ΆΓ  Putting up with unreasonable laws

Korea Herald 2001. 1.20

While the Korean government has aggressively sought to restructure its foreign investment laws and regulations in all sectors to conform with international standards, there are signs that reforms and an international mindset among government officials are still needed. The prevalence of old style thinking and the narrow interpretation of laws and regulations serve to discourage foreign investors from investing in Korea, as well as undermining its international credibility. Good laws should always aim to promote public policy and public welfare, but certain existing laws concerning foreign investment and its rigid interpretation fail to do so.

Such a predicament prompted one foreign-invested trading company to seek the services of the Office of the Investment Ombudsman (OIO) to recoup its financial losses resulting from financial fraud with a Korean business partner. The trading company was engaged in the business of exporting jeans to Southeast Asian countries. After having reached agreement, through a written contract, the foreign-invested company, in good faith, paid 10,500,000 won in advance to its Korean partner whose job it was to manufacture and deliver jeans to the foreign-invested firm. However, the Korean partner failed to live up to the terms of the agreement and fled with the advance payment. The owner of the trading company sought the services of the police but due to his inability to speak Korean he was unable to get the full attention of law enforcement officials. As a result, the owner's case was neglected with little or no follow-up until the owner wrote a letter of complaint to the Blue House, which then ordered the police department to apprehend the violator.

However, even upon capture the Korean defendant was given a light sentence of 8 months of which he served no time in prison. Because the action occurred during the financial crisis of 1997 the defendant escaped normal sentencing due to the court's leniency. As a result, the defendant was released and paroled for one year without having to pay back the 10,500,000 won he stole from the foreign-invested company owner. Furthermore, the plaintiff complained that the court failed to notify him of the defendant's release after the case had been closed. The OIO maintains that at minimum, the court should have collected the 10,500,000 won owed to the plaintiff before releasing the defendant, but no such remedy was pursued.

When the plaintiff failed to collect damages under the criminal law he sought a civil remedy, but the OIO recommended against such a counterproductive action. Even if the court was to rule in favor of the plaintiff and awarded payment of damages, collection of such damages, through confiscation of defendant's property, would be impractical according to existing laws. The defendant could simply escape his financial obligations by changing the title of the deed to his heir's/relative's name. Unfortunately, in this case, the owner of the foreign-invested company had to absorb the loss and thus was denied adequate legal protection for his investments. Such loopholes in the law leave many foreign investors vulnerable to financial fraud when entering into business partnerships with Korean counterparts.

The next case involving a foreign auto company attests to the lack of an international mindset among government officials based on their personal and rigid interpretation of existing regulations concerning foreign investment. The root of the grievance stems from Article 6 of the Motor Vehicle Safety Standards Act of 1993 governing the Gross Vehicle Weight (GVW) of trucks which is currently set at the 40 ton limit, including the trailer. Korean tractors (3 axles) weigh approximately 9 tons thus permitting them to be attached with a maximum 31 tons trailer. However, European tractors (2 axles), being more efficient, weigh 6.9 tons, thus theoretically giving them 2 extra tons to be added to the capacity of the trailer, for a size of 33 tons. The Ministry of Construction and Transportation (MOCT) rejected the request to allow the introduction of 33 ton trailers because they believed that the roads were not designed to handle the extra weight and thus would lead to increased expenditures in road repairs.

In contrast, the OIO proposed that the MOCT approve the construction of 33 ton trailers given that there was no prima facie violation of the Motor Vehicle Safety Standards Act of 1993. Fears that the increased size of the trailer would damage road conditions were unsubstantiated and groundless as the total weight still equaled 40 tons when coupled with the lighter European tractor model. Furthermore, the OIO argued that the importation of European tractors would provide enormous benefits to the domestic auto industry. By having access to foreign capital goods, the domestic industry can learn and acquire foreign auto manufacturing techniques, thus helping them to develop more efficient and powerful tractors. Indeed, while domestic tractor companies may suffer from short-term losses, competitive companies stand to gain a lot in the long-run. The OIO also pointed out that the introduction of 33 ton trailers has no bearing on road conditions as they are specifically designed to sit only on 6.9 ton tractors. To place them on the standard 9 ton tractor would negatively affect its turning radius and exceed the legally required 10 ton limit for each tire axle. Despite urges from the OIO to approve the introduction of 33 ton trailers, the MOCT officials disagreed without providing any reasonable basis. Clearly, the rejection of such trailers effectively renders useless the already approved European tractor model. The narrow lens by which these government officials view the world serves to discourage foreign investors from wanting to invest in Korea.

The cases above illustrates the need to push forward and complete the process of economic reform, especially regarding law and regulations pertaining to foreign investment. A legal regime in support of the FDI regime is critical to building confidence among foreign investors, who wish to be assured of the safety of their investments and relative ease of investing in Korea.

The writer is a home doctor at the Office of the Investment Ombudsman. He can be contacted on (02) 3460-7645 or sayjeong@kotra.or.kr. - Ed.