Mason Wilder, CFE
Research Specialist, Association of Certified Fraud Examiners
On July 15, a South Korean treasure hunting company called
the Shinil Group claimed
it found the wreck of a Russian warship, the Dmitrii Donskoi. The ship sank
east of the Korean Peninsula more than 100 years prior during a 1905 battle
with the Japanese while carrying a cargo of 200 tons of gold bullion, according
to Shinil’s claim. The Shinil Group announced the find in a full-page newspaper
ad, and also claimed that in 2019 they would distribute dividends worth 10% of
the sunken treasure’s value to holders of the Shinil Gold Coin cryptocurrency —
available on the newly
launched Donskoi International Exchange. The company released a statement
two days later that featured photos and video of the shipwreck, including what
appeared to be confirmation of the ship’s name painted on the hull.
Following these initial announcements, the story drew
international attention — as did the announcement that the co-owner of the Shinil
Group agreed to become the majority shareholder of Jeil Steel, another South
Korean firm. With fantasies of sunken treasure fueling presales of the Shinil
Gold Coin, Jeil Steel stock soared — increasing more than 200% after being
mentioned in connection with Shinil.
All the attention and excitement surrounding the shipwreck
find also drew scrutiny. It was soon discovered that the Shinil Group was
formed only about a month earlier in June, and other marine salvage and
treasure hunting firms indicated that they’d never heard of the group. BBC
Korea reported that the
company had not applied for salvage rights with the South Korean government
to be able to raise the treasure. The South Korean financial regulator advised
investors to be cautious about investing based on rumors without concrete facts
regarding the discovery of a treasure ship, without specifically naming the
Shinil Group.
Experts began analyzing the claim of more than $130 billion
in gold aboard the ship, questioning not only why a warship on the Donskoi’s course
would be carrying gold in bulk during an armed conflict (especially when there
was a safer land route to the ship’s destination of Vladivostok), but also
where the $130 billion figure even came from. The math didn’t make sense; South
Korea’s gold reserves, totaling 104 tons, were valued at approximately $4.8
billion, not even close to half of the value originally postulated by Shinil
Group for the 200 tons supposedly on board the sunken ship. Critics pointed out
that another company once claimed they found the Donskoi shipwreck, causing a
stock bubble in 2003. Shinil’s shine began to wear off a bit.
On July 26, a Shinil Group company representative named Choi
Yong-seok gave a news conference to try and clear things up. According to Choi,
who indicated that he was just promoted to CEO following his predecessor’s
withdrawal earlier in the day with other board members, Shinil Group was
confident that the ship it discovered was, in fact, the Donskoi. However, he
also stated that there was no way to determine whether gold coins or bars were
on the ship, and that the company apologized for the misleading claims, which
were based on speculative materials and media reports regarding the ship. Choi
went on to also explain that the Korean Shinil Group had nothing to do with the
Shinil Gold cryptocurrency, the Singaporean Shinil Group issuing it, or Jeil
Steel. He did acknowledge, however, that the majority shareholders of both
Shinil Groups were siblings.
Since then, Jeil Steel’s stock price dropped all the way
back to where it was before the announcement, Korean authorities launched an
investigation into Shinil Group for potential securities fraud, raided the
company’s headquarters, banned Choi from leaving the country and issued an
arrest warrant for former Shinil Group CEO and majority shareholder Ryu
Seong-jin. An Interpol arrest warrant was also requested for Ryu, who
reportedly fled South Korea in 2014 to escape another fraud charge. Estimates
of investment into Shinil Gold Coins, backed by shares of a treasure that
probably never existed and certainly won’t ever be brought to the surface by
the Korean Shinil Group, range from $8 to $53 million.
That the entire Shinil saga could even occur, much less ramp
up and implode within a two-month time frame, serves as a reminder that the
mostly unregulated realm of cryptocurrencies and ICOs is susceptible to
variants of traditional frauds, such as pump and dump schemes, exit schemes, Ponzi
schemes and multilevel marketing schemes adapted to take advantage of interest
in a trendy, buzzword technology. Until governments determine how to define and
then regulate virtual currencies to prevent frauds like this Shinil shipwreck
scheme, investors and consumers should exercise caution in dealing with them,
and fraud examiners should stay aware of how emerging technologies are being
used to perpetuate fraud schemes.