the pooling of an originator's illiquid individual mortgages.The new pooled security is then sold by the originator to other financial institutions, thus, replacing a potentially non-performing asset on the originator's books with cash.The cash can then be used to offer more mortgages.

Thus, the originator does not need to raise additional cash through the more expensive tools of issuing debt or equity.These mortgage-backed securities (MBS) are enticing to investors, since they guarantee a fixed rate of return.

All individuals, including homeowners, benefit from securitization, since it increases market efficiencies while promoting additional access to capital.Problems occur when markets are dominated by dopey hacks and savvy crooks.

For example, a type of security called a collateralized debt obligation (CDO) is a security, in short, where assets and loans are pooled and the pool is divided into classes (tranches).Each tranche represents a different risk with the higher risk tranche receiving a higher yield than a lower. The safer, lower yielding tranche, normally is the senior tranche, thus during default, will be paid first. CDOs allow great flexibility, thus encouraging more investment.Problems occur when language in the agreement is worded in a manner that obfuscates.

The unintentional obfuscation by the dopey hack or the intentional obfuscation by savvy crooks causes litigation.For example, Citigroup's billion-dollar CDO is ending in litigation because of conflicting language in the CDO contract.

This wouldn't occur if it was drafted in a clear manner and all parties were astute enough to understand the implications of their investments.These same dopey hacks and savvy crooks had their hands in our rating agencies, government sponsored enterprises, financial institutions, congressional hallways, academic institutions, think tanks and even in some of our best known law firms.


Politics Takes Backdoor to Progress

Politics Takes Backdoor to Progress

By Sean Hayes (Korea Times 12/03/08)

South Korea and India are scheduled to sign a Comprehensive Economic Partnership Agreement (CEPA). The accord will offer more opportunities for trade. However, many reforms are needed in both nations before the full benefits of the pact and free trade are realized.

For my Korean and international clients looking to invest in India, one of the most alarming discoveries is the dreadful state of the Indian banking sector.Many investors are hopeful for the continuation of 9 percent growth in India, but fear that if foreign direct investment (FDI) decreases, because of our present financial situation, it is likely that India's growth rate will drastically fall, which will naturally lead to fewer opportunities and benefits from investing in India.An interesting seminar, which I had the pleasure to present a paper at, hosted by the Asia-Europe Perspective Forum and the India-Korea Business and Policy Forum, was held Thursday.

The seminar discussed some of the necessary reforms that both nations need to quickly adopt. My presentation, at the seminar, emphasized business opportunities for Korean and Indian companies, while noting reforms that are needed in both countries.

In India, necessary reforms must be immediately implemented, according to many observers, in the banking sector. However, many fear that political interest groups in Korea and India, for their own self-interest and possibly self-preservation, will never allow them and that the status quo is likely to remain unchanged in the foreseeable future.

For example, India is vigorously seeking FDI mainly because of the lack of funding opportunities for local companies and the difficulty Indian companies face in obtaining external commercial borrowing (ECB).One reason for the funding difficulties, amongst others, is that India's financial sector is controlled by state-owned commercial banks, which are required to lend to ``priority" sectors.The Statutory Liquidity Rules (SLR) require that 25 percent of bank deposits in government securities, the nation has a low savings rate, the local stock markets only account for around 140 percent of GDP, and the bond market is dominated by the debt-ridden government (90 percent of the bond market in government debt).

These facts led to an economy that lacks the ability to adequately fund needed industries and corporations. Thus, FDI and ECB are vigorously sought.The answer to this problem, at first blush, is obvious. However, India is often, for political motivations, not willing to pursue the obvious.

India, first, needs to privatize banks. Nearly 80 percent of the assets and deposits in the banking sector are controlled by state-owned commercial banks. These banks are notorious for allocating capital in an inefficient manner.Secondly, India must lower the amount mandated to be loaned to priority sectors. Regulations mandate that state-owned banks must provide 40 percent and private banks 25 percent of their funds to priority sectors.

These sectors include politically sensitive entities such as agriculture enterprises and small businesses. These sectors' loans have a high likelihood of being non-performing and often are in industries that are returning very low returns on investment, thus leading to an inefficient use of capital.Additionally, India's high amount of government debt, SLR, and low stock market capitalization effectively creates a situation where companies have few internal sources of funding.

The answer lies in these and other liberalizations and the development and fostering of a vibrant and liquid market for corporate bonds.Koreans played an instrumental role in launching the Vietnamese stock market and will launch a Cambodian stock market. There experience in developing markets could be beneficial to an India striving to maintain consistent growth.

Hopefully, for the sake of India, politics will take a back door to development.


Dec 21, 2008

Garnishing Pay in Korea

Garnishing Wages in Korea

I received a call from a friend asking about information concerning collecting on a large debt. He loaned money to a “friend” and the friend never made a payment on the loan. Word to the wise, don't make large loans to friends----cry poverty instead.

In Korea, after a judgment or order to pay by a court, a plaintiff can collect on an unpaid debt through garnishing of wages. Garnishing of wages is normally the best way to guarantee the collection of debt when a debtor doesn’t have real or personal property. Most law firms can perform the service for a modest fee.

  • Less than W1.2mil (No wages can be garnished)
  • W1.2mil - W2.4mil (Monthly Wage – W1.2mil)
  • W2.4mil –W6mil (1/2 Monthly Wage)
  • Over W6mil (Half monthly Wage minus W3mil divided by two plus W3million minus monthly wage)
1. W2,000,000 Monthly Pay (Can garnish monthly W800,000)
2. W3,000,000 Monthly (Can garnish monthly W1,500,000)
3. W5,000,000 Monthly Pay (Can garnish W2,500,000)
4. W6,000,000 Monthly Pay(Can garnish W3,000,000)
5. W12,000,000 Monthly Pay (Can garnish W7.500,000)
6. W20,000,000 Monthly Pay (Can garnish W13,500,000)


Nov 13, 2008

Radical Liberals Rule

Radical Liberals Rule
By Sean Hayes (Korea Times on 11/14/2008)

The Lee Myung-bak administration's bold ``747 Vision'' of achieving 7 percent growth over 10 years, a per capita GDP of $40,000 by 2017 and turning Korea into the seventh largest economy in the world has been stymied by vocal interest groups with often radically liberal ideologies.

