The Enforcement Directorate has widened the ambit of its probe into functioning of crypto currency exchanges following action against the WazirX with at least six such exchanges being probed on suspicion of Chinese nationals using them as shell companies to fly large amounts of cash out of the country through their gateways.
Of the six high-profile crypto exchanges, it's learnt that one each is based in Hong Kong and Seychelles and the rest are in India.
The ED, conducted searches over three days from August 8, at various premises of Yellow Tune Technologies Private Limited in Bengaluru and issued an order to freeze its bank balances, payment gateway balances and crypto balances of Flipvolt Crypto, totaling ₹370 crore worth of assets under the Prevention of Money Laundering Act (PMLA).
The present searches and ED action are under PMLA. However, in the case of WazirX, the ED is investigating two cases under Foreign Exchange Management Act (FEMA) wherein the initial charge entails that WazirX had allowed outward remittance of crypto assets worth ₹2,790 crore to unknown wallets. While there is no law to regulate cryptos, legal experts believe there is nothing to stop government agencies from initiating probe if there is prima facie evidence of exchange control violations.
“The absence of any specific legislation ought not to preclude the authorities from initiating fact finding investigative proceedings in respect of affairs of crypto bourses if there is semblance of violation of exchange control regulatory framework in respect of cross-border transactions and other payments done which fall within the FEMA regulations,” said Aseem Chawla, Managing Partner, ASC Legal.
The ED has, meanwhile, proceeded against the bourses.
"It is found that this shell entity was incorporated by Chinese Nationals Alex and Kaidi (real names not known) with the active connivance of willing CAs/CSs and the bank accounts were opened in the name of dummy directors," said the ED. The two Chinese nationals, said agency officials, left India during December of 2020. Subsequently, bank internet credentials, digital signatures of dummy directors etc., were shipped abroad and were used by them to launder the proceeds of crime.
After the criminal investigation began, many of these fintech APPs have shut shop and diverted away huge profits earned using dubious means, the ED said. "While doing fund trail investigation, the ED found that large amount of funds to the tune of Rs 370 crore were deposited by 23 entities including accused NBFCs and their fintech companies into the INR wallets of Yellow Tune Technologies held with crypto exchange Flipvolt Technologies," the agency revealed.
‘Proceeds of crime’
These amounts, charged ED, were nothing but “proceeds of crime” derived from predatory lending practices. Crypto currency so purchased was transferred to various unknown foreign wallet addresses. The sleuths said that during the searches at various premises of Yellow Tune they could not locate the beneficial owners of the company and that of the recipient wallets. And the company promoters are still untraceable but the ED said it could attached the company assets to the extent of ₹2.31 crore under the PMLA.
" Yellow Tune by using the assistance of Flipvolt Crypto exchange which has very lax KYC norms, no EDD mechanism, no check on the source of funds of the depositor, no mechanism of raising STRs, etc assisted the accused fintech companies in avoiding regular Banking channels, and managed to easily take out all the fraud money in the form of crypto assets," the ED stressed in the official statement.
Flipvolt failed to give the complete trail of crypto transactions made by Yellow Tune, despite giving repeated opportunities, the agency officials pointed out. Nor could it supply any form of KYC of the opposite party wallets, which is the reason cited by the ED to initiate money laundering proceedings against them.
Of the ₹370 crore worth assets seized, ₹367.67 crore was lying with Flipvolt Crypto exchange and payment gateway balances worth ₹164.4 crore and crypto assets lying in their pool accounts worth ₹203.26 crore, have been frozen under the PMLA, 2002, till complete fund trail is provided to the ED.