The Enforcement Directorate (ED) on Friday said it has frozen ₹64.67 crore worth bank deposits of one of India's prominent crypto currency exchanges WazirX as part of an ongoing money laundering probe against some fraud smartphone-based loan dishing apps "backed by" Chinese funds.
The federal agency said it conducted raids against Sameer Mhatre, a director of Zanmai Lab Pvt Ltd (which owns WazirX) on August 3 as he was not forthcoming with information being sought from him and was "non-cooperative".
The ED issued a statement and said the exchange and its executives were "giving contradictory and ambiguous answers to evade oversight by Indian regulatory agencies".
The agency said it found that a number of fintech companies involved in "predatory lending" through mobile apps in the country "diverted maximum amounts of funds to WazirX exchange and the crypto-assets so purchased have been diverted to unknown foreign wallets".
The ED has charged WazirX on at least four counts of displaying non-cooperative behaviour that forced it to hit a wall in the investigation against the menace of instant loan apps.
Zanmai Labs Pvt Ltd has created a web of agreements with Crowdfire Inc. USA, Binance (Cayman Islands), Zettai Pte Ltd Singapore to "obscure" the ownership of the crypto exchange (WazirX), it alleged.
"Their Managing Director Mr Nischal Shetty had claimed that WazirX is an Indian exchange which controls all the crypto-crypto and inr-crypto transactions and only has an IP and preferential agreement with Binance."
"But now, Zanmai claims that they are involved in only inr-crypto transactions, and all the other transactions are done by Binance on WazirX," the ED said.
It said WazirX works from a cloud-based software (@AWS Mumbai) and all employees work from home and the registered office is a two chair coworking space.
"All crypto-crypto transactions are controlled by Binance, which is again without any known office, any known employee and rarely responds to queries on email@example.com," the ED said.
The agency alleged that despite giving repeated opportunities, WazirX "failed to give the crypto transactions of the suspect fintech app companies and reveal the KYC of the wallets."
"Most of the transactions are not recorded on the blockchain also," it said.
WazirX informed that prior to July 2020, they did not even record the details of the bank account from which funds were coming into the exchange to purchase crypto assets and that no physical address verification was done, the ED said.
"There is no check on the source of funds of their clients. No EDD (enhanced customer due diligence) is done. No STRs (suspicious transaction reports) were raised," the ED charged.
Mhatre, it said, had complete remote access to the database of WazirX, but despite that he is not providing the details of the transactions relating to the crypto assets, purchased from the proceeds of crime of instant loan app fraud.
"The lax KYC norms, loose regulatory control of transactions between WazirX and Binance, non-recording of transactions on blockchains to save costs and non-recording of the KYC of the opposite wallets has ensured that WazirX is not able to give any account for the missing crypto assets," the ED said.
It has made no efforts to trace these crypto assets. By encouraging obscurity and having lax AML (anti-money laundering) norms, it (WazirX) has actively assisted around 16 accused fintech companies in laundering the proceeds of crime using the crypto route, it said.
"Therefore, equivalent movable assets to the extent of ₹64.67 crore lying with WazirX were frozen under the PMLA," it said.
ED has been probing the instant loan app alleged fraud cases and has said that a number of NBFC (non banking financial companies) and their fintech partners were indulging in predatory lending practices in violation of the RBI guidelines and by using tele-callers who misuse personal data and use abusive language to extort high interest rates from loan takers. Various fintech companies, it said, backed by Chinese funds, could not get NBFC license from RBI for carrying out lending business and hence they devised the MoU route with defunct NBFCs to piggyback on their license.
The ED said as its criminal probe under the anti-money laundering law began, many of these fintech apps shut shop and diverted away their huge profits using the above modus operandi.
"While doing fund trail investigation, ED found that large amounts of funds were diverted by the fintech companies to purchase Crypto assets and then launder them abroad. These companies and the virtual assets are untraceable at the moment," it said.
WazirX, last year, got a ₹2,790 crore worth show cause notice from the ED for alleged contravention of the Foreign Exchange Management Act (FEMA).