Binance-owned Indian exchange WazirX investigated for alleged AML failings

Published at: June 11, 2021

The well-known Indian crypto exchange WazirX, which Binance acquired in 2019, is under investigation for alleged violations of India’s Foreign Exchange Act (FEMA). The probe was publicly announced in an official tweet today from India’s Enforcement Directorate (ED):

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 the Indian numbering system, one crore denotes 10 million. The 2,790 crore rupees in cryptocurrency transactions under investigation, then, are worth roughly $389 million. According to a report from the Times of India, ED has named the four-year-old exchange and its directors, Nischal Shetty and Hanuman Mhatre, in its show cause notice.

Law enforcement agents reportedly came across the suspect transactions in the course of a money-laundering investigation into illegal online betting applications, which involved Chinese nationals. The Times cites the ED’s explanation, which claims that the accused individuals laundered proceeds from criminal activities worth roughly 57 crore rupees ($7.8 million) by converting their rupee deposits into Tether (USDT). They then allegedly transferred the USDT to Binance wallets, following instructions received from abroad. The ED further claims that:

“In the period under investigation, users of WazirX via its pool account, have received incoming cryptocurrency worth Rs 880 crore [$120.4 million] from Binance accounts and transferred out cryptocurrency worth Rs 1,400 crore [$191.6 million] to Binance accounts. None of these transactions are available on the blockchain for any audit or investigation.”

The ED contends that WazirX has failed to gather the required information to vet its clients and transactions, in violation of Anti-Money Laundering and Combating Financing of Terrorism laws, as well as FEMA. Law enforcement agents said that the exchange’s clients are, therefore, able to transfer crypto to any other individual, irrespective of jurisdiction or nationality, without needing to provide the requisite documents.

WazirX director Nischal Shetty has already responded to the ED’s announcement with an extended thread on Twitter:

1/3WazirX 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.

— Nischal (WazirX) ⚡️ (@NischalShetty) June 11, 2021

In the two follow-up tweets, Shetty wrote that WazirX goes “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.” He added that the exchange is, therefore, able to trace all users of the platform using official identity data.

Shetty concluded his response by saying that, should the exchange receive a formal communication directly from the ED, it will cooperate fully with the probe. News of the investigation comes at a time of unpredictable crypto regulatory developments in the country, with the most recent reports suggesting that authorities may have now dropped earlier plans for a blanket Bitcoin ban in favor of classifying cryptocurrencies as a distinct asset class.