The Enforcement Directorate (ED) said on Friday it had frozen bank balances of Rs 64.67 crore belonging to a company that runs a popular cryptocurrency exchange, WazirX, adding that premises of a director of the company, Zanmai Labs, was searched on Wednesday.
The ED said it had found evidence against the company while investigating non-banking financial companies (NBFC) and their fintech partners indulging in predatory lending practices. After the investigation started, it said, many of these companies shut up shop and diverted funds through the fintechs to buy crypto assets, which were then laundered abroad.
ED searches the Director of WazirX Crypto-Currency Exchange & freezes its Bank assets worth Rs 64.67 Crore for assisting accused Instant Loan APP Companies in laundering of fraud money via purchase & transfer of virtual crypto assets.
— ED (@dir_ed) August 5, 2022
“These companies and the virtual assets are untraceable at the moment. Summons were issued to the crypto-exchanges. It is seen that the maximum amount of funds were diverted to the WazirX exchange and the crypto assets so purchased have been diverted to unknown foreign wallets,” the ED said in a statement.
The NBFCs allegedly used tele-callers who misused personal data and used abusive language to extort high interest rates from borrowers. Various fintechs backed by Chinese funds could not get NBFC licences from RBI. “So they devised the MoU route with defunct NBFCs to piggyback on their licences. After the criminal investigation began, many of these fintech apps have shut shop and diverted away the huge profits earned using this modus operandi,” the ED said.
According to ED, Zanmai Labs has created a web of agreements with Crowdfire Inc. USA, Binance (Cayman Islands) and Zettai Pte Ltd, Singapore, to obscure the ownership of the crypto exchange.
“Earlier, their managing director, Mr Nischal Shetty, had claimed that WazirX is an Indian exchange which controls all the crypto-to-crypto and INR-to-crypto transactions and only has an IP and preferential agreement with Binance. But now, Zanmai claims that they are involved in only INR-to-crypto transactions and all the other transactions are done by Binance on WazirX. They are giving contradictory and ambiguous answers to evade oversight by Indian regulatory agencies,” the ED statement said.
According to the ED, WazirX works on cloud-based software (@AWS Mumbai) and all of its employees work from home. Its registered office is a two-chair coworking space with Wework, and all crypto-to-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 agency said.
“Despite giving repeated opportunities, WazirX failed to give the crypto transactions of the suspect fintech app companies and reveal the KYC [know-your-customer details] of the wallets. Most of the transactions are not recorded on the blockchain also,” the ED statement said.
According to the ED, WazirX said that before July 2020, it did not even record details of the bank account from which funds were 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… Because of the non-cooperative stand of the director of the WazirX exchange, a search operation was conducted under the PMLA on 3.8.2022..,” the ED said, adding that Sameer Mhatre, a director of the exchange, refused to provide details of the transactions related to the crypto assets purchased with proceeds from instant loan app fraud.
According to the ED, 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 KYC details of the opposite wallets had ensured that WazirX was not able to give any account for the missing crypto assets.
“It has made no efforts to trace these crypto assets. By encouraging obscurity and having lax AML (anti-money laundering) norms, it has actively assisted around 16 accused fintech companies in laundering the proceeds of crime using the crypto route. Therefore, equivalent movable assets to the extent of Rs. 64.67 crore lying with WazirX were frozen under PMLA 2002,” the ED statement said.