The Enforcement Directorate (ED) has increased its searches and investigations into possible FEMA and PMLA violations by Indian cryptocurrency exchanges over the past few months.
Recent searches by the ED under the Prevention of Money Laundering Act of 2022 (PMLA) were undertaken at the locations of the cryptocurrency firms Vault and WazirX, and their respective bank balances of INR 370 Cr and INR 65 Cr were frozen. On August 27, it conducted searches at CoinSwitch Kuber’s offices.
The Foreign Exchange Management Act (FEMA), not the PMLA, CoinSwitch Kuber said the searches were performed under. However, an ED officer informed Inc42 that the investigation is still ongoing and nothing is yet final.
“The investigation is still in its early stages. We are gathering all the information we can on their method of operation and the relationship between it and the ongoing inquiry into Chinese loan applications. Whether a PMLA or FEMA investigation is necessary will be determined accordingly, the officer stated under anonymity.
Almost all of the leading cryptocurrency exchanges have received inquiries from the ED under FEMA or PMLA, including WazirX, Binance, Coinswitch Kuber, CoinDCX, Vauld, Zebpay, BuyUCoin, Bitbns, and Giottus. The ED has summoned the founders of cryptocurrency exchanges to testify before the agency as part of the investigation and provide specific information.
The ED has occasionally even searched the founders’ homes and offices.
Many of these questions concern fraudulent Chinese loan apps. The organization is currently looking into the involvement of over ten cryptocurrency exchanges, including two foreign and other significant Indian businesses, in a case involving the laundering of INR 1,000 Cr. in connection with the 365 Chinese fast lending apps fraud.
“We are currently looking into the function of all the significant cryptocurrency exchanges in India. The officer stated that none of the cryptocurrency exchanges had received a clean bill of health yet.
Why Are Cryptocurrency Exchanges Being Examined?
The ED is looking into the cryptocurrency exchanges on two different fronts:
FEMA Violations: According to the ED, a significant amount of money is allegedly being transferred outside of India without following the proper procedures and violating FEMA’s prohibitions.
PMLA Violations: According to the agency, the owners of the Chinese loan apps may have co-opted several cryptocurrency exchanges to facilitate cross-border transactions. Additionally, it has been claimed that several conversations violated PMLA and did not follow proper compliance procedures like KYC.
The investigation is a component of the ED’s research into the Chinese lending applications that have been active under various names for the past few years. However, the ED is also independently reviewing the exchanges. The Reserve Bank of India (RBI) has banned these apps, yet they continue to offer small, quick loans at astronomical interest rates. Investigation revealed that even for a bit loan of just INR 5K–INR 10K, consumers were requested to pay in lakhs.
To avoid being detected by RBI, most of these lending apps are temporary and frequently change their identities. In line with this, the ED Bengaluru recently carried out search operations at the locations of the financial businesses Paytm, Cashfree, and Razorpay.
The ED also has suspicions that many of these Chinese loan operators sent money from India to foreign countries through cryptocurrency exchanges. According to reports, many cryptocurrency exchanges failed to keep track of their finances and failed to follow the KYC requirements.
What Details Is ED Looking For?
Over ten cryptocurrency exchanges have already been the subject of ED raids and inquiries. Most of these investigations took place this year in January, July, and August.
The purpose of the initial investigation of these exchanges was to gather operational data and KYC information. Depending on the information provided and sought by the agency, the officer stated, more searches or raids may follow the investigation.
The ED has asked the exchanges for information on their top users, including their transactions and wallet information, as well as information on international transactions after thoroughly investigating all facets of the cryptocurrency exchanges’ operations. Additionally, it has requested that withdrawals stop until further notice from the sales.
The ED has also looked into several exchange revenue streams. “The goal of the investigation was to comprehend how the platform operated. The ED also wanted to understand the markets and the various revenue streams. Given that Indian citizens own the company, Giottus had little to say about the “flow of foreign monies” to the platform, according to Vikram Subburaj, CEO of Giottus Crypto Platform.
Inc42 contacted the exchanges as well in order to comprehend their viewpoint. “We have not got any warning or search query from ED regarding Chinese loan apps,” said Sathvik Vishwanath of Unocoin.
CoinSwitch Kuber refrained from commenting further and referred to the events as “secret.”
“We have been engaging with relevant authorities to help them answer any inquiries,” a Bitbns spokeswoman said. The questions received no response from CoinDCX. Upon obtaining a response from the exchange, the story will be updated.
Exploring Legal Options For Exchanges
To the best of our knowledge, Giottus is not the subject of an ongoing investigation by the ED, Subburaj replied in response to the inquiry. Giottus, an Indian cryptocurrency exchange, supports any objective and fair analysis by a government body. Jumping to conclusions and outright criticizing any government action is wrong.
“In our situation, the ED’s move was more of an investigation. On their end, organizations like ED should proactively clear the air. Subburaj said, “We want to have proactive conversations with these organizations to incorporate a solid due-diligence transaction monitoring procedure that might benefit investors and enforcement agencies.
According to the ED, some exchanges have allegedly refused to assist with the inquiry. The investigation agency summoned the WazirX founders earlier this year as part of the investigation.
As a result of the ED’s activities, other cryptocurrency exchanges are investigating their legal alternatives. The Delhi High Court and the Karnakata High Court have received applications from WazirX challenging the ED summons.
According to insiders, two other significant exchanges are also actively putting their petitions together. “As we have done in the past, the ED has instructed us to freeze some of the user wallets. On the other hand, what if the ED also freezes our accounts? Asked the founder of an exchange, who requested anonymity.
We have no choice except to file a lawsuit, he continued