Chinese Loan Apps Probe: No Crypto Exchange Has Been Given Clean Chit By ED, Say Sources

In the last few months, the Enforcement Directorate (ED) has stepped up searches and inquiries in connection with alleged FEMA and PMLA violations by crypto exchanges in India.

The ED recently conducted searches at the premises of crypto entities Vauld and WazirX under the Prevention of Money Laundering Act, 2022 (PMLA) and froze their bank balances to the tune of INR 370 Cr and INR 65 Cr, respectively. On August 27, it conducted searches at the premises of CoinSwitch Kuber.

While CoinSwitch Kuber said that the searches were not conducted under PMLA but the Foreign Exchange Management Act (FEMA), an ED officer told Inc42 that the probe is still going on and nothing is final yet.

“The investigation is still at an early stage, and we are gathering all the information regarding their modus operandi and also their correlation with the ongoing investigation regarding the Chinese loan apps. Whether an inquiry (needs) to be done under PMLA or FEMA will be accordingly decided,” the officer said on the condition of anonymity.

So far, almost all the major crypto exchanges, including WazirX, Binance, Coinswitch Kuber, CoinDCX, Vauld, Zebpay, BuyUCoin, Bitbns and Giottus have been inquired by the ED under FEMA or PMLA. As part of the inquiry, the ED had summoned crypto exchange founders to appear before the agency and submit certain details.

In some cases, the ED has even conducted searches at their offices as well as at founders’ residences.

A number of these inquiries are related to Chinese loan apps’ fraud. The agency is currently investigating the role of over ten crypto exchanges, including two foreign and other major Indian crypto exchanges, in an INR 1,000 Cr money laundering case in correlation with 365 Chinese instant loan apps scam.

“We are currently investigating the role of all the major crypto exchanges that operate in India. None of the crypto exchanges has been given any clean chit yet,” the officer said.

Why Are Crypto Exchanges Being Investigated

The crypto exchanges are being investigated by the ED on two accounts:

• FEMA Violations: The ED suspects that a large amount of funds is being transferred outside India without following due process and allegedly violating restrictions imposed under FEMA.
• PMLA Violations: The agency suspects that multiple crypto exchanges were co-opted by the operators of the Chinese loan apps for cross-border transactions, majorly in cryptocurrencies. Besides, it has been alleged that some exchanges were not following due compliance such as KYC and violated PMLA.

While the ED is also evaluating the exchanges independently, the investigation is also part of the ED’s probe into the Chinese loan apps that have been operating under different names for the last few years. Despite a ban by the Reserve Bank of India (RBI), these apps offer small and instant loans and charge exorbitant interest rates. During the investigation, it was found that users were asked to pay in lakhs even for a small loan of mere INR 5K-INR 10K.

Most of these loan apps operate for a short term and keep changing their identities to stay off RBI’s radar. As part of this, the ED Bengaluru recently conducted search operations at the premises of fintech startups Razorpay, Cashfree and Paytm under the PMLA.

The ED also suspects that many of these Chinese loan operators used crypto exchanges to send money from India to abroad. Many crypto exchanges allegedly did not maintain their balance sheets and were not compliant with the KYC norms.

What Information Is ED Seeking

The ED has conducted searches and inquiries at over ten crypto exchanges so far. Most of these inquiries were conducted in January, July and August this year.

The initial inquiry was to collect the operational information as well as the KYC details about these exchanges. The inquiry can then be followed by further searches/raids if required depending on the information provided and sought by the agency, the officer said.

After having looked into all aspects of the business of the crypto exchanges, the ED has sought from the exchanges data on top users, including their transactions and wallet details, and on transactions made abroad. Besides, it has also asked the exchanges to halt withdrawals till further notice.

The ED has also sought different revenue streams of these exchanges. “The inquiry was to understand the operations of the platform. The ED also sought to know the trades and the different revenue streams. Giottus had little to share on ‘flow of foreign funds’ to the platform as the company is a fully Indian-owned entity,” Vikram Subburaj, CEO of Giottus Crypto Platform told Inc42.

Inc42 also reached out to the exchanges to understand their perspective. Unocoin’s Sathvik Vishwanath said, “We have not received any notice or search inquiry from ED regarding Chinese loan apps.”

Meanwhile, CoinSwitch Kuber declined to comment in detail and termed the proceedings as “confidential”.

A Bitbns spokesperson said, “We have been working with relevant authorities to help them resolve any queries we get.” CoinDCX did not respond to the queries. The story will be updated upon receiving a response from the exchange.

Exchanges Exploring Legal Options 

On the probe by the ED, Subburaj said, “To the best of our knowledge, there is no ongoing investigation against Giottus. As an Indian crypto exchange, Giottus welcomes any impartial and fair inquiry by any government agency. It is wrong to jump to conclusions and blatantly criticise any action on part of the government.”

“In our context, the ED’s action was more of a fact-finding mission. Agencies like ED, on their part, also should take the initiative to clear the air. We also want proactive discussions with these agencies to build in a robust due-diligence transaction monitoring process that could help the investors and the enforcement agencies,” Subburaj added.

The ED has alleged that some of the exchanges haven’t co-operated in the investigation. Earlier this year, the investigation agency summoned WazirX founders as part of the probe.

Meanwhile, many crypto exchanges are exploring legal options in view of the ED’s actions. WazirX has filed petitions in the Delhi High Court as well as the Karnakata High Court against the ED summons.

Two other major exchanges too are currently in the process of preparing their petitions, sources told Inc42. “The ED has ordered to freeze some of the user wallets which we have done in the past. However, what if the ED freezes our accounts too,” an exchange’s founder said on the condition of anonymity.

“We are left with no choice but to go to the courts,” he added.