25/01/2023 Alexander

Crypto scandals which could have been prevented with Corporate KYC

Corporate Know Your Customer or Know Your Client is the process of validating the legitimacy of a business or corporate entity and beneficiary owners to meet AML and KYC compliance. In the cryptocurrency industry, these are sometimes neglected or bypassed altogether.

Here are some examples of high profile cryptocurrency fiascos which could have been avoided or had it’s negative impact reduced if proper corporate KYC had been in place.

FTX wouldn’t have gotten so big that it took down billions of dollars when it collapsed

Proper corporate KYC involves the disclosure of a company’s shareholder structure and beneficial owners. Investors would probably not have invested a substantial amount of money into the FTX cryptocurrency exchange had they done proper due diligence including controllers and connected persons for FTX and the connected companies.

In this chart illustrating the FTX ownership information, we can see that Sam Bankman-Fried is tied to a number of companies which control FTX trading. There is also a significant link to Alameda which might have triggered a red flag for investors.

Source: https://app.lexchart.com/public/bankman-fried-and-ftx-trading-bankruptcy-filing/qBDuWwtyRWy3t1eLi_Su1A

Without big investors backing FTX, it wouldn’t have grown into one of the world’s biggest exchanges and would have taken down less money upon its collapse.

OneCoin ponzi scheme would not have had a global impact

Bulgaria’s Financial Supervision Commission (FSC) issued a warning of potential risks in new cryptocurrencies, citing OneCoin as an example in 30 September 2015. After the warning, OneCoin ceased all activity in Bulgaria but started to use banks in foreign countries to handle wire transfers from participants.

If banks in foreign countries heeded the warning from Bulgaria’s FSC and declined to facilitate OneCoin, the OneCoin ponzi scheme wouldn’t have grown internationally.

Bitzlato wouldn’t have been ordered to stop trading in the US

The Treasury Department designated Bitzlato under a section of the USA Patriot Act, a law used to combat money laundering and terrorist financing, for allegedly laundering illicit funds for ransomware actors based in Russia. This effectively cuts off Bitzlato from the entire US financial system.

U.S. prosecutors claimed that Bitzlato lacked effective know-your-customer procedures to check users’ identity as required by U.S. anti-money-laundering laws and did substantial business with U.S.-based customers despite claiming not to accept users from the U.S.