The President's highly anticipated reforms have nearly universally been moderated or abandoned so the President will avoid further conflict with these interest groups. The only losers in this battle are the Korean people.

A good example of the effectiveness of the actions of these interest groups is the recent tax law proposals by the administration. The measures, if approved, are to come into effect on Jan. 1, 2009.

The proposals include a modest reduction in the corporate tax rate. The corporate tax rate for companies with a tax base of over 200 million won will be reduced, under the proposal, by 3 percentage points, in fiscal year 2009, to 22 percent exclusive of the 10 percent resident surtax.

The rate is still notably high compared to other Asian economies such as Hong Kong, Malaysia, Thailand, and Singapore and on an effective rate basis will still be higher than most nations of the world. Before the proposed deduction Korea had the sixth highest effective corporate tax rate amongst the wealthiest 79 nations in the world.

The reduction in tax rate, coupled with other modest changes, will only drop the effective tax rate by percentages that will have little effect on Korea's global competitiveness.

The modest reduction is welcomed by companies presently in Korea, but will have only a marginal effect on encouraging additional investment in Korea and will encourage few companies in Korea, because of the only modest tax savings, to further invest in Korea.

The proposals also include a token reduction in personal income tax rates. For tax payers earning more than 88 million won, which includes the largest percentage of individuals that invest in the Korean stock market and who own and invest in small and medium business, the rate will be reduced, in the proposal, by one percent to 34 percent and the foreign worker flat tax will be reduced by two percent to 15 percent.

Such a modest reduction will have little influence in encouraging more investment and will motivate few foreign company employees to choose Korea over more taxpayer friendly Asian locales such as Hong Kong and Singapore.

The proposals also include an extension of the tax loss carry-forward period from five to 10 years, measures to reduce the tax burden on foreign individuals and corporations including an exclusion, in some cases, of most foreign source income for foreign workers, a 5 percent reduction in the interest and dividend withholdings paid by Korean companies to foreign companies or non-residents and the possibility of excluding a higher percentage of R&D expenditures from taxes.

The proposals, as a whole, are steps in the right direction, but until the Korean people allow the radically liberal to have a voice only equal to their numbers we will never see the real reforms needed to move Korea down the path to further economic, social, and political development.

If the President and his advisors had their way we would most likely see a drastic cut in corporate and personal income tax rates which would lead, according to the vast majority of the world's economists including Christina and David Romer, professor of economics at the University of California at Berkeley, to ``very large and persistent positive output effects.'' Studies, nearly universally, show that lower taxes will increase growth and tax revenues.

Hopefully, Korea can settle the difficulties with this vocal minority by standing behind the President and allowing him to lead the nation down the path towards his ``747 Vision.''


Oct 29, 2008

Defamation on Trial

By Sean Hayes

Appeared in the Korea Times on October 30, 2008

A renowned actress recently committed suicide after being traumatized by malicious comments posted on Internet message boards. The actress leaves behind her young children and adoring fans.

Politicians have reacted by proposing legislation that would impose a more rigorous real name registration requirement on the Internet and more heightened punishment for defamatory statements. Expansion of real name registration would assist prosecutors in obtaining the identity of those posting malicious comments and thus prosecute them under Article 309 and 311 of the Korean Criminal Act. Many have commented that these laws are needed, while others have noted that these laws should be discarded as archaic vestiges of the past.

In much of the developed West, these laws, as applied to this situation, would run afoul of their nations' constitutions. However, in Korea because of a profound difference in attitude toward speech and the right to privacy the founders of the Korean Constitution chose to protect speech to a lesser degree. For example, Article 21(1) of the Korean Constitution notes that ``All citizens shall enjoy the freedom of speech and the press and the freedom of assembly and association."On the face of it this article is similar to the First Amendment to the U.S. Constitution which states that ``Congress shall make no law … abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble …"However, the Korean Constitution modifies this seemingly absolute protection, by noting, in Article 21(4) that ``Neither speech nor the press shall violate the honor or rights of other persons nor undermine public morals or social ethics."

The Korean Constitution, thus, in short, balances the right to free speech with the right to privacy, public mores and social ethics. This balance creates less protection for the freedom of speech than in the United States. It is interesting to note that the privacy protected, in application of the right, is not only against violations by the government, but violations by private individuals. Most constitutions only protect against actions by government.

In contraposition, in America, the First Amendment has been interpreted as creating near absolute protection for the freedom of speech. Justice Benjamin Nathan Cardozo stated the reason for the near absolute protection of free speech by noting that ``our history, political and legal," recognized ``freedom of thought and speech" as ``the indispensable condition of nearly every other form of freedom."

Thus, in America, criminal punishment for speech not coupled with action is nearly impossible to successfully prosecute and civil liability is available for a defamed public figure only if the plaintiff can prove that the defamatory comment is false and that the statement was made with ``malice." Malice is defined, in law, as either knowledge by the defendant that the statement was false or a reckless disregard by the defendant for the truth of the statement. Because of this high standard and that the burden of satisfying the standard is placed on the defendant, it is nearly impossible, except with the most flagrant mendacious statement, for a plaintiff to win a lawsuit.

This situation in Korea is very alarming and upsetting. However, most Americans would rather hear of these difficulties, which America also has a good deal of and which I have written about in these pages, than have an often biased government choose if speech violates ``the honor or rights of other persons" or ``undermine public morals or social ethics."

