The searches were made under provisions of the Prevention of Money Laundering Act (PMLA), the agency said in a press release on Saturday.
The ED has launched an investigation on the basis of 18 first information reports (FIRs) registered by the Cyber Crime Police Station, Bengaluru, against numerous entities and individuals.
“It has come to notice that the said entities were doing their suspected/illegal business through various merchant IDs/accounts held with payment gateways/banks. The premises of Razorpay Pvt. Ltd, Cashfree Payments, Paytm Payment Services Ltd and entities controlled/operated by Chinese persons are covered in the search operation,” the ED said. “The modus operandi of these entities is by using forged documents of Indians and making them as dummy directors of those entities, they are generating proceeds of crime.”
The Bengaluru Police had registered a case on charges of extortion and harassment of people who had taken small loans through mobile apps run by the entities and individuals. The searches, which began on Friday, were said to be still in progress at press time on Saturday.
“During enquiries it has emerged that these entities are controlled/operated by Chinese individuals,” the ED said, adding it had seized Rs 17 crore “in merchant IDs and bank accounts of these Chinese persons-controlled entities.”
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The lending and subsequent recovery transactions of these lending apps were routed through online payment gateways. In February 2021, the ED’s Hyderabad zone had summoned officials of Razorpay, Cashfree and Paytm. Subsequently, the statements of Razorpay CEO Harshil Mathur, Paytm CFO Vikas Garg and Cashfree CEO Akash Sinha were recorded, sources said.
Paytm said on Saturday that it had responded quickly to the agency’s queries.
“We are supporting law enforcement agencies, who are investigating a specific set of merchants,” a spokesperson said. “The authorities reached out to us with directions to provide certain information about these merchants under scrutiny along with their transaction details, to which we promptly responded. We continue to cooperate with the authorities and remain fully compliant.”
A spokesperson for Razorpay said, “Some of our merchants were being investigated by law enforcement about a year and a half back. As part of the ongoing investigation, the authorities requested additional information to help with the investigation. We have fully cooperated and shared KYC and other details. The authorities were satisfied by our due diligence process.”
Cashfree Payments said it was cooperating with the agency.
“We extended our diligent co-operation to the ED operations, providing them the required and necessary information on the same day of enquiry,” the company said. “Our operations and on-boarding processes adhere to the PMLA and KYC (know your customer) directions, and we will continue to do so in the time to follow.”
The accused non-banking finance companies (NBFCs) opened merchant IDs with the payment gateways at the behest of the fintechs, said an official, citing ED’s findings in a case in Hyderabad related to the same matter.
This allowed the “companies to do lending business for the same amount as the security deposits,” the official said. “The entire lending and recovery payment transactions of these fintech companies were routed through payment gateways. In the case of Razorpay, over 300 virtual accounts along with the same number of connected bank accounts have been found. The entire business was done by these apps and not controlled and managed by the NBFCs.”
The federal agency has
allegedly found proceeds of crime exceeding Rs 800 crore as part of a long-drawn money laundering probe against 365 fintechs and their NBFC partners, said people with knowledge of the matter.
“Payment gateways aren’t regulated as much as the banks and this makes them vulnerable to misuse,” said the official cited above. “Ordinarily, banks issue suspicious transaction reports (STRs). However, gateways don’t follow this. In the instant cases when there were multiple and regular transactions from these firms, especially during Covid times, the gateways were exploited and used as a means to transfer proceeds of crime.”
The ED said it had discovered during the searches that “the said entities were generating proceeds of crime through various merchant IDs/accounts held with payment gateways/banks and they are also not operating from the addresses given on the MCA website/registered address and having fake addresses.”
The case refers to predatory lending apps that lured people with apparently easy loans. In some instances, money was paid into customer accounts even without explicit loan applications.
This was followed by escalating harassment, including threats to upload morphed photographs to people on contact lists unless repayments were made at usurious rates of interest. Repayments at multiples of the original loan amounts didn’t stop the harassment, borrowers have alleged. The apps were allegedly floated by Chinese entities with the aid of Indian accomplices.
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