Implementing a Real Name Financial Transaction System to Increase Transparency and Reduce Corruption

A real-name financial transaction system (RNFTS) requires that the real name of an individual or a legal entity be used in financial transactions, subject to verification by some form of identification. By enhancing the integrity and transparency of financial transactions, RNFTS aims to address the development challenge of reducing corruption and promoting fair taxation. Introducing RNFTS entails basically two types of delivery challenges: technical and political economy. The technical challenge has to do with setting up data infrastructure and dealing with verification and transition problems while safeguarding financial privacy. The political economy challenge has to do with overcoming the resistance of those who wanted to keep financial transactions secret.

Since the early 1980s, successive governments in Korea acknowledged the imperative of financial transparency and integrity, but their commitment to implement the requisite reform fluctuated depending on political and economic conditions. In fact, although technical challenges associated with RNFTS had been largely addressed by the mid-1980s, political economy issues prevented its implementation until 1993.

Introducing RNFTS is generally regarded as a case of concentrated costs and dispersed benefits, where reform-minded citizens must play entrepreneurial politics to mobilize the support of the general public to overcome the resistance of the powerful vested interest. However, under certain conditions, it may more resemble a case of concentrated costs and concentrated benefits, where a few reformers derive a disproportionate share of benefits against their political rivals.  In Korea’s case, the payoff structure associated with RNFTS seems to have gone through this shift from the 1980s to 1993.