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Investigator Shows How Poor Crypto Exchange KYC Can Empower Criminals

Aurelius Capital Value, a public company investigator, chastised Silvergate for doing business with Huobi Global, despite prior evidence of the exchange’s lax KYC enforcement.

Aurelius claimed that Silvergate’s vetting process was flawed because of Huobi’s alleged history of facilitating money laundering and a 2020 experiment demonstrating the ease of creating bogus accounts.

Silvergate’s KYC Due Diligence Is Under Fire

Aurelius questioned Silvergate’s partnership with Huobi Global in a Twitter thread following a 2020 experiment by forensics firm Cipherblade.

The experiment demonstrated the ease with which fake accounts could be created by submitting photoshopped celebrity images as ID photos. Authorities in Thailand and China busted a $124 million money-laundering ring that took advantage of Huobi’s lax controls in 2021.

By 2019, Silvergate Bank had become the bank of choice for approximately 1,600 of the most significant crypto firms. Its Silvergate Exchange Network specializes in converting cryptocurrency to fiat currency.

Researchers also discovered troubling links between Huobi and the darknet marketplace Hydra, and they were unable to reconcile Silvergate’s official due diligence process with the obvious flaws in Huobi’s onboarding process.

Justin Sun, a member of Huobi’s global advisory board, plays an important role in the story. According to Aurelius, Sun partnered with Silvergate Bank to launch the TRON stablecoin, a cryptocurrency that critics claimed had a weak technical foundation and little value. Sun raised $58 million in 2017 through TRON’s initial coin offering.

Sun was accused of money laundering, insider trading, and other financial crimes in Chinese media in 2019. According to another report by The Verge, Sun approved a bogus KYC system at the Poloniex exchange in order to onboard new customers.

According to one former Poloniex employee, a new account could be created with a picture of the cartoon character Daffy Duck.

Sun vehemently denied the claims and threatened to sue those who spread false allegations for defamation.

“We reserve the right to pursue legal remedies against the falsehoods brought on by any entities. “Harderer LLP serves as our legal counsel,” he confirmed.

Identity Theft Can Be Caused by Poor Controls

KYC rules require financial service providers to collect and verify customer information in order to prevent criminals from opening accounts.

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

There are numerous reasons for lax controls, including varying degrees of enforced KYC and anti-money laundering regulations in different jurisdictions. Inexperienced compliance officers conducting visual inspections of identifiable information may also allow bad actors to infiltrate.

Crypto exchanges may relocate to less stringent regulatory jurisdictions, such as Malta, which can cause additional issues for clients.

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

Furthermore, because many cryptocurrency investors use exchanges to convert fiat to crypto, weak KYC controls may allow criminals to convert stolen crypto to fiat.

The gang obtained personal information from people through fake job advertisements in the case of the Chinese money laundering bust. They then used these details to open multiple exchange accounts to act as conduits for illegal funds.


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