South Korean banks could face trouble as regulator investigates Kimchi Premium Bitcoin “irregularities.”

Source: Adobe/Monica

South Korean banks could be in the firing line after the government, media and regulators took a closer look at the role of banks in allowing premium kimchi retailers to make quick bucks as trade volumes soar.

As previously reported, regulators stepped in last month to warn banks about their failure to prevent traders from buying tokens like Bitcoin (BTC) abroad via wire transfer – which traders then tried to sell them for a hefty profit throwing domestic crypto exchanges.

As BTC prices have risen in recent years, retail investor trading volumes have skyrocketed — historically resulting in discrepancies of up to 50% between prices on domestic platforms such as BTC up bit and global platforms like binance.

Some opportunistic traders have attempted to take advantage of such price discrepancies by buying BTC from over-the-counter vendors — mostly those based in Mainland China, Hong Kong, and Japan. South Korean authorities, which already impose strict regulations on foreign exchange trading, have equated the trade with money laundering – and vowed to stamp it out.

Banks have since responded with caps on foreign transfers, but concerns have since been raised that – historically – some $3.4 billion worth of illegal foreign exchange transactions have been conducted in recent years. And the Financial Oversight Service (FSS) said last week that all of this money may have flowed through domestic banks.

The FSS first identified what it considered “abnormal” foreign exchange transactions in both Woori and Shinhanwith prosecutors also reviewing the evidence.

But according to Energy Kyungjae, citing unnamed banking industry sources, the FSS has been aware of the potential problems for over a year – and previously warned most domestic banks of possible breaches. The media outlet added that the regulator reiterated its warnings “several times” in 2021.

In addition to the woori and shinhan mentioned above, the regulator has also reportedly issued private warnings Kookmin Bank, KEB Hana Bankand Nonghyup Bank. The FSS reportedly urged all five banks to “be cautious about arbitrage trading targeting the kimchi premium” in 2021.

KEB Hana was fined this year for violating the provisions of the Foreign Exchange Transactions Act after an internal audit uncovered historical irregularities — potentially related to crypto in some cases — dating back to 2018.

Chosun, meanwhile, reported that the FSS was “extending its initial investigation to the entire financial sector” and claimed the regulator had conducted “on-site investigations.” The results of these probes have been shared with prosecutors, as well as the National Intelligence (NIS) and the Korean Customs Service.

The latter has previously had some success tracking down premium kimchi retailers.

However, a deeper investigation into the matter appears to have unearthed a network of suspicious-looking companies, which some suspect were used by foreign players to launder funds.

That Financial Investigation Unit (FIU) has found details of “dozens of abnormal transactions” related to an unnamed company based in Daegu, as well as similar cases that may involve shell or “paper” companies based elsewhere in the country.

These companies appear to have conducted crypto activities through domestic exchanges — and then exchanged their coins for fiat KRW before sending funds abroad.

Some have claimed that people linked to North Korea may be involved in the network.

But according to Yonhap, Kim Kyu-hyeon, the director of the NIS, said Intelligence Committee of the National Assembly that the investigation into alleged illegal foreign exchange transactions worth $3.4 billion “is ongoing”.

Meanwhile the Financial Services Commission (FSC) will hold a landmark meeting with the heads of the country’s five largest crypto exchanges later this month.

FSC chairman Kim Joo-hyun will personally attend the meeting, Seoul Kyungjae reported. Kim will listen to exchanges’ proposals after prompting companies to set up a self-regulatory body. The meeting will be significant as no FSC chief has previously held a face-to-face meeting with industry leaders.

An unnamed industry insider was quoted as welcoming the news, stating, “The FSC appears to be more active in the cryptocurrency industry and market than it used to be.”

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Learn more:
– South Korean prosecutors complete Terra raids on exchanges, tech and VC firms
– Erste Bank limits remittances to block kimchi premium opportunists

– 3 South Korean banks say they will not deal with ‘risky’ crypto exchanges
– South Korea’s Shinhan, LG CNS launch CBDC platform

– Banking Giant KB creates crypto, NFT and CBDC compatible wallets
– South Korean bank NH is launching a blockchain-based document wallet

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