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Government failed to heed Arbitrade red flags for years – Dunkley

The Opposition has accused the Government of failing to heed years of red flags over the troubled cryptocurrency firm Arbitrade.

The remarks came as the Government pledged to work with authorities overseas if the company or its backers were found to be culpable.

Michael Dunkley, of the One Bermuda Alliance, spoke after fraud charges were levelled against the firm by the Securities and Exchange Commission in the US.

The SEC filed charges last Thursday in the US District Court for the Southern District of Florida against Arbitrade Ltd, a Bermudian company, and Cryptobontix Inc, a Canadian company, and their principals.

The firm was accused of a fraudulent “pump-and-dump scheme” — meaning it allegedly inflated the value of its cryptocurrency known as Dignity or DIG.

The accusations were levelled against Troy Hogg, the company’s founder, with “James L Goldberg, and Stephen L Braverman, and a so-called international gold trader, Max W Barber”.

Mr Hogg is also the target of fraud accusations by the Ontario Securities Commission.

Arbitrade promised to create hundreds of jobs in setting up its global headquarters in Bermuda in 2018 as the island moved to secure a global position as a fintech hub and regulator.

A government spokeswoman this evening called the move by the SEC and OSC charging Arbitrade and its Ontario sister company Cryptobontix “an unfortunate development”.

She added: “The principals of Arbitrade came to Bermuda pledging to get regulated under our then-developing regulatory frameworks, as well as to fund and support various beneficial programmes.

“Unfortunately, those pledges went unfulfilled and they did not seriously pursue licensing under our regime once it became operational.

“It should be noted that their actual coin offering was made in Ontario by the sister company Cryptobontix and they did not conduct an offering or any digital asset business from Bermuda.

“Arbitrade formed a company, purchased a building and actively promoted their intent to get licensed.

“The company underwent and passed the same due diligence that any entity would undergo to form a company or purchase a building in Bermuda; the same due diligence which allowed them to form a company and purchase a hotel in Ontario.

“A string of companies expressed great interest in the developing regulatory framework, but ultimately they only wanted to promote their intent to get regulated while having had no serious intention of actually doing so; Arbitrade is one such company.”

The spokeswoman said the Government had subsequently learnt to “leverage the strength of the regulatory frameworks we have developed and no longer entertain the bold pledges of companies that express an intent to get licensed but have not yet done so”.

She said the island had “turned a significant corner” in the developing its fintech industry — pointing to 16 licensed digital-asset businesses and seven licensed digital-asset insurers.

The spokeswoman said Bermuda had built up “a stable of companies who have fulfilled their pledges to get regulated and are actively investing in Bermuda creating jobs for Bermudians”.

She added: “Should the principals behind Arbitrade be subject to a judgment or settlement that causes them to forfeit their assets, we pledge to work with the SEC and OSC to assist them in the recovery and sale of any such Bermuda assets such as Victoria Hall to ensure the proceeds are returned to the investors.”

Mr Dunkley, the Shadow Minister of National Security, said earlier that the charges against the firm came as “no surprise” – calling it “shocking” that the Government under David Burt, the Premier, “could not see that this entire operation was a sham and a pump and dump”.

Mr Dunkley said the Premier had told the House of Assembly that the business had been vetted through “enhanced due diligence” using Interpol.

Those remarks came during Premier’s Question Time in the House in December 2018.

In subsequent remarks, Mr Burt said information used by Bermuda’s Financial Intelligence Agency came from “from multiple sources, not solely Interpol”.

But Mr Dunkley said Arbitrade’s claims “raised red flags with anyone who had an ounce of common sense”, and that the Government was warned four years ago that the company was fraudulent.

“The Opposition was consistent in calling out that Government should be very wary of any relationship with Arbitrade,” he added.

“In 2018, I asserted that Arbitrade and its outlandish claims raised glaring red flags.”

Mr Dunkley highlighted that the firm had secured a licence from the Government to buy Victoria Hall, a Hamilton property, as its headquarters.

Mr Burt has stated in Parliament that granting the licence was not linked with any approval by the Government of the Dignity digital asset.

Mr Dunkley recalled that the Opposition was met with “fierce pushback” by Mr Burt and colleagues when the party queried the legitimacy of the firm.

He accused the Government of poor judgment, claiming that support of Arbitrade had “cast a dark shadow over the island's reputation”.

“It did not have to be this way,” he said.

• UPDATE: this story has been amended to include a government response.