Enforcement Directorate on June 11 issued a show cause notice to WazirX Cryptocurrency exchange under the Foreign Exchange Management Act (FEMA) 1999 for alleged transactions involving cryptocurrencies worth Rs 2,790.74 crore
ED has issued Show Cause Notice to WazirX Crypto-currency Exchange for contravention of FEMA, 1999 for transactions involving crypto-currencies worth Rs. 2790.74 Crore.
— ED (@dir_ed) June 11, 2021
In a statement issued by the Enforcement Directorate, and verified by MediaNama, the agency said that it initiated the FEMA investigation on the basis of the ongoing probe into Chinese-owned illegal betting applications. The agency also said that the notice was issued to WazirX CEO Nischal Shetty and Co-founder Sameer Hanuman Mhatre.
Nischal Shetty, CEO of WazirX told MediaNama, “WazirX is yet to receive any show cause notice from the Enforcement Directorate as mentioned in today’s media reports. WazirX is in compliance with all applicable laws. We go beyond our 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. We are able to trace all users on our platform with official identity information. Should we receive a formal communication or notice from the ED, we’ll fully cooperate in the investigation.”
According to the Enforcement Directorate statement, ED allegedly found that Chinese nationals had laundered proceeds of crime worth Rs 57 crore by converting the INR into crypto-currency Tether (USDT). The same was then transferred to Binance, which is an exchange registered in Cayman Islands “based on instructions received from abroad”.
“In the period under investigation, users of WazirX via its pool account, have received incoming cryptocurrency worth ₹880 crore from Binance accounts and transferred out cryptocurrency worth ₹1,400 crore to Binance accounts. None of these transactions are available on the blockchain for any audit or investigation,” ED said in their statement.
It added that the agency allegedly found that the WazirX Clients could transfer ‘valuable’ crypto-currencies to any person irrespective of their location and nationality without any proper documentation whatsoever, making it a safe haven for users looking for money laundering/ other illegitimate activities.
RBI circular had asked banks to conduct due diligence on AML, KYC, FEMA
Interestingly, on May 31, the Reserve Bank of India through a notification urged banks and regulated entities to continue carrying out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.
This was triggered by emails sent last week by India’s leading banks to their customers, warning them about the risks of investing in cryptos. While HDFC Bank asked customers to provide information as to the nature of certain transactions, SBI Cards and Payments warned its users against buying crypto-currencies on their credit card. Both banks said that if customers do not comply, they would take action.
“This may be another test case before a law in this regard is promulgated. Essentially, the government is looking to audit the trail of crypto transactions that are alleged to be violative of the existing laws. Forensic analysis of many privacy-focused cryptocurrencies is not achievable as they are not based on an open ledger blockchain system. The upcoming law must address such concerns,” Nakul Batra, Associate Partner, DSK Legal told MediaNama.
Enforcement Directorate statement regarding the issue
Directorate of Enforcement (ED) has issued a Show Cause Notice (SCN) to Crypto-Currency Exchange M/s Zanmai Labs Pvt Ltd (WazirX), and its Directors Nischal Shetty and Sameer Hanuman Mhatre under Foreign Exchange Management Act, 1999, (FEMA) for transactions involving crypto-currencies worth Rs 2790.74 Crore.
ED initiated FEMA investigation on the basis of the ongoing money laundering investigation into Chinese owned illegal online betting Applications. During the course of the investigation, it was seen that the accused Chinese nationals had laundered proceeds of crime worth Rs 57 Crore approximately by converting the INR deposits into Crypto-currency Tether (USDT) and then transferring the same to Binance (exchange registered in Cayman Islands) Wallets based on instructions received from abroad. WazirX allows vide range of transactions with Crypto-currencies(CCs) including exchange of CCs with INR and vice-versa; exchange of CCs; Person to Person (P2P) transactions; and even transfer/receipt of Crypto-currency held in its pool accounts to wallets of other exchanges which could be held by foreigners in foreign locations. WazirX does not collect the requisite documents in clear violation of the basic mandatory Anti Money Laundering (AML) and Combating of Financing of Terrorism (CFT) precaution norms and FEMA guidelines. In the period under investigation, users of WazirX via its pool account, have received incoming Crypto-Currency worth INR 880 Crore from Binance accounts and transferred out Crypto-Currency worth INR 1400 Crore to Binance accounts. None of these transactions are available on the blockchain for any audit/investigation. It was found that the WazirX Clients could transfer ‘valuable’ crypto-currencies to any person irrespective of its location and nationality without any proper documentation whatsoever, making it a safe haven for users looking for money laundering/ other illegitimate activities.
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Update, June 11, 7 pm: The statement of the Enforcement Directorate that was attributed to several reports was verified by MediaNama, and the copy has been accordingly updated. A copy of the statement also has been added at the end of the copy.