On August 5, 2022, the Indian Directorate of Enforcement (ED) issued a Press Release wherein:
Directorate of Enforcement (ED) has conducted searches on one of the Directors of M/s Zanmai Lab Pvt Ltd which owns the popular Crypto-currency exchange WazirX and has issued a freezing order to freeze their Bank balances to the tune of INR 64.67 Crore. ED is conducting Money Laundering investigation against number of Indian NBFC companies & their fintech partners for 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 the loan takers. Various fintech companies backed by Chinese funds could not get NBFC license from RBI for carrying lending business. So they devised the MoU route with defunct NBFCs to piggyback on their license. After the criminal investigation began, many of these fintech APPs have shut shop & diverted away the huge profits earned using the above modus operandi. While doing fund trail investigation, ED found that large amount 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. Summons were issued to the Crypto-exchanges. It is seen that maximum amount of funds were diverted to WazirX exchange and the crypto-assets so purchased have been diverted to unknown foreign wallets.
[Directorate of Enforcement. Press Release. (Accessed August 6, 2022)].
Essentially, "... the Directorate of Enforcement alleged WazirX facilitated transactions by unnamed fintech firms 'to purchase crypto assets and then launder them abroad' as part of a scheme involving Chinese-backed companies circumventing India’s licensing regulations. In its investigation, the ED said it ordered WazirX bank accounts containing 646.7 million Indian rupees — roughly $8.1 million at the time of publication — frozen and conducted a search connected to co-founder Sameer Mhatre" [Wright, T. Indian authorities freeze $8.1M in WazirX funds as part of AML investigation. (Accessed August 6, 2022)].
During the course of the investigation so far, the ED has made the following four observations"
- Zanmai Labs Pvt Ltd - the company owning WazirX Crypto Exchange - 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. Earlier, their Managing Director Mr Nischal Shetty had claimed that WazirX is an Indian Exchange which controls all the crypto-crypto & inr-crypto transactions and only has an IP & 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 & ambiguous answers to evade oversight by Indian regulatory agencies.
- WazirX works from a Cloud based software (@AWS Mumbai), all employees work from home, the registered office is a 2 Chair 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.
- 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. No physical address verification is done. There is no check on the source of funds of their clients. No EDD is done. No STRs were raised.
Nonetheless, Binance denies it's involvement. "The CEO of Binance, Changpeng Zhao, has said that the company does not own any equity in Zanmai Labs, the parent company behind the exchange. Zhao added that Binance only offered wallet services to WazirX, and the Indian-based exchange was solely responsible for KYC and other operations. The director of WazirX, Nischal Shetty, has disputed the claims made by Zhao saying that Binance acquired the exchange. Shetty added that Binance was responsible for processing withdrawals and operating crypto trading pairs" [Raza, A. Authorities freeze $8.1M of WazirX funds as it investigates AML compliance. (Accessed August 6, 2022)].
With the exodus of many crypto firms in China following a regulatory crackdown, many companies have reportedly turned to the markets in India. The ED reported that some fintech firms “backed by Chinese funds” had “piggybacked” on Indian companies with defunct non-banking financial company licenses to offer lending services to residents.
[Wright, supra].
This is not Wazirx's first go round with the ED for accusations of money laundering [See, e.g. Huillet, M. Binance-owned Indian exchange WazirX investigated for alleged AML failings. (Accessed August 6, 2022)]. Specifically,
The ED took similar action against WazirX in June 2021, ordering the crypto exchange to show cause related to transactions of a money-laundering investigation into illegal online betting applications involving Chinese nationals. Shetty said at the time that the exchange went 'beyond [its] legal obligations by following Know Your Customer (KYC) and Anti Money Laundering (AML) processes and have always provided information to law enforcement authorities whenever required'.
[Wright, supra].