South Korean banks are under investigation for their role in facilitating $6.5 billion in suspicious foreign remittances that have been linked to cryptocurrency arbitrage firms.
According to an August 15 report by the Asia Times, the Financial Supervisory Service (FSS) ordered an investigation of South Korean banks last month after identifying a significant number of overseas remittance transactions in late June.
The research found that the majority of the $6.5 billion remitted abroad between January 2021 and June 2022 came from cryptocurrency exchange accounts before being sent out of the country, suggesting that some Korean companies are exploiting the “Kimchi premium.” (kimp)”.
The Kimchi premium is the gap in cryptocurrency prices on South Korean exchanges compared to foreign exchanges. Investors buy cryptocurrencies on foreign exchanges and sell them on local Korean exchanges for profit.
Regulators have been concerned about the premium Kimchi trade as it encourages capital flight from the country.
The kimchi premium currently stands at a modest +3.37%, but was already over +20% last April, according to market tracker CryptoQuant.
Reports from Shinhan Bank and Woori Bank found that most of the money remitted was first transferred from domestic cryptocurrency exchanges to various corporate accounts of Korean companies.
These large remittances have raised red flags that investors are using huge sums of money to exploit the Kimchi premium, according to an August 15 report by local media outlet Asia Times.
There are also suspicions that the remitted funds are being used for money laundering, according to news outlet KBS on August 14, and some employees of the unnamed companies that made the remittances have been arrested.
The total amount sent abroad was more than double what the FSS expected to find when it ordered the banks to investigate the matter. The Asia Times reported that the FSS is now expected to conduct further investigations on the domestic banks’ site, which could uncover more funds that have been remitted.
Related: South Korea’s Financial Watchdog Wants To ‘Swiftly’ Review Cryptocurrency Legislation: Report
The FSS is now expected to issue sanctions against Shinhan and Woori for allowing the largest amount of remittances. Asia Times wrote that Lee Bok-Hyeon, director of the FSS, said: “We are taking the foreign exchange transaction seriously and sanctions are inevitable.”
Site investigations are ongoing at Shinhan and Woori, but will be completed on August 19.