Delhi HC Seeks ED Response On WazirX Plea To Set Aside FEMA Probe

The Delhi High Court has asked the Enforcement Directorate (ED) to file its reply by September 5, 2022 in response to cryptocurrency exchange WazirX’s petition to set aside the agency’s legal proceedings against it for violation of the Foreign Exchange Management Act.

In January 2022, WazirX filed a writ petition in the court seeking to set aside the ED proceedings with regards to the show cause notices served to its parent company, Zanmai Labs.

The Delhi High Court, in its interim order on January 18, 2022, said, “Noting the fact that an adjournment is sought, the Adjudicating Authority, on whose behalf the communication dated December 28, 2021 was issued, shall adjourn the hearing to a date beyond the date fixed by this Court in these proceedings.”

In June 2021, the ED had served a show cause notice to WazirX for allegedly violating the Foreign Exchange Management Act, 1999 (FEMA) in transactions involving cryptocurrencies worth INR 2,790.74 Cr.

“It was seen that the accused Chinese nationals had laundered proceeds of crime worth about INR 57 Cr by converting Indian Rupee (INR) deposits into cryptocurrency Tether (USDT) and then transferred it to Binance (exchange registered in the Cayman Islands) Wallets based on instructions received from abroad,” the enforcement agency said in a statement then.

ED Didn’t Follow FEMA Adjudication Rules: WazirX

WazirX counsel Dayan Krishnan contended that the ED failed to follow the statutory mandate of Rule 4(3) and (4) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (FEMA Adjudication Rules) and failed to communicate any reasons which could justify the continuance of the proposed enquiry as contemplated under Section 13 of FEMA.

According to Rule 4(3) of FEMA Adjudication Rules, if the Adjudicating Authority favours holding an inquiry against the accused in a case, it should issue a notice fixing a date for the appearance of that person either personally or through his legal practitioner or a chartered accountant duly authorised by him.

Further, Rule 4(4) states that on the date fixed, the Adjudicating Authority shall explain to the person proceeded against or his legal practitioner or the chartered accountant, as the case may be, the contravention alleged to have been committed by such person indicating the provisions of the Act or of rules, regulations, notifications, direction or orders or any condition subject to which an authorisation is issued by the Reserve Bank of India in respect of which contravention is alleged to have taken place.

Krishnan alleged that the ED did not follow the due procedure in this regard. He also cited the orders of Delhi High Court in J.P. Morgan India versus ED in 2021 and of Bombay High Court in Shashank Vyankatesh Manohar versus Union of India, highlighting that Rule 4 envisages a two-tier enquiry and it was, therefore, essential for the ED to communicate the reasons to justify a formal inquiry under Section 13 of the FEMA.

The ED, however, submitted that the writ petition is not maintainable at the stage when the Enforcement Officer proceeds to initiate a formal enquiry as contemplated under Rule 4(5) of the FEMA Adjudication Rules.

The next hearing in the case is scheduled for September 5.

WazirX And Other Crypto Exchanges Under The Scanner

It must be noted that Zanmai Lab also filed a separate writ petition against the Indian government and the ED in Bengaluru High Court in June 2022, challenging the summons served by the ED under Section 37(1) and (3) of FEMA, Section 131(1) of the Income Tax Act, and Section 30 of the Code of Civil Procedure, 1908.

Earlier this month, the ED conducted searches on one of the directors of Zanmai Labs and issued an order to freeze Zanmai’s bank balances to the tune of INR 64.67 Cr.

The Karnataka High Court is likely to hear the case on August 24.

WazirX is not the only Indian crypto exchange which is under the lens of the ED. The enforcement agency, in its investigation of a slew of fintech apps, has found that various crypto exchanges were allegedly used as a tool to send money from India to abroad, China in particular. Earlier this month, it also froze assets worth INR 370 Cr belonging to a Bengaluru-based company lying with the Indian entity of crypto exchange Vauld.

The ED has been separately investigating the role of WazirX and Binance in particular for allegedly violating FEMA regulations.

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