South Korea: New probe uncovers $6.5B worth of digital assets linked to illegal transactions

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The Financial Supervisory Services (FSS), South Korea’s financial industry regulator, has uncovered more illicit foreign exchange transactions tied with digital assets arbitrage trades. 

According to a report by Asia Times, the FSS issued a directive to banks to conduct self-inspection, where they uncovered $6.5 billion (KRW 8.5 trillion) worth of suspicious transactions. The banks have also noted that most transactions originated from digital assets exchanges between January 2021 and June this year. 

These exchanges had established an elaborate money laundering scheme to exploit the Kimchi premium by buying digital assets in foreign exchanges and selling them for a profit in the more expensive South Korean market. 

The FSS first caught up with the scheme from its investigation into Woori Bank and Shinhan Bank in July, where it found a total of $3.1 billion worth of suspicious transactions. 

Explaining the mechanism used to work the scheme, the FSS said that exchanges sent funds to locally registered trade groups, which in turn sent foreign remittances to their counterparts registered overseas, majorly in Hong Kong. 

The head of the FSS, Lee Bok-hyeon, has stated that the offenders will not go unpunished. He added that the illegal forex transactions have contributed to capital flight from the South Korean market. 

“We are taking the foreign exchange transaction seriously, and sanctions are inevitable,” he said in a statement.

The FSS will complete its onsite inspection of the Woori and Shinhan Bank on Aug. 19, after which it will impose the necessary sanctions. The onsite inspection team will also proceed to other banks that have found suspicious transactions. 

South Korea’s scrutiny of the digital assets market continues to deepen 

Meanwhile, prosecutors have been cracking down on individuals involved in the scheme. Last week, investigators in the Daegu District Prosecutor’s Office reportedly arrested three individuals involved in conducting illegal forex transactions with Woori Bank. The individuals allegedly wired around $307 million on behalf of exchanges through dubious companies they set up. 

The bank probes are only part of efforts South Korean authorities are taking to weed out bad faith actors in the digital assets market. The government has been cracking down on digital asset firms and exchanges, mainly linked to the Terra LUNA and UST crashes. 

Efforts to introduce regulations for the industry have been accelerated while interim oversight committees have been set up. 

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