However, Korea has a vastly different history and relies more on the government for solutions to difficulties.


Oct 26, 2008

Don't Only Blame Bush

Don't Only Blame Bush

By Sean Hayes
(Appeared in Korea Times on October 23, 2008)

Most ``mainstream'' pundits and the vast majority of editorial writers have blamed the current financial mayhem on the Bush administration's ``deregulation bias.''

Democratic presidential hopeful Sen. Barack Obama has noted, in a campaign speech, that John McCain and the Bush administration ``fought against the very rules of the road that could have stopped this mess.''

Let's put blame where blame is due; Republicans and Democrats played a significant role in this mess. Without this realization we will never learn from our mistakes.

Those espousing Sen. Obama's viewpoint have not cited one Bush-term regulatory change that is the culprit for our present difficulties nor have they explained away the fact that the U.S. financial market is one of the most regulated markets in the world.

The reason we hear no explanation is the obvious disingenuousness of these statements. The reality is that a Bush regulation that would have assisted in alleviating these problems was strongly opposed by the same regulation bellwethers and regulation is a major culprit behind our current situation.

First, we can't put all the blame on a deregulation-biased Bush administration. The administration proposed a regulatory framework that would have helped prevent the coming crisis, however, Democrats strongly opposed the plan and Republicans, because of more pressing Iraq issues were unwilling to strongly push for the regulations.

In 2003, the Bush administration attempted to create an agency ``to regulate and supervise the financial activities" of Fannie Mae and Freddie Mac. It perceived that a problem with one of these agencies could ``cause strong repercussions in financial markets, affecting federally insured entities and economic activity."

However, our usually regulation-friendly Democrat Barney Frank, chairman of the House Financial Services Committee, strongly opposed the plan, noting that the agencies ``are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

He added, in a House hearing, that ``there has been more alarm raised about potential unsafety and unsoundness than, in fact exists … I want to roll the dice a little bit more in this situation toward subsidized housing.''

The Bush administration renewed its efforts in 2004 and 2005, but again Barney Frank and his liberal cohorts vigorously opposed the plan. Frank's ``dice roll'' failed, but he is unwilling to take an iota of blame for this crisis and still has a major role in the inevitable regulatory backlash.

Secondly, over-regulation was a major catalyst. The Clinton administration, motivated by a debunked Boston Federal Reserve Bank study, extended the scope and impact of the Carter-era Community Reinvestment Act and the Home Mortgage Disclosure Act.

The acts, and particularly the Clinton amendments, made it more difficult for lenders to receive acceptable bank ratings. Acceptable ratings, after the amendments, were heavily influenced by how well a lender ``served'' low, moderate income and minority borrowers.

The bank examiners looked at federal home loan data and broke the data down by income group, neighborhoods, race, and tax brackets and determined how well the banks were servicing these groups.

Without an acceptable rating banks would not be given permission to merge or to establish new branches and may even be subjected to costly class action lawsuits.

The impetus for the bills was a study that incorrectly claimed that banks were not giving loans to minorities because of their race. Holes and possible fabrication of data were found by a noted economist who, adjusting for the irregularities, found no mortgage discrimination based on race.

Lastly, the Clinton administration encouraged Fannie Mae to underwrite loans to subprime borrowers.

Franklin Raines, the former chairman and CEO of Fannie Mae, noted that ``Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements … Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Clinton fixed this with a program in 1999 to underwrite loans to subprime borrowers.

Republicans, Democrats, and of course some unscrupulous lenders are to blame for these difficulties. However, if we can't force them to take a good look in the mirror we will never learn from the present melee.


Feb 28, 2008

Debtor's Liability to New Owner after Transfer of Business and Trade Name

A developer recently contacted me concerning a dispute with a supplier of building materials. The developer purchased building materials from a supplier with payment to be forwarded 30-days after receipt of the materials. This is a common practice when a supplier has a long-term relationship with a developer, provides a consistent flow of supplies to a developer, and the developer is solvent.

Here comes the problem. The supplier was sold and the business and trade name was transferred to a new owner. The problem arose when the developer paid the old owner, who the manufacturer believed was still the owner of the supplier, for the building materials.

The developer paid the old owner at the business office of the supply business without noticing any difference in ownership and without being informed by the old owner of the change of circumstances.

As expected, the new owner charged the client for the supplies, since the new owner claims that the old owner, through the sales contracts, transferred all rights including the credits for the shipped supplies to the new owner.

The old owner is nowhere to be found and likely collected from multiple creditors leaving the new owner with credits that were reflected in the sale price of the supply business.

Article 25 of the Korean Commercial Code states that:
(1) A trade name may be transferred on in cases where business is discontinued or it is transferred together with the business.
(2) Transfer of a trade name shall not be effective as to third persons unless it has been registered.

The business trade name was properly transferred and registered by the new owner under Article 25.

However, Article 43 states that:
. . . a performance made to the transferee in respect of any obligation that has arisen from the business of the transferor shall be valid, in cases where the obligor effecting the performance has acted in good faith and without gross negligence.

Therefore, since the old owner did not inform the developer of the transfer, the payment was made at the companies business address - the developer is not liable to to the supplier.

To clarify for the author of another law blog who seemed a little confused - The transferee-old owner was paid by the obligor-developer and acted in good faith and without gross negligence, since the developer paid at the company office and was never informed of the transfer -thus the developer is not liable.

The converse and what the court will look to is the bad faith of the old owner. The deceptive practice of taking the money at the business office of the company will alleviate the burden on the plaintiff to prove good faith. I was trying to state this in my former post, but I assumed a level of understanding that I should have not assumed.

A letter from a law firm explaining the law on the matter would usually settle these types of disputes and often the business relationship can still continue.


