One thing many bankers are wondering, in the wake of Sam Bankman-Fried's arrest and the indictments against him and his colleagues at the disgraced cryptocurrency exchange firm FTX, is what this means for banks that work with crypto-related companies.
Among the specific indictments against FTX CEO Sam Bankman-Fried and co-founders Caroline Ellison and Gary Wang are wire transfer fraud, directing FTX customer funds to affiliated hedge fund Alameda and misappropriation of customer deposits — activities in which banks allegedly had a role. Banks that did business with FTX, according to the risk advisory firm
"There's more maturing to do for banks to work directly with exchanges," said Jeff Sinnott, CEO of Vantage Bank Texas, in a recent interview. FTX's issues came about in part "because they don't follow the purity of what a blockchain technology is supposed to do. It needs to be back to where our customers have trust."
Any bank that did business with FTX or Alameda should be concerned, according to onetime federal prosecutor Renato Mariotti, a former member of the Department of Justice's Securities and Commodities Fraud Section who is now a trial partner at Bryan Cave Leighton Paisner.
"Some of them may end up being victims of this scheme because they may have invested money or provided services to FTX and they won't necessarily get their money back," Mariotti said. "Any bank that ends up losing money as a result of FTX's scheme has to be concerned about the potential lawsuits from their own shareholders and investors who are going to say to them, well, you haven't conducted the appropriate due diligence."
The accusations against FTX's leaders point to how banks may need to step up due diligence and further vet potential customers and partners.
Misappropriation of customer deposits
One of the major indictments against Bankman-Fried was the misappropriation of customer funds from FTX to Alameda Research. It's been suggested that banks that worked with FTX should have known and not allowed this.
In a
Lane declined a request for an interview. But in a letter Silvergate made public that same week, the bank said it operates in accordance with the Bank Secrecy Act, the Patriot Act and anti-money-laundering rules.
"For each and every account, these laws require us to determine the beneficial owner, the source of funds, and the purpose and expected use of funds," the letter stated. "Silvergate also monitors transaction activity for every account and identifies activity outside of the expected usage. When we identify certain kinds of activity, we are required to file suspicious activity reports, and we do so routinely. We have a track record of closing accounts that are used for purposes outside of the expected use."
FTX's use of Deltec Bank in the Bahamas obscured U.S. banks' view of FTX's transactions, some say. And according to the
When banks monitor transactions, they are required to look for large and unusual movements and report them through suspicious activity reports.
"There's certainly an expectation under vendor management guidelines, and even more so under know- your-customer guidelines and ongoing customer due diligence, that you pay attention to what's going on with accounts," said Joseph Silvia, a financial institutions partner at Dickinson Wright and adjunct professor of law at Chicago-Kent College of Law. "You monitor the transactions to see if anything out of the ordinary happens, something that's not expected based on what the account opening expectations were."
But if the activity does not look unusual, "there has to be a reasonableness argument, if I'm the bank, to say, wait a second, I'm following the rules. I did my KYC, I did my customer onboarding appropriately, I've done my ongoing monitoring," Silvia said. "There's no way for a bank to know whether or not each and every transaction of a customer is appropriate or not."
Fraudulent wire transfers
Several of the indictments against Bankman-Fried related to fraudulent wire transfers.
In the letter Warren and her colleagues wrote to Silvergate, they said FTX customers continued to send wire transfers to Alameda's Silvergate account as recently as this year. "It appears that Silvergate did nothing to halt these activities," they wrote.
However, it is unlikely that the banks that handled fraudulent wire transfers on behalf of FTX and Alameda will be blamed for them, according to Mariotti.
"When I was a federal prosecutor, I often handled investigations that involved wire transfers and we often called banks as witnesses," he said. "That's usually how we viewed them, as potential witnesses, not as targets. Sometimes they're even victims."
Banks are expected to follow certain policies and procedures for wire transfers, Silvia noted.
"If everything checks the box of policies and procedures that are expected for wires, then how is the bank supposed to go into each wire transaction and say, well, something must be wrong here?" he said.
Banks receive limited information about wire transfers, noted Ed Groshans, senior policy and research analyst at Compass Point Research & Trading and a former bank examiner with the Federal Reserve.
"Wire instructions are not a Tolstoy novel," he said. "There are eight data fields, and they're mostly account information: send money from this account to this account. The bank puts it through their third-party processor. If it doesn't get kicked back by an Office of Foreign Assets Control or sanctions list or anything along those lines, it goes out."
Raising the bar for crypto banking
An aftereffect of FTX's collapse is that the regulatory bar will be raised for banks that want to work with crypto-related businesses, Groshans said.
"And it should be," he added. Bank regulators currently don't have the authority or tools to regulate cryptocurrency activities.
"It's relatively new and they haven't really figured out the best way to overlay the bank regulatory system on that system," Groshans said. "Until they figure it out on their end they're going to make it harder for the banks."
Banks may feel pressure in the short term to end their relationships with crypto firms and others in the digital- assets business, Mariotti said. The FTX failure is also a reminder that good due diligence is important.
"There was perhaps a perception by many that regulators were going to take a hands-off approach in this space," he said. "To the extent that was ever true, those days are now over. Federal enforcement authorities have made crystal clear that they intend to aggressively take action whenever they see potential wrongdoing in this space. So everyone in the crypto space has to be concerned, and I think that anyone doing business with crypto firms has to account for that increased regulatory scrutiny and behave accordingly."
Sinnott at Vantage Bank also says bank-cryptocurrency partnerships will "slow down drastically and probably go sideways for a period of 18 to 24 months. But in the end, I think the shakeout will be healthy."
