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On March 30, 2023, the Korean Financial Intelligence Unit (KoFIU) under the Financial Services Commission (FSC) announced enforcement measures taken against five domestic crypto exchange operators.
The move came after on-site inspections revealed major deficiencies and lapses in anti-money laundering and countering the financing of terrorism (AML/CFT) controls. On the same day, the results of the inspections – which were carried out in the second half of 2022 – were published.
As stated in the announcement, the enforcement actions ranged from reprimands and reprimands for employees and managers to fines for the company in accordance with the Law on Reporting and Use of Certain Information on Financial Transactions (Law on AML).
Identified violations for the prevention of money laundering and terrorist financing
Although KoFIU cannot go into the specifics of violations by different companies, it listed some examples that led to sanctions:
- Unusual transactions: the user received 27.8 billion won of crypto-assets from abroad 1,074 times over nine months without withdrawal, and sold them in 12,267 transactions with several purchases before withdrawing the proceeds of 28.2 billion won in cash on 712 occasions.
- Suspicious deposits and withdrawals: a repeated pattern of a customer receiving 32 types of cryptoassets in 2,243 transactions (16.4 billion won) from 313 unknown addresses and withdrawing 2,243 times (16.3 billion won) to overseas addresses.
- Accounts in borrowed name: older clients (between 73 and 95) who were actively trading many different types of cryptoassets late at night or in the early hours and using the same IP address abroad.
- Lack of internal controls: executives and employees trading cryptoassets on their employer’s exchange using their spouse’s accounts
For anyone experienced in preventing money laundering and terrorist financing, the identified activities bear all the hallmarks of possible money laundering – such as smuggling, uneconomic off-ramping trades and the use of “nominated” accounts – as they bypass know-your-customer (KYC) controls, due diligence (CDD) and transaction monitoring.
KoFIU noted this in its inspection findings and highlighted problem areas such as ineffective transaction monitoring, lack of proper KYC verification, non-compliance with Travel Rules requirements and poor client risk assessment.
More inspections are coming in 2023
Due to the findings of the inspection, KoFIU intends to conduct further thematic inspections in vulnerable areas with a high risk of money laundering (ML), as well as share observations with the industry to prevent similar violations by other firms.
KoFIU also stated that the focus of the inspections was on raising the standards of business entities in the new industry by identifying violations of the AML Law and if similar issues arise in the future, there will be stricter sanctions.
This is a clear warning to other crypto business operators in South Korea as the KoFIU intends to conduct further inspections of digital asset companies such as wallet operators this year.
South Korean authorities have always been quite active in policing the crypto sector. These recent actions are just the latest salvo – including 16 foreign crypto exchanges flagged by the KoFIU in August 2022 for targeting domestic investors without proper registration, and the arrest of 16 individuals in the same month for involvement in illegal foreign exchange transactions involving crypto assets.
While there may be difficulties in taking enforcement action against such foreign entities, it does reflect the KoFIU’s willingness to target errant firms, regardless of where they are located.
Encouraging the positive development of the industry
Additionally, the South Korean government is also taking a measured approach towards regulation and innovation in the crypto sector. In October 2022, the FSC and the National Assembly announced collaboration on legislation that balances blockchain development and investor protection.
Seventeen separate cryptocurrency-related legislative proposals are now being considered with a comprehensive framework – known as the Digital Assets Basic Law – likely to emerge. In February 2023, guidelines were also published on the treatment and regulation of tokenized cryptoassets as securities under existing capital market rules.
It is clear that the South Korean government is not averse to the emerging crypto industry; it just wants the sector to be well regulated with proper safeguards and safeguards. Accordingly, in January 2023, the Department of Justice announced plans to launch a “virtual currency tracking system” that will allow law enforcement agencies to address money laundering activities and help recover crypto assets lost to crime.
These plans to increase monitoring of the crypto sector in South Korea have been in the works for some time and come after a partnership revealed in October 2022 between the Korea National Police Agency and five major exchanges to prevent and investigate crypto-related crime.
Impact on crypto business in South Korea
In order to move forward, domestic businesses definitely need to take care and shape up – especially with regard to their anti-money laundering and terrorist financing controls – to ensure they don’t break regulations and attract unwanted scrutiny.
It is also important for them not to become unwitting guides to crime due to inadequate KYC/CDD controls and weak implementation of surveillance systems, including the use of blockchain analytics to trace the source and destination of funds, as well as continuous transaction monitoring.
If you run a crypto business in South Korea, contact us to speak with one of Elliptic’s experts and discuss in more detail how we can help your business adapt to the increasing expectations of the country’s regulators and law enforcement agencies.
APAC Crypto Businesses Compliance