Feb 21, 2008

Transfer Pricing Reform In Korea

A U.S. NASDAQ listed company requested information concerning a specific transfer price scheme, amongst other issues, in Korea. The company has recently decided to enter the Korean market after having successfully entered the Japanese and other Asian markets.

For obvious reasons, I can’t answer the question here, but a brief description of recent amendments to the law may be of interest to those that have considered global transfer price issues.

The transfer pricing rules underwent a major change a couple of the years back. In 2006, the Law for the Coordination of International Tax Affairs (LCITA) and a Presidential Enforcement Decree were amended.

The Law and Decree were amended in order to codify the “substance over form” rule, encourage investment overseas by Korean companies, improve the application of the “arm’s length principle,” to discourage treaty shopping, and to clarify the numerous ambiguities that have developed, since the enactment of the original law in January 1, 2006.

The most notable changes are:

1. Substance over Form
The first major change was the codification of the substance over form rule. It seemed that before the change the National Tax Service employed the substance over form rule for the interpretation of international transactions and treaties. This amendment codifies this changed practice.

2. Berry-ratio Method
The amendment recognizes the Berry-ratio method as having the same priority as the transactional-net-margin method and the profit split method..

3. Cost Contribution Arrangement (CCA)
Cost contributions, according to the law, must reflect the expect benefit. The amended law, however, allows adjustments to cost contributions when the CCA is held to be in violation of the arm’s length principle.

4. Rollback of Unilateral APAs.
Rollbacks are now available for unilateral and bilateral advance price agreements for the length of the statutory corporate tax amendment period of three years.

5. Offset of Transfer Prices

Non-arm’s length transfer prices can be offset if the transactions occur in the same taxable years, are performed in the same overseas office, or there is an advance agreement.


Feb 20, 2008

Bank Antipathy To Foreigners

This article appeared in the Korea Times on Feb. 20, 2008.

By Sean Hayes

President-elect Lee Myung-bak's plan to make Korea a more hospitable place for foreigners is a welcome development for many of us long-term residents of Korea; however, the plan will fail unless private enterprises follow suit and realize that foreigners play an integral part in the Korean economy.

I have been writing legal Q&A column for this and other papers for over five years. I receive more complaints and questions about the banking sector than any other area combined. The complaints are real and the questions are because of the banks seeming incapability of understanding and explaining bank rules and government regulations.

Since I came to Korea more than 10 years ago, I have seen little development in the consumer banking sector and my bank, Kookmin Bank, has even deteriorated.

Bank employees are ill informed, incapable of performing even the most rudimentary transactions in an efficient manner and are too often willing to blame most of their missteps on the government. Senior management is unwilling to provide even the most basic services to foreigners in a convenient and consistent fashion.

For example, many foreigners, including myself are plagued with the problem of not being able to use our Korean ATM cards in foreign countries even though the card states, in Korean, that the card can be used in foreign nations. I was hit by this new bank rule a few years back when I went to the Philippines to present a speech. I brought my bankcard, a few hundred thousand Korean won, and the understanding that since I used the same card in the Philippines in the past that the Kookmin card would work.

Too my surprise, the card didn't work, the airport banks wouldn't exchange Korean money, and Philippine taxi drivers are so kind that they even take passengers without money. Luckily, the hotel was generous enough to overcharge my credit card and give me a cash refund for the overcharged amount and a former student was kind enough to send me money by Western Union. Obviously, this caused a good deal of embarrassment and a great deal of anxiety.

When I returned to Korea I confronted the bank manager at my local bank. He, in a not so kind manner, explained that this was a new Korean government regulation. I informed him that he was full of hot air. Korea has no regulation prohibiting foreigners from using international ATM cards, but the nation does prohibit foreigners from withdrawing more than $10,000 per exit from the country. Kookmin and other banks just feel its easier to block foreigners from using cards, than to create a system that prohibits foreigners from withdrawing more than $10,000 per exit from the country.

I was also a little alarmed by my bank a few weeks ago when I went to the bank to transfer funds overseas. I was given a form, in Korean, that stated that I must inform the bank of my reason for transferring the money. The form has multiple boxes and I was forced to pick one if I wanted to send money. I was also informed that I could only send money from this specific branch. I was lucky enough to be able to read and understand the form, but many foreigners would not have been.

I asked the bank to translate the form and get the form back to me, but three weeks later I never heard a word from the bank. I assume, as usual, Kookmin Bank employees are still pointing to a box and simply telling foreigners to check here, sign here, and initial here without foreigners even knowing what they are signing.

The Korean bank industry and other service industries will never improve until they realize that foreigners are a needed component for the future development of the local economy. This realization should be pushed on private industries by the new administration.


Feb 18, 2008

Korean Corporate Forms under the Korean Commerical Code

There are four basic corporate entities under the Korean Commercial Code.

1. Chusik Hoesa (Joint Stock Company)
Only form of corporate entity that is allowed to publicly issue shares. An article will be posted on the specifics of forming a Chusik Hoesa in the next couple of weeks and a link will appear HERE when the article is completed.

2. Yuhan Hoesa (Limited Liability Company)
A closely held company that is prohibited from having more than 50 shareholders. In recent years a few foreign companies have chosen the Yuhan Hoesa, however, most foreign companies are advised and will form a Chusik Hoesa. A few companies, recently, have chosen this form because of possible U.S. tax benefits. I will explain the tax benefits in a follow-up article. A link will appear HERE when the article is completed.

3. Hapja Hoesa (Limited Partnership)
One or more partners may have unlimited liability and one or more partner may maintain limited liability. The entity is responsible for corporate taxes.

4. Hapmyung Hoesa (Partnership)
Must be formed by two or more partners and each partner maintains unlimited liability. The entity is responsible for corporate taxes.


