Bitcoin cryptocurrency with a pile of coins and smartphone, Vector illustrator
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U.S. financial regulators sanctioned Silvergate Bank, a major banker to the crypto sector — including failed crypto platform, FTX — for its alleged anti-money laundering compliance failures and misleading investors about its financial condition in the wake of FTX’s collapse.

The U.S. Federal Reserve Board fined Silvergate Bank and Silvergate Capital Corp. US$43 million. The California Department of Financial Protection and Innovation (DFPI) also fined the bank US$20 million for alleged deficiencies in its compliance with anti-money laundering laws.

At the same time, the U.S. Securities and Exchange Commission (SEC) charged Silvergate Capital and two executives — former CEO Alan Lane and former chief risk officer Kathleen Fraher — for allegedly misleading investors and violating reporting, internal controls, and books-and-records requirements.

Specifically, the SEC alleged that Silvergate — which shifted its business to serving the emerging crypto sector starting in 2014 — and the executives misled investors when they sought to rebut speculation that failed crypto platform, FTX, had used its accounts at Silvergate to facilitate its misconduct.

The regulator said they “misrepresented the operational and legal risks facing the bank by falsely stating in SEC filings and other public statements” that it had effective anti-money laundering controls that were tailored to the added risks posed by its crypto asset customers, “including one of its now most notorious customers, FTX.”

The SEC alleged that the bank’s controls were inadequate and that its automated systems failed to adequately monitor for suspicious activity in approximately US$1 trillion worth of transactions on its payment platform. The regulator also alleged that the bank failed to detect nearly US$9 billion in suspicious transfers by FTX.

“At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public. Here, we allege that Silvergate, Lane and Fraher fell not only woefully, but also fraudulently, short in that regard,” said Gurbir Grewal, director of the SEC’s enforcement division, in a release.

“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. … Silvergate’s stock eventually cratered, wiping out billions in market value for investors,” he added.

Without admitting or denying the SEC’s allegations, Silvergate agreed to a final judgment ordering it to pay a US$50-million civil penalty (which may be offset by the US$63-million penalty imposed by the Fed and the California DFPI) and imposing a permanent injunction to settle the charges.

Lane and Fraher also both settled the charges without admitting or denying the allegations, agreeing to permanent injunctions, five-year officer-and-director bans, and civil penalties of US$1 million and US$250,000, respectively. All the settlements are subject to court approval.

The SEC also charged Silvergate and its former chief financial officer, Antonio Martino, for allegedly misleading investors about the company’s financial condition following FTX’s collapse, which prompted a liquidity crisis at the bank.

The regulator further alleged that Silvergate and Martino “understated Silvergate’s losses from expected security sales and misrepresented that it remained well-capitalized” in an earnings release and earnings call. The allegations against Martino have not been proven in court.

Last year, Silvergate announced that it was voluntarily winding down its operations.

The Fed said the bank has now paid back all its customers’ deposits.