It is usual to find two entities fighting for ownership of a company. It is, however, unusual to see two entities fighting to disown each other, despite admitted links with each other.

The WazirX crypto-exchange, after being investigated by the Directorate of Enforcement for alleged money laundering, is now being disowned by its founder, Nischal Shetty, and its acquirer, Changpeng Zhao, founder of Binance over Twitter. Changpeng Zhao was born in Jiangsu, China, but later shifted to Canada.

Between December 2021 and January 2022, Fortune India sent multiple queries to Nischal Shetty and team to clarify the ownership of WazirX by Binance. The WazirX management, however, chose not to respond to Fortune India. However, Nischal Shetty now maintains that WazirX is wholly owned by Binance.

A Fortune India report had pointed out the fiscal risks a company like WazirX posed to India’s economy.

Recently, however, the Directorate of Enforcement (ED) found that WazirX involved in alleged money laundering and facilitated illegal entities to send money out of India, via purchase and transfer of virtual crypto assets. As per the ED, WazirX is owned by Zanmai Lab Pvt Ltd. Its directors, Nischal Shetty and Sameer Hanuman Mhatre, are now being investigated for these alleged acts.

Nischal Shetty claims WazirX is owned by Binance, and does not belong to Zanmai Lab. On the other hand, Binance CEO, Changpeng Zhao, states that Binance only provides wallet services to WazirX as a tech solution, and does not own WazirX.

The reason for ED raid on WazirX and its directors:

As per the ED press release, the investigation agency is conducting money laundering investigation against a number of Indian NBFC companies and their fintech partners for predatory lending practices in the violation of the RBI guidelines. Various fintech companies backed by Chinese funds could not get an NBFC licence from the RBI for carrying out lending business in India, so they devised the MoU route with defunct NBFCs to piggyback on their licence and started disbursing loans through mobile apps. These Chinese fintech entities employ tele-callers who misuse personal data and use intimidatory language to extort high interest rates from loan seekers.

After the criminal investigation began, many of these Chinese Apps shut shop and diverted their funds out of India. While conducting fund trail investigation, the ED says it found large amount of funds were diverted by the fintech companies to purchase crypto assets and then launder them abroad. The ED notes the maximum amount of funds were diverted to WazirX exchange and the crypto-assets so purchased have been then diverted to unknown foreign wallets.

As per the ED press release, WazirX informed that prior to July 2020, they did not even record the details of the bank account from which funds were coming into the exchange to purchase crypto assets.

The ED also states that because of the non-cooperative stand of the director of WazirX exchange, a search operation was conducted on August 3, 2022, and it was found that Sameer Mhatre has complete remote access to the database of WazirX. However, Sameer Mhatre is deliberately not providing the details of the transactions relating to the crypto assets, purchased from the proceeds of this alleged instant loan app fraud. Therefore, as equivalent movable assets, the ED has issued order to freeze the directors’ bank balances to the tune of Rs 64.67 crore.

The ED press release mentions lax KYC norms, loose regulatory control of transactions between WazirX and Binance, non-recording of transactions on blockchains to save costs, and non-recording of the KYC of the opposite wallets, ensured that WazirX is not able to give any account for the missing crypto assets.

By encouraging obscurity and having lax AML norms, WazirX has actively assisted around 16 accused fintech companies in laundering the proceeds using the crypto route, says the ED.

Are Nischal Shetty and Sameer Mhatre not guilty?

Nischal Shetty and Sameer Mhatre are now faced with the responsibility of legal and ethical conduct of the platform.

Shetty actively promoted WazirX as a safe and self-regulated crypto-exchange through multiple marketing channels and public appearances. On the face of the ED investigations, he claims that all the access to WazirX AWS root servers belongs to Binance and they never had any control on the records of transactions. The question is: How could he promote WazirX without having any control over its safety and ethical standards?

WazirX has allegedly been used by criminals for laundering money, extorted from vulnerable Indians, and siphoning it abroad. Its founders were smart enough to create a crypto-exchange and raised resources by allegedly selling it. The ED now finds it hard to believe that Nischal Shetty and Sameer Mhatre were unaware that their platform was being used for the alleged money laundering. Or that Shetty and Mhatre were ignorant about Binance being investigated by the United States Department of Justice, and the Internal Revenue Service of U.S., for money-laundering and tax-offenses.

The ED fears by selling WazirX to Binance, which is owned by a Chinese entrepreneur, Shetty and Mhatre may have opened the doors for an entity of Chinese origin to carry out activities within India.

To what extent has that compromised the database of Indians, and India's own fiscal safety, is a matter still under investigation.

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