The interface of Indian payments app Paytm is seen in front of its logo displayed in this illustration picture.
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“Extensive illegal activity” perpetrated by multiple businesses managed by “a syndicate of individuals connected to a foreign state” who cheated lakhs of Indians by offering “fraudulent services including prohibited gambling activities and dating services” was the trigger for the ₹5.49 crore fine imposed on Paytm Payments Bank Limited (PPBL) by India’s Financial Intelligence Unit (FIU) last week.

The matter first came to light over two years ago with the Cyber Crime Station of Hyderabad lodging First Information Reports (FIRs) under relevant sections of the Indian Penal Code and the Telangana State Gambling Act.

The FIRs flagged certain business entities and their network of businesses engaging in a number of illegal acts such as organising and assisting online gambling, routing the proceeds of such criminal activities through bank accounts they maintained with the payments bank.

Also read: Paytm Payments Bank meltdown, its meaning | Explained

The FIU, as per a summary of its March 1 order against PPBL, said the inception of its probe into the troubled payments bank stemmed from law enforcement agencies “identification” of this illegal activity. As part of the FIU’s mandate to ensure effective implementation of the Prevention of Money Laundering Act (PMLA), it regularly examines compliance levels of reporting entities like PPBL in the wake of any criminal conduct or fraud coming to light.

“In the course of such investigation, certain entities were found to have cheated lakhs of Indians through the offering of fraudulent services including prohibited gambling activities, dating services, and streaming. The proceeds of these fraudulent activities were subsequently remitted abroad,” the FIU noted.

The agency added that it also came to light that several of the involved entities had used payment intermediaries to implement their fraudulent designs within India.

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Based on the bank’s responses to its show-cause notices, the FIU concluded that it had violated the law by failing to exercise ongoing due diligence with reference to the accounts of 34 beneficiaries and failed to file suspicious transaction reports in respect of those accounts.

The agency also listed out payout-related charges against the bank, which included its failure to put an internal mechanism in place to detect and report suspicious transactions in the manner prescribed under the PMLA and PML rules.

The bank also failed to “satisfy the requirements with respect to reliance on third-party KYC [Know Your Customer] by relying on a non-compliant/unregulated entity in violation of Section 12 of PMLA read with Rule 9(2)(c) and Rule 9(2)(f)”, as per the FIU order summary. It also hauled up PPBL for failing to “exercise ongoing due diligence with respect to its payout service and accounts of entities in question…”

The order refers to “extensive illegal activity conducted by multiple businesses under the syndicate of individuals connected to a foreign state” but does not indicate which foreign state was involved.

Vijay Shekhar Sharma. File.
| Photo Credit: Reuters

Vijay Shekhar Sharma has stepped down as part-time non-executive Chairman of Paytm Payments Bank Limited (PPBL), and the board of the bank has been reconstituted.

The Reserve Bank has barred the PPBL from accepting deposits and credits from any customer post-March 15 for persistent non-compliances and continued material supervisory concerns in the bank.

PPBL has reconstituted its Board of Directors with the appointment of Ex-Central Bank of India Chairman Srinivasan Sridhar, retired IAS officer Debendranath Sarangi, former Executive Director of Bank of Baroda Ashok Kumar Garg, and former IAS officer Rajni Sekhri Sibal, Paytm said in a regulatory filing on Monday.

These persons had recently joined as Independent Directors, it said.

One 97 Communications Ltd (OCL) is the owner of the Paytm brand.

“The company has been separately informed that Vijay Shekhar Sharma has also resigned from the Board of Paytm Payments Bank to enable this transition. PPBL has informed us that they will commence the process of appointing a new Chairman,” the filing said.

OCL supports PPBL’s move of opting for a board with only independent and executive directors by removing its nominee, it added.

“PPBL’s future business to be led by a reconstituted Board,” the filing stated.

Paytm said its associate Paytm Payments Bank Limited does not undertake outward foreign remittances.
| Photo Credit: Reuters

“The Enforcement Directorate (ED) has questioned senior Paytm executives and taken submission of documents from them following the recent Reserve Bank of India (RBI) action of barring Paytm Payments Bank Limited from accepting deposits or top-ups in any customer account,” official sources said on February 15.

The Central agency, according to the sources, is conducting preliminary examination of documents before it decides to launch a formal investigation into the RBI-flagged alleged irregularities at the fintech company under the Foreign Exchange Management Act (FEMA).

“Some documents have been recently submitted by Paytm executives following which they were asked certain questions. Some more information has been sought,” the sources said.

The Paytm Payments Bank debacle | Explained

“As of now, no irregularities have been detected and a case under FEMA will only be registered once any contravention under the said law is found,” they added. “An investigation under the Prevention of Money Laundering Act (PMLA) involving Paytm is already going on for some time,” they said.

One97 Communications, which provides financial services under the Paytm brand, and its banking arm Paytm Payments Bank have been receiving notices and requests for information with respect to customers of the respective entities, an exchange filing by the company said on February 14.

Paytm said its associate Paytm Payments Bank Limited does not undertake outward foreign remittances.

“One 97 Communications Limited (OCL), its subsidiaries and its associate, Paytm Payments Bank Limited, have over time been receiving notices and requisition for information, documents and explanations from the authorities, including Enforcement Directorate (ED), with respect to the customers that may have done business with the respective entities, and provided the required information, documents and explanations to the authorities,” Paytm said in a regulatory filing.

Paytm said the company and its associate have continued to provide information, documents and explanations to the authorities as required by them.

Also read: Paytm sees ₹300-500 crore blow as customers won’t be able to top up wallets, PPBL accounts

Earlier this month, the Enforcement Directorate and the Financial Intelligence Unit (FIU) asked the RBI to share its report on the recent action taken to bar Paytm Payments Bank Limited from accepting deposits or top-ups in customer accounts, according to sources.

The Central bank, on January 31, directed it to stop accepting deposits or top-ups in any customer accounts, wallets, FASTags and other instruments after February 29.

The ED has been probing Paytm and other online payment wallets as part of its money-laundering investigation against Chinese-controlled mobile phone apps who allegedly laundered funds using merchant IDs created on these fintech platforms.

The FIU has also sought the report from the RBI to analyse whether Paytm or PPBL followed the required procedures as a “reporting entity” under section 13 of the PMLA.

Under this section of the anti-money laundering law, a financial institution, bank or intermediary has to furnish details to the FIU about maintaining records of all transactions and documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.