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Xiaomi India, a subsidiary of a large Chinese phone brand, has lost an appeal against the seizure of its assets in one of India’s biggest financial crime cases to date.
Last week, an Indian appellate court upheld a previous order by the country’s financial crime agency, the Directorate of Enforcement, to seize $683m worth of assets held in Xiaomi bank accounts.
This week, Xiaomi India hit back with a statement in which it said it was “disappointed” with the decision, and that it will continue to defend the transactions that led to the investigation.
“None of the factual and legal contentions raised by us has been addressed,” said Xiaomi India.
“We believe our royalty payments and statements to the bank are all legitimate and truthful.”
In the same statement, Xiaomi India continued to claim that the remittances in question were for the purpose of royalty payments to intellectual property (IP) holders.
It noted that its parent company, Xiaomi Group, has entered into a legal agreement with US-based Qualcomm Group to license IP for manufacturing smartphones, making it a legitimate recipient of royalty payments.
Of the $683m seized, Xiaomi India said that more than 84 percent of the total amount was made up of royalty payments destined for Qualcomm.
“All royalty payments made by Xiaomi India were only related to sales done by Xiaomi India and not for any other countries or regions. This has been confirmed by Qualcomm Group (USA),” the company said.
“These royalty payments were made via Reserve Bank of India (RBI) approved and mandated banking channels and are legitimate commercial arrangements.”
A record-breaking seizure
Xiaomi India’s appeal dates back to April this year, when the Directorate of Enforcement first executed the seizure of assets after taking statements from the company’s executives.
The directorate said the seizure was, and remains, the largest single amount it has ever seized under the Foreign Exchange Management Act (FEMA), which covers the country’s remittance laws.
Xiaomi India launched in 2014 and began remitting money abroad in 2015. According to the Directorate of Enforcement, it sent $683m in foreign exchange (FX) to three entities abroad, including one Xiaomi Group entity.
The payments were made on the instruction of Xiaomi's Chinese parent company and were supposedly for the purpose of transferring royalty payments.
However, the directorate said the payments could not have been related to royalties, as according to their investigation, the ultimate beneficiary of all the payments were other Xiaomi Group entities.
“Xiaomi India is a trader and distributor of mobile phones in India under the brand name of MI,” the directorate said in its first statement following the seizure.
“Xiaomi India procures the completely manufactured mobile sets and other products from the manufacturers in India.
“Xiaomi India has not availed any service from the three foreign-based entities to whom such amounts have been transferred.”
At the time of asset seizure, the directorate accused Xiaomi India of using a “documentary façade” to create the impression of royalty payments being made.
The Directorate of Enforcement added that Xiaomi India had also provided “misleading information” to its bank while remitting the money abroad.
One week after the seizure, Xiaomi India appealed against the enforcement action on the grounds that the information it had provided to the Directorate of Enforcement was obtained under duress.
The Directorate of Enforcement responded with its own statement several days later: “The allegations that the statement of the officials of Xiaomi India was taken under coercion by DE is untrue and baseless.”
“The officials of the Xiaomi India deposed their statements before DE under FEMA voluntarily in the most conducive environment on various occasions.”
According to data from Counterpoint Research, Xiaomi is tied with Samsung (19 percent each) for the largest share of India's smartphone market, followed by Chinese brands Vivo (17 percent) and OPPO (16 percent).
India-China tensions
The dismissal of Xiaomi India’s appeal comes at a time of heightened tension between India and China with regard to financial crime.
As reported by VIXIO, the Directorate of Enforcement is currently pursuing a major crackdown on so-called “illegal loan apps” that are suspected to be money laundering operations for Chinese-linked funds.
In August, the Directorate of Enforcement’s investigation led it to freeze $8.1m in assets belonging to the owner of WazirX, India’s largest crypto exchange.
In September, those funds were unfrozen, after WazirX convinced the directorate that although entities linked to several illegal loan apps had used the exchange, they did not do so for money laundering purposes.
