India: Binance-acquired WazirX gets show-cause notice claiming it’s ‘safe haven for money laundering’

India’s Directorate of Enforcement, on Friday, issued a show-cause notice to Indian crypto-exchange WazirX for violating FEMA guidelines for transactions involving cryptocurrencies worth Rs. 2,790.74 crore ($381,862,278 approx).

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

The ED initiated the FEMA investigation on the basis of an ongoing money laundering investigation into Chinese-owned illegal online betting applications. 

The officially registered entity M/s Zanmai Labs Pvt Ltd was incorporated in 2017 as a native Indian crypto-startup and the directors – Nischal Shetty and Sameer Hanuman Mhatre have been called out in the ED’s notice. Here, it should be noted that global crypto-exchange Binance had acquired WazirX two years after incorporation in 2019. 

The ED’s statement highlighted, 

“During the course of 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 cryptocurrency Tether (USDT) and then transferring the same to Binance Wallets based on instructions received from abroad.”

According to the probe agency, WazirX offers a wide range of crypto-related transactions, including exchange of CCs with INR and vice-versa; exchange of CCs; Person to Person (P2P) transactions; and even transfer/receipt of cryptocurrency held in its pool accounts to wallets of other exchanges which could be held by foreigners in foreign locations.

The ED has also alleged that WazirX did not collect the required documents and that in turn contravened the mandatory Anti-Money Laundering (ALM) and Combating Financing Terrorism (CFT) rules and FEMA guidelines.

“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.”

Enforcement Directorate @dir_ed issues show cause notice to #WazirX.. under FEMA.. says, “found that WazirX clients could transfer valuable crypto to any person irrespective of docx ..making it a safe haven for money laundering.” @WazirXIndia @NischalShetty #cryptocurrency pic.twitter.com/RKJr78uYIU

— Karishma Asoodani (@tweettokarishma) June 11, 2021

Curiously, according to CEO Nischal Shetty, WazirX is yet to receive any show-cause notice, with the exec stressing that the exchange is in compliance with all laws and regulations. He added,

“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.”

Here, it’s worth noting that crypto-regulations in India are very foggy at the moment. Highlighting the same, a user reacted to the development by tweeting, 

Isn't FEMA only applicable for currency?

Govt didn't define if Crypto is an Asset or Currency. Japan treats it as an Asset, El Salvador treats it as currency.

Most interesting part is if ED is defining it as a currency.

This could be a net positive for regulations in India.

— Save Invest Repeat ? (@InvestRepeat) June 11, 2021