The South Korean financial watchdog said Tuesday it will closely monitor stock trading by paper companies set up in tax havens to ferret out local nationals disguised as foreign investors to dodge domestic law and engage in illegal activities.

The Financial Supervisory Service (FSS) said out of 38,437 foreign corporations investing in the country, 7,626, or 20 percent, are offshore companies based in 62 tax haven-designated countries including the Cayman Islands, the Virgin Islands, Bermuda, Barbados, Panama and Mauritius.

The watchdog is trying to clamp down on South Korean nationals who have established paper companies in these countries to disguise themselves as foreign investors. Foreign investors in local stock markets are exempted from some of the taxes, including when they buy initial public offering (IPO) shares.

These offshore investors owned by South Koreans even engage in price manipulation, tax evasion and creation of slush funds, the watchdog said.
"The 'disguised' foreign investors enjoy law benefits and earn more profits, but they abuse the rules and disrupt the fair financial market order," FSS deputy governor Lee Eun-tae said.

"We will draw out a system to detect these Korean-turned-foreign investors and tighten their monitoring."

In line with the FSS' move, the state tax agency has launched a comprehensive crackdown on tax evaders who conceal money by using offshore paper companies. It imposed more than 1 trillion won (US$978.7 billion) in taxes last year through an investigation into such entities. (Yonhap)