Feb 16, 2008

Report on Korea-US FTA by Peterson Institute

The Peterson Institute, the most influential nonpartisan think tank dedicated to international economics, published an excellent work assessing the Korea-U.S Free Trade Agreement. All interested in Kor-US FTA should read this report.

The summary of the report notes:
The Korea-United States Free Trade Agreement (KORUS FTA) opens up substantial new opportunities for bilateral trade and investment in goods and services and promotes important foreign policy interests of both countries.
The FTA quickly removes most tariff barriers to auto trade and substantially reduces tax and regulatory burdens that impede sales of US cars in Korea; improves access to the Korean market for a wide range of US farm products; and opens up the Korean services market in key areas such as financial services, insurance, express delivery, and legal and accounting services. onetheless the ratification of the KORUS FTA has been controversial.
In the United States attention has focused on both the auto sector, which accounts for almost one-quarter of bilateral trade and a large share of the US trade deficit with Korea, and Korean restrictions on US beef imports due to bovine spongiform encephalopathy (BSE) concerns. Several automakers and auto unions have opposed the deal, and the Democratic leadership in the US House of Representatives has demanded that the auto provisions be recast.
In the US Senate, the resolution of the beef problem-which is now being addressed by Korean regulators-is a prerequisite to passage of implementing legislation. No clear timetable exists for the congressional vote and action may be deferred until 2008.
The Bush administration will have to respond constructively to Democratic concerns about the FTA before the deal can be ratified and should consider new federal programs to help promote the competitiveness of US automakers. Doing so should attract a substantial minority of Democrats in the House, along with the majority of Republicans, to support the FTA.
The stakes-in terms of both US economic and security interests in East Asia-are too great, and the costs too high, to reject the pact or defer a decision.

The complete report can be found HERE.


Feb 14, 2008

Deceptive Practices Under Korean Commercial Code

This article appeared in the Korea Times on Feb. 15, 2008.

Deceptive Practices Under Commercial Code

Dear Professor Sean Hayes:

I lent my name to an ex-friend so he could open up a bar in Seoul. My friend is a non-Korean and I am Korean. I met this man when I was an exchange student. He thought it would be easier for him to open the business under my name. However, the business failed and now he owes a sizable amount of money to food, spirits, beer and other vendors. A food vendor has already sued me and I expect to be sued by others. My ex-friend is nowhere to be found and it seems that when he knew he was going to go under he ordered a large amount of products from multiple vendors and skipped town. Am I responsible for the debt? What can I do? Potentially Broke in Seoul.

Dear Potentially Broke:

Article 23 of the Korean Commercial Code considers allowing one to use another name to open a business as a practice considered to be engaged in for an unfair business practice.

Thus, Article 24 of the Korean Commercial Act provides protection for those that have been deceived by the Act. Article 24 states that: "A person, who has allowed another person to carry on business using his name or trade name, shall be liable jointly and severally with such other person to effect performance in respect of any obligation arising from a transaction in favor of a third person who has effected such transaction in the belief that such other person was the proprietor of the business."

Thus, the creditors of the business have a right to make a claim against you for unpaid debts.

However, the Supreme Court (91 Da 18309 ) ruled that the Article 24 was intended to impose liability on name lenders only in order to protect innocent third parties who effected the transaction because of the deception.

The Supreme Court (2000 Da 10512), however, noted that it is the burden of the lender of the name to affirmatively prove that the creditor knew that the name was lent or the creditor was reckless in not knowing that the name was lent.

Thus, if you can prove that the creditors actually knew or were reckless in not knowing that you lent your name, then you will not be held responsible to pay the debt. However, if you fail to prove the aforementioned then the creditors will likely prevail in the suit.


Feb 12, 2008

Lawyer Cap Unconstitutional

This article, written by Sean Hayes, appeared in the Korea Times on February 13, 2008

By Sean Hayes

Any numerical limitation on the number of law schools, law students or Korean Judicial Exam passers is unconstitutional under Article 15 of the Korean Constitution.

Most of the world's constitutional democracies don't impose numerical caps on the number of law schools, law students, and bar passers. Korean people are smart enough to realize that these numerical limitations are only tools to protect the livelihood of lawyers, and increasingly lawyers are being perceived by the public as greedy, dispassionate about clients' needs, and unwilling or incapable of handling unique and sophisticated legal matters.

The Korean Bar, therefore, for the good of the nation and legal system should voluntarily give up its insistence on protecting lawyers at the expense of their nation, law, legal system and the Korean people and should insist that colleges of law create real professional graduate law schools with rigorous programs, professors capable of not only lecturing but teaching in the Socratic Method, and schools with faculties that comprise licensed and experienced lawyers.

If the Korean Bar is unwilling, the Constitutional Court, as it has so many times over the past two decades must stand-up for the rights of the people and the nation and declare these caps unconstitutional under Article 15 of the Korean Constitution.

Article 15 of the Constitution guarantees the freedom of occupation. If the clause has any meaning at all, it means that all applicants with good moral character and that are competent to practice law must be allowed to enter the profession.

Any law or regulation that does not focus on moral character and competency, as noted by the deceased Professor and Supreme Court litigator George Ethridge, is simply ``undemocratic and tends to create by law a favored class of professional aristocracy to consist alone of those who have the good luck to be born well off financially, or who have rich friends who will let them have the means to take up these long years of study.''

The Constitutional Court, therefore, as the U.S. Supreme Court did in Schware v. Board of Bar Examiners of New Mexico, should allow the government to ``require high standards of qualification, such as good moral character or proficiency in its law, before it admits an applicant to the bar,'' but must demand that all professional licensing laws and regulations have ``a rational connection with the applicant's fitness or capacity to practice law.''

