Why ED is probing Paytm Payments Bank? All you need to know

Paytm, the prominent Indian fintech company, finds itself in a challenging situation as the Enforcement Directorate (ED) initiated a preliminary inquiry into Paytm Payments Bank, as per sources reported by Reuters. Despite media reports on this preliminary investigation, neither Paytm nor the ED has issued an official statement.

Why did the ED begin an investigation against Paytm Payments Bank?

The Paytm Payments Bank, owned by One 97 Communications, faced stringent actions from the Reserve Bank of India (RBI), which directed the payments bank to cease its services by February 29. Described as a preliminary examination by government sources in New Delhi, the ED's investigation centers around suspicions of Paytm Payments Bank violating foreign exchange rules. The ED's probe into One 97 Communications, also known as Paytm, is based on allegations of foreign exchange rule violations, as reported by Reuters earlier. The Reserve Bank of India had provided additional information to the investigating agency, following its order for Paytm Payments Bank to wind down a significant portion of its business by the end of February. The Reuters report did not specify the exact provisions of the Foreign Exchange Management Act (FEMA) related to individual and corporate overseas transfers. 

Unfounded and factually incorrect, Paytm on alleged FEMA violations

Paytm swiftly responded to these allegations, labeling them as "unfounded and factually incorrect." A spokesperson emphasized that Paytm Payments Bank does not allow any overseas remittances from its bank accounts or wallet accounts, asserting a denial of speculations regarding FEMA violations. 

RBI Governor Shaktikanta Das, addressing the situation, declared that there would be no review of the regulatory measures against Paytm Payments Bank. The RBI had issued an order on January 31 instructing the payments bank to halt accepting deposits or top-ups after February 29 due to non-compliance with regulations and supervisory concerns. 

Despite these challenges, Paytm continues to offer a range of benefits, from insightful newsletters to real-time stock tracking and breaking news, emphasizing its commitment to providing valuable services to users. 

According to The Hindu, the Enforcement Directorate (ED) has not found any violation under the Foreign Exchange Management Act (FEMA) during the inquiry of Paytm Payments Bank Limited (PPBL) transactions. The Reserve Bank of India (RBI) has the authority to take action against certain other instances of alleged non-compliance, according to the sources privy to the matter. 

On January 31, the RBI had issued a circular barring PPBL from taking further deposits, top-ups or undertaking credit transactions into its customer accounts, wallets, FASTags, and National Common Mobility Cards (NCMC) after February 29. The deadline has now been extended till March 15. The action was taken on the basis of the Comprehensive System Audit report and a subsequent compliance validation report of the external auditors’ reports disclosing “persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action”. The ED was also asked to scrutinize the financial transactions under the scanner. 

The agency investigates suspected violations or offences under the FEMA and the Prevention of Money Laundering Act (PMLA). According to sources, as there is no PMLA scheduled offences involved in the case of PPBL, money laundering investigation cannot be done. “If no crime is made out, there is also no generation of ‘proceeds of crime’ and so, PMLA does not apply,” said a government official. Therefore, the ED looked into the transactions to determine if there was any violation under the FEMA provisions. It is learnt that the ED examined more than 50 lakh wallets/accounts, largely having small deposits, which did not reveal any foreign exchange rule contravention. 

The other alleged violations mainly pertained to Know Your Customer (KYC) compliance and other issues, on which the RBI is empowered to take action. The ED findings have been reported to the RBI with certain observations as regards some other payment banks, apart from PPBL, third party application providers, and payment aggregators as well, a source said. 

The RBI may take appropriate action in this regard. The areas of concern flagged by the agency include slackness in adherence to KYC norms such as the processes involving user or merchant onboarding, document collection and authentication, anti-money laundering measures, merchant category code assignment, and National Payments Corporation of India’s regulatory compliance. Among the other aspects are processes for identification of ultimate beneficial ownership, politically exposed persons, KYC adherence related to setting up of virtual accounts, strict monitoring and periodic reporting of suspect transactions to the authorised agencies such as the Financial Intelligence Unit. 

Given that vulnerabilities like possible misuse of Application Programming Interfaces (API) keys and URL spoofing may lead to financial fraud, full-fledged adoption of Information Technology audit framework as prescribed by the agencies concerned has also been recommended.