Public company investigator Aurelius Capital Value called out Silvergate for doing business with Huobi Global, despite earlier evidence of poor KYC enforcement at the exchange.
Aurelius used Huobi’s alleged history of enabling money laundering and a 2020 experiment that showed the ease of creating fake accounts to suggest that Silvergate’s verification process was flawed.
KYC due diligence at Silvergate questioned
In a Twitter thread, Aurelius questioned Silvergate’s partnership with Huobi Global following forensics firm Cipherblade’s 2020 experiment.
The experiment revealed the ease of creating fake accounts by submitting photoshopped images of celebrities as ID photos. In 2021, authorities in Thailand and China busted a $124 million money laundering syndicate that exploited Huobi’s lax oversight.
Silvergate Bank has become the bank of choice for around 1,600 of the most significant crypto companies by 2019. Its Silvergate Exchange Network specializes in converting between crypto and fiat money.
The researchers also found troubling links between Huobi and the dark market Hydra, and could not reconcile Silvergate’s official due diligence process with glaring flaws 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 has reportedly teamed up with Silvergate Bank to launch stablecoin TRON, a cryptocurrency that critics have pointed out has a weak technical foundation and little value. Sun raised $58 million through TRON’s 2017 Initial Coin Offering.
In 2019, Chinese media accused Sun of money laundering, insider trading and other financial crimes. Another report from The Verge said that Sun approved a fake KYC system on the 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.
The Sun strongly rejected the claims and warned of the possibility of defamation suits against those making the false accusations.
“We reserve the right to seek legal remedies against falsehoods presented by any entities. We are represented by Harder LLP as our legal counsel,” he confirmed.
Poor controls can lead to identity theft
Financial services companies must adhere to KYC rules to collect and verify customer information to prevent criminals from opening accounts.
In addition, the process must identify and prevent sanctioned individuals from illegally opening accounts.
There are many reasons for weak controls, including varying degrees of enforcement of KYC and anti-money laundering regulations in different jurisdictions. Inexperienced compliance officers performing visual reviews of identifiable data can also allow bad actors to creep in.
Sometimes crypto exchanges move to regions with less burdensome regulations, such as Malta, which can lead to other problems for clients.
According to AureliusHuobi clients seeking legal remedies against the exchange could only send correspondence to a post office box in the Seychelles because the exchange had no physical presence there.
Also, since many crypto investors use exchanges to convert 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 information from people through fake job ads. They then used this information to open multiple accounts on exchanges to act as conduits for illegal funds.
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BeInCrypto has reached out to the company or individual involved in the story to get an official statement on the recent events, but has yet to hear back.