At least nine cryptocurrency exchanges are under the Enforcement Directorate scanner for allegedly assisting China-backed fintech firms in salting away their profits abroad.
This is supposedly being done through predatory lending practices and buying virtual digital assets or crypto assets before sending them overseas.
"We have issued summons to three-four big cryptocurrency exchanges. Preliminary investigation shows these exchanges have facilitated transactions of several fintech firms by flouting AML (anti-money laundering) and KYC (know your customer) norms", a senior official told Business Standard.
"They (the exchanges) have not kept records of the transactions these firms made through digital assets, and even gave loose ends so that the money could be transferred abroad without regulatory checks," the official said.
"No KYC norms were followed during the buying and transferring of crypto assets," the official added.
About 300 fintech firms are under investigation by the ED for allegedly partnering 38 non-banking financial companies (NBFCs) for predatory lending practices to charge borrowers high interest rates.
The agency has termed the practice 'instant app-based loan fraud'.
The probe findings have suggested these fintechs used crypto platforms after they were denied loan-business licences following their misuse of personal data, and threatened borrowers with abusive calls and extortion, another official said.
While tracing these fintechs' mobile applications, the agency has found significant amounts were spent on buying cryptocurrencies and transferring them abroad.
"The money has been diverted to eight-nine crypto exchanges, which are under investigation," the official cited above said.
Acting on the inputs, the agency last fortnight searched the Hyderabad premises of a director of Zanmai Lab, the company that runs popular cryptocurrency exchange WazirX, and froze its bank account, which has a balance of Rs 64.67 crore (Rs 646.7 million).
'We have seen that a major amount was diverted to WazirX and the crypto assets so purchased have been sent to unknown foreign wallets,' the ED stated on August 5.
However, those who owned the companies and their virtual assets are untraceable at the moment, the agency said.
The probe showed WazirX had encouraged obscurity, and since it lacked AML norms, it helped around 16 fintech companies in laundering the proceeds using the crypto route.
Similar action would be taken against other crypto exchanges in the coming weeks, the official indicated.
The ED has, so far, acted against at least 15 NBFCs including Acemoney, Kudos Financial Services, and PC Financial.
A few people were arrested and assets seized.
To date, it has attached Rs 260 crore (Rs 2.6 billion) lying in bank accounts belonging to 14 NBFCs and their fintech partners under the Prevention of Money Laundering Act (PMLA), besides Rs 278 crore (Rs 2.78 billion) of PC Financial under the Foreign Exchange Management Act (FEMA).
As for WazirX, investigators said it had created 'a web of agreements' with companies in the US, the Cayman Islands, and Singapore. The intention is to "obscure the ownership of the crypto exchange".
The company's managing director, Nischal Shetty, had earlier said WazirX was an Indian exchange that had only a tie-up with Cayman Islands-based exchange Binance.
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 blockchain either, the ED found.
WazirX said before July 2020, it did not even record the details of the bank accounts from which money was coming into the exchange to purchase crypto assets.
No physical address verification is done. There is no check on the source of funds of their clients.
According to the agency, various Indian fintech firms, backed by significant Chinese investments, created Memoranda of Understanding with defunct NBFCs, and gave security deposits in the name of performance guarantees.
The agency had shared the details of most of the mobile apps used for the purpose with Google. But the information provided by the search engine office was not sufficient in tracing the key people behind these apps.
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Feature Presentation: Ashish Narsale/Rediff.com