After the government, media, and regulators increased the scrutiny of the banks' role in enabling kimchi premium traders to profit quickly when trading volumes increase, South Korean banks may find themselves in the firing line.
As was previously reported, regulators intervened last month to alert banks about their failure to prevent traders from using wire transfers to buy tokens like bitcoin (BTC) overseas, which traders then sought to sell for a handsome profit on domestic cryptocurrency exchanges.
Retail investors' trading volumes have skyrocketed in response to recent increases in BTC prices, which has historically resulted in price differences of up to 50% between domestic platforms like Upbit and international platforms like Binance.
By purchasing BTC from over-the-counter sellers, mostly people based in Mainland China, Hong Kong, and Japan, some opportunistic traders have attempted to profit from such price discrepancies. Foreign exchange trading is already subject to strict regulations in South Korea, and the government has compared it to money laundering and vowed to stop it.
After banks responded with overseas remittance caps, concern has since grown over the fact that, historically, recent years have seen illegal foreign exchanges totaling about USD 3.4 billion. And last week, the Financial Supervisory Service (FSS) stated that it is possible that all of this money went through domestic banks.
Prosecutors also looked at the evidence after the FSS initially discovered what it believes to be "abnormal" foreign exchange transactions at both Woori and Shinhan.
The FSS has been aware of potential problems for more than a year, according to Energy Kyungjae, which cited unnamed banking industry sources. The FSS has also previously warned most domestic banks about potential violations. The media outlet further stated that the regulator had "several times" in 2021 reiterated its warnings.
The regulator reportedly sent private warnings to Kookmin Bank, KEB Hana Bank, and Nonghyup Bank in addition to the aforementioned Woori and Shinhan. All five banks reportedly received instructions from the FSS in 2021 "to be careful about arbitrage trading aimed at the kimchi premium."
An internal audit of KEB Hana this year revealed historical irregularities dating back to 2018 that may have been connected in some cases to cryptocurrencies. KEB Hana was fined for breaking the terms of the Foreign Exchange Transactions Act.
While this was going on, Chosun claimed the FSS had conducted "on-site investigations" and that it was "expanding its initial investigation to the entire financial sector." The prosecution service, the National Intelligence Service (NIS), and the Korea Customs Service have all received the results of these investigations.
The latter has had some success in the past in locating kimchi premium traders.
But further investigation appears to have uncovered a network of dubious-looking businesses that some have speculated might have been used by international players to launder money.
The Financial Intelligence Unit (FIU) has discovered information regarding "dozens of abnormal transactions" involving an unnamed Daegu-based company as well as related incidents involving potential shell or "paper" companies with locations throughout the nation.
These businesses appear to have carried out cryptocurrency transactions through domestic exchanges before exchanging their coins for fiat KRW and sending the money abroad.
Some have asserted that members of the network may have ties to North Korea.
However, according to Yonhap, NIS Director Kim Kyu-hyeon stated to the National Assembly Intelligence Committee that the investigation into the allegedly illegal foreign exchange transactions totaling USD 3.4 billion "has not yet been completed."
The leaders of the nation's five largest cryptocurrency exchanges will meet with the Financial Services Commission (FSC) at a historic event later this month.
Kim Joo-hyun, the chairman of the FSC, will be present in person, according to Seoul Kyungjae. Kim will consider the exchanges' suggestions after requesting that the businesses establish a self-policing body. The meeting will be significant because no FSC chief has ever met directly with business executives before.
Unidentified business insider was quoted as saying, "The FSC seems to be more active in the cryptocurrency industry and market than it used to," in response to the news.
By fLEXI tEAM