The Enforcement Directorate has conducted searches against one of the directors of Zanmai Lab Private Limited, which owns crypto-currency exchange WazirX, and issued an order to freeze ₹64.67 crore kept in bank accounts.
The action has been taken as part of the probe against several non-banking financial companies (NBFCs) and their fintech partners for alleged predatory lending practices in violation of the Reserve Bank of India (RBI) guidelines. They also allegedly extorted high interest rates from borrowers.
“Various fintech companies, backed by Chinese funds, could not get NBFC licence from the RBI for lending business. So, they devised the MoU [Memorandum of Understanding] route with defunct NBFCs to piggyback on their licences,” said the agency in a statement.
Funds diverted
After the investigation was launched, many fintech Apps were closed, huge profits diverted for buying crypto assets and then laundered abroad. “These companies and the virtual assets are untraceable at the moment...maximum amount of funds were diverted to WazirX exchange and the crypto assets so purchased have been diverted to unknown foreign wallets,” the ED alleged.
According to the ED, Zanmai Labs had created a web of agreements with Crowdfire Inc. USA, Binance (Cayman Islands), Zettai Pte Ltd Singapore to “obscure the ownership of the crypto exchange”. Earlier, its managing director, Nischal Shetty, had allegedly claimed that WazirX was an Indian exchange that controlled all the crypto-crypto and INR-crypto transactions and only had 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. They are giving contradictory and ambiguous answers to evade oversight by the Indian regulatory agencies,” it alleged.
WazirX operated through a Cloud-based software and all its employees worked from home, said the agency.
“The registered office is a 2Chair co-working Wework space, and all crypto-crypto transactions are controlled by Binance (which is again without any known office, any known employee and rarely responds to queries on legal@binance.com). 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,” alleged the ED.
WazirX purportedly told the agency that before July 2020, it did not even record the details of the bank accounts from which funds came into the exchange to buy crypto assets; no physical address verification was done; and that there was no check on the source of funds.
Not cooperating in probe
As the WazirX director, Sameer Mhatre, was allegedly not cooperating in the probe, the agency conducted searches on August 3. It found that he had complete remote access to the exchange database, but was not sharing details of the suspect transactions related to the funds generated via Instant Loan App.
“The lax KYC norms, loose regulatory control of transactions between WazirX and Binance, non-recording of transactions on blockchain to save costs and non-recording of the KYC of the opposite wallets have ensured that WazirX is 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,” alleged the agency.
