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An Indian financial regulator has issued a major fine to Paytm Payments Bank for its failure to detect an illegal gambling and money laundering operation with connections to a foreign state.
On Friday (March 1), India’s Paytm Bank was hit by a INR54m ($660,000) fine for serious violations of the Prevention of Money Laundering Act (PMLA) 2002.
India’s Financial Intelligence Unit (FIU) said it had opened an investigation into Paytm Bank following tip-offs from law enforcement related to suspected illegal transactions.
As per an FIU statement, Indian law enforcement identified “extensive” illegal activity conducted by multiple businesses under the control of individuals connected to a foreign state.
The case originated from first information reports (FIRs) submitted by the Cyber Crime Station of Hyderabad under the Telangana Gaming Act.
The FIRs alleged that the suspects had engaged in the offering of illegal online gambling services, and that the proceeds from these services were being laundered through Paytm Bank accounts.
As the case was passed to the FIU, further evidence came to light that certain of these entities had also engaged in other types of fraud.
The network had defrauded “hundreds of thousands” of Indians through illegal dating services and streaming services, for example, in addition to online gambling services.
The proceeds from these fraudulent activities were then remitted abroad, the FIU noted, moving out of the country through Paytm Bank, among other intermediaries.
In February 2022, the FIU issued a show-cause notice to the bank and, based on its responses, found that the bank had failed to discharge its obligations under the PMLA.
A range of failures
Upon further investigation, the FIU confirmed that Paytm Bank had failed to put in place a mechanism to detect and report suspicious transactions, as per its obligations under the PMLA.
Further, the bank had failed to exercise due diligence in respect of its "Payouts" feature, and had violated rules against over-reliance on third parties to conduct know your customer (KYC) checks.
These failures led to Paytm Bank processing "Payouts" to at least 34 beneficiaries in violation of the PMLA.
More pain for Paytm Bank
The FIU fine comes as Paytm Bank faces an ongoing regulatory crackdown from the Reserve Bank of India (RBI).
On January 31, the RBI issued a directive that could effectively lead to the shutdown of the bank due to “persistent non-compliance”, covering KYC and IT systems violations.
The non-compliance could ultimately result in the revocation of Paytm’s banking licence, but for the time being, Paytm Bank has been ordered to stop taking new deposits, processing credit transactions and onboarding new customers.
The original deadline to implement these measures was set at February 29, but has since been extended to March 16.
Prakhar Tiwari, a partner at New Delhi law firm Tatvika Legal, told Vixio that he believes more fines are likely to be issued to Paytm in the future, and from a wider range of regulators.
Tiwari said the Ministry of Corporate Affairs (MCA), which regulates for competition, solvency and accounting issues, is likely to be the next regulator to move against Paytm Bank.
In the meantime, the stock of Paytm parent company has all but collapsed, and the founder and CEO of the company, Vijay Shekhar Sharma, has stepped down from his position as non-executive chairman of the board, although he will remain CEO.