Thus, the Constitutional Court should declare, the present 1000 lawyer yearly limit unconstitutional, since it has no ``rational connection with the applicant's fitness or capacity to practice law.'' If, for example, in one year 2000 applicants are fit and have the capacity to practice law only 1000 are allowed to pass the examination. This quota has no relation to the individual competency or character of the applicant and is simply a ``gate keeping'' tool to protect this ``professional aristocracy.'' Under the new plan the judicial exam pass cap is increased, and the barrier to entry simple becomes the number of students allowed to enter law school and the number of law schools, thus, the same unconstitutional illogic is espoused.

Hopefully, the Court, for the nation, its institutional integrity, and the sanctity of the Korean Constitution and Korean Constitutional Law will do the obviously correct thing and declare, if the cap on the number of law schools, law students, and judicial exam passers is challenged - unconstitutional.

The Constitutional Court, comprised of a group of justices and researchers that are overwhelmingly licensed lawyers, would be perceived as a true bastion for democracy and the rule of law if it declares, against their own and their colleagues interest these caps unconstitutional.

The determination of the case will be a clear sign of the willingness and ability of the justices of the Court to be isolate themselves from pressure from the Korean Bar, the ordinary judicial system, and their colleagues and will show to the people that the Court is a truly the ``guardian of the constitution.''


Feb 9, 2008

Managers Can Advocate for Corporation without Hiring of Korean Licensed Attorneys

An issue has recently circulated concerning the legality of company managers acting in a legal role for a company without being a Korean licensed attorney.

A manager of a company, who does not have a license to practice law in Korea, can act in a legal role for a company and even perform litigation for a company.

Many companies have individuals educated in law, but that don’t have licenses to practice law. These individuals negotiate settlements, file attachments, and even litigate for their companies. These individuals are not violating the Attorney Act, the Criminal Code, or other acts or regulations if they are bona fide managers that are not being paid a fee based on performance in the case or the number of cases handled.

Article 11(1) of the Commercial Act allows bona fide managers to perform duties normally reserved for the licensed attorneys. "A manager may perform all judicial and extra-judicial acts relating to his business on behalf of the proprietor of the business."

However, a district court noted, "Allowing a manager the right of an attorney is recognized, since the law recognizes that a manager has a right of inclusive representations related to business as a chief assistance of an owner.” However, if an individual is employed just to complete a “a company's credit relationships and perform litigations concerning it, the person does not have the right of the attorney because he does not have any substance as a manager and works just for the convenience of the litigations.” (서울지법 1986. 1. 20. 선고 85가단5402 판결) (Seoul District Court 1986. 1. 20. 85KaDan5402)


Jan 24, 2008

"Fair Use" Korean Copyright law

Appeared in the Korea Times on Jan. 25, 2008

Dear Professor Hayes : I am in the process of completing a book on the modern history of the Republic of Korea. A good deal of my work cites news reports, published journals, and first hand reports mentioned in other books, Web sites and personal blogs. My book chronicles the modern developments from the eyes of foreigners who reside or resided in Korea. My publisher wants to confirm that Korea has a "fair use" doctrine, therefore, allowing me to cite the works of others.

Author in Rhode Island

Dear Author : In general, the copyright holders, in Korea, may solely economically exploit a copyrighted work for the life of the author of the work plus 50 years.

Korean Copyright Law provides that copyright infringers may be held liable in civil court and even punished in criminal court. In recent years, the Korean prosecution has been vigorous in prosecuting copyright infringers and the court system has been more willing to hand out sizeable monetary damages in the civil court and jail sentences for repeat offenders in criminal courts.

However, the Korean Copyright Act provides "fair use" type exceptions. Korea, theoretically, doesn't have a fair use doctrine, but the exceptions enumerated in Section 6 of the Copyright Act under the heading Limitations on Authors' Property Rights acts in a similar manner as the commonly understood notion of "fair use."

For example, Article 25 of the Copyright Act permits making "quotations from a work already made public, if they are within a reasonable limit for news reports, criticism, education and research, etc., and are compatible with fair practice."

However, the user of the work, as stated in Article 34, must clearly indicate the source of the quotations.

Courts have interpreted these clauses to allow even lengthy quotations from copyrighted works if the work manages to expound on the work in a meaningful manner.

Hence, author, if your work is an original work that uses only "quotations" from other works and clearly cites that the quotations are from other works you should not be in jeopardy of violating the rights of the copyright holder.

The Korean Copyright Law may be found at or for a fee at the Korean Legislative Research Institute Web site at


Jan 15, 2008

Going Green

Going Green

Appeared in the Korea Times on Jan. 16, 2007

By Sean Hayes

My father has gone green. No my father has not been transformed by Al Gore's ``Inconvenient Truth." He has been transformed by market mechanisms that have encouraged him to go green. My father is a conservative conservationist and he doesn't even know it.

Yes, my father, proudly, has purchased the liberal do-gooder mother ship ― the Toyota Prius. No he didn't accept the free Al Gore bumper sticker or the dinner with Jane Fonda.

Last year, in the United States, the Toyota Prius, for the first time, outsold the highest selling sports utility vehicle- the Ford Explorer.

My father and many others purchased this gas-electric hybrid because it gets 22 kilometers per liter, many states don't impose sales tax on the car, a federal tax credit is available, the car has a mid-size car feel, it doesn't cost considerably more than a non-hybrid and the car operates in the same manner as ordinary cars (no extension cords required).

My father, the conservative conservationist, is helping an increasingly ailing environment and he is doing it with a smile on his face. If we left this issue to our Al Gore type environmental scare tactic-liberals we would be in risk of destroying many of our cherished economic and social freedoms.

Thus, Korea must watch the footsteps of my father and thus encourage consumers and manufacturers to go green or radical conservationists may step-in and strip us of freedoms that we hold so dear.

Thus, the real ``inconvenient truth" becomes obvious. We will lose many of our cherished freedoms through increased government intervention in our lives, if we don't do something to lower our dependency on fossil fuels.

