ED finds 800 crore crime proceeds in fintech, NBFC probe

ED finds 800 crore crime proceeds in fintech, NBFC probe

The Enforcement Directorate (ED) has allegedly found proceeds of crime of over Rs 800 crore as part of a long-drawn money laundering probe against 365 fintechs and their non-banking financial companies (NBFCs) partners, sources close to the matter told ET.

These lending apps flourished amid the Covid-19 pandemic when many in the blue-collar workforce lost their jobs as the country went into a lockdown. These firms have been under the scanner for more than a year.

People aware of the ED investigation said that loans of over 4,000 crore were disbursed by these fintech firms, which then sought to recover the amounts lent through telecallers. The companies mostly used defunct NBFCs, which allegedly lent their RBI-issued licence for a share of profit ranging from 0.5% to 1%. In most of these cases, the investigation has found that the platforms were backed by Chinese money.

Chinese nationals had taken operational or directorship control of the service provider companies and provided funds to run these apps.

Of the loans disbursed, over Rs 700 crore was recovered upfront by these fintechs under the guise of processing fees and over Rs 85 crore in the form of interest and penalty charges, people in the know said on the condition of anonymity.

“The capital of the fintechs was parked in the bank accounts of the accused NBFCs in the form of inter corporate deposits or performance guarantee… These NBFCs did not receive any approvals from the Reserve Bank of India (RBI) before accepting the deposits from the fintech players, thereby violating the norms,” explained a person privy to the development.

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“They followed a co-lending model wherein the total disbursement amount was provided by the fintech companies. These NBFCs charged around 0.5% of the disbursement through mobile apps or a minimum commitment on a monthly basis, whichever was higher. These NBFCs earned money without investing a single rupee,” he added.

The role of payment gateways

The lending and subsequent recovery transactions of these lending apps were routed through online payment gateways. In February 2021, the ED had summoned officials of Razorpay Software Pvt Ltd, Cashfree and

.

Subsequently the statement of Harshil Mathur, CEO, Razorpay, Vikas Garg, CFO, Paytm and Akash Sinha, CEO, Cashfree, was recorded, sources said.

“The accused NBFCs on the behest of the fintechs opened merchant IDs with the payment gateways thereby allowing the companies to do lending business for the same amount as the security deposits. 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,” added the source.

The fintech companies under the scanner were lending from their own security deposits and acting on the licences of the NBFCs, the ED has established as a part of the investigation, people privy to the matter said.

When contacted by ET, a Paytm spokesperson said, “We conduct thorough checks on the merchants before and after their onboarding on our payment gateway platform including know-your-customer (KYC) and business document verification, along with comprehensive risk assessment of the merchant’s website and app. No merchant is onboarded without proper documents of the account where one wishes to receive funds and such accounts are opened by scheduled commercial banks. In the post onboarding stage too, we rigorously monitor all transactions to flag off any risky behaviour or suspicious patterns.”

According to a fintech executive involved in operations of these payment gateways, the issue at hand was that the virtual accounts on behalf of the loan apps — whose antecedents appeared dubious — were opened by their NBFC partners. “The biggest challenge the payment gateways faced was that they could not refuse an RBI-registered entity, an NBFC in this case, from opening an account. These NBFCs were operating in cahoots with these so-called Chinese loan apps and had multiple virtual accounts opened for their partners.”

“We would like to state that we are not a part of any ongoing investigation on lending by the ED. As a leading industry player, it is our endeavour to continuously support the government, the regulators as well as any government investigating agencies in promoting best practices to drive safe and secure digital payments,” said a Cashfree spokesperson.

A Razorpay spokesperson said that the company has fully cooperated with the ED investigation, “Some of our merchants were being investigated by the law enforcement about a year and a half back. We have fully cooperated and shared KYC and other details. The authorities were satisfied by our due diligence process.”

Modus operandi
The probe has revealed that the accused lending companies would set up call centers across India. The period of lending was between 7 to 60 days. Apps were deducting 15-25 % of the micro loan at the time of disbursement itself in the guise of processing charges. They would charge exorbitant interest rates with high processing fees coupled with GST charges. While sanctioning the loan all contact details, photos and personal data of the borrowers were taken from the loan app. Calls would be then made to the family members and friends of the borrower using abusive language.

“… These companies were using spoofing technologies to hide their identity and making calls to customers and forcing them to repay the previous loan amounts. In certain cases, the borrower ended up paying 150 to 450 percent of the loan amount,” explained an officer.

ED’s probe is based on predicate offence spelt out in 40 FIRs filed by various state police forces, including six cases of abetment to suicide registered in Telangana. The federal agency has attached assets of Rs 158 crore of four NBFCs namely Kudos, Rhino, Acemoney and Pioneer lying in their banks and payment gateway accounts.

Recently, the RBI has introduced stricter practices to be followed by NBFCs and their servicing partners — after the episode of the Chinese loan apps — through the latest digital lending guidelines.

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