ED detects Rs 500 crore laundered by China-backed fintech apps; NBFC firm's CEO held

The Enforcement Directorate (ED) on Saturday unearthed a massive money laundering racket to the tune of Rs 500 crore involving Indian Non-Banking Financial Companies (NBFCs), fintech firms, and Chinese investors. 

According to the ED, several Indian NBFC companies which are in the business of 'Instant Personal Loans via Mobile apps' had entered into an agreement with various fintech companies backed by Chinese beneficiaries. Under the racket, instant personal microloans of a term ranging  7-14 days were being provided to the public in complete violation of RBI guidelines. 

Around 39 fintech companies, accused of being a part of the massive scam are said to be absconding and unresponsive to the summons issued by ED. 

What was the racket?

On December 17, the financial watchdog arrested Pavitra Pradip Walvekar, promoter, director & CEO of Kudos Finance and Investment Private Limited, an NBFC company under provisions of the Prevention of Money Laundering Act (PMLA) 2002. After being produced before the PMLA Special Court, Hyderabad, he was remanded to judicial custody for 15 days. 

According to the ED, Kudos Finance engaged about 39 fintech companies as a 'service provider' to assist in identifying prospective customers. It claimed that the companies were being used to verify the eligibility of customers, collect information/documents, conduct due diligence, collect pre-disbursement documents, arrange the execution of the loan agreement, assist with collections/recovery of principal and interest payments, and attend service requests/product related queries for the retail loans offered by the company.

However, in reality, the Indian NBFC was allowing the fintech companies to misuse the license of Kudos to take a huge amount as 'security deposits' and then open separate Merchant ID (MID) with payment gateways for each fintech app. These were being used to deposit the security money in the MID of the respective fintech apps. At the time of loan disbursal, the apps would deduct 15-25% of the amount as processing fee and charge a very high-interest rate on the remaining amount.

Chinese owners were 'capturing' consumer data 

Later, it was found that these fintech companies were, in fact, operating on the basis of instructions from Chinese owners to capture customers’ data by getting access to their mobile contacts, media, etc. In order to obtain more profits and to maintain a high recovery rate, their call centres resorted to harsh recovery measures by using abusive language and misuse of social media privileges, owing to which certain people committed suicides.

According to the fund trail unearthed by the ED, Kudos circulated loans totalling Rs 22,24,15,11,508 in its name, funded by 39 fintech companies, who have now disappeared and are not responding to summons. In the entire business, fintech companies have gained a total profit of around Rs 544 crore and Kudos has gained a profit of around Rs 24 crore.

This entire arrangement is in complete violation of RBI guidelines on NBFCs and the entire profit of Rs 568 crore is nothing but proceeds of crime, the Enforcement Directorate asserted. The source of funds with the fintech companies is also being investigated.