So first, on the supply-side, we need cars and other products that are greener. We need, through tax incentives, to encourage manufacturers and retailers to create and market green products.

Second, through the demand side, we need consumers, like my green father, to be encouraged to purchase green products. This can be accomplished through cutting VAT taxes and increasing tax credits.

Thirdly, we must reframe the environmental issue. The liberal scare tactics help only the liberal political cause and does little to nothing in finding a reasonable solution to the problem. We need to refocus our attention to educating the population on the economic necessity of being responsible citizens and stewards.

Fourth, we must consider and promote the economic opportunities available in being greener. Many companies, because of economic realities, have chosen to go green because it helps their bottom line.

For example, Unilever has increased its efforts to recycle its manufacturing waste products, WalMart has begun to lower its energy dependency, and a plethora of companies have been investing heavily in alternative and renewable fuel sources.

Lastly, we must encourage private innovation. We need to create a profit motive for private enterprises and individuals to develop more eco-friendly buildings and products and thus create a more sustainable way of life.

As in the words of the Republican governor of South Carolina: ``If conservatives cannot reframe, reclaim and respond to climate change with our principles intact, government will undoubtedly provide a solution, no matter how taxing it may be."

Hopefully, the next administration will take heed and lead us down the conservative conservationist path.


Jan 11, 2008

Exemption From National Health Insurance Plan

Exemption From National Health Insurance Plan

Appeared in the Korea Times on January 10, 2007

Dear Professor Hayes:

I am an American working for a company in Korea. My company and I pay for a private insurance policy, but I also pay for the Korean National Insurance Plan. I found that last month premiums drastically increased and I think it is unfair for me to have to pay for two insurance plans when one of the plans I will never use. Can I and the many other foreign workers in this situation avoid paying for the two insurance plans by canceling the government plan? How can I do this? Paying Twice in Seoul.

Dear Paying Twice:

A revision to the enforcement decree of the National Health Insurance Law came into effect a few months ago. The revision allows for foreigners and Korean nationals that reside abroad to avoid paying into the National Health Insurance Plan if they have alternative insurance coverage.

The insurance premiums, over the last few months, have drastically increased. Employees and employers can feel a not insignificant savings by simply filing a few documents with the National Health Insurance Corporation.

All good law firms in Seoul have notified their clients of this change, since in many cases it can relieve a sizeable burden on companies and employees.

Prior to the amendment many foreigners working for companies in Korea contracted for private insurance plans that covered more than the government insurance plans, thus, many would forgo use of the government insurance plan, but still would be required to pay into the National Health Insurance plan.

To alleviate this burden and also the burden on Korean nationals that reside abroad the revision was made.

To avail of this exemption from payments your employer may simply file with the National Health Insurance Corporation a statement signed by the employee that he or she wishes to withdraw from the health insurance plan and include with the documents information related to your health insurance plan.

For contact information for the local office of the National Health Insurance Corporation please visit:


Jan 10, 2008

No American Law Firms in Korea - YET

The KOR-EU FTA passed and thus British law firms will be able to setup shop in Korea over a five-year three-stage phase-in period.  All of the leading British firms have begun building relationships with an eye to formal partnerships. 

KOR-US FTA, however, has stalled because of opposition of some prominent lawmakers in the liberal parties even though the two FTAs are very similar in scope.

We have been approached by many of the British and U.S. firms requesting meetings concerning how to structure a relationship with J & S Law Firm and my team.  From these meetings, I have found that my Team, since it operates in a manner similar to international law firms, is more attractive to the international firms than the top-heavy ubiquitous Korean firms because of these firms' low earnings per attorney and unwillingness to structure into firms with international standards of case management and representation.  They have noticed that they have seen no noticeable quality shift over the past few years, but fear breaking their present relationships out of a fear that they will lose referrals.

The following article is an interesting article on the intention of an American law firm in the Korean market and shows that local firms have nothing to fear and will benefit from these firms' focus on quality, profitability per attorney and equitable management.

Full Disclosure: We have not had a meeting with the firm mentioned in the article.

Korea poised to admit foreign lawyers with FTA (Korea Times)

Lawyers for Los Angeles-based Paul, Hastings, Janofsky & Walker LLP spent so much time in Seoul hotels helping South Korean chipmaker Pixelplus Co. go public in the United States last year, they memorized the room-service menus.

The five Korean-speaking attorneys commuted from Hong Kong for 10 months because South Korea doesn’t allow foreign law firms to open offices.

"It’s like having your office in Los Angeles and all your clients in Chicago," said Kim Jong-han, a U.S.-educated lawyer heading the firm’s Korea group in Hong Kong.

As more foreign investors focus on South Korea, an economy growing at 4.6 percent a year, U.S. and European law firms are eager to hang out their shingles in Seoul and other Korean cities. The path may be cleared soon.

A trade agreement being negotiated with the United States would include initial steps to open South Korea’s legal services market. A bill to implement the change is being reviewed by Korea’s Justice Ministry and might be voted on by the National Assembly in early 2007, the Seoul Bar Association says.

"We want to represent Korea’s leading companies, which are very established global players, and there’s a big advantage to being in Korea where their decision makers are," said Greg Nitzkowski, Paul Hastings’ managing partner in Los Angeles.

Legal services would be among many markets covered by the proposed trade accord, along with textiles, agriculture, pharmaceuticals and automobiles. The next round of talks is scheduled for the week of Dec. 4 in the United States.

The deal may boost trade by $29 billion annually, the U.S. International Trade Commission forecasts.

"Services have become a huge part of what in particular developed countries are exporting," said Steve Norton, spokesman for the Office of the U.S. Trade Representative in Washington. "The U.S. permits foreign-licensed lawyers to work here, and it is reasonable that reciprocal treatment by Korea should be given to U.S. lawyers."

