India’s multi-disciplinary organization mandated with investigating offenses of money laundering and violations of foreign exchange laws, the Directorate of Enforcement (ED) has conducted searches on one of the directors of Wazirx, a crypto exchange operating in India.
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The search was conducted in regard to the fact that some Chinese-backed instant loan application companies have routed their profit by investing in cryptocurrency through Wazirx.
Under the Prevention of Money Laundering Act (PMLA) on 3 August 2022, ED conducted searches on the premises of Sameer Mhatre, director of Zanmai Lab, which owns the exchange.
Ed says that due to lax KYC norms, Chinese individuals have used this platform to route money to their country. It also said that even though Mhatre has complete remote access to its database, he is not sharing this information with the investigative agency.
During the search, ED also decided to freeze close to $8.5 million lying with Waxirz under the PMLA act.
ED in a statement said that the majority of the cash was observed to have been redirected to the WazirX exchange, and the crypto assets subsequently purchased were transferred to unidentified international wallets.
Investigators think that Zanmai Labs, the entity that owns WazirX, has established “a web of agreements” involving businesses in Singapore, the US, and the Cayman Islands. To “obscure the ownership of the crypto exchange” is the goal.
According to ED, WazirX is unable to account for the lost cryptocurrency assets due to inadequate KYC standards, loose regulatory monitoring of transactions between WazirX and Binance, and non-recording of transactions on Blockchains to save money, and non-recording of the KYC of the opposing wallets.
ED made the charge that Wazirx has never attempted to locate these cryptocurrency holdings. It has deliberately helped roughly 16 accused fintech companies launder criminal funds using the crypto method by promoting obscurity and having inadequate AML standards, the agency added.
The company’s managing director, Nischal Shetty, had previously asserted that WazirX is an Indian exchange that manages all crypto-crypto and INR-crypto trades and only has intellectual property (IP) and preferential agreement with Binance.
However, Zanmai says that they only participate in INR-crypto transactions and Binance handles all other transactions on WazirX.
In order to avoid regulation by Indian regulatory organizations, “they are offering conflicting & unclear responses,” the ED claimed.
Blame game begins between Binance & Wazirx
Declining that Wazirx is owned by Binance, the US-based crypto exchange Chief Communications Officer Patrick Hillmann said that in 2019, the company would be good to enter the Indian market through that partnership with Wazirx. “For the past two years, we are still debating with Wazirx to pass ownership to us”, Hillman stated.
On the ED investigation, Hillmann said that they came to know about this only through the news. ED is not in touch with them, but their global investigations team is looking forward to assisting ED if they reach out to them.
Wazirx CEO Nischal Shetty on its part said that he has all the legal documents to show that Binance is the owner of Warzix and it controls all crypto-to-crypto trading along with crypto deposits and withdrawals on the platform.
In an interview with a business portal, Shetty said that Zanmai Labs is a local entity that operates Wazirx, which is owned by him along with his co-founders. “They have a license from Binance to process INR transactions. Wazirx is a brand and product owned by Binance after the acquisition way back in 2019”.
Shetty also stressed that since the acquisition, it has been reported in the media that Wazirx is owned by Binance, but Binance never objected to this, which shows that they own it.
“The acquisition took place when there was Reserve Bank of India (RBI) ban on crypto trading through banking platforms and after the ban was lifted and Indian entity was required to process INR deposit and withdrawals, this is where our local company, Zanmai, got the license form Wazirx from Binance”, Shetty underlined.
In a series of tweets on 5 August 2022, Binance chief Changpeng Zhao said that it doesn’t own WazirX.
“Binance only provides wallet services for WazirX as a tech solution. There is also integration using off-chain tx, to save on network fees. WazirX is responsible for all other aspects of the WazirX exchange, including user sign-up, KYC, trading, and initiating withdrawals,” the tweet added.
However, Zhao shared a tweet of a business daily on 5 April 2021 that reads, “Binance-owned Indian crypto exchange WazirX crosses $200m in daily trading volume; eyes $1b in 2021.”
In a blog post on 5 August 2022, Binance said that the 2019 acquisition of Wazirx was limited to an agreement to purchase certain assets and intellectual property of WazirX. Binance did not purchase any equity and does not own any equity in Zanmai Labs.
All workers of WazirX work from home, the company’s registered office is a two-chair coworking WeWork space, and Binance oversees all cryptocurrency transactions. It operates on cloud-based software Amazon Web Services (AWS) Mumbai, which is again without any known office, or any known employee and rarely responds to queries, ED said.
WazirX was given enough chances to present its view, but it never provided the cryptocurrency transactions of the questionable fintech applications or disclosed the KYC of the wallets.
According to the enforcement directorate, the majority of transactions are not also logged on the blockchain.
As for WazirX, they say they did not even keep track of the bank account information used to deposit money into the exchange in order to buy cryptocurrency assets until July 2020.
There is no actual address verification.
“The clients’ sources of funding are not checked”, ED said, adding further that no Suspicious Transaction Reports (STRs) were raised during such large transactions, where these Chinese transactions are very high-value assets.
