Is Silvergate In Trouble? Why Didn’t KYC And AML Prevent The FTX Fiasco?

Did Silvergate let FTX and Alameda share funds and bank accounts? Isn’t that illegal? Also, if one of the objectives of KYC and AML procedures is to stop money laundering, why didn’t Sam Bankman-Fried and company’s actions trigger alarms? They were allegedly doing egregious activities out in the open. Of course, the answer is that the rules are different for the rich and famous. However, after the FTX collapse, Silvergate might have to answer some questions. 

Let’s start at the beginning, though. Credit where credit’s due, a pseudonymous Twitter user that goes by the name of EventLongShort made the case.

What Is Silvergate And How Did They Serve FTX And Alameda?

The vast majority of Silvergate clients are in the crypto business, from “exchanges (i.e. FTX), institutional investors (crypto hedge funds), and stablecoin issuers (Circle/USDC).” Their main product is the SEN network, “which allows these customers 24/7 access (important in crypto) to send money between their Silvergate accounts and other participants on the SEN network.”

So, if you wanted to fund an FTX wallet with a wire transfer, they would direct you to their Silvergate account. However, FTX didn’t have one. Alameda did. There are documents that seem to prove this, but they’re not necessary. In that bizarre text interview that Vox published recently, Sam Bankman-Fried described this scenario, “oh FTX doesn’t have a bank account, I guess people can wire to Alameda’s to get money on FTX.” Could Silvergate be in trouble for permitting that?

If Alameda was a subsidiary of FTX or vice versa, the whole situation would be a non-event. However, “Both structure charts provided by Sam Bankman-Fried and new court appointed CEO John Ray show Alameda was a completely seperate company. The only commonality was SBF owned the majority of both.” Does this mean that Silvergate broke KYC procedures? It might.

FTT price chart for 11/19/2022 on Bitfinex | Source: FTT/USD on TradingView.com

Silvergate And Its Risk And Compliance Department

In what might seem like an admission of guilt, Silvergate replaced their Chief Risk Officer two days after FTX filed for bankruptcy. At the time of the egregious activities, the CEO’s son and son-in-law were in charge of the Risk and Compliance Department. Yikes! According to  EventLongShort, the two geniuses might’ve ignored KYC and AML requirements because “the deposit growth was so massive and attractive.” 

The pseudonymous investigator identified another possible reason, maybe Silvergate didn’t want to do business with FTX directly because “it was banned in the US” and “Alameda was way around that.” That’s not all of it, the “new CEO John Ray identified ~$1bn of cash at the FTX and Alameda silos suggesting FTX was the only bank to these entites.” Yikes!

There seems to be a way out of this for Silvergate, though. Since Alameda had an OTC desk facing the public, it’s justifiable that people were wiring money to them. Can Silvergate just allege that they were following their client’s instructions and had no idea that the money was for FTX? Even if it sounds like a bad excuse, it could work in a court of law if there are no documents proving otherwise. 

So, Are KYC And AML Procedures Useless?

They might be. Silvergate was a completely regulated bank. Presumably, all of their clients provided KYC and AML requirements and those were thoroughly checked. That didn’t accomplish anything. And the FTX fiasco will be remembered as one of the world’s biggest scams, and possibly as one of the largest money laundering operations. 

As another pseudonymous Twitter user puts it, “What’s the point of AML/KYC if it can’t catch SBF illegally laundering $billions? Seems like it’s completely ineffective and useless, just massive violation of privacy with zero upside.” That’s not mentioning Chainalysis. The surveillance firm had direct access to all of FTX’s data and they still ended up on their list of creditors. What does that say about their services?

Is it possible that… KYC and AML procedures are just instruments of population control and have nothing to do with preventing money laundering? Maybe?