Korean regulators investigate banks over $6.5B tied to Kimchi premium

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South Kore­an banks are being inves­ti­gat­ed for their role in facil­i­tat­ing $6.5 bil­lion in sus­pi­cious over­seas remit­tances which have been tied to com­pa­nies arbi­trag­ing cryptocurrency. 

Accord­ing to an Aug. 15 report from Asia Times, the Finan­cial Super­vi­so­ry Ser­vice (FSS) ordered an inves­ti­ga­tion into South Kore­an banks last month after iden­ti­fy­ing a sig­nif­i­cant amount of over­seas remit­tance trans­ac­tions at the end of June.

The inves­ti­ga­tion found that a major­i­ty of the $6.5 bil­lion remit­ted over­seas between Jan 2021 and Jun 2022 came from cryp­to exchange accounts before being sent out of the coun­try, sug­gest­ing some Kore­an com­pa­nies are exploit­ing the “Kim­chi pre­mi­um (kimp).”

The Kim­chi pre­mi­um is the gap in cryp­tocur­ren­cy prices in South Kore­an exchanges com­pared to for­eign exchanges. Investors buy cryp­to from for­eign exchanges and sell them on local Kore­an exchanges for a profit. 

Reg­u­la­tors have been con­cerned about Kim­chi pre­mi­um trad­ing as it encour­ages cap­i­tal flight from the country. 

Cur­rent­ly, the kim­chi pre­mi­um sits at a mod­est +3.37% but was above +20% as ear­ly as last April accord­ing to mar­ket track­er CryptoQuant.

Reports from Shin­han Bank and Woori Bank found that most of the mon­ey remit­ted was first trans­ferred out of domes­tic cryp­to 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 Aug. 15 report from local news out­let Asia Times.

There are also sus­pi­cions that the funds remit­ted are being used for mon­ey laun­der­ing, accord­ing to the KBS news out­let on Aug. 14, with some employ­ees from the unnamed com­pa­nies that per­formed the remit­tances hav­ing been arrested.

The total amount sent over­seas was more than dou­ble what the FSS had expect­ed to find when it ordered banks to look into the mat­ter. Asia Times report­ed that the FSS is now expect­ed to con­duct addi­tion­al on-site inves­ti­ga­tions of domes­tic banks, which could uncov­er more funds that have been remitted.

Relat­ed: South Kore­a’s finan­cial watch­dog wants to ‘quick­ly’ review cryp­to leg­is­la­tion: Report

The FSS is now expect­ed to issue sanc­tions toward Shin­han and Woori for allow­ing the great­est amount of remit­tances. Asia Times wrote that Lee Bok-Hyeon, head of the FSS said “We are tak­ing the for­eign exchange trans­ac­tion seri­ous­ly, and sanc­tions are inevitable.” 

On-site inves­ti­ga­tions are ongo­ing at Shin­han and Woori but will be com­plet­ed on Aug. 19.

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