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 a Monday 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 June 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 a Monday 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 Sunday, 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.