South Korean authorities have swooped on suspected kimchi premium traders – making 16 arrests linked to some USD 1.4bn worth of crypto transactions.

Per the media outlet Newsis, as well as KBS and NoCut News, the individuals were all arrested by Seoul-based customs officials, with two cases already sent to prosecutors. Not all of the 16 are believed to be traders – some may be suspected brokers or intermediaries. A large number of the arrested individuals are still being questioned by officers, with the authorities yet to decide if their cases should be forwarded to the prosecution service. Others have already been fined.

All were arrested under the terms of the Foreign Exchange Transactions Act. As reported, financial regulators have been investigating all of the nation’s major commercial banks over suspected negligence. They claim that the sum total of illegal kimchi premium trading conducted via South Korean banks may be as high as USD 6.5bn, although the precise total will likely be revised after the regulators complete their audits.

Kimchi premium trading refers to a situation whereby growth in domestic demand for coins like bitcoin (BTC) drives prices in South Korea up above the global average.

As such, many traders have attempted to buy tokens from over-the-counter (OTC) sellers, usually based in China and Japan. These coins have then been dumped onto South Korean platforms and sold for fiat, yielding eye-watering profits. This fiat has then been reportedly used to buy commodities from abroad, including precious metals like gold and semiconductor chips. The initial remittances to the OTC vendors may have been made via the South Korean banks – as, regulators such as the Financial Supervision Service (FSS) say, were the commodities purchases.

Regulators claimed that they had issued multiple warnings to banks, telling them that kimchi premium trading was now rife. Some responded by tightening their overseas remittance rules for domestic customers. But the regulators have claimed the banks failed to heed their “repeated” warnings on the matter.

Most cases are thought to date back to 2021 or the early months of 2022.

Prosecutors claim that the traders made use of a number of alleged domestic shell companies in an attempt to throw investigators off the scent.

One of the people arrested, customs officials explained, is suspected of having established “several ghost companies” in South Korea “under the name of an acquaintance” from April of last year to March of this year. This unnamed individual then allegedly attempted to cover up the nature of the transactions by claiming money passing through the company had been raised through the sale of imported cosmetics. Customs officials handed this individual a USD 8.2m fine.

Two other individuals, whose cases will be sent to the prosecution, allegedly organized rings of clients, pooling money for larger OTC purchases and promising to pay out profits via “domestic beneficiaries” as “designated” by their alleged “clients.”

These arrests are likely just the tip of a much larger iceberg, however. The media outlets reported that customs officials were also investigating 23 other suspected “shell” companies that “may have used similar methods.”