Overseas sales of legal services by U.S. firms total about $5 billion a year, Norton said. The domestic U.S. legal services market is worth about $180 billion annually.

International law firms are following their clients into Asian markets, particularly China and Japan. London-based Clifford Chance, the world’s biggest legal adviser by revenue, said in August it wants to double its number of lawyers in China to 90 by 2010 to advise on corporate takeovers and securities sales.

Several foreign firms, including London-based Linklaters and Chicago-based Baker & McKenzie, have Korean-speaking lawyers in Hong Kong or Tokyo to serve Korean clients.

South Korea, Asia’s third-largest economy, has about 8,000 lawyers serving 48.8 million people — or one lawyer for every 6,100 people, according to Korean Bar Association data. By comparison, the United States has one lawyer for every 268 people, based on data from the American Bar Association website.

Korean lawyers are reluctant to allow foreign law offices because local firms typically are smaller than Western ones, said Ahn Chong-ghee, economic counselor with the Korean Embassy in Washington.

"Our firms are concerned about being overshadowed by foreign competitors," Ahn said. "We know that eventually we will have to open the market, but it will take time."

Seoul-based Kim & Chang is Korea’s largest firm, with about 300 professionals, according to its website. Clifford Chance has 3,300 lawyers. Kim & Chang lawyers declined requests for interviews.

Han Ri-bong, director of international affairs for the Seoul Bar Association, said Korean lawyers don’t object to opening the market as long as it occurs gradually, as in Japan. That nation took about 18 years to fully liberalize its market.

"We don’t expect it will take such a long time in Korea, but we see Japan as a successful model," said Han, a corporate lawyer with Bae, Kim & Lee. "We’re concerned that if there’s an immediate opening it will be disruptive and have a negative effect for Korean lawyers."

Only a handful of Korean firms work with international corporations, creating intense competition for legal services and delaying transactions as potential merger suitors wait in line for advice. It isn’t uncommon for the same firm to represent both buyers and sellers in a transaction, said Paul Rhee, a U.S.-educated lawyer and vice chairman of the European Union Chamber of Commerce’s legal services committee. The chamber is a trade group representing European businesses.

"It’s a race to get to a lawyer in order not to get knocked out of the game," said Sy Kim, an attorney with Sheppard Mullin Richter & Hampton in New York whose clients have included Glovit Inc., a Korean theme-park developer.

Removing restrictions might make South Korea more competitive with China in attracting foreign investment. South Korea received $11.6 billion in direct foreign investment last year, compared with China’s $60.3 billion, according to data from the respective governments.

Pixelplus, which designs semiconductors for cameras in cell phones and personal computers, raised $36 million in its Dec. 20 debut.

"There are so many places where investments get bottlenecked," said James Thoma, a Los Angeles-based lawyer with Greenberg Traurig LLP, whose clients have included Suwon- based Samsung Electronics Co. and U.S. media companies doing business in Korea. "It’s impossible to get the sophisticated legal analysis that investors expect."

South Korea has long had an inward-looking attitude and a distrust of foreign corporations, said William Overhalt, director of the Center for Asia Pacific Policy at Rand Corp., a nonprofit research firm in Santa Monica, California.

"There has been a reaction against foreigners making a lot of money and not paying taxes," Overhalt said.

South Korean prosecutors are investigating Dallas-based Lone Star Funds’ 2003 acquisition of Korea Exchange Bank, the nation’s fifth-largest lender by assets. That investigation has stalled Lone Star’s proposed sale of Korea Exchange to Kookmin Bank, the largest lender.

Lone Star, the biggest foreign investor in South Korea, stands to make a $4 billion profit.

The Korean Supreme Prosecutors Office sought warrants to detain Lone Star cofounder Ellis Short and other current executives to question them about alleged stock manipulation. Those requests were denied by judges on Nov. 3, and prosecutors reapplied hours later. Cofounder John Grayken said last week the probe was driven by an "antiforeign" political climate.

Most of the pressure on the Korean government to open its legal market has come from the United Kingdom because British firms historically have had a bigger presence in Asia, said John Kwon, chairman of the EU chamber’s legal services committee in Korea.

Major U.K. firms such as Clifford Chance and Allen & Overy have had offices in Hong Kong since the 1980s.

The issue of Korean restrictions on legal services came to the fore during the now-stalled Doha round of World Trade Organization talks. The proposed South Korean legislation would apply to all foreign lawyers, not just those from the United States.

Prosecutor Choi Yong-hoon, who oversees the bill’s progress, declined to comment, saying the measure was being reviewed by the Justice Ministry and requires a public hearing. He also declined to comment on when lawmakers might vote.

"A few comments or remarks from me may create a disturbance or a misunderstanding," Choi said. "The matter is closely connected with the current FTA negotiations."

The proposed free trade agreement would be the largest for the United States since the North American Free Trade Agreement of 1994. Trade between South Korea and the United States last year was $71.5 billion.

The fourth round of negotiations, on Jeju Island, South Korea, ended Oct. 27. The talks were marked by scuffles between police and Korean farmers, who oppose opening agricultural markets.

Chief U.S. negotiator Wendy Cutler said during an Oct. 30 conference call that both sides still "have different views" concerning legal services. She wouldn’t elaborate.

The draft bill released in April won’t allow foreign law firms to hire Korean lawyers or set up joint ventures with Korean firms. Yet foreign firms say they will benefit just by being closer to Korean clients.

Linklaters — which advised Lone Star and has 320 lawyers spread across Asia in Hong Kong, Beijing, Shanghai, Tokyo, Singapore and Bangkok — would consider opening an office in Seoul if allowed, said Simon Davies, the managing partner for Asia.

"Given the size of the economy and the size of the deals, it is a very important market," Davies said.

from the Korea Herald