Investigator Shows How Bad KYC Can Empower Criminals

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Public company investigator Aurelius Capital Value called out Silvergate for doing business with Huobi Global, despite previous evidence of the exchange’s misapplication of KYC.

Aurelius used Huobi’s alleged track record of facilitating money laundering and a 2020 experience demonstrating 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 Silvergates’ partnership with Huobi Global after a 2020 experiment by forensic firm Cipherblade.

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 hacked into a $124 million money laundering syndicate that exploited Huobis’ lax controls.

Silvergate Bank became the bank of choice for around 1,600 of the top crypto companies in 2019. Its Silvergate Exchange Network specializes in converting between crypto and fiat currency.

Researchers also found troubling links between Huobi and darknet market Hydra and could not reconcile Silvergates’ formal due diligence process with apparent flaws in Huobis’ onboarding process.

Was Huobi’s KYC process influenced by Justin Sun?

Huobis Global Advisory Board Member Justin Sun is a key character in the story. According to Aurelius, Sun has partnered with Silvergate Bank to launch the stablecoin TRON, a cryptocurrency critic pointed to as having a thin technical base 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 from The Verge alleged that Sun approved a fake KYC system at the Poloniex exchange to onboard new customers.

A former Poloniex employee mentioned that a new account might be created with a picture of cartoon character Daffy Duck.

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

We reserve the right to take legal action against untruths provided by any entity. We are represented by Harder LLP as legal counsel, he said.

Poor controls can lead to identity theft

Financial services 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.

There are many reasons for lax controls, including different degrees of enforcement of KYC and anti-money laundering regulations in different jurisdictions. Inexperienced compliance officers performing visual inspections of identifiable information can also allow bad actors to infiltrate.

Sometimes crypto exchanges move to regions with less restrictive regulations, such as Malta, which can introduce further problems for customers.

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

Additionally, since many crypto investors use exchanges to convert fiat to crypto, weak KYC checks can allow criminals to convert stolen crypto to fiat.

In the case of the China money laundering case, the gang obtained people’s personal information through fake job offers. They then used these details to open multiple accounts on exchanges to act as conduits for illegal funds.

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Disclaimer

BeInCrypto has reached out to a company or individual involved in the story for an official statement on recent developments, but has yet to receive a response.

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