The U.S. Securities and Exchange Commission (SEC) recently filed a lawsuit against Silvergate Capital Corporation, the parent company of Silvergate Bank, for allegedly not meeting Bank Secrecy Act/anti-money laundering regulations. The SEC also named former CEO Alan Lane, former COO Kathleen Fraher, and former COO Antonio Martino in the lawsuit, claiming that the bank failed to conduct sufficient suspicious activity monitoring despite warnings from government examiners.
According to the complaint, Silvergate was aware of serious deficiencies in its compliance program before November 2022. The bank also allegedly failed to detect nearly $9 billion worth of suspicious transfers by FTX, which filed for bankruptcy in November 2022. The SEC further alleged that Silvergate did not appropriately monitor its ‘Silvergate Exchange Network’ (SEN), which led to approximately $1 trillion in banking transactions going unchecked for suspicious activity.
Despite being notified by Bank Secrecy Act examiners about its inadequate efforts, Silvergate reportedly claimed in its quarterly and annual reports that there were no risk factors. While a 2021 quarterly filing did mention a “heightened risk” due to some crypto customers, the bank did not disclose the executives’ awareness of the compliance deficiencies.
As a result of these issues, Silvergate ultimately decided to wind itself down voluntarily. This decision came amidst challenging times for the crypto industry, with other technology-tied lenders facing liquidation. Silicon Valley Bank and Signature Bank were seized and liquidated by U.S. authorities, further impacting the digital assets sector.
Silvergate’s downfall was swift, considering its rapid rise to become a prominent financial partner for the digital assets sector. The bank had to accelerate sales of securities to repay advances from the Federal Home Loan Bank of San Francisco, leading to a loss of over $8 billion in deposits from crypto customers. The Federal Reserve’s inspector general concluded that Silvergate’s management was ineffective, and the federal regulator’s oversight failed to address the issues within the institution.
Overall, the SEC’s lawsuit against Silvergate sheds light on the importance of compliance with anti-money laundering regulations and the consequences of failing to meet these requirements in the financial sector. It serves as a cautionary tale for other institutions operating in the crypto space to prioritize regulatory compliance to avoid similar legal challenges and potential liquidation.
