Investigator Shows How Poor KYC Can Empower Criminals

Public company investigator Aurelius Capital Value called out Silvergate for doing business with Huobi Global, despite earlier proof of the exchange’s poor KYC enforcement.

Aurelius used Huobi’s alleged history of facilitating money laundering and a 2020 experiment demonstrating the ease of creating bogus accounts to suggest that Silvergate’s vetting process was deficient.

KYC Due Diligence at Silvergate Questioned

In a Twitter thread, Aurelius questioned Silvergate’s partnership with Huobi Global after a 2020 experiment by forensics firm Cipherblade.

The experiment revealed the ease of creating fake accounts by submitting photoshopped celebrity images as ID photos. In 2021, authorities in Thailand and China cracked a $124 million money-laundering syndicate that exploited Huobi’s lax controls.

Silvergate Bank became the bank of choice for about 1,600 of the most significant crypto firms by 2019. Its Silvergate Exchange Network specializes in converting between crypto and fiat money.

Researchers also discovered troubling connections between Huobi and darknet marketplace Hydra and couldn’t reconcile Silvergate’s official due diligence process with the apparent deficiencies in Huobi’s onboarding process.

Was Huobi’s KYC Process Influenced by Justin Sun?

Huobi’s global advisory board member Justin Sun is a key figure in the story. According to Aurelius, Sun reportedly partnered with Silvergate Bank to launch the TRON stablecoin, a cryptocurrency critics pointed out had a thin technical underpinning and little value. Sun raised $58 million through TRON’s initial coin offering in 2017.

In 2019, Chinese media accused Sun of money laundering, insider trading, and other financial crimes. Another report by The Verge alleged that Sun approved a fake KYC system at Poloniex exchange to onboard new customers.

One former Poloniex employee mentioned that a new account could be created with a picture of the cartoon character Daffy Duck.

Sun vehemently denied the claims and warned of the possibility of a defamation suit against purveyors of false allegations.

 “We reserve the right to pursue legal remedies against the falsehoods brought on by any entities. We are represented by Harder LLP as our legal counsel,” he affirmed.

Poor Controls Can Lead to Identity Theft

Financial service companies must comply with KYC rules to collect and verify customer information to prevent criminals from opening accounts. 

Additionally, the process must identify and prevent sanctioned individuals from illegally opening accounts.

Many reasons exist for lax controls, including different degrees of enforced KYC and Anti-Money Laundering regulations in varying jurisdictions. Inexperienced compliance officers performing visual inspections of identifiable information can also allow bad actors to slip in.

Sometimes crypto exchanges move to regions with less burdensome regulations, like Malta, which can introduce other problems for clients.

According to Aurelius, Huobi clients seeking recourse against the exchange could only send correspondence to a Seychelles mailbox because the exchange had no physical presence there. 

Also, since many crypto investors use exchanges to convert between fiat to crypto, weak KYC controls can allow criminals to convert stolen crypto to fiat. 

In the case of the Chinese money laundering bust, the gang obtained personal details from people through fake job advertisements. They then used these details to open multiple accounts on exchanges to act as conduits of illegal funds.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

Disclaimer

BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.



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