SAFEMA Appellate Tribunal Sets Aside PMLA Freezing Orders Against WazirX and Vauld, Directs Fresh Adjudication
Background and Context
The Appellate Tribunal under SAFEMA, New Delhi, recently delivered a significant ruling in the matter of Sameer Hanuman Mhatre Vs Deputy Director arising from appeals filed under Section 26 of the Prevention of Money Laundering Act, 2002 (PMLA). The Tribunal intervened in the order dated 27.01.2023 passed by the Adjudicating Authority, which had allowed OA No.726/2022 and OA No.727/2022 filed under Section 17(4) of the Prevention of Money Laundering Act, 2002, permitting retention of seized digital devices and continuation of freezing orders against cryptocurrency exchanges WazirX (operated by M/s Zanmai Labs Pvt. Ltd.) and Vauld (operated by M/s Flypvolt Technology Pvt. Ltd.).
The central issue before the Tribunal was whether the Adjudicating Authority had conducted a proper, reasoned examination of the rival contentions before permitting the Enforcement Directorate (ED) to continue freezing significant financial assets and crypto holdings belonging to the appellants.
Origins of the Investigation: The Chinese Instant Loan App Scam
The Underlying Criminal Activity
The investigation traces its origins to ECIR No. ECIR/HYZO/04/2021, registered on 18.01.2021, based on multiple FIRs lodged with Cyber Crime Police Stations of Rachakonda, Cyberabad, and Hyderabad. The FIRs alleged widespread cheating by operators of Chinese-backed instant loan mobile applications who:
- Lured borrowers with easy credit and thereafter imposed exorbitant interest rates, excessive processing fees, and disproportionate penalties
- Unlawfully accessed borrowers' personal data — including contact lists, photographs, and sensitive information stored on mobile devices
- Used such personal data to harass, intimidate, and blackmail borrowers and their family members for loan recovery
Note: Several borrowers allegedly resorted to extreme measures, including suicide, due to the brutal recovery tactics employed by the fintech entities involved in the instant loan app ecosystem.
Role of Fintech Companies and NBFCs
Investigation revealed that various fintech entities effectively controlled lending operations through mobile applications, while Non-Banking Financial Companies (NBFCs) served as mere regulatory shields. The fintech companies managed loan disbursements through virtual accounts, harvested sensitive borrower data, and deployed coercive collection practices. Funds generated through these illegal activities were classified by the Enforcement Directorate as proceeds of crime under the Prevention of Money Laundering Act, 2002.
Search Operations and Freezing Actions
Action Against WazirX / M/s Zanmai Labs Pvt. Ltd.
On 03.08.2022, the ED conducted a search operation at the Hyderabad premises of Shri Sameer Hanuman Mhatre, Director of M/s Zanmai Labs Pvt. Ltd. During this operation:
- Two Apple MacBook Pro laptops were seized
- Two mobile phones (an Apple iPhone 13 Pro Max and a Samsung Galaxy S22 Ultra) were seized
- Bank accounts of M/s Zanmai Labs Pvt. Ltd. maintained with IDBI Bank and IDFC First Bank were frozen to the extent of Rs. 64,67,41,053/-
The ED alleged that proceeds of crime totalling Rs. 86,30,55,528/- had been transferred to M/s Zanmai Labs Pvt. Ltd. from sixteen entities and individuals linked to the instant loan app scam. Out of this amount, approximately Rs. 21,63,14,475/- had been returned, leaving Rs. 64,67,41,053/- frozen in the accounts.
Statements of Shri Mhatre were recorded under Section 50 of the Prevention of Money Laundering Act, 2002 on 02.08.2022 and 03.08.2022. The ED observed inconsistencies between statements made by Shri Mhatre and those of another director, Shri Nischal Shetty, particularly regarding ownership, operational control, and the execution of cryptocurrency transactions on the WazirX platform.