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Former FTX CEO Sam Bankman-Fried is apprehended in the Bahamas, new CEO John Jay Ray sheds light on the company’s non-existent record-keeping and US lawmakers introduce a bipartisan crypto money laundering bill.
This week, almost 40 days since FTX filed for bankruptcy, former CEO Sam Bankman-Fried was arrested by the Royal Bahamas Police Force.
According to Ryan Pinder, Bahamas attorney general, the arrest took place after the US Department of Justice (DOJ) confirmed that it has charged Bankman-Fried with multiple crimes, and that an extradition request is likely to follow.
Following his arrest, Bankman-Fried petitioned a Bahamian judge to release him on a $250,000 bail, but the judge denied the request due to his perceived flight risk.
In a statement released on Tuesday (December 13), the DOJ said it has charged Bankman-Fried with a range of offences including wire fraud, commodities fraud, securities fraud and conspiracy to commit all three.
The DOJ also charged Bankman-Fried with conspiracy to commit money laundering, campaign finance violations and conspiracy to defraud the Federal Election Commission (FEC).
At 30 years old, the indictment contains more than enough counts to put Bankman-Fried behind bars for life if convicted.
Bankman-Fried faces two counts of wire fraud conspiracy, two counts of wire fraud and one count of conspiracy to commit money laundering, each of which carries a maximum sentence of 20 years in prison.
On the same day, the Securities and Exchange Commission (SEC) announced that it is suing Bankman-Fried in a separate civil action.
The SEC alleges that Bankman-Fried diverted FTX customer funds to Alameda Research, his crypto trading firm, and used these funds for his own personal benefit, including by trading against his own customers on FTX.
Additionally, the SEC alleges that Bankman-Fried defrauded at least $1.8bn from FTX equity investors, due to his fraudulent representations of the exchange and how it conducted its business.
Finally, the Commodities Futures Trading Commission (CFTC) also announced that it is suing Bankman-Fried, FTX and Alameda Research in another civil action.
The CTFC alleges that the defendants committed fraud and made material misrepresentations in its sale of digital commodities, ultimately “causing the loss of $8bn in FTX customer deposits.”
An ‘utter failure’ of corporate controls
Later on Tuesday, FTX’s new CEO, John Jay Ray, appeared before the US House Financial Services Committee, which is investigating the collapse of FTX in a series of hearings.
Bankman-Fried had also been invited to speak at the Committee prior to his arrest, but did not attend or give testimony from the Bahamas.
Ray introduced himself as a 40-year expert in bankruptcy proceedings, having played a role in some of the world’s largest ever corporate restructuring efforts, including Enron, which collapsed following a $60bn accounting fraud scandal.
Asked by Rep. Ann Wagner (R-MO) if the FTX collapse is “worse” than Enron’s, Ray responded that the FTX bankruptcy is unlike anything he has ever seen in his career.
“The FTX Group is unusual in the sense that, literally, there is no record-keeping whatsoever,” he said.
“Employees would communicate invoicing and expenses on Slack, which is essentially a chatroom.
“They used QuickBooks,” he added, referring to the automated accounting software. “I’ve nothing against QuickBooks — it’s a very nice tool — just not for a multi-billion dollar company.”
Ray went on to say that FTX’s company structure, which never had an independent board, was also “highly unusual” for a company of its size and valuation.
“We really had one person controlling this,” he said, “and it was made all the more complex because we’re not dealing with something tangible here: we’re dealing with crypto.”
In his seven-page prepared testimony, Ray argued that an “utter failure of corporate controls at every level” had led to FTX’s bankruptcy and collapse.
He emphasised that his investigation into FTX’s practices is still ongoing, but he also listed five forms of misconduct that he believes he knows for certain that FTX engaged in.
Mirroring the charges of the DOJ, SEC and CFTC, Ray said that customer assets from FTX were commingled with those of Alameda Research, meaning that Alameda used FTX client funds to engage in trading activities for its own benefit.
This exposed FTX customers to “massive losses”, said Ray, as did Alameda’s use of these funds for market-making activities at other exchanges that were “inherently unsafe”.
Ray also said that FTX had made more than $1bn in payments and loans to “insiders”, and had been on a “spending binge” in late 2021 and early 2022 on investments that were worth “only a fraction” of what FTX paid for them.
“The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals, who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets,” said Ray.
Crypto money laundering crackdown
Continuing a busy week for crypto on Capitol Hill, on Wednesday (December 14) two senators introduced a new bipartisan bill to combat crypto money laundering.
Authored by Sen. Elizabeth Warren (D-MA) and Sen. Robert Marshall (R-KS), the bill aims to reduce the national security threat posed by crypto, by closing loopholes in the existing anti-money laundering and countering of the financing of terrorism (AML/CFT) framework.
It also seeks to bring the digital asset ecosystem into greater compliance with the rules that govern the rest of the financial system.
“Rogue nations, oligarchs, drug lords and human traffickers are using digital assets to launder billions in stolen funds, evade sanctions and finance terrorism,” said Warren.
“The crypto industry should follow common-sense rules like banks, brokers and Western Union, and this legislation would ensure the same standards apply across similar financial transactions.”
Among its provisions, the Digital Asset Anti-Money Laundering Act would extend Bank Secrecy Act (BSA) responsibilities to crypto wallet providers, miners and validators by designating these actors as money service businesses (MSBs).
It would also introduce new measures to regulate unhosted wallet transactions, which currently allow individuals to bypass AML and sanctions checks.
For example, the act would require that banks and MSBs verify customer and counterpart identities, keep records and file reports on unhosted wallet transactions.
Finally, the act would extend BSA rules regarding reporting of foreign bank account activity to include digital assets.
According to the bill, if a US person engaged in a transaction of $10,000 or more using digital assets through one or more offshore accounts, they would be required to file a Report of Foreign Bank and Financial Accounts (FBAR) with the Internal Revenue Service (IRS).
Incoming FCA chair to focus on crypto AML
Ashley Alder, the incoming chair of the UK Financial Conduct Authority (FCA), has also set his sights on combating crypto money laundering.
Appearing at the Treasury Select Committee — which VIXIO will cover in more detail — Alder called firms such as FTX “deliberately evasive”, allowing money laundering to “happen at size”.
