South Korean banks are being investigated for their role in facilitating $6.5 billion in suspicious overseas remittances which have been tied to companies arbitraging cryptocurrency.

According to an Aug. 15 report from Asia Times, the Financial Supervisory Service (FSS) ordered an investigation into South Korean banks last month after identifying a significant amount of overseas remittance transactions at the end of June.

The investigation found that a majority of the $6.5 billion remitted overseas between Jan 2021 and Jun 2022 came from crypto exchange accounts before being sent out of the country, suggesting some Korean companies are exploiting the "Kimchi premium (kimp)."

The Kimchi premium is the gap in cryptocurrency prices in South Korean exchanges compared to foreign exchanges. Investors buy crypto from foreign exchanges and sell them on local Korean exchanges for a profit.

Regulators have been concerned about Kimchi premium trading as it encourages capital flight from the country.

Currently, the kimchi premium sits at a modest +3.37% but was above +20% as early as last April according to market tracker CryptoQuant.

Reports from Shinhan Bank and Woori Bank found that most of the money remitted was first transferred out of domestic crypto exchanges to various corporate accounts of Korean companies.

These large remittances have raised red flags that investors are using huge sums of money to exploit the Kimchi premium, according to an Aug. 15 report from local news outlet Asia Times.

There are also suspicions that the funds remitted are being used for money laundering, according to the KBS news outlet on Aug. 14, with some employees from the unnamed companies that performed the remittances having been arrested.

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