India’s Central Bank Enlisted In Crackdown On ‘Illegal Loans Apps’

September 14, 2022
India’s Ministry of Finance has declared a new multi-agency war on unregulated loan apps, which it accuses of entrapping customers, abusing licences and intimidating debtors to extort repayments.

India’s Ministry of Finance has declared a new multi-agency war on unregulated loan apps, which it accuses of entrapping customers, abusing licences and intimidating debtors to extort repayments.

As India’s fight against illegal loan apps continues, this week the Ministry of Finance enlisted the support of multiple agencies in a new crackdown on “predatory” lending activities.

At a meeting chaired by Finance Minister Nirmala Sitharaman, the Reserve Bank of India (RBI) was handed several duties in the campaign to disrupt the apps and prevent them from accessing capital and customers.

First, the RBI was tasked with creating a whitelist of all legal and compliant loan apps.

Once drawn up, the Ministry of Electronics and Information Technology (MeitY) will ensure that only these whitelisted apps are available for download via the Apple and Google app stores.

Second, the RBI will expand its attempts to monitor “mule” or “rented” loan app accounts that may be used for money laundering purposes.

At the same time, the RBI will review and cancel any dormant non-bank financial company (NBFC) licences that are being misused by illegal loan apps.

Finally, the RBI will ensure that all legal payment aggregators are registered before an upcoming deadline, after which no unregistered payment aggregators will be allowed to operate.

These measures are designed to prevent illegal loan apps from finding new customers, obtaining licences and from accessing the services of payment aggregators.

The Ministry of Corporate Affairs (MCA) has also been tasked with identifying shell companies connected to these apps and deregistering them to prevent their misuse.

The Ministry of Finance will monitor all of the above measures, and has encouraged consumers, bank staff and law enforcement agencies to increase their knowledge of these apps and how they operate.

Cat-and-mouse chase continues as WazirX assets unfrozen

In parallel to this multi-agency approach to clamp down on rogue loan providers, India’s Directorate of Enforcement (DE) is also investigating 16 fintechs and loan apps suspected of financial and other crimes.

Last month, the DE made the headlines after raiding the address of Nischal Shetty, director of Zanmai Labs, the company that owns India’s largest crypto exchange, WazirX.

Following the searches, the DE froze $8.1m of funds in Zanmai Labs bank accounts on suspicion of money laundering.

Without naming the suspects, it said it was pursuing a number of NBFCs whose lending practices had violated RBI rules, and whose use of telesales and abusive language violate data privacy and extortion laws.

The DE added that these lenders were backed by Chinese funds that were ineligible for an NBFC licence from the RBI, so they “piggybacked” on “defunct” licences by signing memorandums of understanding (MoUs) with holders of previously legitimate licences.

“After the criminal investigation began, many of these fintech apps have shut shop and diverted away the huge profits earned using the above modus operandi,” it said in a statement.

“While doing fund trail investigation, DE found that large amounts of funds were diverted by the fintech companies to purchase crypto-assets and then launder them abroad.

“Funds were diverted to WazirX exchange and the crypto-assets so purchased have been diverted to unknown foreign wallets.”

At the time of the asset seizure, Zanmai Labs was accused of creating a “web of agreements” with foreign companies, including Binance, to obscure its beneficial owners.

Previously, in November 2019, Binance announced that it had “acquired” WazirX. However, on the day of the DE’s asset seizure last month, the crypto firm attempted to clarify this post and distance itself from WazirX.

“We would like to clarify that the 2019 'acquisition’ described in this blog was limited to an agreement to purchase certain assets and intellectual property of WazirX,” it said.

“Binance did not purchase any equity (and does not own any equity) in Zanmai Labs.”

This statement was immediately contradicted by Shetty, who insisted that Binance had acquired WazirX and now processes its crypto-to-crypto transactions and its crypto withdrawals.

In a statement describing the DE’s actions, WazirX admitted that entities linked to the 16 fintech and loan app suspects had used its platform, but WazirX had not processed any illegal transactions for them.

“The company further clarified that it has no association with any of the alleged accused fintech and instant loan app entities which appear to be the subject of DE investigation, and is carrying out the KYC/AML checks despite having no legal obligation to do so,” it said.

“WazirX is like any other intermediary whose platform may have been misused.”

After an internal investigation, WazirX said it noticed that most of the users whose information was sought by the DE had already been identified as suspicious and were blocked in 2020-21.

“Due to the active cooperation extended by WazirX and active anti-money laundering (AML) checks that led to the blocking of suspicious accounts, DE has unfrozen the bank accounts of WazirX,” the statement said.

“WazirX is now in a position to continue its banking operations as usual.”

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