Quicktake

• Lawsuit Filed: SEC sues Silvergate Bank for false AML statements.
• Accusations: Bank failed to detect nearly $9 billion in suspicious transfers linked to FTX.
• Defendants: Former CEO, COO, and CFO named in the lawsuit.
• Settlement: Silvergate agrees to pay $50 million; former executives also face penalties.
• Compliance Issues: Inadequate monitoring of the Silvergate Exchange Network (SEN).

Silvergate Bank, a key player in the cryptocurrency banking sector, has reached a settlement with the U.S. Securities and Exchange Commission (SEC) after being accused of making false statements regarding its anti-money laundering (AML) procedures. The lawsuit, filed by the SEC, centers on Silvergate’s failure to detect almost $9 billion in suspicious transfers connected to the now-defunct crypto exchange FTX and its related entities.

The SEC’s complaint, filed on Monday, points to significant deficiencies in Silvergate’s Bank Secrecy Act (BSA) and AML compliance programs. Specifically, the SEC alleges that the bank did not have appropriate measures to monitor the Silvergate Exchange Network (SEN), which facilitated fund transfers among crypto firms.

Compliance Shortcomings

According to the SEC, Silvergate’s compliance program was inadequate for monitoring the massive volume of transactions occurring on SEN. “The Bank failed to adequately or automatically monitor for suspicious activity approximately $1 trillion in banking transactions that occurred on the SEN,” the SEC stated. This failure included nearly $9 billion in suspicious transfers from FTX and its related entities, which went undetected due to the bank’s flawed monitoring systems.

The lawsuit names former CEO Alan Lane, former Chief Operating Officer Kathleen Fraher, and former Chief Financial Officer Antonio Martino as defendants. While Silvergate, Lane, and Fraher have agreed to settle without admitting or denying the allegations, Martino has not agreed to the settlement terms. Silvergate will pay $50 million in fines, Lane will pay $1 million, and Fraher will pay $250,000. Both Lane and Fraher also face permanent injunctions preventing them from serving as officers or directors of any company registered under the Exchange Act.

Regulatory Responses

In addition to the SEC’s actions, the Federal Reserve Board and the California Department of Financial Protection and Innovation have also settled charges against Silvergate. This multi-agency action underscores the severity of the bank’s compliance failures and the widespread impact of its misleading public statements.

Gurbir Grewal, the SEC’s Director of the Enforcement Division, highlighted the gravity of Silvergate’s actions in a statement: “Rather than coming clean to investors about serious deficiencies in its compliance programs in the wake of the collapse of FTX, one of Silvergate’s largest banking customers, they doubled down in a way that misled investors about the soundness of the programs. In fact, because of those deficiencies, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities.”

Impact of FTX Collapse

The collapse of FTX in late 2022 had a domino effect on Silvergate. The bankruptcy filing of FTX led to a run on customer deposits at Silvergate, which further destabilized the bank. In a regulatory filing, Silvergate later admitted it might be “less than well-capitalized” and began reevaluating its business model. This announcement caused Silvergate’s shares to plummet and led major clients like Coinbase, Circle, Paxos, and Gemini to sever ties with the bank.

The Role of SEN

Silvergate launched the Silvergate Exchange Network (SEN) in 2017, which allowed crypto firms and investors to move U.S. dollars between major crypto trading firms. However, the SEC revealed that from 2021 into 2022, SEN transactions were not subject to automated monitoring for suspicious activity. This oversight left a significant gap in the bank’s ability to detect and report potentially illicit transactions.

The SEC’s complaint notes that in a Form 10-K statement for the year 2021, Silvergate falsely claimed to have “enhanced procedures” to monitor customer activities. The reality, according to the SEC, was starkly different. More than $1 trillion in SEN transactions were not adequately monitored for suspicious activity for at least 15 months, leaving Silvergate’s AML compliance severely lacking.

Conclusion

The SEC’s lawsuit and subsequent settlement with Silvergate Bank mark a significant development in the regulatory landscape for cryptocurrency banking. The case highlights the critical importance of robust compliance programs and transparent communication with investors. As the crypto industry continues to evolve, financial institutions must prioritize rigorous monitoring and compliance to safeguard against similar issues in the future. Silvergate’s case serves as a cautionary tale, underscoring the potential consequences of failing to meet regulatory standards in the high-stakes world of cryptocurrency finance.