ED Uncovers Proceeds Of Crime Worth INR 800 Cr In Loan Apps Money Laundering Probe

In a money laundering probe into 365 loan apps and their non-banking financial companies (NBFCs) partners, the Enforcement Directorate (ED) has allegedly found more than INR 800 Cr as proceeds of crime.

According to an ET report, the investigation revealed that more than INR 4,000 Cr were disbursed by these fintech companies as loans. More than INR 700 Cr were recovered by these loan apps as ‘processing fees’, while around INR 85 Cr were collected as interest and penalties.

These loan apps used defunct NBFCs, taking their RBI-issued NBFC licences in exchange for a share of profit of up to 1% of net proceeds. Additionally, most of these fintech apps had Chinese backers, and the apps were remitting the proceeds to these Chinese nationals.

A source cited in the report above noted that the loan apps would park their capital in the bank accounts of the NBFCs. The NBFCs did not receive any approvals from the Reserve Bank of India (RBI), which violates the norms for NBFCs. 

The apps and the NBFCs followed a co-lending model. In this model, apps disbursed the loans and charged around 0.5% of the total disbursement, or a monthly commitment, whichever was higher. Thus, NBFCs were essentially monetising their licences.

These apps were routing their lending and recovery transactions via online payment gateways. The ED took preemptive measures in January 2021 when it summoned officials from payment gateways such as Razorpay, Paytm and Cashfree, recording their statements. All three companies are assisting the ED with its investigation.

The investigation into these apps has been ongoing for more than a year now. The financial law enforcement agency has based its probe on more than 40 FIRs across various states of India. 

The Modus Operandi Of Instant Loan Apps

The apps would ask the partner NBFCs to create a merchant ID with the payment gateways. It allowed the loan apps to channel their loan disbursal and recovery via these payment gateways. 

Since a payment gateway can’t refuse an RBI-registered entity, the NBFCs created multiple virtual accounts for their partner loan apps. It is also prudent to mention that NBFCs were not involved in any business activity of the loan apps past this point.

The ED established that the apps lent from their security deposits and used the licences of the NBFCs. These companies gave short-term loans with periods ranging from seven days to two months, charging very high interest rates, processing fees and GST charges.

The shady tactics of the apps under scrutiny did not end here. The loan apps set up call centres across the country to make recovery calls. The apps got access to the photos, contact lists and other personal information and reached out to family members and friends to make recoveries, using an abhorrent public humiliation tactic.

So far, the ED has attached assets of multiple such predatory loan apps, including the likes of Kudos Finance. 

The NBFC saw assets worth INR 72.3 Cr attached in January this year, having arrested the director and CEO Pavitra Pradip Walvekar in December 2020 under the Prevention of Money Laundering Act, 2002. It was found that Kudos does not have a lending app of its own, but was working with multiple loan apps.

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