The ingenious manner in which Indian companies, through their multi-layered structure, move cash and other assets to other jurisdictions, is coming to light with the unfolding of the proceedings in the US bankruptcy court involving Nirav Modi’s three entities.

The examiner in the US court appointed to take a look at Nirav Modi’s ties to the US companies, while confirming that the three entities – Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc – were indeed involved in the transactions related to the Modi-PNB fraud, also sheds light on the numerous shadow entities created to launder funds obtained fraudulently from PNB.

The examiner identified tens of millions of dollars of purported diamond sales by the US entities to various shadow entities, in respect of which payment can be traced to proceeds from the alleged bank fraud in India.

The investigation also suggests that fraudulently obtained proceeds from these sales flowed from India into the US and, in numerous instances, were returned to Firestar in India or used to fund the US companies’ operations. Nirav Modi is the majority shareholder of Firestar International based in India, the ultimate parent company.

High-volume transactions

Investigations disclosed that Modi’s US entities engaged in a large volume of suspect transactions with shadow entities.

The examiner’s investigations centered on those shadow entities that conducted the highest volume transactions with the US companies, as well as those identified by the CBI as having received the largest transfers of LoU money – Auragem Company, Brilliant Diamonds, Tri Color Gems, and Fancy Creations Company, among others.

It may be recalled that in the ₹14,000-crore fraud on PNB, Nirav Modi and his three firms – Diamond R Us, Solar Exports and Stellar Diamonds – were allegedly procuring fraudulent Letters of Undertaking (LoUs) from PNB’s Brady House branch.

According to the CBI chargesheet, 1,208 LoUs were fraudulently issued between 2011 and 2017. The January 31 CBI FIR that gives details of the LoUs issued in 2017 names entities such as Auragem, Tri Color Gem, and Pacific Diamonds as the overseas exporters.

Unable to reconcile

While corroborating that the shadow entities are Modi-related shell entities, the examiner also found evidence that these entities were created to layer transfers of funds.

The three US companies’ books reflect that a substantial portion of their business between 2011 and 2017 was with the shadow entities.

According to sales journals, during the seven-year period between 2011 and 2017, Firestar Diamond Inc (FDI) recorded $167,668,835 in total sales to shadow entities, and A Jaffe made $46,136,094 in total sales to these entities.

The examiner was unable to reconcile the volumes of sales reported in the sales journal with any of FDI’s tax returns or with A Jaffe’s tax returns.

Enjoying trade sops

The report states that most of the shadow entities were registered at either small, unoccupied offices, or at single, leased desks within shared offices.

They are located in Special Economic Zones (SEZs) and Free Trade Zones (FTZs), areas within a country that enjoy trade incentives. These are also a safe haven for money launderers.

Internal records of the three US entities also revealed that bulk transactions of loose diamonds with shadow entities were recorded and tracked separately from transactions with retail customers.

“For example, in 2012, A Jaffe appeared to create and maintain two sets of financial sales records: ‘Core’ financials, which did not include the loose diamond sales, and ‘regular’ financials, which did,” the report noted

“The difference between the reported gross sales of $9,090,661 on A Jaffe’s tax return and the $49,628,873 reflected in A Jaffe’s sales journals for 2012 was described by CFO Ajay Gandhi as the difference between core and regular financials,” stated the report.

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