The Directorate of Enforcement (ED) on 10 June issued a press release stating it has issued a show-cause notice to Zanmai Labs Private Limited and its directors, for contravening provisions of Section 3(a) of the Foreign Exchange Management Act, 1999 (“FEMA“). Zanmai Labs owns and operates India’s leading crypto exchange WazirX.
The premier law enforcement agency tweeted on Friday (11 June) that the show-cause notice was issued for the transactions involving crypto-currencies worth an amount of INR 2790.94 crores. In US dollar terms, the amount is around $382 million. WazirX has around 900,000 clients including foreigners.
Under Section 3(a) of FEMA, no person can deal in or transfer any foreign exchange or foreign security to any person not being a person authorized by RBI. ED alleges that cryptocurrencies have tangible value and are used as an instrument of ‘payment’ and are akin to money under FEMA. While India’s central bank has powers to compound various offences under FEMA, the offence under Section 3(a) can only be compounded by ED.
ED has been investigating a case of Chinese betting apps in India, where some Chinese nationals have been accused of carrying out illegal online betting and collecting over Rs 1,300 crore. The investigation was initiated by the cybercrime division of Hyderabad police and ED got involved due to the multi-state network and the allegations of money laundering under PMLA, 2002.
WazirX and Binance links under scrutiny
During this investigation, the agency found WazirX was used by accused Chinese nationals to exchange around Rs 57 Crore ($8 million) of proceeds from the criminal activity. The money was swapped from INR to tether (USDT) before being sent on to crypto exchange Binance. Binance is registered in the Cayman Islands and is the holding entity of Zanmai Labs having acquired it in November 2019. ED alleges that close to INR 2790 crores were sent to unknown non-WazirX wallets, primarily located offshore during the period March 2020 to November 2020.
Zanmai Labs has a preferential agreement with Binance and transactions between users of two entities are not recorded on the blockchain. The agency stated that for the period under investigation, incoming cryptocurrency from Binance accounts stood at INR 800 crores while the outgoing amount to Binance accounts stood at 1400 crores and these transactions were not available on the blockchain. The agency alleged that WazirX does not collect any KYC data for non-WazirX wallets in violation of basic AML / CFT norms and FEMA norms which are also applicable to cryptocurrency exchanges.
“The law does not prescribe any AML / KYC requirements for crypto-exchanges though most exchanges self regulate and conduct AML/KYC checks as a good practice. Regulatory clarity on what is expected from businesses, will allow them to remain compliant”, says Anirudh Rastogi, founder and managing partner of law firm Ikigai Law. It is alleged that by facilitating users to transfer cryptocurrencies to unknown wallets, WazirX has violated the provisions of FEMA.
“Exact quantification of the actual amount of crypto-currency that has travelled offshore is not possible because of the completely anonymous way of record keeping of trades being done by M/s WazirX,” the June 10 press statement said.
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A show-cause notice is a preliminary step in any investigation and it may or may not culminate into penalties or sentencing. By Friday evening, WazirX in a series of tweets clarified that it is yet to receive any notice from ED and it will cooperate with the investigation.
Should we receive a formal communication or notice from the ED, we’ll fully cooperate in the investigation.— WazirX: Bitcoin & Cryptocurrency Exchange in India (@WazirXIndia) June 11, 2021
Please note: Your funds are absolutely safe on WazirX.
RBI continues to have major concerns on crypto
The country’s central bank continues to have “major concerns” on digital assets even after clarifying to banks that they can’t caution their customers against dealing in crypto, citing a quashed 2018 RBI circular. While banks cannot cite the 2018 circular, RBI stated that banks may continue due diligence under existing regulations dealing with AML / CFT.