Korea Exchange Seeks Cut of $3 Billion Illegal Gold Trade

South Korea’s equity exchange started offering physical gold trades for the first time on 23 March, as the government seeks to curb as much as $3 billion of black-market transactions.

Korea Exchange Inc., which has had bullion futures since 1999, aims to gradually replace illegal sales that total as much as 70 metric tons annually and deprive the state of an estimated $280 million in taxes. Customs officers intercepted 360 kilograms last year as the number of busts more than doubled from 2012.

Purchasing gold bars is a common way to hide income in Korea, where a shadow economy of unreported buying and selling accounts for a quarter of gross domestic product. While Korea Exchange will reduce taxes on physical trades, smuggled gold is likely to remain as much as 7 percent cheaper, according to the Korea Precious Metals Distributors’ Association.

Samduck is among the 57 refiners, jewellers and securities firms that have joined the trading platform. Others include Samsung Securities (016360) Co., Hyundai Securities Co., Shinhan Investment Corp., Woori Investment & Securities Co., Daesung Metals Co. and Korea Gold Trading Center.

Tax Payments

While traders on Korea Exchange get a waiver on the 3 percent import duty for gold, they still pay a 10 percent value-added tax for taking physical delivery of bullion. Those who trade without taking possession of the metal will receive corporate tax deductions and a VAT exemption, according to the exchange.

Korean Exchange is using 1-gram units of bullion of 99.99 percent purity to spur liquidity. Delivery will be in 1 kilogram bars.

There has been no trading in standard 1-kilo futures in Seoul for the past three years, while average daily transactions for so-called mini-futures representing 100 grams was 141 contracts in 2013, exchange data show.

South Korea’s shadow economy was equal to almost 25 percent of gross domestic product in 2010, above an average 18 percent for OECD members, according to a paper by the Institute for the Study of Labor in Bonn, Germany.

Of as much as 110 tons of gold traded in the nation each year, about 70 tons are estimated to be on the black market in Korea, Asia’s fourth-largest economy, the Financial Services Commission said in July. The FSC said the value was as much as 3.3 trillion won, or about $3 billion.