Inside ED’s Probe Into Crypto & Fintech Startups

“Crypto Startups Under ED Scanner”

“ED Raids Paytm, Razorpay, Cashfree Premises”

“ED Freezes INR XX Cr From These Chinese-Controlled Entities”

These headlines have become routine over the past few weeks as some of the major players from the country’s burgeoning startup ecosystem have come under the Enforcement Directorate’s (ED) radar as part of its various probes. 

The agency is investigating various cases of digital fraud and violation of the country’s laws. Many entities accused of the violations are operated by Chinese nationals or have Chinese connections, as per the ED. 

In the line of ED’s fire are many major startups, especially fintechs and cryptocurrency exchanges, which have seen unannounced search operations and funds seizure over the last few weeks. 

The ED has scooped a trail of paperwork into financial transactions of the entities under question that shows that they remitted “proceeds of crime” from India to China and other foreign nations via payment aggregators/enablers and crypto exchanges.

Despite China’s comments about ‘discrimination’ against companies by nationality / origin in India, the government has tightened the screws on the Chinese companies involved in various violations of the country’s laws.

Amid the ongoing stand-off between soldiers on the India-China borders, the Indian government has alleged that companies from China are committing financial crimes like money laundering and tax evasion while operating in India. 

The law enforcement agency’s probes, based on various FIRs for digital frauds and scams, have led to the Chinese entities and through them, the Indian startups. The startups are accused of not being compliant with KYC norms, and flouting rules under the Foreign Exchange Management Act (FEMA) or the Prevention of Money Laundering Act (PMLA). 

Case 1: Illegal Lending Apps Ripping Off Gullible Indians

The News: One of the major cases that have so far caught the attention of everyone is the ED raids on the premises of Paytm, Razorpay, Cashfree and the likes. Major crypto exchanges are also being investigated for helping the Chinese loan app operators transfer “proceeds of crime” outside India through cryptocurrencies. 

The Chinese entities are accused of luring users with promises of high returns on their crypto investments. 

For instance, only recently, some Chinese-origin nationals developed an app named ‘Keepshare’ that claimed to provide part-time jobs to youth and collected money in the form of cryptocurrencies from them.

These payment and cryptocurrency platforms have been accused of not following KYC norms. 

So far, the ED has seized and frozen more than INR 2,000 Cr from these crypto platforms and payment apps, trying to get a complete trail of the money. It claims that over INR 4,000 Cr was disbursed in loans via these illegal digital lending apps.

The Accusation: The ED has claimed that miscreants used these apps to dupe ‘gullible’ Indians. For instance, illegal lending apps used payment aggregators as intermediaries in providing small loans. These Chinese lenders have been accused of using heavy-handed tactics for loan recovery, charging high-interest rates and processing fees.

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 operated for a short term and kept changing their identities to stay off RBI’s radar, the ED has alleged. 

Since these cryptocurrency apps did not necessarily maintain their balance sheet, several crypto platforms’ accounts such as WazirX and Bitbns were frozen until they provided a complete trail of their transactions. 

Similar was the case with fintech apps such as Paytm and Razorpay. 

The Modus Operandi: The ED has alleged that the operators of the illegal lending apps created dummy entities in India and entered into partnerships with defunct NBFCs to dupe their users.

These China-backed loan apps used the defunct NBFC licences of companies such as Kudos Finance, Acemoney (India) Limited, Rhino Finance and Pioneer Financial and Management Services to get into the lending business. 

Under a revenue-sharing model, these NBFCs created a merchant ID in the name of the loan apps with payment aggregators such as Paytm, Razorpay and Cashfree.

These China-backed entities submitted fake addresses while registering themselves and were generating proceeds of crime from the seized merchant IDs. The lending platforms also forged documents of Indian citizens and made them dummy directors of those entities, according to the ED.

Comein Network, Mobicred, Magic Data, Baitu, Aliyeye Network, Wecash, Larting, Magic Bird, Acepearl Services, Cashhome, Cashmart, easyloan are among the companies named in the FIRs and are being investigated.

The agency reportedly also summoned 100+ fintech startups and NBFCs such as Pagarbook, Propelld, Progcap, Pocketly, Krazybee for allegedly helping the Chinese entities set up operations. In June 2022, the ED froze their bank accounts, but it is not clear if the accounts have been unfrozen.

Co-working space BricSpaces claimed that it was a victim of these fraudulent companies who used the company address as their registered address.

Case 2: Alleged Money Laundering

The News: 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 the Foreign Exchange Management Act (FEMA) or the Prevention of Money Laundering Act (PMLA).

Besides, Chinese smartphone makers Oppo, Vivo and Xiaomi are also accused of ‘illegal outward remittances’ in the name of royalty for the use of patents, technology and other intellectual property which they have not purchased.

The Accusation: Under the FEMA violations, the ED suspects that a large amount of funds were transferred outside India without following due process.

The Modus Operandi: One of the blessings of cryptocurrencies is decentralisation. But due to its decentralised nature, crypto transactions can also happen without any identification with the internet protocol addresses of users as the only available information. 

Crypto exchanges are also an avenue for tax evaders looking to explore options to shift their unaccounted wealth through investment in non-financial assets. It can lead to a large number of transfers over blockchain without revealing the identity of the source transferer.

As such, the ED has accused crypto exchanges such as WazirX of assisting certain accused instant loan apps in laundering fraudulent money via the purchase and transfer of virtual crypto assets. 

The agency said that the crypto exchanges allowed foreign users’ to convert one crypto into another on their exchanges, forming a layer of transactions on the blockchain and enabling money laundering.

Case 3: Use Of Crypto & Other Platforms For Scams

The rise in adoption of cryptocurrencies and the desire to make huge gains in a short time has also led to multiple high-profile crypto scams such as the GainBitcoin scam, Bitconnect fraud and other crimes involving OneCoin, ATC Coin and more. 

Chainalysis, a software platform that tracks criminal activities linked to cryptocurrency transactions, tracked the top five most visited scam websites in India. Coinpayu, adbtc, hackertyper.net, dualmine.com and coingain alone received about 46 Lakh visits from Indian users of the total 96 Lakh visits of scam websites by Indians in 2021.

However, it is not only crypto platforms which are under the ED scanner in various cases. The agency recently raided the Indian arm of online forex trading app OctaFX and found that its operations were not approved by any Indian regulatory body.

The culprit companies, which are allegedly China-based, were first investing in the forex trading platform and then routing the money through layers to buy cryptocurrencies. 

Similarly, the ED cracked down on gaming top-up platform Coda Payments India and mobile game Garena Free Fire. The investigative agency said that once a user registered with these platforms, they could make subsequent payments without any authentication. However, there was no sale or purchase of digital content and it was a platform for money laundering.e: 

Update: December 23, 2022 | 5:00 PM

Updated the table to include Easebuzz’s stance.