The FTX scandal sometimes reads like a comedy, especially the deeper you get into it.

By now you have all heard about FTX, a cryptocurrency exchange led by the wonderboy Sam-Bankman Fried (SBF). The exchange was established in 2019 and was at its peak in 2021, it had over a million members and ranked third in terms of volume among all the cryptocurrency exchanges.

If you had asked someone in the cryptocurrency community at the beginning of this year, what would the biggest seismic event be during 2022? It is likely along the lines of how long the crypto winter would persist or the Ethereum merging. Is FTX the crash of crypto exchanges?

If you want to read more about FTX and all the craziness surrounding it (and there is plenty where that came from), then we highly recommend subscribing to Linas Beliūnas’s newsletter https://linas.substack.com/. And trust us when we say you get your money's worth.

Vespia was more curious about the AML (Anti-Money Laundering) and KYB (Know Your Business) aspect of the case.

“It all came crashing down”

To sum it up - FTX has filed for bankruptcy and will now be stuck in court for probably years to come.

They also have a new boss, John Ray III, a lawyer who has served as the restructuring officer in several high-profile bankruptcy cases. He has been around for ages, even was there when Enron collapsed, and says that FTX is far worse: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”

A fun fact: FTX was an up-and-coming superstar with many known VCs and investment funds investing. You can still see SBF featured as a speaker in New York Times events alongside Zelensky and Zuckerberg.

Sequoia, Binance, Coinbase, Lightspeed… everyone wanted a piece of FTX. Many invested, but since then have come to their senses and backed out. Some actually conducted their due diligence (DD) before investing large amounts and said no, such as Binance (we applaud you!).

The whole cryptocurrency sector is on edge as a result of the collapse of the FTX cryptocurrency exchange. It raises concerns about how customers and investors are able to participate in these crypto projects, invest, buy, sell, trade, and exchange - without conducting the proper DD on the company.

In transparency, we trust

FTX, like any other crypto exchange, is an anti-money laundering (AML) obligated entity. This means that they needed to have AML procedures, tools, documentation, and AML specialists in place. But most importantly, they need to be legitimate businesses not only on paper but also in practice.

Vespia defines a legit business as a business that is, first of all, TRANSPARENT. Transparent in their shareholder structure, source of funds, office locations, and transactions.

It is pretty common for crypto businesses, such as FTX, to be established in the Bahamas, or any other Caribbean nation with tax and legal loopholes.

However, it becomes a problem, when a business has endless layers of shareholders located in different offshore jurisdictions. It becomes an even bigger problem when the business hides those layers and doesn’t disclose the full picture of its company structure to the investors.

According to Linas Beliūnas, the organizational structure of FTX is so convoluted that it resembles a maze. But given that SBF's father was an authority on tax shelters and a professor at Stanford Law School, it's probably not shocking:

We at Vespia also looked into some of the companies in the FTX shareholders structure and let us tell you, SBF’s family sure knows how to manipulate the data and hide companies.

Not only are these entities difficult to find in the offshore registers (which is pretty typical), but even the Commercial Registers of Germany, an EU country with supposedly transparent registers, responded to many of our requests with: “Was ist das?”

The fun in KYB

We did a bit of digging using Vespia’s solutions and found quite a few of the potential shareholders of FTX. Vespia has access to more than 300 commercial registers, 4000 Sanctions lists, a global PEP database, Adverse Media, and much more.

Vespia’s verdict?

You know when you get a present in a pretty box and you take the present out, and you tell yourself that you need to keep the box because you will use it in the future? But you never do and the box just hangs there on your shelf, collecting dust.

Well, what all the companies connected to FTX have in common is that they don’t have a lot of substance to them, inside they look pretty empty.

A few reasons why the company can look empty in the register:

a. It is the specifics of the business register. Some registers are hesitant to provide you with too much too soon, you need to really want it and request additional incorporation documents.

b. It is a shelf company. A company was created but has never been used. The company can be sold to entities wishing to open a business and not deal with the hassle of creating a new company.

c. It is a shell company. A company that was created on paper, but has no real office or employees. Used for tax evasion, tax avoidance, and money laundering.

We are leaning towards c), pretty easy to get the authorities confused when you have run your money through 20+ different companies a few times.

However, when researching a complicated shareholder structure, you need to take into account the a) option as well and don’t expect to get all the information from the dinosaur register in a matter of seconds with just one click.

Vespia is on the path of changing this. Our goal is to make it possible for you to get an overview of the company and make a well-informed decision in under 30 seconds.

Want to outsource AML compliance and due diligence? Talk to our experts and let us take care of it!

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